Mumbai: Intact Insurance Co., Canada’s largest home, auto and business insurer, and Germany’s third largest insurance group, HDI-Gerling International Holding AG, have emerged as top contenders to buy a 26% stake in Anil Ambani-owned Reliance Capital Ltd’s non-life insurance arm, Reliance General Insurance Co. Ltd, according to two people with direct knowledge of the development.
The two, neither of whom wanted to be identified, also said the deal value could be around Rs 1,500 crore, which would make it among the largest foreign investments in the insurance business in India.
One of the two said it was only a matter of time before “a term sheet” is signed by “Reliance Capital, Reliance General and the foreign partner”.
To be sure, deals of this nature are never final till they are signed and, even then, are subject to approvals from concerned regulators.
A Reliance Capital spokesperson termed the news of the potential deal speculative and said the company wouldn’t comment. Gilles Gratton, vice-president (corporate communications) at Intact Financial Corp. (which owns Intact Insurance) also declined to comment.
Replying to an email, Martin Schrader, press officer at Talanx AG that controls HDI-Gerling, said, “It is our policy not to comment on market rumours and speculations.”
The stake sale in Reliance General is part of holding company Reliance Capital’s plan to reduce debt. The company has already repaid part of this with money received from Nippon Life Insurance Co. for stakes in Reliance Capital’s life insurance and asset management businesses.
“Between October and March 2011, we have managed to reduce our debt by Rs 2,700 crore. Another around Rs 1,500 crore that we will get from Nippon Life in lieu of the asset management company’s stake will also be used to reduce debt,” said one of the two people mentioned in the first instance, a senior executive with Reliance Capital. “The process for the stake sale in the general insurance business is also on, and once that is completed, debt should come down by another Rs 1,000-1,500 crore.”
That would bring down debt to around Rs 1,000 crore.
UBS Securities India Pvt. Ltd has been appointed as the adviser to Reliance General for the deal.
There are 27 non-life insurers in India, and Reliance is one of the few private ones without a foreign partner. In April, the industry underwrote a total gross premium of Rs 6,506.51 crore, a growth of 15.73% from the year-ago period. Reliance General underwrote a gross premium of Rs 233.36 crore in April.
The company made a loss of Rs 250 crore in the last quarter of 2011-12 largely on account of third-party motor claims, according to an Edelweiss Securities Ltd report.
The general insurance business has been hit because of third-party claims, which will continue in FY13-14 as well, albeit at lower levels of less than Rs.100 crore, it said. “We view (the possible) stake sale as a positive development,” added the 22 May report.
Reliance General has been scouting for a foreign partner for a year. Intact Insurance is a relatively new name in the race. US-based general insurer Travelers Group was a strong contender around a year ago, till it bowed out recently, said the two people.
Intact Insurance is Canada’s largest home, auto and business insurance company with at least four million customers. HDI-Gerling is the third biggest insurance group in Germany.
HDI-Gerling currently has a non-life insurance joint venture in India with Kolkata-based Magma Fincorp Ltd. The joint venture, Magma HDI General Insurance Co. Ltd was formed in 2009, but is yet to launch its products.
Before it acquires a 26% stake in Reliance General, HDI-Gerling will have to to sell its stake in Magma HDI General. A foreign insurer can’t have stakes in two Indian insurers that are in the same business.
That shouldn’t be a problem, said an investment banker who specializes in insurance deals. “After the introduction of regulations for ‘amalgamation and transfer of general insurance business’ in India by the Insurance Regulatory and Development Authority last year, it is not difficult for an existing foreign company in India to exit one insurance joint venture and enter another,” added this person, who did not want to be identified.
Over the past year, Reliance Capital’s stake sales in its life insurance and asset management businesses have helped it improve the capital structure. Last week, Reliance Capital reported a net profit of Rs 330 crore for the fourth quarter of fiscal 2012, which, according to Macquarie Capital Securities India (Pvt.) Ltd, was far ahead of estimates, “due to capital gains of Rs 450 crore in the life-insurance business following a stake sale and cost rationalization across segments”.
Reliance Capital Asset Management, which manages assets worth at least Rs 1.4 trillion across mutual, pension and hedge funds, recorded a net profit before tax of Rs 308 crore. “The profitability improvement in the AMC business is mainly due to cost rationalization and a change in the product mix. With a focus on a leaner cost of operations, operating costs declined 20% year-on-year compared to a 9% decline in total income,” said the 21 May Macquarie report.