Reliance Capital sells 26% in life arm for Rs3,062 crore

Reliance Capital Ltd on Monday said it will sell 26% stake in its life insurance subsidiary to Japan’s largest insurance company Nippon Life Insurance Co Ltd for $680 million, or Rs3,062 crore, making it the largest foreign direct investment in India’s insurance space.

Nippon Life Insurance’s deal to acquire Reliance Life Insurance’s 26% stake — the maximum a foreign insurer could own in an Indian insurer — pegs the value of the Indian company at $2.6 billion, or Rs11,500 crore.

“Our view is that the Indian life insurance sector is a very attractive market which is expected to achieve robust growth in the long term due to its second-largest population in the world, and attractive
demographic composition with a large portion of youth,” spokesperson for Nippon Life Akira Tsuzuki told DNA.

Nippon Life’s investment in Anil Ambani-controlled Reliance Capital is a strategic move by the Japanese insurance major to grow outside its home turf that has been bedevilled by sluggish economy and ageing population.    

About 33.1% of Indians are under 14 as against 14% of Japanese, who are under the same age, according to Ministry of Health, Labour and Welfare, United Nations.

Japanese population is also ageing at a faster clip, and according to UN estimates, by 2030 over a third of Japanese will be over 65 year old from the current 20.1%. At the same time, a little less than 9% of Indians would be over 65 compared to the current 4.6%.

Reliance Life, which does not require any capital infusion in the near-term, may use a “small amount” received through the deal for meeting its anticipated future capital requirement, said a senior executive at Reliance Life Insurance, who did not wish to be identified.

“The majority of the money would go to Reliance Capital as part of secondary sale and a part of it is fresh issuance,” a spokesperson for Reliance Capital told DNA.

A company executive said that Reliance Life Insurance was looking out to unlock value and was in touch with several foreign players since over a year now.

“We were in talks with different people at different points of time, but it’s over 3-4 months now since we have been in discussions with Nippon,” said a spokesperson.

The news sent shares of Reliance Capital sharply higher by 9.72% to close at `561.80 on the Bombay Stock Exchange even as the benchmark BSE Sensex was up 1.46% to end at 18439.48 on Monday.

“Till this deal happened, the markets were attributing lower valuations to Reliance Capital’s life business in line with the group’s other stocks. Also Reliance Life was the only private player which was going solo in insurance space. Now, with Nippon as a partner, people would find more comfort on the growth prospects and the corporate governance part,” said Deven Choksey, managing director at KR Choksey Securities.

With Nippon now a 26% owner in Reliance Life, it seems to be well placed to raise its stake to 49% once the foreign direct investment ceiling is raised to that level. The Reliance Capital spokesperson, however, did not comment on the same.

The Indian insurance space — like the Indian telecoms market — is crowded with about two dozen life and general insurers.

Therefore, many players in the space are plagued with rising costs and shortage of talent, and hence are loss-making.

However, unlike the telecoms market, most players in the insurance space are seeing improved returns due to the untapped growth potential in India, where nearly 80% of the population is without life, health and non-life insurance coverage.

While life insurance penetration is at 4%, non-life cover is even lower at 0.6%. The per capita spend on life and non-life insurance is just about Rs2,000 and Rs300, respectively, compared with a global average of at least Rs18,000 and Rs13,000.

Reliance Capital entered the life insurance business in August 2005 when it acquired AMP Sanmar Life Insurance from Australia’s AMP and its Indian joint venture partner Sanmar.

Though the size of the deal was not disclosed, experts estimated it to be between Rs225 and Rs400 crore.

Since then, Reliance Capital has infused close to Rs3,100 crore into its life insurance arm. This means the company has recovered its entire investment by selling only 26% and retaining the rest.

Reliance Life Insurance, having a market share of 8%, as against Life Insurance Corp’s 70% — recorded a profit of Rs23 crore in the quarter ended December 2010.

Nippon Life remains undeterred on news that the company might be liable to pay huge amount on the damages incurred after its home country was struck by twin blows of earthquake and tsunami that devastated factories and infrastructure across Japan.

“Nippon Life is financially in a sound position,” a spokesperson said, adding that “it has accumulated 2,806 billion yen (Rs 147,700 crore) in foundation funds and reserves at the end of March 2010”.

Foundation funds and reserves are a financial resource for responding to risks such as a dramatic decline in stock prices, or massive natural disasters.

Nippon’s announcement of investing $680 million also shows that India continues to be the preferred destination for global business houses.

Since the start of January this year, a total of 66 deals worth $12.9 billion have been announced, as against 52 deals valued at $1.6 billion in the same period last year, according to business information group Dealogic.

This year’s numbers got a boost by Mukesh Ambani-controlled Reliance Industries selling 30% stake in its oil blocks to European oil giant BP Plc for $7.2 billion.