Irda plans valuation roadmap in 15-20 days

At a time when some life insurers are planning to list on Indian bourses, the Insurance Regulatory and Development Authority (Irda) is working on a methodology to arrive at their valuations.

According to senior Irda officials, the regulator will come up with the roadmap in 15-20 days. Irda is in talks with the Institute of Chartered Accountants of India (ICAI) for coming out with a uniform method for valuations.

ADDED VALUE

• In talks with ICAI for creating a methodology for valuation of the life insurance companies
• Focus on transparency in terms of company financials, including solvency margin and loss ratio
• Valuation depends on embedded value based on the calculation of the present value of surplus distributable to shareholders
• Solvency and the nature of the products sold in the long term are key measures
• The govt may extend the mandatory listing timeframe of 10 years

The insurance regulator is working on making the valuation methodology transparent. For listing requirements, the regulator will seek more transparency in terms of company financials, including solvency margin and loss ratio.

Valuation in the life insurance industry depends on embedded value. It is the calculation of the present value of surplus distributable to shareholders based on the best estimate assumptions. The business of life insurers is tied to solvency and the nature of the products sold in the long term.

According to the current norms, insurers have to go public after 10 years of starting operations. But with the government close to amending the insurance law, including extending the time-frame for mandatory listing, many companies are likely to defer their listing plans.

However, a few, such as Reliance Life, may not wait. The company has already expressed its willingness to go public since the company is 100 per cent owned by the Reliance ADA Group and the Insurance Bill clause on increasing the foreign direct investment (FDI) limit will have no bearing on it. The company can easily divest 26 per cent stake to raise capital.

Under the Securities and Exchange Board of India (Sebi) regulations, any company planning an initial public offering (IPO) has to report profits for three years in a row. But the regulator is likely to waive this condition for insurance companies as it is a sunrise industry and expecting three years of profits may not be practical. Paresh Parasnis, principal officer at HDFC Standard Life, said the amendment to the Insurance Bill would either raise the FDI limit or do away with the mandatory listing after 10 years of operations. “Possibility of an IPO will be difficult if the FDI limit is raised,” said Parasnis.

As the business for life insurers has shrunk in the last one year on account of the global economic slowdown, insurers have cut down expansion plans and are now concentrating on consolidation.

This means the insurers will need less capital this year. Insurers such as Kotak Life said they would not infuse any fresh capital in 2009-10. Last year, Bajaj Allianz Life Insurance did not infuse any capital to the business. However, Bajaj has said that depending upon the need, it might review its capital infusion plan this year.

The life insurance business is capital intensive and requires a lot of capital initially. Again, higher growth rate is sustainable only through large amount of capital infusion.

The industry is now looking at consolidation. In 2008-09, a few companies, including Bajaj Allianz and Kotak Life, have reported profits. SBI Life has reported loss after being profitable in the last three years. A host of companies that started operation in the first year of liberalisation are yet to report profit.