Reliance Life Insurance's valuation has boosted sentiments within the insurance industry…
19-Apr-2011 •Niti Kiran
In a deal that is being billed as the largest foreign direct investment (FDI) in the Indian financial sector, Japanese insurance firm Nippon Life Insurance will acquire 26 per cent stake in Reliance Life Insurance. The Japanese firm will invest Rs3,062 crore (US$ 660 million) in the Indian company. This transaction pegs the total valuation of Reliance Life Insurance at approximately Rs11,500 crore (US$ 2.6 billion). However, the transaction will materialise only if it obtains the necessary regulatory approvals.
Nippon Life will hold a proportionate directorship in the company. It will also have to get the approval of the Japanese regulator. The Insurance Regulatory and Development Authority (IRDA) will also get assurance on Nippon Life’s financial health from the Japanese regulator. According to a report by Edelweiss Securities, the deal is expected to be executed in the next three to six months.
Currently, Indian legislation does not allow foreign firms to own more than 26 per cent of an Indian insurance business.The proposal to increase this ceiling to 49 per cent is under consideration.
RCap: emerging financial powerhouse
Reliance Capital (RCap) is a leading private sector financial services company. It has undergone significant strategy changes in the past two years: from leasing and infrastructure financing, its focus has shifted to fast-growing segments such as asset management and insurance. The company has also forayed into retail broking and retail financing.
Reliance Life Insurance, which is a part of Reliance Capital, is a leading private sector insurance company whose aggregate premium stood at over Rs6,600 crore on March 31, 2010. Technically, RCap directly holds only 16 per cent in Reliance Life; the balance is held by its associate companies, Viscount Management and Viscount Management (Alpha).
What’s in it for RCap?
RCap has had a string of bad quarters. Both its net sales and profit after tax have declined in the last four quarters on a year-on-year basis. According to a recent Edelweiss Securities report, “RCap has not been booking any investment gains since the past few quarters in the expectation of stake sale in key operating businesses.”
According to the report, besides traction in operating businesses, in future earnings will be further buoyed by investment gains. The proceeds of the deal will be utilised to scale up other businesses, primarily consumer financing and distribution. In the near-term, Reliance Life’s capital requirements will be met by the stake sale proceeds and infusion by RCap into the life insurance business will be limited.
Commenting on the stake sale, Sam Ghosh, chief executive officer, RCap said: “As a strategic partner, Nippon Life will bring vast experience, expertise and global best practices—in areas of product development, underwriting, investment management, distribution, customer relationship management and risk management.” Nippon will get an opportunity to expand overseas as Japan’s traditional life insurance market is shrinking due to an ageing population.
The RCap stock has shown lacklustre performance since November 2010, falling 101 per cent since then. But the stock surged 9.72 per cent in the wake of the announcement. From the day the stake sale was announced till the time of writing this story (March 22, 2011), the stock had gained 2 per cent and was trading at Rs573.30.
This deal with Nippon has propelled Reliance Life’s valuation higher. According to analysts at Edelweiss Securities, “We believe the deal is directionally positive as management has been guiding for stake sale since long. It will also shore up the capital base and enable the company to scale up its other businesses. The deal will also be sentimentally positive for other leading life insurance companies.”