Reliance Industries enters insurance with Bharti Axa acquisition

Mukesh Ambani, chairman of India’s Reliance Industries, is expanding his business empire into insurance, putting him in direct competition for the first time with his younger brother, Anil.

He is entering the industry through an acquisition. Reliance Industries and an associate company are set to buy Bharti Enterprises’ 74% shareholding in Bharti Axa Life Insurance and Bharti Axa General Insurance. Reliance Industries, which is India’s largest private-sector company, will own 57% and Reliance Industrial Infrastructure will own 17% in both insurance companies.

Axa will continue to own 26% and manage the day-to-day operations of the joint ventures. As it had with Bharti, Axa will have the right to buy up to an additional 24% shareholding in both insurance companies when regulations in India allow foreign companies to increase their stake beyond the current 26% ceiling. India’s finance minister suggested in February that a proposal to increase the ceiling to 49% is under consideration.

None of the three parties involved disclosed the value of the deal. However, Indian media have speculated that Reliance Industries had offered around $700 million for the life insurance JV, while Bharti was reportedly expecting around twice that amount.

For the 12 months ended March 31, Bharti Axa Life collected premiums of Rs7.9 billion ($177 million) and Bharti Axa General Insurance collected premiums of Rs5.5 billion

The deal marks the end of Bharti’s diversification into the insurance industry. Bharti collaborated with Axa to launch a life insurance business in 2006, and a general insurance business the following year. At the time of launch, Sunil Mittal, chairman of Bharti, had said that Bharti’s mobile phone customers would also be a target audience.

However, competition in the industry is fierce and has recently become more tightly regulated. The life business has gone from only six insurers in 2000 to around 48 currently, according to an estimate by Celent, a Boston-based financial research and consulting firm.

India’s life insurers have among the lowest profit margins in the world. Quitting the industry will give Bharti the opportunity to earn better returns elsewhere — notably in telecoms. Since entering the sector, its investment has grown substantially, most recently with the $10.7 billion acquisition of Zain’s African operations last year. Bharti also has interests in joint ventures for fresh and processed fruits and vegetables, as well as a joint venture with Wal-Mart for in retail industry.

This deal marks the second foray of Mukesh Ambani’s Reliance group into financial services, but the first to pit him directly against his younger brother. So far, most of Mukesh’s businesses have been branded under the Reliance umbrella, but that option is not on the table this time as Anil’s existing life insurance company, Reliance Life, already uses the brand.

Mukesh Ambani’s first entry into financial services was through an India joint venture with DE Shaw in March. The company will offer services such as trading energy, carbon and related derivatives, and aims to build a presence across areas including private equity and mutual funds.

Ambani’s entry into the financial services sector follows the unwinding of a non-compete agreement between the two brothers dating back to 2006, when the family businesses were divided after the death of their father and Reliance group founder Dhirubhai Ambani. Anil got control of the telecommunications, financial services and power businesses. Last year, the brothers agreed to cancel the non-compete arrangements entered and entered a new, simpler non-compete agreement with respect to only gas-based power generation.

Some specialists speculate that Mukesh’s endgame could be to set up a bank. However, at Reliance Industries’ annual general meeting in early June, when asked this question, he is reported to have said that the company currently had no plans to seek a banking licence.