Following the new ULIP norms and other changes mandated by the insurance regulator IRDA, insurance companies will be hard put to do IPOs even as the market starts valuing them lower
Valuations of insurance companies are being redone by analysts, following the fracas between the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA). Under the latest diktat of IRDA, Unit-linked Insurance Plans (ULIPs), the top-selling product of the insurance companies, have become much less attractive, impacting the very business model of insurance companies. They will now have to cap surrender charges on ULIPs and also equalise the upfront commission they pay their agents over five years. IRDA has also put a cap on commissions payable between 5-10 years and 10-15 years. (See new norms here:
http://www.moneylife.in/article/8/6595.html). Struck by the new stricter norms, the insurance companies have been groaning about how their business model has been ruined.
"In the medium to long run, these changes could seriously impact choice of investment options to customers, restrict product design and innovation, increase new business strain and call for increased capital requirements for insurers-thus impacting the profitability of insurers," said Deepak Sood, managing director and chief executive officer, Future Generali India Life Insurance Co Ltd.
"Under these regulations, the insurer will not be able to recover the incurred expenses (particularly under large-value policies) fully as the regulator has prescribed the limits of discontinuance charges not only by percentage of annualised premium, but also in absolute value," Mr Sood added.
According to some sources, the business of insurance companies would drop by at least 20% and the drop in profit would be 40%-60% still since insurance companies used to benefit hugely from surrender charges thanks to high rates of lapsation.
Under the new IRDA rules, for policies surrendered before the end of the term, insurance companies can deduct only a discontinuance charge from a customer and have to return the remaining amount of premiums paid. Until now, insurers have been forfeiting as much as 100% of the premium paid by customers as surrender charges. IRDA's new rules say that for exits in the first year, insurers cannot charge more than Rs3,000 or 20% of the annual premium or fund value, whichever is lower, for discontinuance of policies carrying a premium payment of Rs25,000 a year. For policies with annual premiums more then Rs25,000, an insurer cannot charge more than Rs6,000 or 6% of the annual premium. These charges decline in the subsequent years and insurers cannot deduct more than Rs2,000 for policies surrendered in the fourth year. IRDA's new rules on how distributors would be compensated are also feared to lead to lower sales.
If the new ULIP rules have made this product unattractive, it would have a chain of effects-delay the break-even of insurance companies, force their investors to inject more capital-leading analysts and institutional investors to lower their valuation. While brokerages have not yet come out with their new valuations, they are busily reworking the embedded value of insurance businesses that appear as investments of listed companies. For instance, Max India has a stake in Max New York Life, ICICI Bank has a stake in ICICI Prudential Life, Aditya Birla Nuvo has a stake in Birla Sun Life Insurance, etc. Max India's stock price fell sharply for two days after the new IRDA norms came out.
Frankly, the analysts would have their work cut out to value the life business following the new IRDA norms. These companies themselves have to substantially rework their business model that would include revamping product portfolio, distribution channel and costs and also managing overheads. Many of them have to revisit their very ambitious expansion plans. For example, in 2008, Max India and New York Life forged an ambitious growth plan which targets annualised First Year Premium (new sales) of Rs12,000 crore by FY11-12 backed by an increase in sales force from 47,000 agents to 300,000 agents and adding at least 250 offices every year. This was planned to expand Max New York Life's distribution footprint from 311 offices as at June 2008 end to around 900 agency offices and 700 rural offices by FY11-12. The tab for this? A peak capital commitment of Rs3,600 crore. This tab would have to go up substantially now-a fact that is reflected in the declining stock price.
Against this background, life companies would have to indefinitely postpone their plans for Initial Public Offerings, which they have been planning for some time now. Also, a lot of smart investors who were hoping to reap big profits from their investments in life insurance companies would also see their investment value dented temporarily as a result of the change in how insurance companies are valued. Hemendra Kothari, a top financier, had bought a 12% stake in ING Vysya from Ambuja Cements for Rs200 crore valuing the business at Rs1,800 crore early this year, possibly hoping to exit on IPO.
India has 23 life insurers whose total premium income went up by 18% in 2009-10, according to data from the Life Insurance Council, the industry mouthpiece. New business premium income was up by 25% in the same period of which 85% came from ULIPs.
