In an unprecedented move, both the Indian promoter and the foreign collaborator want to quit their insurance JV.
Chennai: Even as the insurance vultures have started circling over the AMP Sanmar Life Insurance Company Limited, industry watchers are keenly watching the Sanmar group.
Will the group bite the bullet by buying out AMP's stake in the life insurance company and go solo with professionals at the helm, they wonder.
Interestingly, the group has not exercised its right of refusal to AMP's stakes in the life insurance company. Attempts are being made by some officials to convince the Sanmar top management to go it alone.
The Rs 217.50 crore equity-based AMP Sanmar Life is a 74:26 joint venture between the Chennai-based Sanmar group and AMP ASAL Pty Ltd, part of the Australian wealth management group AMP. While the latter ran the show, Sanmar remained content with board memberships.
Recently AMP surprised the insurance sector by announcing its intention to exit the Indian joint venture to focus on its wealth management business in Australia and New Zealand.
Says AMP Sanmar Life's managing director, Graham Meyer, "In the past, as a traditional life insurance company, AMP earned revenues from premiums on policies and providing guarantees on the capital it had invested. Today AMP's revenues are increasingly driven by fees for services and the value of assets under management." According to him, AMP believes the time is now right to review its presence in India.
For a company AMP's size, its around Rs 56.42-crore investment in the Indian life insurance venture is very small. And so will be the returns even if the venture gives the targeted rate of return. "Perhaps that doesn't deserve AMP's management time and, therefore, the decision to exit," remarks a source.
What really shocked policyholders as well as others in the insurance sector is Sanmar group chairman N Sankar's announcement that the group would exit along with AMP on the grounds of inexperience.
Explains Meyer, "Any Indian buyer of the joint venture would naturally look for the exit of Sanmar. Any foreign buyer would also probably have his own Indian partner. Keeping this in mind, and to facilitate the process, Sanmar is offering its stake for sale along with AMP's. However, if any foreign buyer is interested in Sanmar continuing as a partner, Sanmar will talk to them."
While the policyholders were shocked at the news of the exit of both the promoters, industry analysts are wondering why the Sanmar group had decided to call it quits after investing around Rs 160 crore.
According to Meyer, Sanmar has no direct experience in the life insurance business, and also does not have much of a footprint in the retail business. It exited its only exposure to retail business in the form of Overseas Sanmar Financial Services, some years ago. The group does not have the requisite knowledge of the life insurance industry to run the business on its own.
Others differ. According to consulting actuary, R Ramakrishnan, "It is better for the Sanmar group to go it alone instead of exiting the business or replacing one foreign partner with another."
Adding to that a senior manager of another private life insurer says, "The group can hire domain experts to run the show and seek expertise from consultantsand reinsurers in designing and pricing product." Several others from the industry share similar views and say if there is going to be a sale then Sanmar would end up losing.
First, with both the promoters openly announcing their decision to exit, potential buyers might view this as a distress sale. So it will be tough for the promoters to exit the business at a profit. As far as Sanmar is concerned, the investment loss will be higher than for AMP.
Second, it will be unwise for any promoter to exit a venture that is about to see a 'hockey stick' growth. AMP Sanmar Life has just started reaping the benefits of its wide branch network and its unit-linked policy. The company closed last fiscal with a total premium income of Rs 105 crore (fresh Rs 91.18 crore and renewal Rs 13.82 crore), up from Rs 31 crore earned in FY2004. The target for the current year is Rs 250 crore.
Third, industry experts say that the financial strain on Sanmar will now ease as the insurance company has crossed the start-up phase. It is time for the company to consolidate the gains and grow by charting a new business strategy. The cost overruns could be controlled with effective management, they aver.
And finally, there is the pressure from the policyholders who are uncertain about the fate of their policies. According to sources, the company is experiencing increased policy surrenders - a bad sign at the time of enterprise valuations.
What is it worth?
The AMP Sanmar Life case has aroused considerable interest within the industry, as it is for the first time that a private life insurer is on the block and, therefore, the mode of enterprise valuation is attracting immense interest as this may set the industry trend for further mergers and acquisitions or initial public offers.
According to Meyer, the premium collected by the company till May 2005 since inception is Rs 153 crore and has been growing year-on-year 300 per cent. According to the Insurance Regulatory and Development Authority's (IRDA) annual report, the company's accumulated losses at the end of 2003-04 were Rs 69.59 crore.
Normally, the value of a life insurer is arrived by calculating what is called the 'embedded value', which is the present value of future profits embedded in the policies already sold. Rs. in crore
Source: IRDA and AMP Sanmar Life
|Year ||First year premium ||Renewal & Single premium |
|01-02 ||0.28 ||- ||0.28 ||2.06|
|02-03 ||6.32 ||0.15 ||6.47 ||6.16|
|03-04 ||21.56 ||9.50 ||31.06 ||(77.80)|
|04-05- ||91.18 ||13.82 ||105.00 ||NA|
Number of branches: 86 and Number of agents: Over 9,000
Given the small number of policies sold by AMP Sanmar Life (2004-05: 36,268; 2003-04: 46,282, the two major years for the company) experts say the embedded value is not a right measure here.
The alternative is to value the company's distribution network of 86 branches and 9,000 agents. Says an AMP Sanmar Life employee, "Life insurers are finding it difficult to recruit new agents. With our branch network and agency force all that a new entrant has to do is to plug-and-play."
Here a prospective buyer would like to estimate the business potential that the distribution network / force would generate and not the cost that has been sunk.
It should be noted that from the beginning AMP Sanmar Life has followed a strategy of targeting semi-urban and rural markets in the southern region. In line with the strategy branches were opened in non-metro areas. Later the company went to the western and northern regions.
Industry experts do not find fault with this strategy of targeting the semi urban and small towns rather than the big cities. What was lacking, perhaps, was proper training for the agents and bancassurance tie-ups to back the corporate strategy, they say. While AMP Sanmar Life tied up with Shriram Chits for selling its policies, the tie up with New India Assurance Company Limited for cross-selling products was not permitted by IRDA. Similarly, attempts by the company to market its policies to Kerala-based cooperatives did not succeed.
AMP Sanmar Life saw a steep fall in the number of policies (around 11,000) sold during FY2005 as compared to FY2004, though the average premium per policy went up to Rs 25,854 from Rs 6,024. For a life insurer the number of policies and the average sum assured are important measure.
The big mystery now is would a buyer be ready to pay more than the Rs 217.50 crore (the capital infused by the promoters of AMP Sanmar Life) for acquiring the distribution infrastructure.
"An existing or a new player can establish the distribution network at a lower cost," says Ramakrishnan.
Says another actuary, "The key aspects that I would look for, apart from the distribution network, are, one, the investment guarantees given on policies; two, the pricing assumptions and, three, the lapse ratio."
Requesting anonymity, the CEO of a large private insurer says, "Given the size of their operations and the kind of business they have done, I would value the company at 1.5 times of its last year's total premium of Rs 105 crore."
He, however, hastens to add "No, we are not interested in AMP Sanmar Life as acquiring it does not add any value to us."
Another senior manager from another life insurer had similar views.
With large private insurers not showing interest, a potential buyer for AMP Sanmar Life could be an existing company of a similar or slightly larger size or a company with a presence in the north and the west that wanted to expand in the south or even a new entrant wishing to enter the sector. The latter could be a foreign insurer scouting for an Indian partner or a consortium of Indian companies.
For employees, of course, a new entrant or Sanmar buying out AMP's stakes are better options, as the chances of their jobs being secured would be better.
Last heard on the issue, some large financiers are showing an interest in the company with Sanmar at the helm.
also see : A story of twists and turns