Nippon agrees $2.6 billion valuation for Reliance Life

Nippon Life Insurance buys a 26% stake in Anil Ambani's life insurance company, paying $680 million to become a strategic investor in India's last independent life insurer.

Nippon Life Insurance has agreed to pay $680 million to buy a 26% strategic stake in Anil Ambani’s Reliance Life Insurance. The two companies announced the deal on Monday, in the aftermath of a devastating earthquake and tsunami in Japan.

The ensuing nuclear emergency continues to subdue Asia’s financial markets. No wonder, then, that Ambani, chairman of Reliance Capital, was fairly muted in his statement. “At this time, our thoughts are with the people of Japan, bravely facing an unprecedented natural catastrophe,” he said. “We pray for strength to the country, its people and our new partners in the entire Nippon Life family, to overcome the trauma of the tragic loss of life and devastation caused by this calamity.”

Reliance Life, which had sold more than 7 million policies as of December 31, 2010, has been looking for a strategic partner since early last year. During that time, several European firms, including Swiss Re and Munich Re, were rumoured to be close to an agreement. But the deal Reliance Capital eventually struck for its insurance subsidiary took analysts and investors by surprise.

Nippon’s investment values Reliance Life Insurance at $2.6 billion, a valuation significantly richer than had been expected. The deal is the largest foreign direct investment in the insurance sector in India.

Reliance Life is the insurance arm of Ambani’s listed finance company, Reliance Capital, shares of which gained almost 10% in trading on India’s National Stock Exchange on Monday after the deal was announced. This was on the back of a run-up in its share price last week as news that a deal was close to being signed filtered into the market. Reliance Capital shares closed at Rs558 ($12.31) yesterday.

In a report issued on Monday, before the deal was formally announced, Bank of America Merrill Lynch upgraded Reliance Capital to a buy with a price target of Rs650. Among the reasons cited by BoA Merrill was the fact that the quality and margins of the life insurance business are improving and that Reliance Life was close to striking a deal for a stake sale with a Japanese insurer.

Reliance Capital entered the life insurance business through the acquisition of AMP Sanmar Life Insurance in 2005. Reliance Capital bought out both the founders, India’s Sanmar Group and Sydney-based AMP, Australia’s largest life insurer, giving it a 100% ownership of the insurance business.

At the time, the business had 9,000 agents spread across 90 offices. Reliance Capital increased the distribution network during the past five years to 215,000 advisers spread across 1,250 offices. For the financial year ended March 31, 2010, Reliance Life Insurance booked around $1.46 billion of premium.

Reliance Life was the only large player in India’s insurance industry without a foreign partner, which strengthened its bargaining position. “It was the only game in town and both parties knew that,” said a source.

Nippon Life, which is the sixth-largest life insurer in the world and the largest private life insurance company in both Japan and Asia, is likely to have been very keen to get a foothold in India. The Indian market provides the Japanese insurance major, which has over 14 million policies in Japan, with an opportunity to participate in a high-growth market with a demographic completely different from the one Nippon has to face in its home market.

Nippon has acquired a true strategic minority, added the source, and will get rights including proportionate board representation commensurate with its shareholding. “Product development, underwriting, investment management, distribution, customer relationship management and risk management,” were mentioned in the written statement as some of the areas in which Nippon would share expertise with Reliance Life.

Currently, legislation in India does not allow foreign firms to own more than 26% of an Indian life insurance business. However, India’s finance minister in February suggested that a proposal to increase this ceiling to 49% is under consideration.

Deutsche Bank, which was appointed adviser to Reliance Life for the induction of a strategic partner some time ago, was on the sell-side. Morgan Stanley worked with Nippon on the buy-side.

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