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Last Updated : Jul 02, 2020 02:57 PM IST | Source: Moneycontrol.com

Coronavirus playing dampener in pricing of insurance stake sales

Investors are citing the COVID-19 uncertainty to demand lower prices for buying sale in insurance ventures

For public sector banks (PSBs) wanting to sell stakes in their insurance ventures, COVID-19 is giving ‘valuation nightmares’.

Consider this. In November 2019, a public sector bank was looking to sell stake in its insurance venture, with a valuation of Rs 4,700 crore. In March 2020, three investors were short-listed. But their quotes were almost 20 percent lower than the valuation because of the Coronavirus-led financial stress. The bank had to finally shelve its plan.

With PSB consolidation, banks will have to exit non-core businesses like insurance. In fact, the government, in its PSB Reforms Agenda, has suggested that banks should focus on core businesses.


But the COVID-19 outbreak has put them in a dilemma. Potential investors are either demanding a reduction in valuation or a higher stake.

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“Insurers, especially, life insurers, are slowly losing their bargaining power as the business itself has seen a slump. In such a scenario, investors may not want to pay the valuation demanded,” said a banker specialising in insurance deals.

Life insurers have been facing a significant decrease in premium collection since the nationwide lockdown on March 25. Their new premium collection fell 32.2 percent year-on-year (YoY) to Rs 25,409.30 crore in March 2020 after the lockdown. In the next two months, collections declined by 32.6 percent and 25.4 percent, respectively.

So, deals are either seeing a slump in valuation or investors are seeking more time. Sources said that private equity firms, in particular, are demanding higher stake for the same cash offer or refusing to sign deals.

Considering the low penetration of insurance (3.7 percent of the GDP) in India, marquee investment firms are now eager to invest in the sector.

The Insurance Regulatory and Development Authority of India (IRDAI), had, in 2018, allowed private equity and venture capital firms to become insurance company promoters on the condition of a minimum lock-in period of five years in investee insurers.

With the PSB Reforms Agenda in place, it is likely that several PSBs will have to pare down their stake in insurance joint ventures in the next 10-18 months. While a few private equity players have expressed interest, they are not willing to give an assurance to stay invested for more than 3-4 years.

Bank consolidation to set the ball rolling for new deals

In August 2019, Finance Minister Nirmala Sitharaman announced the merger of 10 PSBs -- Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and United Bank of India; Union Bank, Andhra Bank and Corporation Bank; Canara Bank and Syndicate Bank; Indian Bank and Allahabad Bank; under four separate entities. This has come into effect from April 1, 2020.

PSBs which have stakes in two life insurers have to bring them down over the next 10-12 months.

OBC, PNB, Canara Bank, Union Bank and Andhra Bank are promoters in life insurance companies. OBC and Canara Bank are promoters in Canara HSBC OBC Life Insurance, PNB is a promoter in PNB MetLife Insurance, Union Bank is a promoter in Star Union Dai-ichi Life, and Andhra Bank is a promoter in IndiaFirst Life Insurance.

Union Bank has said that it will reduce the stake of Andhra Bank, which has now been merged with itself, in IndiaFirst Life Insurance to below 10 percent.

A similar decision to reduce stake in Canara HSBC OBC Life Insurance by PNB (which now owns OBC’s 23 percent stake) will be taken. PNB already holds 30 percent stake in PNB MetLife. It is likely that this transaction will be completed in FY21.

Investment bankers told Moneycontrol that banks don’t want to sell at a lower-than-premium valuation while PE/VC players are quoting at least 20-25 percent lower.

“Even regular stake sale deals initiated after PSB mergers are getting stuck. Investors seem to be using the ‘COVID clause’ to seek deep discounts. Banks, of course, are not agreeing to this idea,” said a consultant.

He added that by Q3FY21, if the lockdown is completely lifted ahead of the festive season, PE/VC investors could rethink the deal price. However, banks mandated to sell stakes to comply with regulations, will have to accept a lower price, he said.
First Published on Jul 2, 2020 02:57 pm