Dutch insurance major AEGON could be the next sectoral player to exit the country, after New York Life ended its joint venture with Max India last month.
AEGON operates in India through a joint venture with diversified financial services player Religare Enterprises Limited, called AEGON Religare Life Insurance Company Ltd.
Sources in the direct know of developments said AEGON had started looking at all options, including the exit route, in the light of its inability to invest further in the business, considering the results till now and the receding chances of an increase in the cap on foreign direct investment (FDI) in the sector from the present 26 per cent to 49 per cent in the near future.
Industry sources stressed that about half a dozen insurance companies faced the same problem as AEGON Religare and the developments might indicate a larger sector phenomenon.
Last month, American life insurance major New York Life divested its stake in Max New York Life to Sumitomo Insurance Company Ltd. The Japanese insurer acquired 26 per cent stake in Max New York Life Insurance Company Ltd for Rs 2,731 crore ($530 million), valuing the insurer at Rs 10,500 crore ($2 billion).
AEGON holds 26 per cent stake in Mumbai-based AEGON Religare Life Insurance, established in 2007. Religare holds 44 per cent in the venture, with Bennett, Coleman & Company Ltd holding the remaining 30 per cent. According to the company website, as on December 31, 2011, the promoters had invested Rs 1,075 crore in it.
AEGON spokesman Dick Schiethart said in a reply to an email query that the company had no plans to exit from its insurance joint venture with Religare and India. “AEGON is committed to the insurance joint venture with Religare and is committed to the Indian insurance market,” said Schiethart.
A Religare spokesperson declined to comment on AEGON’S plans to exit the venture, and said: “We don’t comment on market speculation.” AEGON Religare officials declined to comment, saying this was a shareholder issue.
Market analysts say AEGON Religare, a pioneer in the online insurance space in India, was struggling to keep operating and agency network expenses down to match with the premium collected. Languishing at the bottom five out of 23 life insurance companies in India, AEGON Religare collected Rs 207.6 crore by writing new policies during 2011-12, down by 24.5 per cent as against Rs 274.9 crore in 2010-11.
The uncertainty over a rise in the FDI limit has been a bitter pill for most foreign players in the insurance industry, characterised by regulatory issues, low margins, lack of a policy road map and 18 months of unprecedented slide in premium collection.
During 2011-12, the life insurance industry’s policy issuance was down eight per cent. For private players, it was down 24 per cent. As a result, first year premium collection of life insurers was down nine per cent to Rs 1,14,233 crore against Rs 1,25,826 crore in the corresponding period last year. In the same period, collection by the private life insurance industry was down 17 per cent.
A main reason why Indian operations continue to remain “insignificant” compared with other operations for large global players are the margins. A recent study by McKinsey shows the returns and profit margins in India are one of the lowest in the region. The study shows return on reserves from the life insurance sector at minus 27 basis points, whereas it is 110 basis points in China. Similarly, profit margins or the new business-adjusted profit margins in India are at 18 per cent, against China’s 30-60 per cent.
“In the past decade, ending 2010-11, the total capital invested by private sector life insurers was $7.5 billion, of which 50 per cent or close to $4 bn was invested to fund accumulated losses, which have largely been incurred to create distribution capacity,” the report added.