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.” — Raj Pradhan