Reliance Capital's Insolvency: What's Next For Insurance Arms, Policyholders
Reliance Capital's insurance units face an uncertain future even as policyholders will be protected by the regulator.
Reliance Capital Ltd.'s insurance units face an uncertain future even as policyholders will be protected by the regulator.
The Reserve Bank of India superseded the board of the debt-ridden company, leaving the fate of its subsidiaries, associates and minority stakeholders uncertain. The regulator also referred it for insolvency.
That will have a domino effect on nearly 20 subsidiaries of the financial services company. But unlike other group firms, insurance businesses are regulated by the Insurance Regulatory and Development Authority of India and are accountable towards policyholders. They hold investments made on behalf of policyholders or customers which cannot be touched or liquidated by creditors seeking to recover dues from the parent.
Reliance Capital owns 100% of Reliance General Insurance Co. and 51% in Reliance Nippon Life Insurance Co., a joint venture with the Japanese insurer.
No haircut on liabilities and claims of policyholders is permitted. So one option could be to sell the companies along with existing investments and liabilities towards the policyholders.
Both the insurance units have been performing well.
They have a solvency ratio above the regulatory requirement. Reliance General is profitable. While Reliance Nippon Life reported a loss in the first half of the ongoing fiscal, it was a period when the life industry saw higher Covid-19 claims after a deadlier second wave of the pandemic.
Still, with the parent facing bankruptcy proceedings, their business may suffer in two ways. The uncertainty surrounding the group may impact customer sentiment and business growth. And raising additional capital, whenever required, will be difficult.
So the sale of the insurers may be put off until a reasonable value is realised, said an insurance analyst with a domestic brokerage on the condition of anonymity as the person is not authorised to speak to the media on the matter.
Queries emailed to Reliance General and Reliance Nippon Life didn't elicit any response.
Reliance General Insurance
The company can be sold in entirety to a buyer wishing to continue the business, the analyst quoted earlier said.
Yet, despite fairly sound financials, the valuation will be controlled by the creditors. And while liquidation and distress sale may be out of question since it involves policyholders' money, such a deal may not yield the full value warranted based on sound financials given the uncertainty around the parent.
Reliance Nippon Life Insurance
Reliance Nippon Life may be treated like Pramerica Life Insurance Co., Dewan Housing Finance Corp.'s joint venture with Prudential Financial Inc. of the U.S.
While independent bids for the sale of DHFL's 51% stake in the company were invited, it could not be sold. Finally, Piramal Enterprises Ltd. got the stake as part of the assets it acquired in DHFL's insolvency resolution.
Alternatively, Reliance Nippon Life may have to find a new investor for the 51% stake that Reliance Capital owns.
Also, an amendment to the insurance law passed by parliament now permits foreign direct investment of up to 74% in the insurance sector. That allows Nippon Life to increase stake, if the Japanese insurer wants. The rest can be sold to others.
Still, any potential stake purchase by Nippon Life will have to be routed through the creditor group that may pick the best bid. In addition, both a new investor and Nippon Life will require the IRDAI's approval.