The passage of the insurance bill in Parliament comes as a tide that can lift the fortunes of Indian private sector insurers. It clears the way for foreign joint venture partners to raise their stakes, thus bringing capital into the sector. Some insurers may decide to list now which will improve disclosure norms, bring in uniformity of valuation methods and provide a valuation benchmark. This in turn will unlock value for the parent company (and their shareholders) of these insurance ventures.

Currently, the market is valuing insurance companies at 1 to 1.6 times their one-year estimated embedded value, which is at a discount to past transactions, says a note from Societe Generale. New York Life Insurance Co.’s sale of its stake in Max Life and the Reliance Life to Nippon happened at prices close to three times the embedded value of the firms. The opening up of the sector will likely trigger more transactions and help in value discovery. Embedded value of a life insurance firm is adjusted net asset value added to its present value of future profits.

Note that the increased valuations are warranted by fundamental factors as well. The insurance sector might well be turning a corner after four years of regulatory upheaval which saw new premium collections in the life segment falling by as much as one-quarter between 2011 and 2014. Now, in the first nine months of the current fiscal year, private life insurers are registering a growth in premium collections.

Remember that the economic slowdown and the shift in household savings to physical savings also played a part in the woes of life insurance firms. With the growth forecast to improve in the coming years, new premium collections are also bound to bounce back. Already, persistency levels (proportion of policies that continue to generate renewal premiums) have improved for most private firms.

Moreover, the problems of the past four years have also made these firms tighten their belts. Expenses as a proportion of premium have come down significantly for most firms. This has led many of them to start making profits, though it must be noted that the lack of growth in previous years and surrender of unit-linked insurance plans also helped boost profitability. Further growth will improve the return on embedded value thus providing a trigger for re-rating of these stocks.

The extent to which the parent companies of these private insurers benefit will of course depend on how much this business contributes to their earnings, the financials of the business and whether there are other factors such as put options given to foreign partners at pre-decided prices, like in the case of Bajaj Finserv Ltd.

“We expect listing of life insurance companies to happen at around 3.0x embedded value. This could be a big re-rating trigger for the potential listed life insurance plays—Max India, Bajaj Finserv, Reliance Capital and Aditya Birla Nuvo," said the Societe Generale note.

The writer doesn’t own shares in the above-mentioned companies.

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