IRDAI's move to allow PEs as promoters piques their interest in insurance firms

Private equity (PE) major Warburg Pincus is reportedly buying a 26 percent stake of Legal & General, the foreign joint venture partner in IndiaFirst Life Insurance. According to a report, the PE major will be paying Rs 710 crore for the stake, valuing the insurer at Rs 2,730 crore.

After the insurance regulator has allowed PEs to become promoters of insurance companies, there has been a sudden spike in interest among these players. This not only means that the companies can hold a significant amount of stake in insurance companies, they can also make money and exit in five years.

Warburg Pincus, Legal & General and IndiaFirst did not immediately respond to an e-mail sent by Moneycontrol.

Even as the PEs' interest in the sector increases, foreign insurers who hold stake in Indian companies are looking to exit. Sources told Moneycontrol that at least three foreign partners in Indian life insurance ventures are looking to exit the Indian market in the next one year.

The regulation

In December 2017, Insurance Regulatory and Development Authority of India (IRDAI) released guidelines that allowed PE firms to promote insurance companies. The regulator said that they can do so by having a lock-in period of five years during which they cannot exit.

Whichever firm holds stake more than 10 percent in an insurance company is considered being part of the promoter group. Until recently, PEs weren’t given the promoter status due to the abrupt entry and exit strategies followed in companies.

But IndiaFirst Life is not the only one. Standalone health insurance company Star Health Insurance has multiple global and domestic PE firms holding part stake including a Sequoia Capital-owned venture. Now that these companies are seeking an exit, the standalone health insurance company is on sale.

Foreign shareholders exiting

Insurance being a sector with a long gestation period, foreign shareholders who do not have a long-term view want early exits. Further, several financial institutions have faced troubles in their domestic markets in Europe that has led them to take this view.

Sources said that UK-based Legal & General was looking to exit the Indian market for almost one year. It was evaluating its options in the Indian market which is why it did not increase its stake in the life insurance company from 26 percent to 49 percent.

They are not the only ones to exit the Indian market, which is often considered among the toughest markets to operate in.

Take ING for instance. The Dutch financial services major exited Exide Life Insurance (then called ING Vysya Life Insurance) in 2013 after Exide Industries brought over its 26 percent in the life insurance company.

Last year, UK-based Old Mutual announced its exit from the Indian market. The insurance major sold its 26 percent stake in Kotak Life Insurance (then called Kotak Old Mutual Life) to Kotak Mahindra Bank for Rs 1,293 crore.

Among the earliest exits from the market in India was almost 11 years ago. In 2007, US-based Chubb exited HDFC ERGO (then called HDFC Chubb) by selling its 26 percent stake to HDFC. Later that year, HDFC entered into a partnership with Ergo to sell 26 percent in the general insurance company.

On an average, industry insiders said that both life and general insurance require a 10 year gestation period and only after that do these ventures start making profits.

Insurers who do not have that long an investment horizon choose to drop out.

In April 2012, US-based New York Life sold its 26 percent stake in Max Life Insurance to Japan’s Mitsui Sumitomo.

“Foreign companies have been facing a lot of questions from their parent companies headquartered in Europe and the US. India is not a core market since it is a difficult region to operate in,” said an insurance consultant.

PE firms jump into the opportunity

Insurance penetration, which is measured as a percentage of premiums to gross domestic product (GDP), saw a rise to 3.49 percent from 3.40 percent in FY17, according to the sigma report by global reinsurer Swiss Re. Life insurance penetration stood at 2.72 percent while general insurance penetration stood at 0.77 percent.

“The demography of the country presents an attractive opportunity for PE firms who are in always in the lookout for investment opportunities with good returns. Though there was an apprehension that they will be asked to stay invested in a venture for at least 7-10 years, the five year lock-in has been favourable,” said an investment banker who is working with two such PE firms to strike a deal in the insurance space.

IRDAI has said that PEs can become promoters and have to set up a special purpose vehicle (SPV) for this.

Apart from Warburg Pincus, True North, KKR and Temasek have been interested in the insurance sector. In December 2016, State Bank of India sold 3.9 percent stake in SBI Life Insurance to KKR and Temasek for Rs 1,794 crore.

A recent report said that PE fund True North is likely to buy a 40 per cent stake in Royal Sundaram General Insurance for about Rs 1,300 crore.

Similarly, standalone health insurance company Star Health Insurance that is on the block had evinced interest from Bain Capital, PremjiInvest, Temasek as well as Warburg Pincus.

Private general insurer ICICI Lombard General Insurance is the frontrunner for the deal that is said to be announced as soon as the health insurer gives clarifications on the case filed in the Madras High Court by UAE's billionaire businessman Ahmed Abdulla Ahmed Al Ghurair.

Disruptions due to frequent entry-exits?

Traditionally, PE firms have an entry and exit strategy for companies that they invest in. To ensure that the stability of an insurance company is not compromised, the regulator will bring out detailed guidelines giving out circumstances under which a PE can enter or exit an insurer.

As per current regulatory norms, firms holding 10 percent or more in an insurance company are classified as promoters while those holding less than that are called investors. PE-VC firms, unlike promoters, invest in companies with healthy business prospects and exit when the returns do not correlate to the investments.

Another area that is under discussion is the Indian management control rules that will also be applicable if PEs promote insurance companies. Most such funds have parents or majority ownership from Singapore or other market. This could be a deal-breaker if the PE engages in a buyout of a company.