Posted on Jul 29, 2011 by Sergio Ulloa
India's second biggest public sector lender, Punjab National Bank (PNB), has agreed to acquire a 30 percent stake in MetLife India for an undisclosed amount, becoming the single largest shareholder in the private insurance company. The move marks the bank's first foray into the insurance business. Once the transaction is finalized, the two parties have agreed the joint venture company will be renamed PNB MetLife India Ltd to leverage the combined strength of the two brands in the Indian market.
MetLife India, affiliate of global insurer MetLife Inc., the largest life insurer in the United States, was incorporated as a joint venture operation between MetLife International Holdings, The Jammu and Kashmir Bank, M Pallonji and Co, and other private stakeholders in 2001. PNB officials announced that the acquisition of a 30 percent stake in the insurance company would come through issuance of fresh equity, which would in turn dilute the existing percentages of MetLife India's stakeholders proportionately. After the deal, MetLife US' stake would reduce to from 26 percent to an estimated 19 percent. India's current foreign direct investment (FDI) regulations prevent foreign entities from holding more than 26 percent of any Indian insurance enterprise, a rule that could soon change. With FDI capped as it is in India, investments from local entities through fresh shares have become the only option available for companies looking to raise their overall capital base. MetLife would plan to increase its stake back to the 26 percent limit within the first few months of the closure of the deal.
William J Toppeta, President of MetLife's international operations, told reporters on Thursday that the deal with PNB would grant the insurer the necessary capital to service its growing business in India. "Given its global significance, India is a strategic focus market for MetLife. We believe that the addition of an outstanding financial institution like PNB as a shareholder and partner will greatly enhance MetLife India's ability to move into the top tier of life companies here. We value PNB and our current shareholders for their integrity, market knowledge, distribution power and financial strength," Toppeta told the press, adding that if and when the country's FDI limits are relaxed, Metlife would consider increasing its stake further in their Indian branch.
The path which lead PNB to purchase a stake in Metlife India began in December 2010, when the bank invited expressions of interest (EOI) from both Indian and foreign insurance companies to set up a strategic partnership. PNB received responses from some 26 different insurance companies, each offering their own business model proposal. After evaluating the technical bids, the bank put three life insurance companies on the final short list: Aviva, Metlife and Bharti AXA. Based on the financial bids and a more diversified shareholding, PNB ultimately accepted MetLife India's offer although the fiscal details of the deal have yet to be disclosed. The transaction is still subject to the approval from The Reserve Bank of India, Insurance Regulatory and Development Authority (IRDA) and other regulatory bodies. The deal would be expected to close by end the end of 2011.
In addition to this influx of fresh capital, the two companies will benefit from a 10-year exclusive distribution arrangement. As part of the deal, PNB have agreed to promote and distribute MetLife India's insurance products through its branch network. MetLife already has a similar agreement with Karnataka Bank and Barclays in India. The distribution platform PNB provides could prove to be the most distinctive advantage for MetLife. PNB is the largest nationalized bank in India, with a network exceeding 5,000 branches and over 60 million active customers. According to Metlife India Managing Director Rajesh Relan, this strategic affiliation would enable the insurance company to more than double its existing customer base, diversify its products offered, and quickly establish itself amongst the country's leading insurance providers. "With 60 percent branches in the rural and semi-urban areas, PNB is uniquely positioned to take insurance to the deep pockets of India. This partnership has the potential to drive the company into the top tier of Indian life insurers and more than double its market share," Relan told reporters in New Delhi.
PNB Chairman and Managing Director K.R. Kamath added that the deal would be beneficial to the bank as it would give them more options in interacting with clients, helping to maintain its leadership position in the Indian financial services market. "The partnership with MetLife will provide PNB insurance expertise and bancassurance capabilities that will be an asset to the bank as it pursues its growth strategy in India and seeks to expand its leadership in the Indian financial services market," Kamath said.
Since the insurance market in India was first opened up to the private sector and international investment in 1999, total insurance penetration has doubled and the domestic protection industry has overtaken several developed markets in output. There has been a substantial rise in insurance coverage, with both the number of life and health insurance policies increasing many times over. While premium income in the Indian insurance market within the upcoming decade is projected to reach US$ 350-400 billion
, a combination of regulatory issues and fierce competition between both local and international companies (including AIG, Allianz, Standard Life and AXA) is expected to hamper profitability and constrict many insurers' margins in the short term. Recent moves made by India's regulatory authorities
have opened up many of the country's industries to greater foreign capital investment. This would be a particularly welcome development for the international insurance industry.
Insurance Companies Mentioned
Possessing over 140 years of insurance expertise, MetLife aims to be an innovator in the field of international Life insurance. Globally, MetLife is able to offer its clients accident and health insurance, life insurance, disability income protection, and retirement and savings products.