Wednesday, December 7, 2011

IPO guidelines fail to excite insurers

The recent Initial Public Offer (IPO) guidelines notified by the Insurance Regulatory and Development Authority to raise capital may not excite too many life insurance companies given the poor sentiment in the equity market and doubts on the possibility of getting good valuations. On the contrary, eligible insurers (for IPO) would rather want to dilute their stake in favour of their foreign joint-venture partners rather than test the volatile equity markets since last last one year.
Insurance sector was opened up for the private sector in the year 2000. There are about 23 life insurance companies besides state insurer Life Insurance Corporation (LIC). According to IRDA, insurers that have complete at least 10 years in India would be eligible for raising capital through IPO.
IPO guidelines
The insurer’s overall financial position, track record, reasons for fund raising and the capital structure post issue would be the basic parameters insurance regulator would look at before granting its approval. Post IRDA’s approval, the applicant would have to file the Draft Red Herring Prospectus (DRHP) with the capital market regulator Securities and Exchange Board of India (SEBI) within a year.
The draft prospectus must mention the risk factors specific to the insurance companies, overview of the insurance industry, glossary of terms used in the sector and financial statements, among others. The insurance companies must have an embedded value (EV) of at least twice the paid-up-equity capital, according to the IRDA guidelines. The embedded value of a life insurance business is an estimate of the value of both its net assets and the income stream expected from policies already in force.
No issuance and allotment of capital by an insurance company should be, in any form other than as fully paid-up equity shares, the guidelines said. The insurance regulator would prescribe “the extent to which promoters shall dilute their respective holding, the maximum subscription which could be allotted to any foreign investors”, said the IRDA (Issuance of Capital by Life Insurance Companies) Regulations, 2011. IRDA, it added, would prescribe a lock-in period for the promoters to prevent them from exiting the company.
The regulations stipulate that no life insurance company should approach market regulator Securities and Exchange Board of India (SEBI) for an IPO without seeking prior approval of IRDA. “Almost all such companies who have completed 10 years are in urgent need of additional capital and the regulations would make it convenient for the promoters to address the issue,” said Kamalji Sahay, MD & CEO, Star Union Dai-ichi Life.
Valuation worry
Life insurance industry is going through a major and unprecedented haul since last 12-14 months starting from the Unit Linked Insurance Plan guidelines issued in September, last year. The series of measures be it on commissions or 4.5 per cent guarantee on pension products which were announced earlier this year and taken back last month left insurance industry reeling under the pressure of making substantial changes to their distribution model and overall marketing strategy along with the structure of various products.
This hit the bottomline of the insurance companies negatively affecting their profitability and forcing them to pare the operating expenses. Total premium collected by the life insurance industry stood at Rs 1,25,179 crore during April-September 2010-11, according to the Life Insurance Council.
"The fall in total premium is due to the drop in new business premium collection," it said. The total new business premium for the industry decreased 21 per cent year-on-year to Rs 49,046 crore from Rs 62,362 crore.
The IRDA in its guideline has removed the earlier suggested mandatory 3 year profitability clause which would come as a great relief for the insurers hit by the lowering margins.
A rather tepid two years on account of global slowdown and regulatory changes in the sector has seen companies focusing on rationalisation and consolidation rather than growth. “It will take at least a year for the situation to stabilise and for growth to return to the previous heady levels”, said SB Mathur, Secretary General, Life Insurance Council.
The decline was on account of low sales of unit-linked products, especially individual pension segment, which has fallen drastically this year to 1.2 per cent from an average of 26 per cent for the earlier two years for the same period.
They want FDI, not IPO Cash strapped insurance industry has been demanding hike in the Foreign Direct Investment (FDI) limit to 49 per cent which currently is capped at 26 per cent. “Many private life insurance companies that started operations around a decade back are turning profitable. This is a time to consolidate to ensure a sustainable profitable growth. FDI is of critical importance to the sector at this juncture rather than an IPO,” said the CEO of a private insurance company requesting not to be named.
There are 5 private insurers that have completed a decade in India including Reliance Life, HDFC Standard Life, and ICICI Prudential Life Insurance. Reliance life recently completed its 26 per cent stake sale to Japan’s Nippon Life for over Rs 3,000 crore.
Amitabh Chaudhry, MD & CEO, HDFC Life had earlier told Indian Express, “We are not in a hurry to go for an IPO. Our shareholders are very clear that we would go for it only at the right time which implies the right valuation that can be sustained based on our business performance.”
According to insurance experts, most of the eligible insurers (for IPO) would rather want to dilute their stake in favour of their foreign joint-venture partners, should FDI in insurance is hiked to 49 per cent, rather than test the volatile equity markets.
Life insurance industry (private sector) in India is still in its nascent stage despite spending about a decade. It is trying its hand on various formats of distribution – agency, bancassurance and alternate channels but still needs to find the right mix of distribution strategy which would help it become profitable and break even. Given the economic uncertainty along with the fears of another global meltdown, the equity market visibility for next 12-18 months does not look very optimistic making the IPO guidelines not so exciting for the insurers.

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