A committee on electronic toll collection headed by UIDAI chairman Nandan Nilekani, which is developing the equipment, has recommended using Radio Frequency Identification technology for the system
The government today said that a new electronic toll collection system that will do away with the need for human tax collectors, and help plug revenue leakages will be put in place by May 2012, reports PTI.
A committee on electronic toll collection headed by Unique Identification Authority of India (UIDAI) chairman Nandan Nilekani, which is developing the equipment, has recommended using Radio Frequency Identification (RFID) technology for the system, road transport and highways minister Kamal Nath told reporters.
Radio Frequency transmits the identity (in the form of a unique serial number) of an object or person wirelessly, using radio waves.
The committee's report has been accepted by the government, Mr Nath said, adding, "It would be implemented in the next 18-20 months and with the new systems the government would be able to check revenue leakages in toll collection."
"The revenue leakage at present is 15% of the toll collection, which comes to about Rs300 crore," he said.
Out of the 71,000 km of National Highways in the country, only 8,500 km is under toll and the government is planning to increase it to 30,000 km in the next five years.
"We should be able to toll 30,000 km of National Highways in five years," Mr Nath said.
Electronic collection system (ETC) would allow cashless payment of highway tolls of vehicles passing through a toll plaza. Under the new system every vehicle will be fitted with an RFID (radio frequency identification) tag, which will cost Rs100 per unit.
Mr Nath said the government will hold talks with the Society of Indian Automobile Manufacturers (SIAM) to have inbuilt chips in vehicles.
"We will consult SIAM to have this chip on every vehicle produced," he said.
As per the current SIAM data over 1.2 crore vehicles were produced in the country on March 31, 2010. Based on this estimate, the tags for ETC would cost about Rs120 crore.
UIDAI chairman Mr Nilekani said that the chip, which would be installed on the windscreens of the vehicles is rechargeable.
At present toll is collected manually at the toll plazas which results in increase in travel time for users.
Its bigger competitors Jagran Prakashan and DB Corp are trading at higher prices
Hindustan Media Ventures Ltd (HMVL), the publisher of Hindi daily ‘Hindustan’, is coming out with an initial public offer (IPO) on 5 July 2010. The company has fixed the price band at Rs162-Rs175 per share and plans to raise Rs270 crore through this IPO. Rating agency CRISIL has assigned ‘IPO Grade 4’ to the issue. The issue closes on 10 July 2010. HT Media Ltd will dilute up to 23% in its subsidiary HMVL post the IPO. HMVL’s businesses include Hindi daily ‘Hindustan’ and magazines ‘Nandan’ and ‘Kadambini’. It also has printing facilities and personnel transferred from HT Media on 1 December 2009.
‘Hindustan’ is the third-largest daily in India with a readership of 11,89,000 in the first quarter of 2010, according to the Indian Readership Survey (IRS). It has the largest readership in key Hindi-speaking markets of Bihar and Jharkhand, although these markets have lower purchasing power. The company expects that with 69% of the Indian population being rural, readership will increase further with increase in literacy levels.
HMVL’s price earning ratio (P/E) at the lower band of Rs162 stands at around 15.5 times its March 2011 expected EPS. Some of the listed newspaper businesses including its much bigger competitors Jagran Prakashan and DB Corp are trading at a slightly higher forward PE of 18-21.
HMVL’s five group companies—HT Digital Media Holdings Ltd, HT Burda Media Ltd, Firefly e-Ventures Ltd, HT Mobile Solutions Ltd and Metropolitan Media Company Private Ltd—have incurred a combined loss of Rs29.9 crore in FY2010. With the IPO money, the company will purchase second-hand plant and machinery of Rs3.1 crore, will set up new publishing units costing Rs66 crore and will upgrade existing plant and machinery for Rs55 crore. HMVL’s advertising revenue was Rs104.2 crore in FY10 while its total income stood at Rs166.90 crore. It has a debt of Rs135 crore which was taken to take over the businesses from HT Media. The IPO money will be used to retire this debt. HMVL reported a net profit of Rs13.9 crore for the year ended March 2010.
There are 41 criminal proceedings pending against the company’s promoter HT Media and the employees and ex-employees, relating to defamation and obscenity charges under the Indian Penal Code and 109 outstanding litigations pertaining to income-tax, civil, and other categories. Edelweiss Capital Ltd and Kotak Mahindra Capital Company Ltd are the lead book running managers to the issue.