AIG’s 13-Year Wait Gets Longer as Modi Rebuffed: Corporate India

By and | August 14, 2014

American International Group Inc. has waited 13 years in India to raise its stake in a local venture from a maximum allowed 26 percent. That wait is about to get longer.

Opposition lawmakers, during the current session of parliament scheduled to end today, scuppered Prime Minister Narendra Modi’s attempt to revive a bill proposing a higher cap of 49 percent, dealing a blow to his campaign pledge to open the $1.8 trillion economy. The delay in the legislation, pending since 2008, is hampering the expansion plans of insurers including AIG, Standard Life Plc and MetLife Inc.

“We have been waiting for more than a decade for this bill,” said Kaushal K Mishra, CEO of Tata AIG General Insurance, the New York-based insurer’s partnership in India. “It is still not clear when the bill will be passed and in what form it will be. Many large international insurers are waiting for clarity on this.”

AIG is among the companies that see promise in the second- most populous country where insurance penetration, or premiums underwritten as a proportion of a country’s total economic output, is less than the global average of 6.5 percent. The delay robs Modi, who needs insurers’ funds to meet his infrastructure overhaul goals, of an opportunity to lure investors during a proposed visit to the U.S. next month.

Role Reversal
Efforts by former Prime Minister Manmohan Singh’s government to raise the investment cap were thwarted by rival political parties, including Modi’s BJP and the Communists, who argued that it isn’t in the interest of the Indian insurance industry.

The main opposition Congress party that originally introduced the legislation about six years ago, in a tit-for-tat role reversal, is now against it after losing to Modi in the elections in May. The BJP lacks a majority in the upper house of parliament, the Rajya Sabha, where the proposal has stalled.

The clash is hurting the economy, said Prasun Gajri, chief investment officer of HDFC Standard Life Insurance Co., the Mumbai-based partnership of the Edinburgh-based insurer.

“A robust insurance sector will increase financial savings and help in mobilizing the much needed long-term funds for infrastructure development,” he said. “Growth in this segment will support the economy’s expansion.”

Infrastructure Needs
India needs about $290 billion by 2017 for public works to upgrade its infrastructure according to estimates by the nation’s Planning Commission. The poor quality of roads, bridges, ports, rail and other facilities, ranked below those in Guatemala and Namibia in a World Economic Forum survey, is hindering an economy that expanded 4.7 percent in the year ended March, near the slowest pace in a decade.

Insurers typically invest in long-term government and corporate bonds, a crucial source of funds used to finance infrastructure projects. Indian insurance companies, most of which are state-controlled, held about 20 percent of government securities as of end-2013, according to data provided by the finance ministry.

India’s insurance sector is “investment starved,” Finance Minister Arun Jaitley said on July 10 while presenting the federal budget that proposed raising the limit.

Better Than 26%
Asia’s third-largest economy had 24 life insurance companies and 28 non-life insurers by end-July, according to the Insurance Regulatory and Development Authority. Twenty life insurers and 17 non-life insurers had received foreign investments as of March 2013, IRDA data shows.

“Most international companies will probably increase their stake in Indian ventures,” T R Ramachandran, CEO of Aviva Life Insurance Co. India said by phone from New Delhi. “Passing the insurance bill also frees up the regulator’s hands to reform the sector.”

While a controlling stake is the goal for many foreign insurers, the proposed 49 percent is still better than the current 26 percent, according to Vishal Narnolia, Mumbai-based banking analyst at SMC Global Securities Ltd.

“Lack of head room to hold a more significant share in the Indian joint venture and problems that they were facing in home markets forced some large overseas insurers to exit India,” said Narnolia.

Australia’s AMP Ltd. sold its holdings in a local venture to billionaire Anil Ambani-controlled Reliance Capital Ltd. in 2005. AMP’s then chief executive officer Andrew Mohl said the venture was “several years” from being profitable.

Nuclear Families
New York Life Insurance Co. quit an Indian joint venture in 2012, three years after its local partner Max India Ltd. indicated it would sell its 23 percent holdings to the biggest U.S. life insurer owned by policyholders, should India change its foreign direct investment rules.

Companies including Aviva Plc and Nippon Life Insurance Co have stayed put in the South Asian country. They are betting demand for pension, health and other protection products will increase with higher per capita income, rising average life expectancy, the emergence of nuclear families as well as a reduction in the average size of households, Charles Graham, an analyst with Bloomberg Intelligence, wrote in a research note dated July 14.

Insurance Penetration
Insurance penetration in India has slipped every year from 5.2 percent in 2009 to 3.96 percent in 2012, the latest data provided by IRDA show. That is still the highest among the BRIC nations.

India requires as much as 600 billion rupees ($9.8 billion) in insurance till 2019 to sustain its growth trajectory, said Monish Shah, a Mumbai-based senior director at the local unit of Deloitte Touche Tohmatsu.

Modi’s failure to see the bill through has raised doubts among investors over his ability to take politically sensitive decisions after winning a landslide election victory in May. The rupee has weakened 1.4 percent against the dollar since Jaitley presented the budget, the worst performance in Asia. The benchmark S&P BSE Sensex has slipped 1 percent from a record high reached on July 24, according to data compiled by Bloomberg.

“India presents a huge opportunity and this was a good time to raise the limits and bring in the foreign investors,” Shah said. “Any uncertainty on such policy matters is going to adversely affect investor confidence.”

–With assistance from Bibhudatta Pradhan in New Delhi and Kartik Goyal in Mumbai.

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