ICICI Lombard General Insurance Company Limited (ICICIGI) Earnings Call Transcript & Summary

Thank you, Raymond, and good evening, everyone, and thank you for joining us on this call. These are unusual times, and I hope that you and your family and all your closed ones are safe. Let me start by introducing my colleagues who are with me on this call. I have Gopal Balachandran, our CFO. We have Sanjeev Mantri, our Executive Director, Retail; Alok Agarwal, our Execute Director, Wholesale; and Lokanath Kar, our Chief Legal and Compliance Officer. So today is indeed a landmark day for us. As you would have probably seen, we've entered into definitive agreements with Bharti AXA General Insurance to acquire the non-life business of Bharti AXA GI. This transaction is proposed to be implemented via a scheme of arrangement, under which Bharti AXA GI's non-life insurance business would be demerged into ICICI Lombard. This call is to discuss this notable development, which we think will significantly shape the future prospects of ICICI Lombard. At ICICI Lombard, as you have been -- seen us through the years, we've always worked towards creating long-term shareholder value, whether in terms of growth, distribution network or profitability. As part of our constant endeavor to look for future growth drivers, we've always been open to looking at inorganic opportunities. This particular case stood out for us for a few reasons. One, this was an interesting opportunity for us to acquire the non-life business -- insurance business of a company that is well reputed with strong corporate governance and good management team with a strong cultural fit. The company has, in the last few years, been able to create a credible distribution engine with key partnerships and good traction that is being built over the last few years. This distribution engine would meaningfully enhance the number of customer touch points for us. The company also has a sizable investment portfolio of roughly about INR 47.65 billion as at March 2020. This deal also presented a strong proposition to partner with the Bharti Group, one of India's leading business groups and AXA, a well-regarded, well-reputed large global insurer. And finally, we've used our stock as currency in this deal and, therefore, did not require any capital gains for funding this transaction or for solvency going ahead. We are very excited about this transaction and what this means for ICICI Lombard due to the compelling business strategies, both in terms of revenue and costs that this transaction brings to bear. When we look at the combined entity on a pro forma basis, we would be at a market share of around 8.7% among all non-life insurance in India. The transaction would enable us to further consider our leading position among private non-life insurers, and we would also become one of the top 3 non-life insurers in the country. We've traditionally been very strong on motor insurance and are currently the #2 player in the industry. With this transaction, we would be able to consolidate our market-leading position and increase our penetration across OEMs. Our combined market share in motor insurance on a pro forma basis for the year ended 31 March 2020 would increase from 10% currently to 12%. On the bancassurance side, Bharti AXA GI has recently entered into meaningful partnerships with large retail banking platforms. Post this transaction, we expect that ICICI Lombard would have tie-ups with most of the leading private banks in India. The addition of this large bancassurance tie-ups provide a strong runway for future growth. We hope to leverage our experience and learnings from successfully partnering with ICICI Bank and our deep penetration across the country to deliver rapid success from and deliver value to these bancassurance partnerships. Adding further on the distribution side, we would be able to add roughly about 6,700 agents into our fold through this transaction. Bharti AXA GI's agency force has grown rapidly in the last -- in the recent few years, increasing from 4,000 agents in 2017 to the current level of 6,700 agents. We have internally sharpened our own focus on agency channel, and we expect to be in a position to internally enhance productivity levels of the agents as well. Another aspect that has worked well for us in terms of distribution is a relatively deeper geographical penetration that we have beyond the top 25 cities. We have large presence even in the Tier 2 and Tier 3 cities, and this footprint has really helped us in driving business through the distribution tie-ups that we have in these cities. We hope to leverage our learnings and replicate the success that we have had with the new partnerships that we would form as a result of this proposed transaction. In terms of costs, you would have seen that Bharti AXA GI currently operates at a higher OpEx ratio as compared to us. As we combine our businesses going forward, we expect to benefit from operating leverage and cost effectiveness over time. We will be able to reduce certain overheads, such as branch infrastructure costs, information technology costs, branding and publicity-related costs, et cetera, as examples, given that we'll be functioning as a combined entity rather than 2 separate ones. Along with the compelling business rationale that I spoke about, this transaction was also interesting for us from a strategic point -- standpoint due to the opportunity to partner with Bharti and AXA Groups. We are excited to be entering into this partnership with Bharti Group, which is a large business house with diversified interest. We look forward to working closely with them to provide customers insurance solutions to their group companies and customers. We are also enthused by the prospects of working with AXA, a large well-reputed global insurer and to leverage their unique capabilities on products, risk management and reinsurance solutions. Before I conclude, I would like to elaborate on the transaction structure. Bharti and AXA Groups would be issued fresh shares of ICICI Lombard as consideration for this transaction. Post completion of the transaction, they would own approximately 7.3% stake in ICICI Lombard on a combined basis. It is also important to highlight that the combined entity would be -- would have solvency margin well above regulatory requirement, thus eliminating need for any fund raise for the transaction. This transaction is, of course, subject to various regulatory approvals. We are hopeful, subject to the new approval process, that we shall be able to complete this proposed transaction speedily so that we can commence business as one single entity in the market immediately thereafter. Before I hand over the call to the moderator, I would like to thank the Bharti AXA General Insurance team and welcome them to the ICICI Lombard franchise. I'd also like to thank our shareholders who've always been very supportive and constantly motivated us to keep forging ahead, and lastly my colleagues at ICICI Lombard who have worked diligently to make this transaction happen. On that note, I would like to hand it over to the moderator and open the floor for any questions that you may have. Thank you.

[Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie.

BDji, can you share what is the PAT, net worth and combined operating ratio of Bharti AXA as of FY '20?

Gopal, do you want to answer and give the numbers?

Yes. So they have made a loss, Suresh. So that profit after tax for FY '20, they made a loss of INR 244 crores. The combined ratio, which they had, was about 120.4%. And as of March 2020, they had a net worth of about INR 662 crores.

Okay. So I have 2 questions here, BDji, for you. First, it looks like the price that you've paid looks very high for an entity, which is making negative returns, point number one. So how do you justify such a high price for this entity? Secondly, I am still not comfortable or confident about what kind of synergies that you're talking about, because either there has to be some product complementarities or geographical complementarity or maybe some kind of OpEx synergies. I mean I'm hard pressed to think how do you justify this deal in the sense that, did this deal come to you or you went out for scouting? Any such color would be basely appreciated?

Yes. Thanks, Suresh. So in terms of the deal, this was a curated bilateral deal. We were interested, and I guess as much as the counterparty being also interested in the transaction. So there was no bidding process. It was just us talking to them. In terms of the way we've looked at it, we've looked at multiple aspects of how we've ascribed value to this transaction. The way the valuers have looked at it is basically the market benchmark. And as Gopal explained, since there's no profits last year, of course, there was a onetime write-off on the investment book last year. But even -- apart from that, if you have a loss, there's a P/E ratio to compare. But if you compare the price to books for us versus this entity and also look at benchmark transactions that have happened, even without control premium, the price-to-book for this transaction comes to about -- roughly about 6.5x book, which is similar to what -- where you've seen deals in the market. And at 6.5x book, it's roughly about almost 30% discount to our price-to-book multiple at this point in time.

We are far more comfortable BDji. We're the best insurance company in India and far more profitable. So how can that be a benchmark, just curious.

Yes. So there is -- the benchmark is not just from our discount perspective. I was explaining that even in the market those are the standard benchmarks, including for pure play health companies where the ROE model cannot be as strong. And let me continue with the point that I was making. So in terms of the benefit that we see, there are both revenue and cost synergies that we see. As Gopal explained, if you see the last year number, their loss ratio was about 78%, their expense ratio was 42%. One of the things that you realize in this industry is there are significant scale benefits that we benefit from, for example. If you look at the loss ratio, the loss ratio is not way off the charts from the most good players in the market. But the challenge that they're facing is in the operating expense head. Obviously, as a combined ratio -- combined entity, we believe we'll see significant synergies on the cost side. On the revenue side, we believe if you see some of the recent partnerships that we have signed up with some leading banks in the country as also the investment that they've made in the agency channel, so that investment has been going on for the last couple of years. And we believe the runway for growth on this platform is long for us. So we believe there'll be incremental revenue opportunities that we see. And as I said in the opening remarks, for them, they've largely been the large city company. Their depth into the smaller markets is not as much as us. So with the national tie-up, we believe we'll be able to get significantly higher benefits in terms of the synergy and on the revenue side. So both in terms of the benchmarks that we see in the market for deals in terms of the synergy benefits, both on revenue side as also the cost side, and even our internal models that we've used to value this company very conservatively, we believe we've got a good deal.

Just one last question, if I might squeeze in. Any due diligence done, which could have -- which would eventually result in any further write-offs now? Because you said they took a write-off on their investment portfolio, has all that been accounted for? Or do you think as a part of the merger process, there could be some write-offs here and there, which you'll have to take?

We've done the due diligence, and they have some of the investment assets for which we took a write-off last year, some residual amount left, which we factored in the valuation.

The next question is from the line of Nidhesh Jain from Investec Capital.

Hello? Is it audible?

Yes. We can hear you.

Yes, so the first question is on overlap in terms of distribution and geography. As I see, Bharti AXA also has very strong OEM channel, and you also have a very strong OEM channel. So what is the overlap and where you see there will be a cannibalization of revenue between the 2 entities?

So in terms of OEM, you're right. I mean if you see they're a much stronger motor player relatively among players, and they're pretty strong in the OEM channels. Now having -- however, if you look at within each OEM, there are 2 aspects to look at, one is at the OEM level and then at a dealer level. And when you look at OEM level, there are 3 or 4 OEMs where they're pretty strong. I mean in terms of their relative position, they have got a very large share in some of these platforms. In one of them, they're kind of way ahead of us as well. So I think there is some synergy benefits that we will see. There could be some overlaps here and there, and there is a possibility, which we've already baked in our numbers or some dissynergies here and there. But we are reasonably confident, given our ground level understanding of what they do, where they are, which dealership they're present in. We believe that this will be -- the dissynergy effect will not be very large.

Sure, sir. And apart from motor, other segments, is there any strength that they bring to table? I don't see -- and in terms of their performance, I don't see any significant strength in any other segment.

