Munjals put life insurance plan on backburner

The Munjals were in talks with Munich Re's insurance arm, Ergo International, in the middle of the last year form a life insurance company.

"The Hero group has entered into a joint venture with Daimler for manufacturing commercial vehicles that will require an investment of Rs 4,400 crore over the next five years. Out of this, Rs 1,400 crore will be direct investments. Besides, the Hero group had earlier entered into a joint venture with Honda for two-wheelers. The company's two-wheeler sales have also been hit by high interest rates," an analyst pointed out.

With large capital allocation already lined up, the Munjals are likely to go slow on the insurance venture, which requires large doses of capital, said a source.

An email to a Hero group company spokesperson did not elicit a response. When contacted, Axel Fuerderer, the chief representative of Ergo International, refused comment.

Life insurance business is highly capital intensive, which requires continuous capital infusion with no breakeven for up to 10 years. Of the 15 life insurance players that started operations since the opening up of the sector in 2001, only SBI Life Insurance has been able to break even.

ICICI Prudential Life Insurance, the largest life insurance player, has so far infused Rs 3,772 crore, Birla Sun Life 1,224 crore, Bajaj Allianz Life Rs 900 crore and Reliance Life Insurance will be infusing an additional Rs 1,500 crore in the next three years.

The Insurance Regulatory and Development Authority (Irda), while screening the initial (R1) applications for a life insurance company, insists on examining the credentials of the promoters and their ability to infuse capital. Unless the potential promoters convince Irda that they can bring the required capital, the initial licence is not granted.

"If a company has to infuse Rs 1,000 crore in over 5-7 years, with no potential breakeven for 10 years, then a choice has to be made if the company wants long-term value but short-term pain as compared to an existing business, where the same capital, if deployed, will give an immediate return of 16-18 per cent," said an analyst.