The performance of the stock market in 2015 hasn’t been much to write home about. But insurance has been one sector that has been buzzing with a lot of investor activity. This is thanks to the long-pending Insurance Laws (Amendment) Bill, 2015, that was passed last year which, among other tweaks, increased the FDI limit in insurance from 26 per cent to 49 per cent. This triggered a spate of deals in the insurance sector. Foreign partners have been upping their stakes in their joint ventures with Indian players, both in the life and non-life insurance space.
Aside from providing the much needed capital for growth, these deals have also provided a better benchmark to value insurance businesses, in turn giving a fresh lease of life to banking and financial stocks. Stocks such as Max India, Reliance Capital and Bajaj Finserv — conglomerates in the financial services space — whose insurance subsidiaries account for a substantial portion of their earnings, have been in focus.
But if recent deals are any indication, other stocks such as Housing Development Finance Corporation (HDFC), State Bank of India (SBI), and ICICI Bank, where the insurance business contributes only a small portion of the companies’ overall earnings, could also get re-rated.
So if you are in a limbo not wanting to bet on the core business of banks or financials, you can cherry-pick some of the parent companies that have stakes in leading Indian insurers. These companies are likely to see substantial unlocking of value in their insurance subsidiaries. And if private insurers finally get listed on the stock exchanges in 2016, you can catch a piece of this action too. Owning an insurance stock along with your policies may not be such a bad idea.
Why now?
Insurance subsidiaries of companies in the financial services space have long been undervalued. So what has changed now? For one, after the insurance sector opened up in 2000, both life and general insurance have gone though a series of regulatory changes since 2010. Most players now have been focussing on cost efficiencies and rebalancing their product portfolio to fit the regulator’s Bill.
Until recently, only few insurance players were profitable. But many players now, both in the life and general insurance space, have turned profitable. Of the 24 life insurers in the country (including LIC), 21 are profitable as of March 2015. Five years ago, of the 23 life insurers, only eight were profitable.
In the general insurance space, there are 28 players (excluding GIC, which is a reinsurer). Of this, six are in the public sector space; two are specialised insurance companies — Agriculture Insurance Company of India (AIC) and Export Credit Guarantee Corporation of India (ECGC). In 2014-15, of the 26 private players, 14 were profitable. In 2009-10, of the 13 private players, seven were profitable.
Two, the increase in FDI limit has now opened up avenues for listing of insurance companies or transferring shares in favour of their foreign partners — we have seen many such deals in 2015. Importantly, these deals have happened at 20-30 per cent higher value than the earlier estimated value for these insurance companies.
ICICI Bank’s stake sale in ICICI Prudential Life Insurance Company in 2015, for instance, valued the insurance company at ₹32,500 crore, which is about 25 per cent higher than the analysts’ earlier estimated value for the business. Similarly, Reliance Capital’s recent 23 per cent stake sale to Nippon Life Insurance pegs the valuation of the insurance business at about ₹10,000 crore. This is over 35 per cent higher than the earlier consensus estimate.
In the general insurance space, too, deals have happened at a plum price. ICICI Bank’s stake sale in the general insurance business valued the insurance company at ₹17,225 crore, which is over 40 per cent of the valuation estimated earlier.
It is true that the extent to which banks and other financial services companies will benefit from such value unlocking will depend on the proportion of the contribution of the insurance business to the company’s overall business.
Unlocking significant value
For players such as Max India and Reliance Capital, for instance, the value unlocking will be substantial; 55-80 per cent of these companies’ fair value (calculated on the basis of sum-of-the-parts value) comes from their insurance businesses. Other stocks, such as SBI, HDFC and ICICI Bank, derive a lower share from their insurance business — 6-17 per cent of their SOTP (sum of the parts) value.
Nonetheless, given that only few private insures have a notable market share in the industry, the value unlocking can be significant.
Here are six companies that either derive a chunk of their earnings from insurance businesses or have stakes in leading players.
Deals in the life insurance space have taken place at one to three times the embedded value of the life insurance business. In the general insurance space, deals have happened at one to two times their one-year forward gross written premiums. For arriving at the value of insurance businesses, we have assigned multiples based on the growth prospects, earnings visibility and market share of the insurers in the life and non-life space.
Max India is a player that has interest across life and heath insurance, as well as healthcare businesses. Max Life is one of the key life insurers in the country. Max Life delivered a growth of 12 per cent in total business premium in 2014-15. The company’s rank within private players has gone up to fourth now from seventh five years ago. However given that the company has a higher share of participating policies (57 per cent), IRDA’s proposed guidelines on limitation of management expenses can have an adverse impact on its profitability.
Max Bupa (heath insurance), in which Max India holds 51 per cent stake (after its recent stake sale), is also a fast growing business. Max Bupa is one of the four standalone health insurers. The company’s gross premium grew 21 per cent in 2014-15. However the company is yet to break even. Max India recently sold 23 per cent stake for ₹191 crore to Bupa.
