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TATA AIA buy out of PNB Metlife: The Rationale?

At this point, though it is not sure whether this buy-out is really going to happen or not. While one newspaper kind off confirmed the same, another one just spoke about how this came up for the board meeting of Tata Sons. At least I am not clear whether the deal is all done but for sure this is up for some serious discussion. Coming quite close after the acquisition of Max Life by HDFC Life, it is surely going to create much noise. Though insurance penetration in India is still low, profitability in this sector has been a challenge. Only in recent years, we are seeing a few making a decent profit in this sector. Hence consolidation has always been under discussion in Insurance industry in India. So it will be interesting to see what synergy exists or what benefits do TATA AIA sees when it has been discussing deal with PNB Metlife.

Product Synergy

Single premium scores low in both of their portfolio. 1% for TATA AIA while 2% for PNB Metlife

Average premium equivalent (APE) for Individual policies for TATA AIA is slightly higher (45k) than PNB Metlife (38k). Both had seen increase in APE from FY1415 to FY1516.

TATA AIA life commands a better group insurance premium contribution and that probably stems from the big conglomerate it belongs to. Group premium commands 25% by premium compared to 13% of PNB Metlife.

Channel Synergy


 

The advantage of the merger to TATA AIA clearly comes out here. While TATA AIA shows a balance between Agency & Banca, PNB Metlife shows a dominance of Banca & Direct Business. Point to note that TATA AIA tied up with IndusInd Bank in FY1516 for Banca which had an impact last year as in FY1415, Banca commanded only 14%. Direct business, which also includes online sell of insurance has lower cost of policy acquisition and has been the focus for many insurance companies for OTC (Over the Counter) or non UW products (pure life etc where UW is simple). Hence TATA AIA stands to gain from a better channel coverage across Banca & Direct.

Geography Synergy

Here again the advantage of merger comes out clearly. For this let’s first look at the ‘urban’ distribution of premium across States/ UT. The states/ UT, where the synergy comes out clearly are highlighted. For example, in Delhi, UP, Punjab, J&K PNB has a great edge; TATA AIA has better coverage in Maharashtra, Gujarat etc.

Similar synergy in coverage is seen in Rural as well, as highlighted in below chart.

The merged entity is not only supposed to gain from above synergy but can also look at areas of cost optimization as well:

  1. Employee & hence total payout to employees which impacts Operating expense
  2. Rationalization of front-end sales / relationship team, especially for areas where both seems to be of equally dominance
  3. Rationalization in infrastructure

Hence the rationale at least makes sense in paper & pen. The synergized channel distribution and geographical distribution as well, is expected to push the revenue lever northwards, the above potential optimizations in workforce/ infrastructure can push the cost lever southwards. Together, it clearly will move PAT definitely northwards!

Source:

All calculations, graphs, charts, comparisons are work of Randomwalks. Raw data have been drawn from following schedules (of IRDA public disclosures) of both PNB Metlife & TATA AIA Life:

L4, L22, L-25i, L37, L38, L2

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