I think for them, last 3 years has been kind of investment in building up scale in certain other areas. And one of the areas that they've been focusing on over the last 3, 4 years has been the bancassurance channel. And there, I think what we've seen is, one, they have entered into relationships over the last couple of years only, and we probably haven't seen them fully ramp up these partnerships, number one. And even in bancassurance, we see a lot of opportunity and what we experience in terms of type of products that we sell, both on the SME and the health side, we don't see that replicated as yet, and that to us is an opportunity because, one, these platforms have a runway of growth. And within that platform, I think the mix of business that we can do, we believe, can be far superior.

But these bancassurance partnership will come naturally to the buy entity or they will have to -- because I think they have tied up with Axis Bank or HDFC Bank, which may or may not come to the merged entity?

We believe they will come. I mean of course, every bank can change their partners. There's nothing that can be stuck in -- cast in stone forever, but we believe that they will continue.

And sir, after the deal, the ICICI Bank's stake will decline to below 50%.

Right.

I think there is a regulation that a bank can hold up to 30% or more than 50%. So what will happen today, the ICICI Bank's stake post the transaction?

Right. So what happens to ICICI Bank's stake is that their stake goes to roughly about 48.1%. And you're right that there is some regulation that, typically, RBI wants banks to have -- they don't have a corridor between 30% and 50%. But there are past precedents, for example, in the case of India Infradebt, the regulator have given them some relaxation. And I think what we are given to understand the bank believe that they will be given some dispensation and sufficient time to bring down to 30%, if it all, they have to. So that's the sense that we have at this point in time.

Sure, sir, sure. And a couple of more questions. One is on reserving and float. Do you see any issues or anything that we have to strengthen going forward on the reserving side?

So we've done due diligence, and we've accordingly looked at the valuation. And we honestly, as I said, we like the franchise also because of the quality of accounts, the governance, et cetera. And we think their reserving is quite reasonable.

And then lastly, on the tax impact, there's accumulated losses of around INR 1,600 crores, which are setting for Bharti AXA.

Yes.

Will those be accrued to us, and whether they will be just accrued in 1 year or that can be -- result in a lower tax rate for some years?

So it should accrue. That's part of -- we believe that should accrue. But the point is when it will accrue will depend on when we get the approvals and all of that. It will depend on the timing.

And the entire benefit will be taken in 1 year or it will be...

We'll have to look at that. Gopal, do you want to be more specific on that?

Yes. So Nidhesh, I think, obviously, losses are clearly a function of what kind of profits you make. And typically, also what happens is whatever you recognize as book losses may not necessarily be completely available for tax losses. So that's based on what the tax statements that you ascribe. And basis the profits that you make, obviously the losses will get absorbed over the years. So we'll have to wait and see in terms of what kind of profits are we able to make and then corresponding the losses will get absorbed.

[Operator Instructions] The next question is from the line of Jignesh Shial from Emkay Global.

Most of the questions has been answered.

Jignesh, I'm sorry to interrupt, but we can't hear you very clearly. If you are on speaker, request you to use a handset.

Yes, yes. Can you hear me now?

Yes, it's slightly better, Jignesh.

Yes. Is it better now?

Yes, much better.

So I do have some -- I mean most of my questions have been answered, specifically on the valuation part. I also of the same feeling that it seems to be a little expensive deal what has happened. So if you can elaborate a little bit further on this particular thing. But apart from it, just 2 quick questions. One, the overall merger impact won't be coming in, in FY '21, right? It will take time. So probably assuming that the combined entity or the combined number should be visible from FY '22. Is that correct? And number two, once the merger -- or merged number starts coming in, the initial combined ratio should be inching up, right? I mean gradually, it should be normalizing considering AXA having higher losses out there. So just these 2 questions then.

Yes. So it's highly possible that it will be from '22. It will depend on how fast we get all approvals. So it will be unlikely in '21, while we will try to do it -- push for it as fast as possible. In terms of the point that you're making, the answer is yes, of course. As I said, 120% combined with 42% expense ratio, we believe there's a lot of opportunity to improve the combined ratio reasonably fast. But it won't happen in 1 year. I mean post closure, post the 2 entities merging, it may take a bit of while -- of time. But thereafter, it will definitely begin to show that benefit. That is something that we believe will happen.

The next question is from the line of Ajox Frederick from B&K Securities.

So my first question is regarding the tech synergy. So normally, what happens when a merger happens and some distributors find it difficult to like find the platform consistent. So like what are our thoughts there with respect to like the technology synergy over there?

So we've done a reasonable amount of diligence on the tech stack, and we've also seen what has happened for the company on a stand-alone basis over the last couple of years. If you look at the total take in expenditure that they have is surprisingly large, probably because they're using systems that were of a certain nature. And any case, they were gradually migrating out into new technology architecture. So our sense is that they should be going forward. Once we do the integration, there would be a fair amount of savings. But even in terms of the integration migration, we are reasonably confident that we'll be able to manage it smoothly. I think there are -- as I said, there's a lot of cultural fit, a lot of leadership alignment that is there across the 2 organizations. There are -- I think we'll be able to manage that well.

