ICICI Holdings would be the largest private insurer and fund manager in the country and the biggest testimony to the entrepreneurial culture at ICICI Bank By Rex Mathew.
ICICI Bank has a long history of nurturing different businesses, sometimes as joint ventures, and then spinning them off as separate companies. Technology services company 3i Infotech, started as a small division of ICICI Bank to develop banking related software, and was the first to come out with an IPO.
Subsequently First Source, which was once the captive BPO of ICICI Bank and is now one of the largest BPO companies in the country, also came out with an IPO.
Finally, ICICI Bank has formally decided to shift its insurance and financial services ventures to a holding company. This company may come out with an IPO at a later stage to finance the growth plans of the various businesses under it. There was much market speculation over the last one year about such a move and was partly responsible for the spectacular rise in ICICI Bank stock price in recent months.
In terms of value, the technology and BPO services businesses floated by ICICI Bank are very small when compared to the various financial services businesses. The bank was one of the first players to enter the domestic insurance and mutual fund businesses when these sectors were thrown open to private sector players.
The fact that each of these businesses are among the biggest players in their respective segments speaks volumes about the entrepreneurial culture of ICICI Bank. That is even more surprising as ICICI has always been an organisation run by professionals without any identifiable promoter and originated as a government financial institution.
The bank has announced its intention to transfer its entire holdings in ICICI Prudential Life Insurance Company, ICICI Lombard General Insurance Company, Prudential ICICI Asset Management Company and Prudential ICICI Trust to ICICI Holdings. ICICI Bank currently holds 74-per cent stakes in the insurance businesses and 51-per cent stakes in the asset management business.
The transfer of stakes would be at the current book values of these stake in the bank's books, estimated at around Rs1,950 crore. The holding company would be floated as a non-banking finance company (NBFC) and would be a wholly owned subsidiary of ICICI Bank.
It is appropriate that ICICI Bank is clubbing its insurance and fund management businesses under one company. After all, insurance is essentially a fund management business, which meets its policy liabilities from the investment returns the funds business generates. Insurance requires considerable fund management expertise to deploy the steady cash inflows without compromising on risk management
Kalpana Morparia, joint managing director of ICICI Bank, who is set to retire from the bank this financial year, has been slated to head ICICI Holdings as its managing director and CEO. There would be no change in the respective managements of the operating companies.
ICICI Prudential Life Insurance is a joint venture of the bank with Prudential Group, one of the largest insurance and fund management companies in Europe. It is the largest private sector life insurer in the country with a network of 450 branches and 1.5 lakh agents across the country.
The life insurance venture has been making losses since inception because of high set up costs, actuarial provisioning and marketing expenses. This is true for all private sector life insurance businesses floated in recent years. ICICI Bank measures the performance of its life insurance businesses on the basis of new business achieved profit (NBAP), which is the present value of all future potential profits, which may accrue to shareholders from insurance policies written during a particular period.
The NBAP of ICICI Prudential Life increased from Rs312 crore during 2004-05 to Rs528 crore in 2005-06. For the third quarter of 2006-07, NBAP of the life insurance business was reported at Rs193 crore as compared to Rs142 crore for the same quarter of previous financial year.
ICICI Lombard was floated as a joint venture with Canadian company Fairfax Financial Holdings with the bank holding a 74-per cent stake. It has a 12.5-per cent market share among all general insurers in the current financial year and more than 35 per cent market share among private sector general insurers. Of late, Bajaj Allianz has been proving a very stiff competitor to ICICI Lombard.
ICICI Lombard Financials
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Prudential ICICI has emerged as the top mutual fund house in the country with total assets of Rs43,281 crore under management as of end-February 2007. That gives it a market share of 12.25 per cent of total assets managed by the domestic mutual fund industry. The fund house was the second largest fund manager in the country behind UTI MF for a long time before Reliance MF toppled it from that position. In recent months, a dramatic battle has been going on between these 'big 3' for the for the top position.
Prudential ICICI AMC Financials
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Both insurance and fund management offer very high growth potential in India. Insurance penetration in India is one of the lowest among all emerging markets. Rising income levels and awareness about insurance products would lead to many years of explosive growth in this sector.
