At a premium?

Last Updated: Thu, May 17, 2012 20:00 hrs

New York Life last month exited its decade-long life insurance partnership with Max India by selling its 26 per cent stake to Mitsui Sumitomo for Rs 2,731 crore. Investors in quite a few other life insurance companies are also looking to sell their stake. That’s because the business case for the country’s 23 private life insurers doesn’t look very good. Twelve years after the sector was thrown open for private investment, only a handful of them are profitable. Income from new premiums has declined for at least six quarters. Rising gold and real estate prices reveal those are preferred destinations for investment. Unit-linked insurance plans, or Ulips, went out of favour once the regulator capped the expenses that could be deducted from the premium.

Costs for the insurance business in India are high, given most insurers go through agents or a bank network. And private insurers find it difficult to compete with sector behemoth Life Insurance Corporation (LIC) because buyers are comforted by its ownership by the government and its customer-friendly settlement record. It was expected, when the business was opened up, that LIC would see its market share fall to below 50 per cent in 10 years’ time; its share of new premium income is 72 per cent. Regulatory objections to Punjab National Bank’s offer to buy 30 per cent in MetLife for Rs 1 have not gone down well with investors in the sector, either. It’s a business decision, good or bad, and is best left to the buyer and seller.

Investors would have endured all this had there been some light at the end of the tunnel. But there isn’t any — the United Progressive Alliance government has failed to raise the foreign investment cap from 26 per cent to 49 per cent. Some Indian banks that had floated life insurance ventures now realise they have to earmark funds urgently to meet the new capital adequacy norms, so there isn’t enough to spare for the life insurance arm. And some Indian investors want to exit because they need to deploy the money elsewhere. On the positive side, the companies seem to have generated good value. Max New York Life, now Max Life Insurance Company, was valued at Rs 10,504 crore for the deal. A year ago, Nippon Life bought 26 per cent in Reliance Life for Rs 3,000 crore, valuing the company at over Rs 11,000 crore. However, this means that the currently depressed primary market cannot absorb public issues by these companies; five issues by life insurers, of 20 per cent each, could suck out Rs 10,000 crore. In effect, this exit route for the investors is blocked; till then, they will have to depend on private deals.

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