All right, sir. Sir, can you just throw some more color on how we are going to bring down the expenses if we have thought about it?

So there are many elements that we've looked at. I don't want to get into the specifics at this point in time. But just suffice it to say that if you look at the obvious fixed costs that are there, let's say, the branch infrastructure cost, some of the elements that I talked about in the opening remarks, the overall productivity that we will gain as a merged entity. So wherever there are a lot of overlaps, while the overlap is one aspect, equally, it gives us an opportunity for synergy benefits. So those will play through as we go along. A 42% expense ratio is something that we believe we can definitely bring it down. And the 42% expense ratio is really not just -- not because of some inefficiency by the entity, it's just that there are some scale challenges at this side. Unless you reach a certain scale, the expense issue will always remain very high for entities. That benefit we should get when we integrate the 2 entities.

The next question is from Prateek Poddar from Nippon India Mutual Fund.

Sir, have you thought about relative valuations while ascribing the valuations which you have to Bharti AXA? For example, if you look at the other listed companies, which are indirectly listed via holding companies like Chola MS General Insurance or BAGIC, both are highly profitable and the Chola MS is today available at 0.5x to 0.3x price to float, if you were to think of holding company discounts or less than, I mean, 0.6 to 0.9x price to GWP. Chola MS has generated 16% ROE, is highly profitable. So have you thought about relative valuations or benchmarking while doing this deal? That's question number one. The second question is banca relationships, are there any condition precedents set into the agreement because it would be very difficult to think about Axis Bank selling ICICI Lombard products in a material way. And lastly, on the motor side, the third part, let's say, motor dealer, Bharti plus Lombard becomes -- for a motor dealer, Bharti plus Lombard shares like 80%, I'm sure he will scale it down to 50%, 60%, he will not keep 100%, he would like to have some other player also. So have you thought about these 3 things?

Yes. So let me start with the third first and then go back. So as I explained earlier, we've looked at OEM by OEM presence and the share of the 2 entities. As I said, we also understand on the ground who's doing what and which dealership. So our sense is that there would be some dissynergies here and there in line with what you are saying, but it won't be meaningful. In any case, we've baked that into our -- in the valuation that we did. In terms of second question, are there CPs? Yes, there are CPs. In terms of the...

On banking relationships.

Yes, on the banking...

And is there a volume commitment such that, for example...

I can't be more specific than that, but there are CPs. We still would want to protect our interest. In terms of -- but honestly speaking, one thing that you'll have to look at is any contract, finally, while we have a CP maybe 2 years later after the transaction as a bank goes away, that's the failure of ours, if we go to -- all of us, right? It's not something with the transaction. We were unable to then provide value to the banking partners to be able to continue with any relationship. That's how we think of any banca relation. And we've actually been, in the last few years, adding new private banking relationships. And wherever we've gone in, even third, we've become the #1 partner in a matter of 2 to 3 years. And that's in spite of us being a, in a sense, competing brand when it comes to banking. So we respect the banking relationships, the franchise, and we are able to provide value. So that will help to deliver to all these new partnerships. But to answer your question, there is a CP. In terms of first look the valuers have looked at the market benchmarks, they've looked at transactions in the market, et cetera. But the way we look at the value of an entity is based on DCF, which is what we've always talked about. So we've looked at their business, the projections and what we can do once we -- if and when we step in together and the benefit that we can get out of combining the 2 entities. So our internal calculation was purely based on what we believe is a true value. It's not linked to necessarily the market. The market benchmarks is something that has come out of the value of the report, what I talked about.

But yes, I mean, see, ultimately, whatever valuations I just quoted are implied by the market only, right? So you could have gone in and said that these are the valuations. I'm just trying to think about why is there such a big disconnect between the way you have thought about multiples versus what the market thinks about multiples of the listed entities. If -- I mean I'm sure you guys would have thought about it, right? You guys would have looked at Chola MS, it's stating at such cheap valuations relative to what we are ascribing to Bharti AXA. And Chola MS has 0 crop. So I'm just trying to think about that arbitrage. Where is this arbitrage? Or this arbitrage is purely because you believe this is all synergy benefits, which we'll realize eventually.

Look, I can't comment on why the market is pricing Chola at that price. But if you look at the actual transactions that have happened in the market where, let's say, PE investments have happened into entities or similar strategic investments have happened, let's say, in the health side or in the GI side. Even minority investments that have happened by PE investors using cash has been at similar multiples. So I think that's what the market is seeing in this industry. And when we look at it, we obviously look at the cost of capital. We look at the cash flows. We look at what benefits we get in terms of synergies, et cetera, and then we do the DCF. And that's how we arrive at the value. That's what we've done. We've not looked at every single market-linked entity as to why someone is trading at a very low multiple. It could be multiple other factors, not the foresee value of the franchise.

And lastly, sir, in your INR 4,600 crores of attributable value, how much is synergy? If you can break it up into synergy versus as a stand-alone basis, if you've done this kind of work. But if you can share some bit of -- is this predominantly a lot of value coming because you believe in dissynergy and that will...

