FDI cap in insurance raised to 49%

The insurance sector finally had its moment in the sun after the Budget increased the FDI limit in insurance to 49 per cent. After the insurance sector opened up in 2000, both life and general insurance businesses have gone though a series of regulatory changes. Until recently, only few insurance players were profitable.

Also, the lack of valuation benchmarks in the listed space has kept investor interest tepid. But now, many players, both in the life and general insurance space, have turned around and are profitable.

With a possible recovery in the economy, and structural changes done with, insurance players are likely to get a leg-up.

The much-awaited increase in the FDI limit in insurance to 49 per cent will help the insurance industry in two ways. One, this help companies access capital more easily, which is huge positive, given that the insurance sector is capital intensive.

Two, this could act as a trigger for listing of insurance players, which will provide a better yardstick to value these companies.

For many conglomerates in the financial services space, their insurance subsidiaries are still undervalued, in spite of accounting for a substantial portion of their earnings.

Companies such as Max India, Reliance Capital, Bajaj Finserv and Sundaram Finance will see substantial value unlocking.

For instance, more than 75 per cent of Max India’s value (sum-of-the-parts) valuation comes from the life insurance business. For Bajaj Finserv, 44 per cent of its value comes from the life insurance business and 28 per cent form the general insurance business.

For Reliance Capital, 35 per cent of its value comes from the life insurance business and 13 per cent comes from the general insurance business.