India’s private sector life insurance players remain in the red, even 10 years after breaking ground in the domestic insurance business, with sustained profitability eluding most companies. While life insurance companies do not disclose their embedded value, the actual measure of their profitability, several insurance officials said it was not even twice the capital infused for many players. None of them wanted to be identified by name for this report.
Embedded value (EV) is defined as the present value of the future profits expected out of the current block of insurance business. The Insurance Regulatory and Development Authority (Irda) requires the EV of a life insurance company to be at least twice its paid-up equity capital, if the insurer wants to access capital markets and dilute promoters’ holding.
“Very high level of capital has been infused by the insurance industry, but the corresponding level of profit is yet to be made,” said a senior executive of a private life insurance company.
“Only two or three players such as Kotak Life have been able to achieve an EV that is at least twice the capital infused. The recent Ulips and pensions have further reduced the margins for the insurers,” the executive added.
According to the unaudited data of Life Insurance Council, companies had infused Rs 33,550 crore in business till last February against Rs 31,360 crore till February 2011. ICICI Prudential Life insurance has infused Rs 4,790 crore, Bajaj Allianz Life Rs 1,211 crore and HDFC Life Rs 2,160 crore till this March. Cumulative losses of the life insurance industry stood at Rs 20,569 crore in 2010-11 (Rs 20,143 crore in 2009-10). Figures for 2011-12 are not yet available.
Though dozen-odd companies have been reporting accounting profits, it will still take a while for them to wipe off their accumulated losses. ICICI Prudential Life insurance reported 71 per cent increase in net profit at Rs 1,384 crore during FY12 against Rs 808 crore 2010-11, while SBI Life posted 52 per cent increase at Rs 556 crore for 2011-12 over the previous year. HDFC Life insurance, another leading player, registered a maiden profit of Rs 271 crore in 2011-12, while Reliance Life has also reported a maiden profit of Rs 373 crore for 2011-12 against a net loss of Rs 129 crore in 2010-11. These are statutory profits as per Indian accounting standards and these insurers still have accumulated losses.
High growth and surging valuations of insurance companies at the beginning of the century drove several domestic companies, retail giants, public sector banks and global insurance giants to sign up joint ventures for a foray in the life insurance business. Most Indian promoters believed they would make big bucks once the cap on foreign direct investment (FDI) was raised from the current 26 per cent to 49 per cent. But compulsions of coalition politics have ensured that status quo remains on the insurance reforms. As a result many foreign and domestic promoters are being forced to rethink their plans.
In a report released last November, consulting firm McKinsey said India was one of the least profitable life insurance markets in Asia. Return from reserves (calculated as statutory net profits divided by total technical reserves) was -27 basis points for the Indian insurance industry from 2004-2009, while it was 25 bps for Japan, 74 for South Korea, 118 bps for China, 203 bps for Thailand, 308 for Indonesia and 427 bps for the Philippines.
The McKinsey report, titled India life insurance 2.0, claimed that more than 50 per cent of the capital invested by insurers was used to fund accumulated losses incurred largely to create distribution capacity.
Life insurance business is capital-intensive, and insurers are required to infuse capital at regular intervals to fund new business streams, maintain solvency, set up branches and invest in technology. The experience of the insurance markets globally indicates that companies in the life sector take seven to ten years to break even.
Last month, Japan’s Mitsui Sumitomo Insurance (MSI) bought 26 per cent stake in private insurer Max New York Life Insurance (MNYL) for Rs 2,731 crore, valuing the insurer at Rs 10,504 crore. The all-cash deal represents a multiple of 3.3 times ‘embedded value’ as of March 31, 2011, and was called as a “super premium deal for Max India,” by analysts and rival insurers. MNYL started as a joint venture between Delhi-based tycoon Analjit Singh’s Max Group and New York Life Insurance where New York Life exited MNYL.
In a similar deal last October, Japan’s largest private insurer Nippon Life Insurance bought 26 per cent stake in Reliance Insurance for Rs 3,062 crore. The transaction valued Reliance Life at Rs 11,500 crore. Analysts believe Nippon paid more than 60 per cent premium to the valuation.
Last year, the Bharti group too announced exit from its financial services joint ventures with French firm AXA, and sale of its entire 74 per cent stake in both general and life insurance businesses. Bharti’s deal with Mukesh Ambani-owned RIL, however, failed to go through and talks are on with other unnamed investors.
“The decision (to exit) is in line with Bharti’s strategy of focusing its energies and financial resources in businesses where it is making a deeper impact both in India and overseas. The financial services ventures do not fit into Bharti’s long-term growth plans,” Bharti said in a statement.
Retail major Future Group, led by founder and group CEO Kishore Biyani, is also scouting for partners to exit from its life insurance joint venture, Future Generali Insurance.
Independent insurance consultant Ravi Trivedy said, “A lot of Indian promoters went into business assuming that they would exit once the FDI cap was hiked to 49 per cent. Although foreign players want to continue in India, they question why they should remain minority investment partners with no hope for the future? Global accounting rules require a company to hold at least 51 per cent stake to consolidate their results.”
Ashvin Parekh partner, national leader Ernst & Young said, “Many foreign promoters present here are going through major turbulence in their home countries. I do not give much importance to FDI as, after a certain stage, most companies had accepted that the cap would not be lifted. The real issue is with a growth of 15-16 per cent compared with 32 per cent witnessed earlier, more capital will be required. This will be a challenge.”
“Some of the players, seeing huge growth in telecom and retail, would instead want to use capital in their core businesses instead of pumping more money in insurance,” added Parekh.