No, no. I mean again, I can't get more specific than that, but let me tell you that, of the total synergy benefit that we believe we should be able to get, we've not factored the full amount into the valuation. Obviously, there's a value from the current franchise in itself. And on top of it, there will be some amount of synergy benefit.

Right. So how should I think about payback periods, sir? Obviously, it's a share swap. But if I were to think about payback periods in terms of earnings, how should I think about that?

We've not looked at it that way. I mean the way we look at it is, on a going concern basis, as a merged entity, how are we able to deliver growth in profitability and how do we see our ROEs improve post this deal in a couple of years, because initially, one or 2 years, we may have this transitionary effect. But in our sense is that this will be ROE accretive to our shareholders in due course in the medium term.

[Operator Instructions] The next question is from Mayank Bukrediwala from Franklin Templeton.

Just one thing. So Bharti AXA is doing crop business 26% of their portfolio. I just wanted to check if post the merger that will continue? Or based on our approach of not being in the crop business, would that be discontinued?

So our view on crop hasn't materially changed. Though this year, I think the crop pricing in the market has improved for some players because of lack of capacity as quite a few of us have indicated. So it's not as if we are suddenly deciding to write crop all over again. But there are certain commitments because most of these contracts now are slightly long term, could be 2 to 3 years, we will have to honor those commitments. And as we go along, we will make up our mind whether we want to continue thereafter or not based on how the underlying business reality of the crop business evolves. We've always said that we -- in our crop, we will look at how the market evolves, how the market changes, and then we'll come back, if at all. So we'll do the same thing with this portfolio. There are certain commitments that we have to honor.

The next question is from the line of Santanu Chakrabarti from Edelweiss Securities.

Congratulations on the deal. My questions are twofold. Firstly, it will be very helpful if you could give some sense of this entire cost rationalization that you're talking about. If you can break it up into some sort of operating milestones, if not absolutely time based, but at least purpose based, as to what are the specific areas where you are going to address? Is it going to be general management? Is it going to be from distribution rationalization? Is it going to be renegotiation of some of the contracts? Each of the milestones of that and how much if they could contribute at a broad level. And my second question is now that you have done this, what would be your incremental, both capacity and appetite, for an acquisition?

Sorry, what was the last bit, Santanu, incremental...

Incremental, both capacity and appetite, for a further acquisition. So I mean, within the next 2 years, can we see anything more? Is it possible after this? How much of chewing time does this take?

So let me answer the second question. And on the specifics and operating cost, I'll ask Gopal to share whatever we can at this stage. And I'll cover -- I'll add anything more that is required. In terms of your appetite, so one of the things that this will do is, even post the combined -- merger of the 2 entities, we will be quite comfortable on the solvency side. So it is not as if we will get constrained for capital after this. But in terms of bandwidth, and again, you've known that we've kind of talked about many opportunities in the past. And we've been very careful about what value we've paid, and we've let go of certain opportunities in the past. Now we will have to take the same call in future. We will also have to evaluate the bandwidth because this would be, honestly, a first experience for us in terms of handling and integration of 2 entities, and we will have to figure out the management bandwidth. Capacity, we may have. But the bandwidth factor, we will have to study before we decide. Inclination, we will continue to remain interested in deals that make sense, what we believe makes sense for our shareholders. But we'll have to understand the management bandwidth as we go through this process. And by the way, before we get into that, this deal has to get consummated and taken through all regulatory and statutory clearances. So until that time, very unlikely, we'll look at it. Gopal?

Yes. I think, Santanu, I think, obviously, we would want to look at synergies of all the points that you mentioned, is all a driver of the thought process that we have, and that is pretty much that we would do in each of those aspects. Now whether you look at, let's say, for example, on the cost side, obviously, the attempt will be to look at breaking down every element of cost, mostly in the context of the point that Bhargav made also with respect to the branch-led expansions that they have. The objective will be to try and optimize the presence with respect to locations so that we're able to have a relatively larger footprint through which we are able to source incremental revenues. Similarly, equally, we will also be looking at some of the other administrative expenses that goes into running of the business. It's something that will again be an area of focus that we will look at optimizing. And obviously, the third aspect is in order to kind of run the business at a scale, given that we expect to have incremental revenues coming in on the distribution side that we have, obviously, the attempt will be to again make sure that we're able to get those economies of scale coming in with respect to incremental growth as well. So that's the third aspect that we will focus. And finally, of course, a lot of cost is also in the context of the distribution or, let's say, the procurement cost. So there, again, obviously, the attempt will be to try and work, again, based on growth synergies. We will look at how we are able to optimize insofar as cost structures are concerned. So it will be a combination of all the 4 that will go insofar as costs are concerned. And this will again be supplemented by, obviously, as we are able to get incremental premiums. And to that extent, if you're able to run the business tightly with higher economies of scale, that by itself should also help us to realize lower cost ratios. So those are the 2 things that we would focus on. So it's going to be, obviously, combination of all. It's not that we want to put any specific milestone to say that we will look at only, let's say, the cost-led synergies as a first milestone and then start looking at, let's say, distribution cost-led synergies that could arise or maybe the third aspect of revenue. I think all of that is something that one is going to drive. And in the process, as we have outlined over the next few years, the attempt in the medium term will be to try and make this accretive.