Max India recently received court approval for demerging into three companies, all of which will get listed once the demerger process is complete. With this, Max Life, the company’s life insurance business, will be the first life insurance company in the country to get listed as Max Financial Services (MFS).
The second company, Max India, will have Max Healthcare, Max Bupa Health Insurance and Antara Senior Living. The third entity will be Max Ventures, which will be the investment arm of Max Speciality Films, which manufactures specialty packaging and lamination films.
Reliance Capital is a financial services company with interest in insurance (life and general), asset management, consumer loans and broking.
Reliance Life Insurance is one of the leading players in the space, ranking fifth among private life insurers (in terms of new business premium). The company’s total premium grew 7 per cent in 2014-15. Nippon Life recently bought 23 per cent stake in Reliance Life Insurance (part of Reliance Capital), pushing up its holding in the company to 49 per cent. Reliance General Insurance is also a leading player in the non-life space, ranking fifth amongst private players in terms of gross premium. In 2014-15, the gross premium grew 13 per cent.
Reliance Mutual Fund ranks among the top three in the industry. Nippon Life Insurance, which had a 35 per cent stake in the company, recently bought an additional 14 per cent stake, valuing the business at ₹8,542 crore, over 5 per cent of its mutual fund AUM (asset under management) as of December 2015.
Bajaj Finserv has 74 per cent stake in Bajaj Allianz Life and Bajaj Allianz General Insurance and also a 57.5 per cent stake in Bajaj Finance, one of the leading non-banking financial companies.
Weak economic environment and regulatory changes weighed on the performance of Bajaj Allianz Life Insurance. The total premium for the company grew a modest 3 per cent in 2014-15. But the company still ranks among the top five in the life insurance space in terms of total business premium. It has also been reporting profits since 2009-10. In the general insurance space, Bajaj Allianz continues to rank second amongst private players (based on gross premium). The company has been one of the most profitable insurers. In 2014-15, its profit grew by 37 per cent.
There is, however, a risk to valuations. Allianz (foreign partner) has a call option to increase its stake to 74 per cent, subject to regulatory approvals. This option expires in July 2016. With the FDI limit for insurance increased to 49 per cent, the value of these businesses at 51 per cent stake accruing to Bajaj Finserv could come down. But reports suggest that stake dilution, if and when it happens, will be at market rates and not unfavourable to the company.
ICICI Bank is one of the leading private banks in the country. While steady loan growth and improving margins are positives, increasing stress on its asset quality in recent quarters has weighed on the stock performance. However, ICICI Bank also has presence in life insurance, general insurance and asset management through its domestic subsidiaries, which can unlock value for investors. ICICI Prudential Life Insurance ranks number one amongst the private insurers. The company’s total premium grew by 23 per cent in 2014-15 and 35 per cent in the first half of this fiscal. ICICI Bank recently approved the sale of its 6 per cent stake in ICICI Prudential Life Insurance Company.
ICICI Lombard Insurance also ranks number one in the general insurance space. The gross premium for the company has grown by 18.7 per cent in the first half of this fiscal. ICICI Bank recently approved the sale of 9 per cent stake in ICICI Lombard to its joint venture partner Fairfax Financial Holdings.
Market leader Housing Development Finance Corporation (HDFC) continues to deliver healthy growth in loans. HDFC’s steady growth in the retail loans, possible upsides on the margin front and low delinquencies will continue to drive earnings growth.
Aside from a strong core business, stake sale in HDFC’s life, general insurance and asset management can act as a trigger for the stock.
Housing Development Finance Corporations’ s 23 per cent stake sale in its general insurance business, —HDFC ERGO, to its joint venture partner, Ergo Insurance Group, is one of the many insurance deals that have taken place in the last one year. The deal pegs the value of the general insurance business at about ₹4,900 crore. HDFC ERGO ranks fourth in the general insurance space in terms of gross premium. HDFC also agreed to sell its 9 per cent stake in HDFC Life to its foreign partner, Standard Life, in 2015, pegging the value of the life insurance business at about ₹19,000 crore. HDFC Life ranks second among private players in terms of total premium.
Most public sector banks continue to reel under slower credit growth, increasing loan delinquencies and margin pressure.
The script is not very different for State Bank of India (SBI), the largest bank in the country.
However, SBI has been planning to monetise its non-core assets such as in its insurance ventures, which will help the bank raise the much needed capital and unlock value in its subsidiaries.
SBI Life is among the top three private life insurers in the country. The company’s premium grew 20 per cent in 2014-15 and 33 per cent in the first half of this fiscal. SBI General ranks eight among private players in terms of gross written premium that grew 33 per cent in 2014-15.
The bank informed the BSE that the executive committee has authorised divestment of its stake in SBI Life Insurance by up to 10 per cent.
It has also decided to dilute its stake in SBI General Insurance from 74 per cent to 51 per cent in favour of its foreign partner, Insurance Australia Group (IAG).