The last few months have seen a spurt in private equity deals in the insurance space, with investors like Westbridge Capital and Warburg Pincus buying stakes in Star Health & Allied Insurance and India First Life, respectively (see box). There have been other deals too.
The deals are driven by a new regulation in December 2017, which allowed PE firms to come in as promoters in insurance firms and exit after a lock-in period of five years. This was matched by few foreign partners, who were keen to sell their stake in their Indian ventures.
For instance, Legal & General sold its 26 per cent stake in India First Life to Warburg Pincus for Rs7.1 billion while Diamond Dealtrade and Enam Securities bought Videocon’s 51.32 per cent in Liberty General Insurance. The trigger could be different for each partner.
Some have incurred large claim payouts in certain emerging markets
which has prompted their exit from specific countries, while others may not be satisfied with the performance of their ventures in India, say experts.
* Amazon invests around Rs809 mn in insurance aggregator Acko
* Westbridge, Jhunjhunwala buy 93.9% in Star Health for Rs65 bn
* Warburg buys out Legal & General in India First Life for Rs7.1 bn
* Diamond Dealtrade, Enam buy out Videocon in Liberty General
“PE investors are looking to invest in sectors that have a strong underlying growth story, high degree of regulatory certainty and improving economics, among other things,’’ says Madhur Singhal, managing director of PE advisory firm Praxis Global Alliance.
There's huge room for growth. The ratio of insurance premiums to GDP is 0.8 per cent in India while it is 4.3 per cent in the US. Further, penetration stands at 3.49 per cent in India while it is above 7 per cent in the US. This shows that regardless of the underpenetrated Indian market, today there is enormous growth potential.
Tandon feels the changes like Insurance Bill, which gives IRDAI more flexibility to frame regulations, and the introduction of tax incentives for insurance products, make the insurance market very attractive.
The increase in foreign direct investment limits to 49 per cent from 26 per cent, spurt in M&A deals augurs well for PE investors, who are looking for gross returns of 18 to 24 per cent. General insurance, which is growing at 17 per cent, can deliver 22-24 per cent returns.
“It is still early days and some insurance investments are yet to see the full deal cycle till exit, the outlook is positive,” said Singhal.