The next question is from the line of Rishi Jhunjhunwala from IIFL.

I have a couple of questions. One, just wanted to understand what are the ways in which we can leverage the Bharti enterprises involvement here? You had mentioned that at the beginning as well. And are there any kind of lock-ins or any ways in which we are potentially protecting the current business from deteriorating until the time merger happens or after that? Also in terms of retaining the key people in the company, are there any measures or retention clauses or anything of that sort that we have taken care of?

So in terms of the first, there is, of course, the certain key franchises there in terms of the payment bank, et cetera, as also the group. And there, we have kind of entered into some amount of contractual part of the contract. Some certain clauses are already in built. We have a preferential right in terms of the business there. In terms of protecting the business, of course, there will be the usual mechanism that we have contractually agreed to put up in the interim committee mechanism through which we will ensure that the continuity of existing business is maintained. Thirdly, I think there is also -- I think the team in Bharti AXA, the operating team in Bharti AXA is, we believe, very -- culturally, very similar fit team with a lot of, in a sense, past relationship. And we have a lot of regard for that team. So -- and also what we've discussed with the Bharti AXA and the Bharti promoters -- Bharti AXA promoters in this period, there are certain mechanisms that they have already put in to ensure this happens. So all of that is put in place. In terms of going ahead, we will obviously want to have certain specific elements to which we then continue the relationship with the key talent in those entities. That's something that we will work through as we go along.

But on the shareholding side, there is no lock-in for them?

Shareholding, there's no lock-in, no, no. They'll become like a public shareholder and roughly about 7.3%, split 51-49 between the two.

Fair enough. And secondly, if I look at their motor third-party portfolio, so from a loss ratio perspective, they were at 109% in FY '19, 97% in FY '20. Have you done any due diligence in terms of what kind of provisioning that they would have done? Just trying to understand whether -- how their experience in terms of reserve triangle has been? And could there be any surprise risk on the upside or downside there?

So these are areas where we believe we have a fair amount of competence ourselves. So we -- ourselves done, our own natural team has looked at it with great detail, supplemented by an actual diligence that Towers Watson has done and further checked because there's a regulatory requirement by an independent actuary. Our sense looking at the numbers is that they are probably one of the better reserved businesses today at this point in time.

And lastly, just on -- from our promoter perspective. So since ICICI Bank will go down below 50, but how does that work in terms of consolidation? Will we continue to have the control of the Board and, as a result, consolidation won't get impacted?

Yes. Nothing major changes. They'll continue to have 2 nominated directors as they have, ICICI bank that is. We will -- they will remain the significant large shareholder. So at least as of now, we don't see anything that is going to change immediately. Specific on consolidation, I can't answer. That's something the bank will have to answer. But otherwise, from -- in terms of operating structure, there's not much change.

And Board control will remain the same, right?

They have 2 nominees today -- or they had. Until yesterday, they'll continue to have 2 nominated directors on our Board. The Bharti or AXA doesn't have any special rights.

The next question is from the line of Madhukar Ladha from HDFC Securities.

Most of my questions have been answered. Just one question. You mentioned that there were some investment write-offs last year in FY '20. Can you quantify that number?

Yes, that was -- Gopal, you have the number, right?

Yes. So Madhukar, last year, they kind of provided for about INR 157 crores with respect to some of their troubled investments, which is there as a part of the list of downgraded investments. So that's something that they took a provision in FY 2020.

And what was their overall loss ratio?

Overall loss ratio is roughly at about 78%.

The next question is from the line of Deepika Mundra from JPMorgan.

So just 2 questions from my side. You've been trying to grow your retail indemnity health portfolio. Does the merger bring anything to the table regarding that? Like could you give some color on their health book? And secondly, regarding the banca tie ups, could you clarify as to the duration or something around the economics of the tie ups?

So on the second one, Deepika, basically, what we've contractually agreed is that -- is the continuity of the existing arrangement without getting into specifics of these arrangements on similar commercial terms. So we stand to benefit in terms of what they already have. In terms of the indemnity and the health business, a couple of points. One, even their agency channel, largely, the products that dominate the channel is their motor and SME, and we see an opportunity of adding health indemnity to that 6,700 base of agents. Not that every agent does health, but we believe there will be some opportunity there. Similarly, on the banca channel, again, as I explained earlier, they seem to have a very much larger share of motor in the banca business relative to what we've seen for ourselves. Now a lot of times when we have in the past gone into a bank relationship as, let's say, the third entity, we've also started with maybe SME or things that existing partner wasn't doing. In most cases, we've actually been able to increase our penetration of some of the preferred products simply because we've been able to demonstrate value to our partner. So we believe there will be similar opportunities in their bancassurance tie ups that they have, not just in terms of products, but also in terms of the geographical footprint that we have going into the Tier 2 or Tier 3 cities.

The next question is from the line of Sanketh Godha from Spark Capital.

