Even as IRDA readies its guidelines for insurance company IPOs, there are questions over the quality of disclosures mandated and whether investors would really be able to analyse the prospects of an insurance company
Even as insurance companies are waiting for guidelines on Initial Public Offerings (IPOs) to be issued by the Insurance Regulatory and Development Authority (IRDA), Ashvin Parekh, partner and national leader – Global Financial Services, Ernst & Young Pvt Ltd, has sharply criticised the regulators for dragging their feet over disclosure norms of insurance companies, raising the question whether investors are in a position to evaluate an IPO from an insurance company.
Speaking about the challenges in the valuation process of insurance companies at a seminar in Mumbai recently, Mr Parekh said, “Disclosures for profitability of different product lines should have been made long ago. It would have helped not just for IPOs, but also for corporate governance. But the regulators have already missed the boat by 7-8 years. The authorities kept dragging their feet on Embedded Value (EV) disclosure even after three committees have gone into it. They kept saying it was too technical for them. If it is introduced, now it is impossible for investors to get (an) accurate picture from the disclosure that will be submitted to regulators as per the new guidelines. The regulators should have taken the lead, but confirmed the age-old belief that business is always ahead of regulators.”
Hemant Kaul, managing director & CEO of Bajaj Allianz General Insurance Co Ltd said, “Correct valuations to shareholders may not be available. It will take a strong promoter and brave investor to complete the IPO.”
According to Mr Parekh, “Insurance company valuations can be done based on Market Consistent Embedded Value (MCEV). The valuation of Indian life insurance companies will be done differently than their counterparts from Europe because of the ‘savings’ aspect (rather) than ‘protection’. The liability from protection is much less. The valuation of a general insurance company will be trickier due to the element of reinsurance, risk on balance sheet and volatility due to external factors like calamities, etc. Life insurance in India is more stable due to (the) ‘savings’ aspect. The actuarial surplus is an important parameter for judging an insurer. The valuation should consider 14.4% taxation impact on actuarial surplus. LIC paid Rs3,800 crore tax last year on actuarial surplus. For an IPO, it is important to look at underwriting profit with not much impact from investing profit.”
He added, “There is no benchmark available to offer direction for valuation and regulators will have to come up with it.” There are three elements that make up the basic concept of MCEV: free surplus allocated to covered business, required capital, and VIF (value of in-force covered business).
The current guidelines specify that an insurer in business for 10 years can go for an IPO, but companies are trying to shorten this period. The booming IPO market will only motivate them more to launch a successful IPO.
The IPO will also provide an avenue for foreign investors holding up to 26% stake to dilute stake if they choose to do so. Gerry Grimstone, chairman, Standard Life told reporters last week at a CII insurance summit, “We would not like to dilute at 26% and (would) like to be invested in India. At the same time, we do not know if we want to increase our shareholding to 49%.”
As it is, the accounting process of insurance companies is complex. Frédéric Tremblay, actuarial consultant, Industrial Alliance, Corporate Actuarial Services, Canada, recently wrote in a report: “The financial results of life insurance companies are very complex to analyse. They are prepared according to accounting and actuarial principles varying from one country to another. The financial community often uses the price-to-earnings ratio as a tool to analyse and compare companies. The profits generated by the company in one year are no guarantee of the future. It is impossible to determine the value of a company using these simple results. Everything around a life insurance company is tied to solvency and the nature of the products sold is long term, which makes this type of business unique.”
Chennai: Seeking to allay apprehensions of the textile industry over cotton exports, union textiles minister Dayanidhi Maran today said that the Centre would ensure the domestic requirement was met and export of raw cotton would not exceed 55 lakh bales this year, PTI reports.
“The online registration of cotton export has started and the export of cotton will not exceed 55 lakh bales,” Mr Maran said on the sidelines of a function. Stating that the domestic demand was about 260 lakh bales, Maran said export would begin only after the domestic requirement was met and if there was a surplus.
Referring to the representations that had been received, Mr Maran said Tamil Nadu chief minister M Karunanidhi had written to prime minister Manmohan Singh last month, appealing to him to ensure that the domestic requirement of cotton was fully met before permitting export. Various industry associations, particularly in Tamil Nadu, which is a major textile producer, have opposed the export of cotton, saying it would hurt the requirements of the domestic industry.
Maran said cotton usually arrived in September, but due to heavy rain in certain regions this year the arrival of stocks was delayed. “Now it (cotton) has started arriving,” the minister said.
Asked whether there was a possibility of malpractise in the online registration for cotton exports, Mr Maran said, “It is just online registration. It is not online trading and therefore, there cannot be any malpractises.” He explained that it was mandatory for those who want to export cotton to register online.
On the recent increase in cotton prices, the minister believed that these would stabilise in the coming weeks. Cotton prices in the domestic market are ruling more than 65% higher than that in the corresponding period last year.
Mr Maran explained that in the interest of the weavers, the Centre was keen to generate employment through making cotton clothes for exports. Pointing to the decline in apparel export, he said measures were being taken to correct this trend soon.
New Delhi: JSW Steel has registered an 8% growth in crude steel production in the first half of the FY11at 3.14 million tonnes (mt) as compared to the corresponding period last year, reports PTI.
The company said in a statement today that production of flat steel products—used primarily by the automobile industry—increased by 32% to 2.36 mt in April-September 2010, compared to that in the corresponding period last year.
The output of long steel products for infrastructure and construction companies also jumped by 44% to 0.57 mt in the first half of the year, from that in the corresponding period a year ago.
“The company has started generation of power at its 300mw captive power plant and heating of two blocks out of four blocks of Coke Oven-4, in the 10mtpa (million tonnes per annum) expansion project at Vijayanagar works in Karnataka,” the statement said. The Vijaynagar unit has a capacity of 6.8 mt and the expansion is likely to be completed by the first quarter of 2011.