Stock Review: RELIANCE CAPITAL

Nippon Deal May Boost Local Insurers' Valuation

Nippon Life Buys 26% in Reliance Life

Shares of Reliance Capital rose 9.7% following the announcement that Japanese insurance company Nippon Life Insurance had acquired a 26% stake in its subsidiary Reliance Life Insurance, valuing it at 11,500 crore.

Reliance Capital's investment till date in Reliance Life aggregates close to 3,600 crore, which is about one third of its total capital invested. The deal will not only boost Reliance Capital's overall valuations, but . 3,062 crore that Nippon Life will pay, will boost its other businesses.

According to a report by ICICI Securities in February 2011, the New Business Achieved Profit or NBAP margins of insurers have been falling due to new IRDA pricing norms. However, the deal values Reliance Life at 16 times the new business premium. "The company is roping in a foreign partner at a good time. Soon, IPO guidelines for the industry will be announced and benchmarks will get established. Also, they are getting a renowned and large partner, which will have a long-term commitment ," says Ashvin Parekh, partner, National Leader, Global Financial Services, E&Y.

Reliance Life Insurance is one of India's top private sector life insurers with an annual premium income of over . 6,600 crore and an operating history of over a decade now. Through this JV, Nippon Life will get to enter the Indian market and Rel Life will benefit from Nippon Life's vast experience, expertise and global best practices.

This deal will probably increase the profitability margins of Reliance Life. The company has seen a steady decline in its market share of new business premium to 8.5% of the December 2010 quarter and 10% of the September 2010 quarter. The new business premium in the December quarter was . 593 crore down from . 921 crore in the September quarter. The company has been reporting net losses. The deal appears to be fairly priced and may set a good benchmark for valuation of local insurers, some of whom are bracing up for launching IPOs.