Rs 50,000-cr cheer for life insurance?

After passage of Bill raising cap on foreign investment to 49% in the sector, experts say this money can be raised in the next 3 years; top five can make gains of Rs 20K crore

After the passage of the insurance Bill, Indian promoters of life insurance companies are expected to see inflows of around Rs 50,000 crore (Rs 500 billion) through stake sale to foreign partners or other financial intermediaries and issue of more shares.

Bupa and Axa have already declared their intention to raise stakes to 49 per cent in their joint ventures with Indian firms in the sector.

Reliance and Housing Development Finance Corporation are in talks with their foreign partners.

Kotak Institutional Equities, in a recent report, says the top five life insurance companies -- Bajaj Allianz, HDFC Standard Life, ICICI Prudential, Max Life and SBI Life -- stand to make capital gains of Rs 20,000 crore (Rs 200 billion) if they pare their stake to 51 per cent, without issuing more shares.

The report said that improving 'Annual Premium Equivalent' flows on strong capital markets will boost Embedded Value growth, driving valuations of insurance companies (and capital gains for their parent).

Ashvin Parekh of Ashvin Parekh Advisory puts the number at Rs 50,000 crore (Rs 500 billion) over the next three years for life insurance.

“Since most life insurers have a clause in their agreements that once the Bill is passed, the foreign player will raise stake to 49 per cent in three years, most of this money for the top players will come by then,” he said.

Unless the foreign partner is not doing so well in its respective country and doesn’t have enough capital to bring into India, there is no reason for them to not increase their stake.

Sources in the sector said the figure of Rs 20,000-crore (Rs 200-billion) capital could see an uptick when private equity deals for price discovery happen in the near future.

"No major financial transaction has happened and, hence, the average figures quoted could see significant changes.

“The embedded value calculation would also depend on the new premium collection for FY15, which could see a further upward movement," said the chief financial officer of a private life insurer.

Embedded value of a life insurance company is the present value of future profits plus market value of net assets (accumulated past profits).

Also, despite having the option of issuing fresh shares or selling existing stake, the top players are very well capitalised and their existing business will churn enough money for them to expand their businesses, say those in the sector.

This obviates the need to issue new shares.

“Most large companies are well capitalised and reported solvency ratios of 200-700 per cent, significantly higher than the minimum regulatory requirement of 150 per cent,” added the Kotak report.

Says Amitabh Chaudhary, managing director, HDFC Life: “Most of the bigger players need not raise additional capital by issuing shares because they are well capitalised. Additional capital will require servicing in terms of dividend payment, which is unnecessary.

“However, smaller entities will need a lot of money to expand their businesses. Therefore, issuance of fresh capital may be needed.”

Anuj Agarwal, MD of Bajaj Allianz Life Insurance, agreed that the large companies did not require capital and the real opportunity was for the smaller ones.

In December 2014, HDFC had said Azim Premji Trust would buy 0.95 per cent stake in its life insurance venture, HDFC Life, for Rs 198.9 crore (Rs 1.98 billion).

The deal valued HDFC Life at Rs 19,890 crore (Rs 198.9 billion).

After the entire sale of equity shares is completed, the company will hold 71.42 per cent of the total issued and paid-up equity capital of HDFC Life.

Media reports also say ICICI Bank is planning to sell part of its stake in its life insurance venture.

Experts also said all transactions would see at least 1-1.5 times the EV in the near term.

A senior insurance executive said sectoral stocks had moved significantly since the Bill's passage, proving the transaction price would be much higher than the current valuation.

Analysts also believe bancassurance-led entities will see at least a 15-20 per cent return on EV from FY16, which would increase their capital gains from the stake sale.

Sector executives said the markets were valuing life insurance companies at 1.5-2 times the one-year forward embedded value but listing might happen at about 3.5 times.