The increase in cap on foreign direct investment in the insurance sector from 26 per cent to 49 per cent, earlier this year, has set the ball rolling for Indian promoters to offload some of their stake to their foreign partners.

ICICI Bank had on Monday, approved the sale of the bank’s 6 per cent stake in ICICI Prudential Life Insurance Company — 4 per cent to Premji Invest & its affiliates and 2 per cent to Compassvale Investments Pte Ltd, an indirectly wholly-owned subsidiary of the Singapore-based investment company, Temasek.

After the stake sale, ICICI Bank will hold about 68 per cent share in the life insurance company, while its joint venture partner, Prudential Plc, will continue to hold 26 per cent stake.

Less than a month ago, ICICI Bank had approved the sale of 9 per cent stake in ICICI Lombard to its joint venture partner Fairfax Financial Holdings.

Earlier this year, State Bank of India — India’s largest lender— had decided to dilute its stake in both life and general insurance businesses.

The bank’s executive committee had authorised the divestment of its stake in SBI Life Insurance by up to 10 per cent and had also decided to dilute its stake in SBI General Insurance from 74 per cent to 51 per cent in favour of its foreign partner Insurance Australia Group (IAG).

Unlocking value

For many conglomerates in the financial services space, the passage of the Insurance Bill will help unlock value in their insurance subsidiaries by opening up avenues for listing or transferring shares in favour of their foreign partner.

This unlocking of value is a key positive for investors. But unlike companies such as Max India, Reliance Capital and Bajaj Finserv that derive a chunk (44-85 per cent) of their implied stock value from the insurance businesses, banking stocks such as SBI and ICICI Bank derive a lesser share -- about 10 per cent to 20 per cent of their fair value.

Nonetheless, the proposed transaction value for both insurance businesses -- life and non-life -- indicates a substantial value built since inception.

ICICI Bank’s stake sale in life insurance business values the company at Rs 32,500 crore, which is about 2.4 times the embedded value of life insurance business (as on March 2015). Embedded value is a measure used to value a life insurance business which, among other parameters, takes into account the future earnings of the company.

In the past, deals in the life insurance space have happened at one to three times the embedded value of life insurance business.

ICICI Bank’s proposed stake sale in the general insurance business, a month ago valued the insurance company at ₹17,225 crore. At 64 per cent holding, this is about 7 per cent of the bank’s current market capitalisation.

The life and non life insurance business, after the stake sale, together form about 20 per cent of ICICI Bank’s current market capitalisation.

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