No mad rush for life insurance IPOs

December 9, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Last week, the regulator finally released the long-awaited draft for insurance companies to raise capital through an Initial Public Offer (IPO). As soon as this announcement was made, the entire industry was caught in a frenzy trying to decipher every word.

Judging by the reactions of some industry big guns, although they are relieved it is finally out in the open, it may be a while before we see them rushing to float their IPOs.

Here’s my extract of the guidelines of issuance of capital by life insurance companies:

At present, there are only 23 private life insurers in the country plus the state-owned LIC. IRDA guidelines say that only those companies which have completed 10 years of business can propose to raise capital through a public issue. So, there would be 11 private players who fulfil this criterion as on January 2012.

The next roadblock for these IPO aspirants is that the ‘Embedded Value (EV)’ of the company should be at least 2 times their paid-up Equity Capital. Simply put, EV = Present Value of Future Profits (PV) + Adjusted Net Asset Value. Greater clarity on how EV is calculated would be required but assuming a conservative estimate, the “PV” part would be for the Profits generated in future from the existing business setup. Now this can be a dampener, as the future growth plans cannot be factored in to arrive at the valuation. It is unlikely the regulator would allow any fancy mathematics here.

If you look at analyst reports for insurance, they always include some multiple of the new business profit made in the current year which is in allowance for future new business. The regulator has insisted that the EV should be prepared by an independent actuarial expert and reviewed by another independent actuary. Because of these guidelines, cash-rich companies may be less keen to list themselves. However, the companies who still want to go ahead with their IPOs will need to sit tight and hope for a good valuation from external analysts.

Other requirements that a prospective company will have to meet are a satisfactory record of policyholder protection and their history of compliance with regulatory norms. This means that the regulator will delve into minute details such as the number of customer complaints received, time taken by the insurer to resolve the complaints, etc. If the regulator feels that the requirements are not met, it reserves the right to not give a go-ahead to the company.

This apart, if you were to look at the overall life insurance industry over the last two years, you will notice a slowdown and there are very few players who have managed to make it to the other side. The private sector has suffered more than LIC and the situation is unlikely to improve over the next few months. Experts attribute this to the stringent ULIP guidelines released by IRDA in September 2010.

Considering the under-penetrated insurance market of this populous country, the long-term prognosis on the life insurance industry looks very solid and strong but it may take more than a year for the positive effects to flow in. Couple this with the uncertainties of the equity markets, and it may take a while before we see companies rushing to catch the IPO train.

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