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The passage of the long-pending Insurance Laws (Amendment) Bill, 2015 — which has increased the cap on foreign direct investment in the insurance sector from 26 per cent to 49 per cent — has now set the ball rolling for Indian promoters to offload some of their stake to their foreign partners.
State Bank of India — India’s largest lender— has decided to dilute its stake in both life and general insurance businesses.
The bank has informed the BSE that the executive committee has authorised divestment of its stake in SBI Life Insurance by up to 10 per cent. A few days ago, it 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).
Passage of Insurance Bill
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.
Companies such as Max India, Reliance Capital and Bajaj Finserv, that derive a chunk of their implied value from their insurance businesses, will benefit the most.
Banking stocks such as SBI, HDFC and ICICI Bank on the other hand derive a lesser share from their insurance businesses — about 8 per cent to 14 per cent of their fair value.
For SBI in particular, its insurance subsidiaries contribute about 8 per cent of its implied (sum-of-the-parts) value, with life business alone contributing about 6 per cent.
New business premium
SBI Life Insurance ranks third in terms of new business premium among private players. Its net profit grew 14 per cent to Rs 615 crore in the nine months ended December 2014. It has a market share of 15.2 per cent among private players.
SBI General Insurance ranks 12th among private players and has a market share of 4 per cent. The company made a loss of Rs 63 crore for the nine months ended December 2014 against a loss of Rs 71 crore during the same period last year. The company expects to breakeven in FY 16.
Deals
In recent times, deals in the life insurance space have happened at one to three times the embedded value of the life insurance business. In the general insurance space, the implied valuation of the companies are at about 14-16 times its estimated one year forward earnings or at 1-1.5 times their one year forward gross written premium.
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