With the Insurance Laws (Amendment) Act, 2015, in place, foreign insurance companies have started to increase their stake in India. This puts focus on valuations and factors that drive valuations. Richard Holloway, managing director, South East Asia and India, life, Milliman Inc., and Sanket Kawatkar, principal and consulting actuary, life insurance (India), at Milliman India Pvt. Ltd, an actuarial services company, speak of aspects that they see as important for valuation, and about the need to improve the participating business in India.
To assess valuations, purchase price as a multiple of the embedded value is looked at. For certain insurers, this multiple is quite high, up to three times their embedded value. (Embedded value represents the present value of all future profits plus adjusted net asset value). Does this mean these insurers have high valuations? What would be the right way to gauge valuations?
Richard Holloway: Valuation is a complex subject and many factors contribute to the valuation of a company. In India I see this obsession with looking at valuation as a multiple of embedded value. That’s just one of the many parameters. A younger company, for instance, will have a lower embedded value and so its valuation calculated this way may look very high. India is a young and growing economy and so the valuation may command a higher multiple of embedded value compared to developed economies where the multiple can often be much closer to 1.
