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Even as three of the country’s leading private life insurers are likely to list in the next two years, their persistency rate is likely to play a key role in their valuation, say industry experts.
Recently, housing finance major HDFC announced plans to list HDFC Life Insurance, its life insurance joint venture with Standard Life, this financial year. The board of directors of ICICI Bank also approved a partial stake-sale of its shareholding in the life insurance arm ICICI Prudential Life Insurance, the largest private life insurer via listing of the company on the stock exchanges.
SBI Life is also likely to announce its listing plans shortly. “It’s not going to be easy for investors to understand the life insurance industry’s financials. Investors will watch out for quantitative areas, such as persistency, expenses of management control, which will get reflected in the profitability of these companies, and higher the profitability, the valuation will be higher.
“They will also look at qualitative factors such as management of the company,” said Sanket Kawatkar, Principal and Life Insurance Practice Leader, Milliman India, an actuarial and consulting firm.
Incidentally, while embedded value which is calculated by using present value of future profits and adjusted net asset value is the key parameter for valuing insurance companies, industry experts feel that persistency rate will also play a key role in determining valuation.
Halved to 2.5 crore Shashwat Sharma, Partner — Financial Services, KPMG, said, “The number of new policies have halved over 10 years, which will also reflect in the valuation. There were around 5.1 crore insurance policies sold in 2008 and that number is down to 2.5 crore new policies, which also reflect in the valuation.
Around 30 crore policies have actually moved out of the industry, where customers haven’t been renewing their policies or the policies have lapsed as they weren’t really seen as good investment decisions.”
Kawatkar said life insurers have seen their valuations fall in recent years due to lack of growth in new business premium collection and fall in persistency ratios.
The benchmark valuation has been around 2 to 2.5 times the embedded value in recent transactions, such as the one in which Standard Life paid ₹1,705 crore to buy 9 per cent holding in its life insurance joint venture with HDFC. Standard Life now holds 35 per cent in the life insurance joint venture.
Advantage early movers The deal had valued HDFC Standard Life at ₹19,000 crore. ICICI Prudential Life sold 6 per cent stake to Azim Premji and Singapore government-owned Temasek Holdings’ firm for ₹1,950 crore, valuing the company at ₹32,500 crore, which makes it the most valuable private sector insurer. However, Ashvin Parekh, Managing Partner, Ashvin Parekh Advisory Services, said the early movers are likely to enjoy a premium in valuation during listing as investors would like to have a share in the ‘potential growth’ of the insurance industry which has been a major wealth creator overseas.
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