Just 2, 3 questions. First of all, what is the unprovided book of -- on the defaulted bonds of Bharti AXA? Second question is Bharti AXA probably would have one agri in the current year. So what are the states and likely business compared to INR 800-odd crores of business in last year? What is the likely business they will write in the current year? And third is that Bharti AXA has 135 branches and Lombard has around 270-odd branches. So whether there are overlaps, there is opportunity there to get synergies right there? And just wanted to understand how confident -- and also on the employees, basically, whether you see a significant overlap in the employees accordingly, and there is an employee cost savings part into the business. And finally, how confident you are to bring back the merged entity, the combined ratio back to 100 percentage from -- current, it looks like -- on a pro forma basis, it looks like around 105 percentage right now.

Yes. So the -- on the last 2 questions, let me take, and then I'll give it back to Gopal to answer those specifics on the investment, et cetera. So in terms of the last question, obviously, we've looked at what we believe we'll be able to deliver. We believe that in our model, we've been conservative in how staggered the improvement will be. And I think our, in a sense, internal attempt will be to beat our own internal estimates, and that is an execution issue. So the answer is yes. Now can I give you a concrete sense of when we'll get to 100, the answer is no. But we definitely want to bring it significantly below the pro forma merged number as we go along pretty rapidly. In terms of the synergy benefits that you're talking about in terms of branch and some amount of overlaps in terms of the people organization, naturally, there will be, and we'll have to see what we can get out of that. But those are -- as of now, there's a lot of specific detailing work that would need to be done. But we, at least at an aggregate level, when we look at these numbers, we see benefits -- significant synergy benefits. Gopal, the other 2 questions?

Yes, sir, just to add, to follow up at this point. So if I look at Bharti AXA last year, they made around INR 330 crores of expenditure on advertisement and branding. So can we clearly assume that the INR 330 crores is a low line truth, which can be plucked, and the OpEx ratios of the combined entities can significantly improve? Or there is still -- there is an overlap in the INR 330 crores, which can't be completely made 0. In that sense because it's a one entity, branding exercise would be one then.

So none of the expensive -- expenditures, we believe, can become exactly 0, maybe except for some items. But I think the way to look at this is, as I said, in an aggregate basis, they have a 42% expense ratio. Can we shave off some numbers meaningfully? We believe, yes.

[Operator Instructions]

Gopal will answer the couple of other questions.

Sure. I'm sorry, go ahead.

I'll just answer the couple of questions, Sanketh. I think on your point on the first question with respect to, is there any amount additional required to be provided with respect to the troubled assets? Yes. So they do have exposures to ILFS, Dewan, Reliance Capital and Yes Bank. Yes Bank is 100% already provided for. That's already in FY 2020. With respect to the other 3 investments, as of 31 March 2020, they still had a book value of about INR 112 crores, which is something that we have already kind of considered when we have looked at the valuation of the company. So that's about INR 112 crores of investment that's still lying as book value, which will get provided in the normal course. So that's one. Insofar as crop is concerned, I think even for 2021, they do have exposures to crop. And as we have said, our objective will be to kind of honor the commitments that Bharti AXA has won insofar as the crop tenders are concerned. And that's something that we will continue to honor. At this point of time, as we speak, I think the kind of mandate that they have won on the crop side is pretty much on the lines as what you have seen for FY 2020.

[Operator Instructions] The next question is from Vinod Rajamani from HSBC.

All my questions are answered.

We move to the next question. The next question is from the line of Nischint Chawathe from Kotak.

My questions are answered.

The next question is from the line of Anuj Narula from JM Financial.

Yes. So this is [ Mani Desai ]. Can you hear me?

Yes, we can hear you.

Yes. So now coming back to the question of accumulated losses. And so we just wanted to understand the DTA/MAT credit on AXA's book that Lombard can take a benefit of. If you can just throw a little bit light on it. I know you haven't basically outlined the numbers in a finalized form, but any rough idea would help us.

Gopal, do you want to take that?

Yes. So honestly, I think Mani, I think they're all a function of, as I said, what kind of profits that you make. And deferred tax asset by its very nature are items of timing differences. And over a period of time, I think it will get kind of neutralized based on the combined pro forma numbers in line with what I had mentioned even with respect to, let's say, the losses that they have. So one will have to look at the aggregate position, once this entire process of the approvals are all done. And when we would look at consolidating the position, on that basis, we would look at the ultimate tax positions in terms of the combined entity and then give effect to the elements of the matters, including any element of a deferred tax asset or deferred tax liability situation.

The next question is from the line of Ritika Dua from Elara.

My questions have been answered.

The next question is from the line of Saikat Sanbuii from Reliance General Insurance Company Limited. There seems to be no response from the line of Saikat. We'll move to the next question. The next question is from the line of Bhavesh Kanani from ASK Investment Managers.

Well, over the last many, many years, we have had a fairly good execution track record. And in context of that, just wanted to kind of pick your brains on how you approached this transaction from a make or buy decision? As in what are those factors where we felt that we could not make it ourselves and hence decided to go for a buy? And a subset of this question is incrementally from here on, what are the areas within a structure where the buy decision would still be more attractive compared to a make decision.

