How much is your life worth?
Foreign investors’ valuation of ICICI Prudential at over $10 billion has raised the expectations of other existing and potential promoters.
By Mayur Shetty & Priti Patnaik, TNN |
In every business, there is that one deal which comes with a big bang. And churns the industry. No such deal has taken place in the insurance industry yet. However, commitments from investors valuing ICICI Bank’s life insurance arm at over $10 billion have set the insurance industry on fire. Almost all promoters now expect their insurance arms to be valued at a price that will catapult their firms to the league of top-50 companies in India. Indian corporates in talks with foreign partners have upped the ante and are now demanding a huge premium for providing the foreign company access to a market as lucrative as India.
“Pre-deal, analyst reports were valuing the company at $6.5 billion. Post-deal, the valuation has shot up to upwards of $10 billion,” says ICICI Prudential Life Insurance managing director Shikha Sharma. But she adds that much of the re-rating in the industry happened because of the 100% plus growth of the life insurance industry in 2006-07, which demonstrates the potential of the Indian market.
For multinationals, which are seeing mid single-digit growth rates in their home markets, a market that offers scale as well as growth opportunity is a mouth-watering prospect. But the government’s inability to push through an amendment that increases maximum foreign shareholding to 49% has given Indian partners the advantage. Multinationals keen on management control are willing to pay a premium to the Indian partner who will provide them access to the Indian market. But the game has changed with the revised valuations.
For shareholders, these are very confusing times. After ICICI Pru’s $10 billion valuation, the question on everybody’s mind is: if the insurance business of ICICI Bank is worth $10 billion (Rs 40,410 crore), what is the worth of the banking business of ICICI Bank, which has a market capitalisation of Rs 92,500 crore? Shareholders of other companies which have insurance businesses face similar confusion. Given this huge demand and shortage of information on the valuation of an insurance business, analysts have been coming out with their estimates of how much an insurance business is worth. What is adding to the confusion is the fact that most insurance companies are yet to break even. Like the dotcoms, the valuations are based on future earning potential, but unlike the internet companies, there are paying customers whose future premium installments will translate into profits.
“Investment banks are beginning to come out with analyst reports on how much companies are worth. The big difference is that they are indicative valuations based on the value of an insurance company. Analyst reports are a good starting point, but they do not have access to the volume of data to do it as accurately as an actuarial consultancy would be able to do it,” says Richard Holloway of Watson Wyatt Worldwide. Within the industry too, there are a number of sceptics. Insiders question the worth of the insurance industry vis-à-vis the banking sector (at present not even $100 billion). Others point out that much of these assumptions are based on the experience of an exceptional 2006-07, which saw an extraordinary growth in topline business in the run-up to the closure of some short-term products. With the industry expected to grow at a more modest pace this year, many expect the froth to come off the valuations by the year-end.
According to Mr Holloway, there are three components to the value of a life insurer — the money shareholders have at their disposal in the company, the business that could be generated in future from a policy that has already been sold and finally, the goodwill around which business can be generated in future. For a young company, the value of the goodwill will be by far the most important. For a mature company, which includes most companies in developed markets, the value of the business would be driven by the value of enforced business, he adds.
Two aspects must guide valuations says Watson Wyatt senior analyst Sanket Kawatkar: “The purpose of valuation and who it is carried out for. For example, valuation carried out by a seller of equity stakes in a distressed situation — like solvency issues — may be very different from the valuation carried out by a willing buyer in a friendly transaction.” Experts say that valuing a life insurance business in India presents challenges given the paucity of actuarial disclosure such as embedded value measures and the limited number of reference points like listed insurers or transaction precedents.
For promoters keen on finding out how much their investments are worth, there are tried and tested measures. The embedded value (EV), for instance, gives an idea of what a life insurance company is worth. The Association of British Insurers describes EV as “the sum of the net assets of the insurance business under conventional accounting and the present value of the in-force business based on estimates of future cash flows and conservative assumptions about, for example, mortality, persistence and expenses.” But, even if companies were to compute embedded value and declare it, that would not help investors much. “The embedded value would give an indication of earnings potential from the business already in the books of an insurance company. It would be useful for arriving at valuations of mature companies such as LIC. But for new companies growing at a high rate, it is not that useful,” says HDFC Standard Life Insurance managing director Deepak Satwalekar.
