Why private insurers are coveted buys
By chasing profit over rapid expansion, companies have conserved capital, making them attractive for potential buyers
Among the list of 23 Indian life insurers, Reliance Nippon Life Insurance Company (RNLI) can be considered fairly middle-of-theroad. It does not figure among the top 10 in terms of premium underwritten. Yet, as the fallout of the bankruptcy of Reliance Capital, the holding company of the insurer shows, there is a veritable dogfight for the insurer. Nippon Life, the existing 49 per cent shareholder, wants to become the majority owner while the Aditya Birla Group wishes to merge the company with its own venture.
This week, the lenders to Reliance Capital have said they are not willing to liquidate the company since valuation experts have assessed a sizable value for the company as a going concern. Significantly, 90 per cent of that value of about ~12,000-13,000 crore comes from the two insurance companies it holds — RNLI and the non-life insurer Reliance General Insurance, for which the Piramal Group and Zurich Insurance have submitted expressions of interest.
There are 54 insurance companies in India, covering life, general and health insurance (excluding the reinsurers). One would have thought those wishing to enter the sector would be spoilt for choice. But as the battle for RNLI shows, each of the companies in the sector is valuable. Now, with the Insurance Regulatory Development Authority of India (Irdai) having opened up huge opportunities for the sector in the past few months, the stakes have gone up even more.
Even without the Irdai liberalisation, private insurance companies had become prized assets because in the 15 years since the first of them set up shop, these companies have wisely chased profits instead of trying to expand their reach to reach the uninsured. Out of 23 private life insurers, 15 have completed more than 15 years of operations. Of the 21 private general insurers, eight have completed more than 15 years. This has conserved their capital, making them attractive for the shareholders.
How do we say that? The two common metrics used to judge how well a life insurance company is performing are that of embedded value (EV), and the value of new business (VNB). The EV is the sum of adjusted net worth (the market value of assets) plus the present value of expected future profits on current business. The VNB reflects the expectation of the number of future years the insurer will underwrite at least the same amount of business as it is doing now and with the same level of profitability.
As the table of the listed life insurers, the bigger chunk of the overall insurance business, show, both the numbers look cheerful for all of them. Even RNLI, which is unlisted, has an impressive EV. Since the company is up for sale, it cannot publish a forward guidance like VNB. But, the struggle among the bidders shows, they are confident that the company is expected to remain profitable.
Now compare the health check-up with the number of policies life insurers have issued so far. Even the top private life insurer, SBI Life, has just crossed one million. RNLI is within handshaking distance of thirdranked ICICI Prudential. In other words, the insurance companies have remained profitable by not risking a rapid expansion of their business.
The total capital of the life insurers, as on March 31, 2021, was ~28,346 crore. During FY21, the promoters of the private sector insurers brought in just ~258 crore as additional capital. By not chasing rapid expansion of the number of insured in life insurance, the total benefits paid by the private insurers was just ~1.13 trillion in FY21 — a Covid year. Consequently, they did not need to raise a lot of capital. That is why, as Irdai data shows, none of the insurance companies with foreign joint ventures have crossed 49 per cent foreign direct investment (FDI), although the limit is 74 per cent under government rules. This has the unintended consequence of keeping the insurance companies undercapitalised. “It is one of the reasons Irdai is in favour of reducing the minimum capital requirement to set up an insurance company,” said P J Joseph, former member of Irdai. It provides more scope for entry into the sector, giving new entrants room to buy out an existing company that is not expanding.
The enthusiasm among the investors to pick up stakes in the insurance companies is also impressive because the leading companies in the sector have been “caught bending”, at least twice. In 2015, in the non-life sector, it was found these insurers were paying commissions as high as 70 per cent of the premium for buying insurance, to motor dealers to keep an exclusive arrangement to sell policies on their premises. This year, the tax department again conducted searches in the offices of several insurance companies about allegations they had taken input tax credit far in excess of what they were entitled to. No company has ever owned up to them to report to the stock exchanges about any of these developments.
Keeping these concerns aside, the regulator and the department of financial services in the finance ministry have opened the door big time, for relaxations in the rules for the companies.
The latter has issued the Insurance Laws (Amendment) Bill, 2022, for public feedback. A key change is that the paidup capital required to start general, life or standalone health insurance business at ~100 crore and that for reinsurance business at ~200 crore, will not be written in the Act. These will instead be specified by the Irdai taking into account the size and scale of operations, class or subclass of insurance business and the category or type of insurer.
Debasish Panda, Irdai chairman, has made it clear that the companies can now distribute a far wider range of financial products, which means the distinction between, say, life and non-life or health will not remain in the business of a company. Those will be decided by the boards of the insurance companies. Unlike the present rule, which specifies that nonlife insurance policies will be valid for only one year unless the regulator gives an exemption, companies can decide their duration. And any new types of business underwritten do not need prior approval from the regulator. In related areas, how the companies can park their money for investment has been loosened and so has the age limit for the terms of the regulators. There are lots more of these issued in the past few weeks and months.
It is clearly a great time to be an insurance company.