Even now, life insurance policies are sold in this country mostly as savings and investment products rather than as an essential tool to protect living standards of the family in the event of untimely death of an earning member. The proportion of pure life insurance policies, or term policies, is still very low. As awareness improves, this situation would change dramatically. There is also significant scope for increased insurance penetration in semi-urban and rural areas where very few lives are insured.
Potential for growth in general insurance is also very high. The concept of medical insurance has caught up in recent years, but only in urban centres. Also, the coverage is limited to employees of large and established companies while the majority who are in the unorganised sector and those who are self-employed are still left out.
Insurance policies to cover various risks faced by companies have also seen significant growth. As Indian companies grow in size and expand their operations, the risks faced by them, and the need for insurance, would continue to rise. There is also considerable scope for growth in segments like farm or crop insurance.
The ICICI insurance subsidiaries, being market leaders, are in excellent positions to exploit the future potential. These companies have already built up a large customer base and service network. Their brands are reasonably well established and their management teams are well settled.
However, competition would be stiff in the insurance business in future. Large corporate groups back all ICICI Prudential's main competitors like Tata AIG, Bajaj Allianz and Birla Sun Life. Competition from private players has shaken up market leader LIC, which has become very aggressive of late. New entrants, attracted by the growth potential, are also queuing up to enter th market. The situation in general insurance is no different.
The potential for growth in the fund management business is no less than in insurance. Most of the domestic savings continue to be invested in traditional avenues like bank deposits, real estate and bullion. Though the mutual fund industry has seen a substantial jump in assets under management in recent years, it is still only a fraction of the total savings in the country. Even an increase of a few percentage points in fund flows into mutual funds would lead to a quantum jump in total assets under management.
The mutual industry currently has assets of close to $80 billion under management, which includes investments by retail, corporate and institutional investors. Some research houses have estimated that additional inflows of at least $200 billion can come in from domestic retail investors alone over the next five years and most of this would go into mutual funds.
The fund management business would also see increased competition in future. As mentioned earlier, Prudential ICICI, Reliance MF and UTI MF have been in a three-way see-saw battle for supremacy for many months now. Second rung players like HDFC MF, Franklin Templeton, Birla Sun Luife, SBI MF and Tata MF may step up their efforts to move up the ladder.
Among the smaller players, there are many like ABN Amro, HSBC, Fidelity, Merrill Lynch and Principal who are significantly large players internationally. They may not choose to remain small in a fast growing industry and have the resources, brand image and expertise to challenge the frontrunners. Other international players like Goldman Sachs and some of the large US-based mutual funds may try to enter the Indian market in the near future.
The insurance business, which would contribute the bulk of the total business of ICICI Holdings, requires large investments in the initial years. This is to ensure that the business is properly capitalised to meet regulatory norms. Customer acquisition costs and other operating expenses would be very high as a proportion of income in the initial years and it would take many years for life insurance businesses to generate positive cash flows. During this period, the losses have to be covered through capital infusions.
ICICI Holdings is almost certain to look at raising additional capital in the coming months to meet the capital requirements of various businesses. Though the bank has indicated that a stock listing may be considered, the company may also consider strategic stake sales to institutional investors if market conditions are not favourable for a listing. Being the first in the business to raise additional capital as a focussed entity, it would offer a significant advantage over competitors in the insurance sector.
As both insurance and fund management businesses are at an early stage of development in India, there are valuation benchmarks available. There are no listed companies from these sectors, though some of the listed companies like Bajaj Auto and Max India are the holding companies of other private sector insurance players. Past financial performance of these companies, especially life insurance companies cannot be the basis of valuation because of the losses from initial set up and marketing costs.
However, the huge growth potential in the domestic market would ensure very high valuations for these businesses. Various investment banks and brokerage houses have put the combined value of the holdings to be transferred to ICICI Holdings at between Rs16,000 crore and Rs21,500 crore. That translates to a value of between Rs170 and Rs240 per share of ICICI Bank. ICICI Prudential Life contributes between 60 and 65 per cent of the total value while ICICI Lombard and Prudential ICICI AMC contribute the rest.