Posted on Aug 26, 2011 by Sergio Ulloa
Merger and acquisition activity in two of Asia's largest insurance industries has continued this week, with regulatory authorities in India and China approving new measures to allow foreign firms access to their lucrative emerging markets.
India's Finance Ministry made an important move in granting local insurance firms greater flexibility in selling their shares. Indian insurance companies will no longer have to complete the prerequisite 10 years of operations before divesting and selling their domestic shares to foreign enterprises. The foreign direct investment cap will remain at 26 percent maximum ownership in India, but companies will now be able to meet those measurements, dilute their stake, and access greater overseas capital on their own timetable. The decision to adjust the requirement came after talks with the Ministry of Law and the Insurance Regulatory and Development Authority of India (IRDA).
Under current industry regulations, Indian insurance companies are allowed to offer a 26 percent maximum stake to foreign business partners when their joint venture operation is first incorporated. According to the contrasting Section 6AA of India's1938 Insurance Act however, a preexisting insurance or reinsurance firm owned by an Indian promoter would have to wait to bring in a foreign investor, selling shares within the threshold limit in a lengthy process "after a period of 10 years from the date of the commencement of the said business by such Indian insurance company or as prescribed by the central government."
D.K. Mittal, banking secretary for India's Finance Ministry, explained in a briefing that these time restrictions issues placed on Indian companies needed to be cleared up following recent confusion. "Indian promoters can bring their stake down to 26 percent½We are not changing any rule here. We are just making a clarification."
Mittal then restated the ruling: "The Indian promoter can reduce its equity to a level of 26 percent after 10 years if not done already in a phased manner, for which rules are being issued separately. The limit of FDI will be 26 percent.''
An order to clarify the uncertainty surrounding Section 6AA of the Insurance Act has been long sought after by both local and international players in the insurance industry. This move will enable domestic insurance companies to more readily facilitate and access much needed fresh capital injections.Now that the matter has been addressed, transactions in the industry are soon to be expected. Among them, was the deal brokered between Reliance Life and Nippon Life to sell a 26 percent stake to the Japanese insurance company for US$680 million, which will now go ahead. The share sale had been agreed to in March earlier this year
but hit a hurdle when it emerged that Reliance Life had not yet completed the 10 years of operation necessary for its Indian shareholders to dilute their stake. The IRDA couldn't approve the deal as it was uncertain whether or not Reliance Life's promoters could dilute their stake through a fresh issue of shares to a new partner.
Sam Ghosh, CEO of parent company Reliance Capital, was pleased that the government's clarification would finally enable Nippon Life to invest in their company. He told reporters that the deal would be a positive for Reliance Capital. "The government circular clears the way for IRDA and Reserve Bank of India (RBI) to approve the deal½Reliance Capital will receive over R3,060 crore from Nippon and will infuse R300 crore in Reliance Life. Rest will be invested in other purposes."
The transaction puts the total value of Reliance Life at US$ 2.6 billion. Reliance Life's new life insurance partner, Nippon Life, is one the largest private life insurance companies in Asia. Like other Japanese Life insurers, Nippon Life has been looking to bolster its overseas presence, with the new Indian joint venture enabling access to one of the world's fastest growing life insurance markets. It is estimated that only 10 percent of India's 1.2 billion population hold any form of life insurance cover. Together with the general economic prosperity and rapidly expanding middle class sector in India, the Indian life insurance market is forecast to expand as per capita wealth increases.
China is the other Asian market that can offer similar growth opportunities and economies of scale for life insurance companies. This week, Prudential Financial became the latest foreign company to establish a presence in the world's second largest economy through a life insurance joint venture with a unit of Fosun Group, China's largest private investment conglomerate. The Western financial group received regulatory approval from the China Insurance Regulatory Commission (CIRC) this Wednesday to acquire a maximum 50 percent stake in the Shanghai-based venture, which plans to be launched within the next 12 months.
This is the second joint venture embarked on by the two companies in the past year. In January the two firms agreed to form a US$600 million private equity fund, which enabled Fosun to develop its financial services arm. Now Prudential will be given the opportunity to establish a presence in the country's CNY1 trillion (US$156 billion) life insurance market. Prudential has attributed much of its growth in the past year to the particularly robust performance of its Asian operations, and has been looking to further develop its business in the region to better protect itself against the current market turmoil engulfing the United Sates and Europe.
Prudential will be entering a Chinese life insurance market dominated by China Life, Ping An Life and China Pacific, with market shares of 29, 13 and 8 percent respectively. These entrenched state-owned companies have extensive strength in terms of branding and infrastructure and operate on a tremendous scale even by the standards of the multinational insurers originating from mature markets. The life insurance market is fast moving however and there has been increased competition in recent years as local and multinational insurers (28 foreign players at last count) attempt to strengthen their reach in the country. While the Chinese insurance market is technically open to foreign companies, they are faced with more restrictions and a more active regulatory authority than in many other large countries. Foreign insurance companies thus tend to find success in China through investing and operating as joint venture partners with local Chinese insurance and financial conglomerates.
Major multinational Chinese insurance company joint ventures include the Sun Life Everbright and the Aviva-Cofco partnerships, as well as recent share purchases made by Goldman Sachs and Starr International in Taikang Life and Dazhong Insurance respectively. The emerging insurance markets in Asia are now widely expected to outperform that of other more mature markets, with China and India leading the way.
Insurance Companies Mentioned
Nippon Life Insurance
Nippon Life Insurance was established in 1889 in Japan. Through its subsidiaries, Nippon Life offers various life and non life insurance products and services. Nippon Life operates in North America, Europe, Oceania, Asia, Central and South America, and the Middle East.
Prudential Financial Inc
Prudential Financial Inc. is a financial services leader, with approximately US$750 billion of assets under management as at September 2010. Prudential Financial operates in the United States, Europe, Latin American and Asia, with approximately 42,000 employees worldwide
Reliance Life Insurance
Indian life insurance company, Reliance Life Insurance, is an associate company of Reliance Capital. Reliance Capital is one of India's top 3 financial services companies by net worth. Both Reliance Life Insurance and Reliance Capital are part of the Reliance - Anil Dhirubhai Ambani Group.