Nippon Life to buy 26% in Reliance Life

Current regulations allow a foreign entity to hold up to 26% stake in a domestic life insurance firm.

Finance minister Pranab Mukherjee in his budget speech in February proposed to introduce a Bill in Parliament that aims to raise the limit on foreign stakes in local insurance firms to 49% from 26% now.

Until now, Reliance Life was the only domestic private insurer that didn’t have a foreign equity partner.

According to two recent research reports by Edelweiss Securities Ltd and Kotak Institutional Equities Research, R-Cap’s life insurance business is valued at Rs6,376.50 crore and Rs7,115.80 crore, respectively. The price paid by Nippon implies a 62-80% premium to the valuation ascribed by analysts.

Morgan Stanley Financial Services Pvt. Ltd was the valuer for the deal.

“The premium that Nippon has paid may be for a potentially high embedded value of R-Cap’s life insurance business along with an upside for growing business in an emerging market," said Abizer Diwanji, executive director at audit and consulting firm KPMG.

He added that the deal would certainly set a benchmark and provide confidence to other foreign companies looking to enter the Indian life insurance sector.

The entire pack of the Anil Ambani-led Reliance Group of companies closed with gains on Monday on the Bombay Stock Exchange. R-Cap rose 9.72% to end at Rs561.80 even as the exchange’s bellwether equity index, the Sensex, rose 1.46% to close the day at 18,439.48 points.

While insurance industry experts termed the deal “expensive" for Nippon Life, Reliance Life said the Japanese partner has vast experience in handling traditional insurance products and the partnership would help the Indian company grow in a new regulatory environment when domestic insurers are shifting focus from unit-linked insurance plans (Ulips) to traditional products.

There are 23 life insurance companies in the Rs14.7 trillion industry and all of them are making this shift to protect margins.

In September, the Insurance Regulatory and Development Authority (Irda) tweaked the rules in such a way that life insurance companies are no longer able to pay hefty upfront commissions to agents selling Ulips. They also require more capital to grow their businesses in India.

Among other things, the regulator put restrictions on fund management charges, capped surrender charges and stipulated minimum guaranteed returns in some equity-linked products in such a way that the insurers are not only required to inject more capital to sustain businesses, but are also forced to do away with hefty agent commissions.

“The (Reliance Life-Nippon Life) transaction is yet another proof that insurance companies need to spruce up their distribution, sales and cost models to capture the market, which remains under-penetrated," said Diwanji.

According to him, only those companies that had existing scale would be able to do well in the changed regulatory environment and Nippon may have therefore chosen Reliance Life Insurance for its Indian venture, rather than trying its hand at a greenfield effort.

“Reliance has built the scale in its life insurance vertical by investing capital and has a strong retail platform due to the other businesses of R-Cap," Diwanji said.

Till September, Reliance Life used to collect 83-84% of its new business from Ulips, but in the second half of the fiscal year, around 50% of its new business premium was collected from traditional products, said Sam Ghosh, chief executive of R-Cap.

Margins in sales of traditional life insurance products are higher than that of Ulips, said Sanket Kawatkar, head (life insurance consulting) at Milliman India Pvt. Ltd, a consulting firm.

“I am hearing that it’s an expensive deal for Nippon Life," he said. “The mood in the insurance market is depressed, but the long-term potential for life insurance business is intact."

The valuation looks particularly high when Reliance Life’s first year persistency is taken into account.

Persistency, or the percentage of life insurance policies that are renewed, is a crucial yardstick for valuing a life insurance company.

According to a consultant with a multinational company, the lower first-year persistency (54%) of Reliance Life compared with its peers (70% and above) has been discounted by lowering the new business achieved profit (NBAP) multiples.

“Instead of 17-18 times the multiple of NBAP that the company was seeking, the buyer has paid around 15-16%," the consultant said. He did not want to be identified.

Though there is no standard valuation parameter for life insurance companies in India, over the past few months insurance experts have maintained that the valuations of life insurers have come down after the change in Ulip rules, and all insurers are struggling to bring in as much cash as possible to maintain growth.

Domestic life insurers have infused close to Rs31,000 crore till December, according to data by Life Insurance Council, the representative body of Indian life insurance companies.

A significant portion of this capital has been brought in by the foreign companies that have tie-ups with domestic insurers.

Life insurers are now awaiting guidelines for initial public offerings by Irda to raise capital from the public. To ensure that the equity of both domestic and foreign joint venture partners is diluted on a proportionate basis in a public issue, the industry is awaiting the Bill that proposes to increase the FDI limit.

R-Cap’s Ghosh expects Nippon Life to provide its “experience, expertise and global best practices in areas of product development, underwriting, investment management, distribution, customer relationship management and risk management".

Ghosh said R-Cap, depending on how its individual businesses fared, may look at further overseas partnerships such as the one with Nippon, signalling that it may explore more such foreign tie-ups in the future.

Nippon Life Insurance posted revenue of Rs3.24 trillion and profit of Rs11,700 crore for the fiscal year ended 31 March. The company sold around 1.4 million policies, taking the total number of policies in force to over 14.7 million during the same period.

Apart from life insurance products, Nippon Life Insurance sells products such as defined contribution pension plans and medical coverage plans.

Reliance Life has sold at least seven million policies and managed assets worth at least Rs17,000 crore as on 31 December.

The company has infused at least Rs3,000 crore so far in growing its life insurance businesses, and the deal with Nippon Life will help the company to cover most of this cost.

“At this point, it seems to be more of a financial investment than a strategic one," said a financial sector analyst with a Mumbai-based brokerage. He did not want to be identified as he is not authorized to speak to the media directly.

“Reliance Life Insurance has started off on a clean slate when it comes to traditional products, and with Nippon’s help it would be easier for them to replicate what they have done in other markets," he said.

Commenting on the possibilities of the crisis in Japan posing a problem for the deal to be consummated, the analyst said that since the extent of the damage caused in the country was uncertain, it was too early to say anything. “However, if the general economy goes belly up, there may be issues."

At the company’s last annual general meeting in September, R-Cap chairman Anil Ambani had said that while many of the “giants of India’s financial service market have grown on the back of tie-ups with large foreign partners, our growth is totally organic and made in India".

anirudh.l@livemint.com

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