Reliance Life-Nippon deal may not be a benchmark for insurance valuation
MUMBAI: The Reliance Life- Nippon Life deal may not impact valuations of insurance majors and can not be used as a benchmark for those looking to either list their shares or offload a stake to a strategic or financial partner. Industry experts said the deal is an exception and was priced at a high premium as Nippon Life desperately wanted to enter the Indian market and Reliance Life had the business in place.
"Nippon wanted to enter the Indian market and Reliance has a quality portfolio with the ability to attain profit soon," said a senior executive of a large life insurance company. This is the first secondary sale of shares in the insurance industry. Major acquisitions have been few and far between as the industry majors have been focusing on achieving a respectable size and posting profits. Reliance Life acquired AMP Samnar in 2005 for Rs 100 crore.
Reliance sold a 26% stake to Nippon Life on Monday for Rs 3,062 crore. The deal is subject to regulatory approval. "Valuation depends on factors like business model, distribution reach, profitability and the quality of products and portfolio. A company with a bank as sponsor will command a better valuation," said an analyst.
There are no fixed standards for valuing an insurance business. Insurers at present, do the job by adding the embedded value and the New Business Achieved profit (NBAP). Embedded value is defined as the sum total of net worth and present value of future profit. A major factor of expense overrun, recurring operating expenses, is not subtracted in this method and it tends to present a misleading picture.
The Insurance Regulatory and Development Authority (Irda) is working on a standard method for valuing an insurance company. Kajal Gandhi, AVP, ICICI Securities , reckons that Reliance Life does not set benchmarks for the industry valuation as the deal was one of its kinds. Nippon Life insurance was keen to enter Indian market since past 2-3 years and was ready to pay the high premium. Unless other insurance companies get a similar opportunity such valuations look difficult.
"Nippon wanted to enter the Indian market and Reliance has a quality portfolio with the ability to attain profit soon," said a senior executive of a large life insurance company. This is the first secondary sale of shares in the insurance industry. Major acquisitions have been few and far between as the industry majors have been focusing on achieving a respectable size and posting profits. Reliance Life acquired AMP Samnar in 2005 for Rs 100 crore.
Reliance sold a 26% stake to Nippon Life on Monday for Rs 3,062 crore. The deal is subject to regulatory approval. "Valuation depends on factors like business model, distribution reach, profitability and the quality of products and portfolio. A company with a bank as sponsor will command a better valuation," said an analyst.
There are no fixed standards for valuing an insurance business. Insurers at present, do the job by adding the embedded value and the New Business Achieved profit (NBAP). Embedded value is defined as the sum total of net worth and present value of future profit. A major factor of expense overrun, recurring operating expenses, is not subtracted in this method and it tends to present a misleading picture.
The Insurance Regulatory and Development Authority (Irda) is working on a standard method for valuing an insurance company. Kajal Gandhi, AVP, ICICI Securities , reckons that Reliance Life does not set benchmarks for the industry valuation as the deal was one of its kinds. Nippon Life insurance was keen to enter Indian market since past 2-3 years and was ready to pay the high premium. Unless other insurance companies get a similar opportunity such valuations look difficult.
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