npavan78
10-07-2008, 08:34 AM
Foreign direct investment (FDI) in insurance may not have been eased from 26 per cent to 49 per cent as proposed a few years ago by the government. But several promoters are finding ways to bring in foreign money through the holding company.
According to Watson Wyatt, despite the cap on FDI, companies are finding alternate ways to fund equity through Indian promoters through the private equity route in the holding company. Sanket Kawatkar, who heads Watson Wyatt’s life insurance consulting practice in India says although FDI in India is capped at 26 per cent, there are indirect ways to fund equity through Indian promoters. This is usually in the form of private equity investment in the parent company with the understanding that the money would be used in the life insurance business.
In India, 21 life companies have already set up shop while 4-5 more are in the process of entering the market. Despite the restrictions on foreign holding, more than half-a-dozen companies have a paid-up capital of over Rs 1,000 crore, and several life insurers are expecting to invest over this amount. In some joint ventures like Bajaj Allianz, the foreign partner has brought in additional capital by way of a higher premium in return for a deal which allows the foreign partner to increase stake at a fixed price. Promoters of life insurers have been able to raise funds based on multi-billion dollar valuations by analysts.
Speaking at a seminar on valuation of life insurance companies, Mr Kawatkar said that in India analyst valuations continued to be sketchy. “There has been a lack of understanding on valuation. Analyst valuations have been based on very little information and back of the envelope calculations,” he said.
Internationally, companies use ‘embedded value’ for valuing insurance businesses during M&A deals and for management compensation. Unlike other businesses the worth of an insurance company also depends on the future stream of earnings through present business. Embedded value takes into account the future profits and liabilities after providing for frictional losses. Even the use of this measure has evolved with global insurers moving Market Consistent Embedded Value(MCEV) from the European Embedded value model.
Speaking at the same event, Michel Abbink from Watson Wyatt’s UK practice said that MCEV had a tendency to be more volatile as it had mark-to-market requirement. While a higher level of unit-linked insurance and term insurance pushed up valuations under MCEV, annuity business turned out to be drag on valuations in the initial years. In India, four life insurers have already initiated a move to get their valuations using the new measure.
According to Watson Wyatt, despite the cap on FDI, companies are finding alternate ways to fund equity through Indian promoters through the private equity route in the holding company. Sanket Kawatkar, who heads Watson Wyatt’s life insurance consulting practice in India says although FDI in India is capped at 26 per cent, there are indirect ways to fund equity through Indian promoters. This is usually in the form of private equity investment in the parent company with the understanding that the money would be used in the life insurance business.
In India, 21 life companies have already set up shop while 4-5 more are in the process of entering the market. Despite the restrictions on foreign holding, more than half-a-dozen companies have a paid-up capital of over Rs 1,000 crore, and several life insurers are expecting to invest over this amount. In some joint ventures like Bajaj Allianz, the foreign partner has brought in additional capital by way of a higher premium in return for a deal which allows the foreign partner to increase stake at a fixed price. Promoters of life insurers have been able to raise funds based on multi-billion dollar valuations by analysts.
Speaking at a seminar on valuation of life insurance companies, Mr Kawatkar said that in India analyst valuations continued to be sketchy. “There has been a lack of understanding on valuation. Analyst valuations have been based on very little information and back of the envelope calculations,” he said.
Internationally, companies use ‘embedded value’ for valuing insurance businesses during M&A deals and for management compensation. Unlike other businesses the worth of an insurance company also depends on the future stream of earnings through present business. Embedded value takes into account the future profits and liabilities after providing for frictional losses. Even the use of this measure has evolved with global insurers moving Market Consistent Embedded Value(MCEV) from the European Embedded value model.
Speaking at the same event, Michel Abbink from Watson Wyatt’s UK practice said that MCEV had a tendency to be more volatile as it had mark-to-market requirement. While a higher level of unit-linked insurance and term insurance pushed up valuations under MCEV, annuity business turned out to be drag on valuations in the initial years. In India, four life insurers have already initiated a move to get their valuations using the new measure.