IPO norms by end of April 2011

The IRDA Chairman has announced that the IPO norms for insurance companies in India would be announced by the end of April 2011. Speaking at a conference in Delhi, the Chairman mentioned that a couple of private insurance companies would be completing 10 years of operation (HDFC Life and ICICI Prudential Life) by the end of April 2011, and the initial condition has been that private companies need to be in existence for 10 years before going public, thus norms need to be ready by then. 

It would be interesting to note which life insurance companies decide to tap the equity markets. While the markets have been on a roll, the regulations effective Sep 1 2010 for Unit Linked products (ULIPs) might depress valuations of the life insurance companies. While Bajaj, Max ,ICICI etc have their holding companies listed and the market has assigned an indirect value to the insurance companies, it would be nice to see how the market values a directly listed life or general insurance company. Insurance penetration which is at 5% of GDP and has a total market size of Rs 3 lakh crores still has a lot of potential to expand further in India, and that should keep the capital markets interested.

PNB in final stages of selecting Bancassurance Partner for Life

Punjab National Bank, the second largest bank in the country, is in the final stages of selecting its life insurance partner. In a rigorous selection procedure, more than 40 companies  expressed their interest .Subsequently, PNB has arrived at the final list of 3 life insurance companies- Aviva Life, MetLife and Bharti Axa Life- and has dropped companies such as Birla Sun Life and Reliance Life from the list 

This deal is not a pure distribution arrangement but also an equity participation arrangement wherein PNB will acquire a substantial stake in the final insurance company that it selects. Axis Bank had entered into a similar sort of arrangement with Max New York Life where they had acquired about 5% stake in Max. In this case, the stake that the insurance company would need to offer would be significantly higher as all the three companies shortlisted would be having lower valuations than Max New York, and PNB is a larger bank with more branches, and thus brings more to the party. The other variable that has changed since the Max New York and Axis Bank is that life insurance valuations have got depressed since the new IRDA regulations effective since 1st Sep 2010.

This deal could be a potential game changer for the winning life insurance company as PNB has a huge branch network (5000 + branches). MetLife lost their largest partner Axis when Axis decided to tie up with Max after Shikha Sharma joined Axis. Aviva Life has also lost a few bank partners of late and Bharti Axa Life does not have any significant Bancassurance partner. We expect very aggressive bidding by all the three players left in the fray.

PNB is being advised by BCG, the consulting firm, through this selection process. Once PNB is done with this selection process, they would in all probabilities initiate the process for selecting the non-life partner.

Is LIC India’s most valuable company?

When privatization of the Insurance sector started in 2000, many experts were predicting the gradual weakening and ultimate demise of Life Insurance Corporation of India (LIC0). The state owned life insurance monopoly was perceived to be slow, inefficient and behind the curve. But the situation has turned out drastically different.
In the face of intense competition, LIC has held on to its own and still commands an awesome 70% of the market share . Even more interesting is the fact that in recent months and years, this percentage has gradually creeped up. While the private life insurance companies have tended to pay higher commission margins to their distributors so that they can generate more sales, LIC has been conservative in their commission payouts and generated sustainable, profitable business.

So what then is LIC’s worth. With 2 crore policy holders, assts of Rs 11 lakh crores and 71 % market share in a growth market, LIC’s embedded value has been estimated to be at Rs 2.5 lakh crores, give or take a few thousand crores. Embedded value is essentially the present value of profits from the future, and adjusted net asset value. The recent capping on ULIP charges that IRDA has mandated will help LIC in sales as they have a huge bouquet of traditional products. On top of that, a buoyant stock market and an economy growing at 9% can only lead to an increase in valuations. Though it is difficult to establish a clear ratio between market capitalization and embedded value, India’s most valuable company by market capitalization is Reliance Industries at Rs 3 lakh crores. LIC, with an embedded value of Rs 2.5 lakh crores is not too far from that. Add in the fact that there will be a premium attached with being the leader in a growth industry, LIC can easily command a market capitalization higher than Rs 3 lakhs, were it ever to list in the stock market. And thus become India’s most valuable life insurance company!!

Compared with the valuations that Insurance companies have in China, this will not be surprising at all. China Life commands a market cap of 111 billion USD. LIC could very well have a market value of in excess of 65 billion USD, ie approximately Rs 3 lakh crores.