 "What ails India's public sector insurance firms")
The presence of such an oddity in the annual report of Oriental Insurance Company for close to 40 years, however, does not surprise analysts. "It has been a long time since anyone took the public sector insurance companies to the cleaners," said one of them.
It could be a first of sorts for capital markets regulator Securities and Exchange Board of India (Sebi) to deal with, since no government-run company has ever come to it to be listed with such an entity riding on its balance sheet.
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In Budget 2016-17, Finance Minister Arun Jaitley had announced plans for the listing of the four government-run general insurance companies - New India Assurance, National Insurance, United India Insurance and Oriental.
Except for New India Assurance, none of the other three is in a position to get a nod from Sebi unless the sector regulator, Insurance Regulatory and Development Authority (Irdai), steps in. Their balance sheets are in a mess even though they rank number one to four among all non-life insurers in India. "The jewel in the crown is New India Assurance, whether for its underwriting practice or on any other metric," says Anurag Sunder, director, insurance business at PriceWaterhouseCoopers. It is also the largest among the four.
Yet, for the central government, they are the 'also-rans'; surprising when the government is pushing for deep insurance coverage in health, accident cover and for crops. Unlike the Jan Dhan Yojana, where the National Democratic Alliance government has clearly depended on public-sector banks to deliver, none of the four social insurance schemes will offer the state-run insurance companies any pole position except for Agriculture Insurance Company of India. The four general insurance companies do not have the cash to take on more of the low-premium businesses any more.
For years, these four state-owned companies have priced their insurance products in their major portfolios such as motor and group medical health policies at low premiums, but paid out fat claims on them. Advisory services Willis Towers Watson estimates the motor business at 48 per cent and health at 22 per cent of the total non-life insurance business in India. The losses have been shored up by other profitable business such as fire insurance, but as competition has intensified, those margins have also got wiped out. K K Srinivasan, former member (actuary) at Irdai, agrees. "I would describe the level of competition among the four public-sector units (PSUs) as intense. It is affecting their profitability."
The shorthand measure of the performance of any insurance company is a metric known as combined ratio - the total losses and expenses as a percentage of the total premium earned by an insurance company. It should be less than 100 for a company to earn and show some profit.
Even for New India, the ratios are above 100 per cent. For United India, it is 117.16 per cent as on December 31, 2015; for Oriental 125 per cent; and for National it is 114 per cent. None of their private sector peers has crossed this dubious century. This means government-run companies are eating through their capital for each additional rupee of premium they book.
In a recent report for the Indian insurance sector, China-based Haitong Investment Bank notes: "We think what we regard as inadequate (incurred but not booked claims) provisioning by PSU insurers except New India is a concern. They are not showing the actual claims and this approach seems to mask the impact of aggressiveness in other verticals." It has become scary. The weak numbers are hitting where it hurts the most - the solvency margins, a metric to measure if the company is in trouble or not.
The entire industry demands easier margins pointing to the reserves they hold to pay off large claims, but the PSUs need a bit more help. In November last year, the chiefs of all the non-life insurance companies met the regulator to ease the mandated solvency ratio of 150 per cent. "If the proposed regulations are implemented, solvency margins of many companies that are compliant today will reduce significantly," noted a presentation made by them. The public-sector ones want freedom to value their reserves instead of the straitjacket the regulator imposes on every one.
One way they have made good is their earnings from the investment of their funds. But, here as well, Srinivasan says there is problem. "These companies use to hold a lot of excellent shares. But, the need to declare attractive dividends has often pushed them to sell those aggressively."
The valuation reserve of these companies has consequently remained flat. His suggestion for the insurance companies is to merge them before taking them public. "Else, they may start going sick soon." The painful alternative for the government is to pump in additional capital to improve their balance sheets.
Consequently, the companies were not keen to hit the market despite the changes introduced in the sector last year including a higher foreign investment cap. Last year, the chief of one of them had claimed his company was well capitalised and so it was not in favour of a public issue. That tune has now changed. News agency Press Trust of India quoted Sanath Kumar, chairman and managing director of National Insurance Company, as saying: "There is a lot of hidden wealth in these state-owned general insurance companies in terms of market value of assets they hold, brand equity, trust of their customers and other such parameters... We believe that the real valuation will make a very attractive proposition for the investors."
However, those signs of wealth do not include Industrial Credit Company of India on the books of Oriental since 1973, even though it was not even an insurance company. The entity with Rs 10 lakh paid-up capital has proved impossible to liquidate. Since 1999, there is an unresolved court case in Aligarh blocking the dissolution of the shell company, but the interesting part is that the holding company has not been able to take the case on to its books and let the shell be wound up.
ALL IS NOT WELL
- In Budget 2016-17, Finance Minister Arun Jaitley had announced plans for the listing of the four government-run general insurance companies - New India Assurance, National Insurance, United India Insurance and Oriental
- Except for New India Assurance, none of the other three is in a position to get a nod from Sebi unless the sector regulator, Insurance Regulatory and Development Authority (Irdai), steps in
- For New India, the ratios are above 100 per cent. For United India, it is 117.16 per cent as on December 31, 2015; for Oriental 125 per cent; and for National it is 114 per cent