Reference no: EM132306064

Finance Case - Aditya Birla Financial Services (Life Insurance)

Background - The 16-year-old private life insurance industry in India is passing through a competitive phase since the 2008 financial crisis. Last few years have seen insurers re-evaluate their operating models, modifying product portfolios to bring them in line with new regulations and changing customer preferences as well as focus on being more cost efficient by optimising distribution networks. Falling growth in new business premium and increasing competition from top bank-promoted life insurance companies is leading to sharp de-growth in the agent dependent players. In FY16, Reliance Life (-25%), Bajaj Allianz Life (-16%) and Birla Sunlife (-7%) et al showed negative growth in first year premium. The industry has reacted by exploring M&A strategies to exploit product and distribution synergies (HDFC-Max Life) to grow further. Today, the top 4 private insurer's control ~65% of the virtually consolidated private life insurance market.. Despite initiatives undertaken by market leaders to improve outreach and customer awareness on insurance products, the sector remains underpenetrated at ~3.3% of GDP, signalling large opportunities for growth.

With an experience of over a decade, Birla Sun Life Insurance Company Limited (BSLI) ranks among the top 7 private sector life insurers in India, enjoying the trust of 2.5 million customers. BSLI is a joint venture between the Aditya Birla Group and Sun Life Financial Inc. (a top international financial services companies from Canada). Well known for customer centricity and innovation in products, BSLI was the first Indian insurer to introduce the "Free Look Period" (full refund if the customer is dissatisfied with the product in the first 15/30 days) and also pioneered the launch of ULIPs amongst the private players.

BSLI is looking to reduce its dependency on the fixed-cost agency channel and build a robust distribution network (including through banking relationships, digital platforms etc.) to expand into semi-urban and rural markets to expand market share. Against this backdrop, we are looking at opportunities that can aid our growth inorganically as well as keep us agile enough to quickly respond to regulatory interventions, especially those impacting distribution incentive structures.

Deliverables -

1. Identify suitable targets with complementing product portfolio, distribution outreach, and other factors that build a strong value proposition for acquisition or a joint venture.

2. Build an investment recommendation as per guidance provided below.

Clearly outlining key assumptions, prepare a presentation comprising:

Brief view on Life Insurance industry (i.e. ex-health and general insurance)

a. Analyse the industry/market growth trends and regulatory reforms (viz. open architecture for banks, solvency norms etc.) and perform market sizing

Detailed view of target

a. Scalability of business model, financials (historical and projections), returns analysis.

b. Target Company Valuation via DCF/ Multiple approach (or as is relevant to the industry)

c. Value attributed to synergy from acquisition or a JV with strong rationale for the same

d. Competitor analysis for key financial metrics and valuation multiples

e. Proposed deal structure and alternatives

Investment recommendation with risks involved.