Look, that's a good question. Now if you look at a make or buy, is it that we couldn't have made any of this? Maybe some elements, it would have been difficult, but a lot of it -- a lot of the part that Bharti AXA has today, we could have been able to build as well. The -- when we look at a transaction, we look at with a very pretty granular lens in terms of how do we create shareholder value for the amount of money that we're laying out. And as I said earlier, we've, in the past, looked at many deals, and we've probably not been able to consummate them simply because we have followed that practice. And that's something that we've done even here. And when I -- when we look at the medium term post-integration and the benefits that we believe we will get out of this transaction, we believe that this transaction will be ROE accretive for our shareholders. And the franchise that we are getting for the amount that we are laying out, we believe we are actually not only speeding up our journey, but also in terms of the aggregate ROE benefit that we are getting, we believe it makes sense for us at this point in time. And when we do our diligence, we probably are, as I said, very granular also because we have our own ground level understanding of each business line and how they're playing out. And we kind of factor all of that into our ROE...

Hello?

Sorry, did I answer your question?

Yes. Just one thing more. Just wanted to get idea of the areas where you thought it's better to go in for a buy right now rather than build it over a couple of years. Just 1 or 2 key areas where kind of this decision to go for a buy was making more sense.

Look, our view has been, and we've kind of articulated this for some time, that I think this industry is ripe for consolidation. And there is -- purely on consolidation, there will be some significant benefits that will emerge to players, which take this route and step ahead of the others in terms of scale, size, capability. That's number one. And that's a factor that we've always looked at when we consider this. Second, we've looked at deals in the past where we've looked at completely complementary areas where maybe a certain franchise could have added new element to us. That's another way of looking at it, and we are always open to those transactions also. But this one was more in terms of the first aspect that I talked about. On top of it, there were certain very powerful distribution platforms that they have, which we believe could be of great value to the combined entity in the future, both in terms of specific dealer relationship and share of certain OEM partners as also in the bancassurance side. The agency number, of course, the 6,700 agents to add that is also a fair amount of effort, and that comes on top of both these two.

The next question is from Sandeep Jain from Birla Sun Life Insurance.

Yes. Most of the thing has been answered. Just one thing. On the health side, is Bharti working on the same style that you are working, like it's not a TPA kind of? You're working directly with hospitals Bharti's working? Or is there any synergy out there also?

Gopal, do you want to take that?

Sandeep, I think that motor is more of in-house. Health is really a capability that we are building as we speak. So at this point of time, that's the area where we would definitely see as an opportunity. At the level of scale at which their business is, they have not necessarily in-housed the health claim servicing function. But in terms of the opportunity for growth or runway for growth, that's a segment that we will clearly look at ramping up, and we will continue to leverage the capability that ICICI Lombard has created in terms of in-sourcing or in-housing those claim settlement practices.

Okay. So they are not in-house claim settlement, they are doing with TPA, right?

That's right.

And you will bring it back to Lombard platform?

Yes, that is right. We will obviously evaluate every contract appropriately, but the direction will be that.

We'll be able to take one last question. We take the last question from the line of Ashish Sharma from ENAM Asset Management.

Just one clarification on the stake of ICICI Bank post the transaction. So I mean banks -- the parent had sold some stake and now the stake is below 50%. So we shouldn't assume that the parent would want to keep it closer to 50% to maintain the majority stake? And also, second would be on the -- on AXA or what should have -- I mean technical know-how, AXA brings on the table. And would there be any -- I mean it would be more of a financial investment for them. Will there be any lock-in for Bharti AXA proceeding?

So in terms of the bank, as I explained that there are certain regulations, which indicate that, for a bank, if you go below 50%, they're supposed to bring it under 30%. But there are precedents in the past where banks have been allowed to hold between this range. And our sense from what we understand from the bank is that they would obviously be making applications so that they can hold on to this chain. And if at all, they have to bring it under to 30%, they will take -- they will get time to do it in terms of doing it in a disciplined manner. In terms of -- but otherwise, I think from a bank's perspective, clearly, they want to remain the #1 shareholder, the promoter of this entity, and we will remain one of the large entities of the banking of ICICI Group. So that doesn't change. Now coming to your second question on AXA. Yes, they are really becoming a public shareholder, a minority, about roughly 3.7 -- 3.5-odd percent. But the -- at least our discussion with them is the fact that they are -- continue to remain very keen on certain areas of the Indian market, and we've already had some discussions on how we can partner and do certain -- bring some of the solutions that they have to the Indian market. One of the advantages that we possibly have relative to a midsized entity is scale, particularly into the smaller markets and some of the tie-ups with large distribution formats that we also have. And they see value in this partnership, even in terms of some of these strategic agendas that they have. So clearly, our conversation with them has been that we will want to work together to see how we can mutually benefit from this association.

We'll take that as the last question. I would now like to hand the conference back to Mr. Bhargav Dasgupta for closing comments.

Thank you. Thank you, everyone. I guess, a great set of questions. For us, this is, as I said, an important decision. We've been open to inorganic opportunities, and we've -- as you know, we've been kind of looking at opportunities, but we've been very careful about what we do and what we buy. And in that context, we are quite excited about this opportunity in terms of creating shareholder fair value in the medium term for all of us. So again, thank you for joining us today, and feel free to reach out separately if you have more questions. Thank you.

Thank you very much.