“What we are beginning to see now is the movement into a phase where some of the shareholders want to capitalise on some of the value that has been created. I do believe that in the next two to three years, you are going to see pretty significant chunks of equity go on the market through the IPO route,” says Mr Holloway. The only company to talk about an IPO so far is State Bank of India which plans to create a holding company for its insurance and asset management business and list the holding company. Bajaj Auto will see the holding company for its financial services business getting listed after the demerger. Post-listing, investors will get an idea of the market valuation of the insurance business. More information will also be available once promoters of insurance companies that are listed on the stock exchanges start consolidating the balance sheets of their subsidiaries with their own.
“Pre-deal, analyst reports were valuing the company at $6.5 billion. Post-deal, the valuation has shot up to upwards of $10 billion,” says ICICI Prudential Life Insurance managing director Shikha Sharma. But she adds that much of the re-rating in the industry happened because of the 100% plus growth of the life insurance industry in 2006-07, which demonstrates the potential of the Indian market.
For multinationals, which are seeing mid single-digit growth rates in their home markets, a market that offers scale as well as growth opportunity is a mouth-watering prospect. But the government’s inability to push through an amendment that increases maximum foreign shareholding to 49% has given Indian partners the advantage. Multinationals keen on management control are willing to pay a premium to the Indian partner who will provide them access to the Indian market. But the game has changed with the revised valuations.
For shareholders, these are very confusing times. After ICICI Pru’s $10 billion valuation, the question on everybody’s mind is: if the insurance business of ICICI Bank is worth $10 billion (Rs 40,410 crore), what is the worth of the banking business of ICICI Bank, which has a market capitalisation of Rs 92,500 crore? Shareholders of other companies which have insurance businesses face similar confusion. Given this huge demand and shortage of information on the valuation of an insurance business, analysts have been coming out with their estimates of how much an insurance business is worth. What is adding to the confusion is the fact that most insurance companies are yet to break even. Like the dotcoms, the valuations are based on future earning potential, but unlike the internet companies, there are paying customers whose future premium installments will translate into profits.
“Investment banks are beginning to come out with analyst reports on how much companies are worth. The big difference is that they are indicative valuations based on the value of an insurance company. Analyst reports are a good starting point, but they do not have access to the volume of data to do it as accurately as an actuarial consultancy would be able to do it,” says Richard Holloway of Watson Wyatt Worldwide. Within the industry too, there are a number of sceptics. Insiders question the worth of the insurance industry vis-à-vis the banking sector (at present not even $100 billion). Others point out that much of these assumptions are based on the experience of an exceptional 2006-07, which saw an extraordinary growth in topline business in the run-up to the closure of some short-term products. With the industry expected to grow at a more modest pace this year, many expect the froth to come off the valuations by the year-end.
According to Mr Holloway, there are three components to the value of a life insurer — the money shareholders have at their disposal in the company, the business that could be generated in future from a policy that has already been sold and finally, the goodwill around which business can be generated in future. For a young company, the value of the goodwill will be by far the most important. For a mature company, which includes most companies in developed markets, the value of the business would be driven by the value of enforced business, he adds.
Two aspects must guide valuations says Watson Wyatt senior analyst Sanket Kawatkar: “The purpose of valuation and who it is carried out for. For example, valuation carried out by a seller of equity stakes in a distressed situation — like solvency issues — may be very different from the valuation carried out by a willing buyer in a friendly transaction.” Experts say that valuing a life insurance business in India presents challenges given the paucity of actuarial disclosure such as embedded value measures and the limited number of reference points like listed insurers or transaction precedents.
For promoters keen on finding out how much their investments are worth, there are tried and tested measures. The embedded value (EV), for instance, gives an idea of what a life insurance company is worth. The Association of British Insurers describes EV as “the sum of the net assets of the insurance business under conventional accounting and the present value of the in-force business based on estimates of future cash flows and conservative assumptions about, for example, mortality, persistence and expenses.” But, even if companies were to compute embedded value and declare it, that would not help investors much. “The embedded value would give an indication of earnings potential from the business already in the books of an insurance company. It would be useful for arriving at valuations of mature companies such as LIC. But for new companies growing at a high rate, it is not that useful,” says HDFC Standard Life Insurance managing director Deepak Satwalekar.
“What we are beginning to see now is the movement into a phase where some of the shareholders want to capitalise on some of the value that has been created. I do believe that in the next two to three years, you are going to see pretty significant chunks of equity go on the market through the IPO route,” says Mr Holloway. The only company to talk about an IPO so far is State Bank of India which plans to create a holding company for its insurance and asset management business and list the holding company. Bajaj Auto will see the holding company for its financial services business getting listed after the demerger. Post-listing, investors will get an idea of the market valuation of the insurance business. More information will also be available once promoters of insurance companies that are listed on the stock exchanges start consolidating the balance sheets of their subsidiaries with their own.
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