MUMBAI | NEW DELHI: Bulgebracket private equity funds Warburg Pincus, Carlyle and Temasek have been shortlisted for a 35% stake in ICICI Lombard General Insurance Co Ltd, the country’s largest private sector general insurer, in a deal that could fetch up to $1 billion, said people familiar with the development. The selection took place late last week after bids were received from four potential investors.
Others in the race included Blackstone, KKR, Advent and General Atlantic. The three will now conduct a final round of due diligence before submitting binding offers by April end, the people mentioned above said.
Earlier this year, Prem Watsa’s Fairfax Financial Holdings decided to sell 25% of its 34.6% stake in the insurance joint venture with ICICI for regulatory reasons. Reducing its stake to 10% will allow the Canadian firm to start a new general insurance joint venture in India, one of the people cited above said, adding that foreign investors cannot own more than 10% in an insurance company as a financial stakeholder.
The Canadian company has already submitted an application to form a fresh joint venture in general insurance with Kamesh Goyal, a former executive at German financial services major Allianz. Fairfax entities will own close to 45% of the new joint venture, in which it will be a strategic investor, while Goyal will have 15% and the residual stake is likely to be held by the other financial investors. The Insurance Act allows foreign promoters to hold up to 49% of local operations.
ICICI is also looking to pare its stake by 7-10% in an effort to maximise value unlocking. Investors are expected to pay a significant premium once a third of the company is up for grabs. Most of the bids range between $900 million and $1billion.
In October 2015, Fairfax hiked its stake by an additional 9% for $237 million (Rs 1,550 crore then), valuing the company at Rs 17,225 crore ($2.5 billion). That has set a basic benchmark for this round as well. Industry watchers are expecting a $3-3.2 billion valuation for the company now, giving Fairfax a significant upside on its 16-year investment.
Hyderabad-born Watsa made his India debut in 2001, picking up 26% stake in ICICI Lombard through Hamblin Watsa Investment Counsel Fund and waited for a decade to write his next cheque, for a 9% stake in brokerage firm IIFL in 2011.
There was no response to emails sent to ICICI and Warburg. Fairfax, Temasek and Carlyle declined to comment.
Temasek is already an investor in ICICI Prudential Life Insurance and Analjit Singh’s Max Group. Both Warburg and Carlyle too have made large bets in the Indian financial services space but lack a sizeable pureplay insurance sector exposure so far.
ICICI Lombard, with an 8.4% market share, is a key presence in the vehicle, home, health and travel insurance space with gross written premiums of $1.2 billion in fiscal 2016. The company maintained its market leadership in the private sector with an overall market share of 8.4% and witnessed an increase in policy volumes by 13.90% from 13.87 million in fiscal 2015 to 15.80 million in fiscal 2016. ICICI Lombard’s profit before tax increased from Rs 691 crore in fiscal 2015 to Rs 708 crore in fiscal 2016 despite the impact of the Chennai floods and high weather insurance claims. But profit after tax decreased from Rs 536 crore in fiscal 2015 to Rs 507 crore fiscal 2016, due to a higher effective tax rate in fiscal 2016, as losses carried forward from earlier years had already been absorbed in prior periods.
The nearly Rs 1 lakh crore general insurance business has turned profitable for several companies, which have been given pricing flexibility by the regulator after they bled for several years.
In 2015-16, the general insurance industry underwrote direct premiums of Rs 96,379 crore, registering a growth rate of 13.81%. The general insurance industry has also got an impetus from the government’s focus on crop insurance, which created a new Rs 20,000-crore segment.
This in turn has improved the prospects of large-scale investor interest in the sector, both in life and general insurance.