Listing of PSU general insurers may boost profit, improve solvency
State-run general insurers' listing on stock exchanges to help them with better capital, a retail shareholder base
Mumbai: The cabinet’s decision on Wednesday to allow state-run general insurers to list on stock exchanges is a much-needed shot in the arm for the firms scrambling to cover losses and improve solvency margins.
Public sector general insurers recorded significant losses in the first half of the 2017 financial year due to a surge in claims and operating costs. Poor product-pricing policies and aggressive sales strategies also contributed to the losses.
On Wednesday, the cabinet committee on economic affairs gave the go-ahead for the listing of state-run general insurers. The companies are New India Assurance Co. Ltd.,United India Insurance Co. Ltd., Oriental Insurance Co. Ltd., National Insurance Co. Ltd. and reinsurer General Insurance Corporation Re.
Although state-run general insurers have a larger market share in terms of gross underwritten premiums than private-sector rivals, the latter did better in the April-September period of the current financial year.
Additionally, solvency margins of most of the state-run general insurers continue to be under pressure. Solvency margin is the extent by which the assets of an insurance company exceed its liabilities.
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During the first half of the fiscal, the country’s largest non-life insurer New India Assurance’s profitability was hit by huge underwriting losses. The insurer booked underwriting losses of Rs1,803 crore in the first half. However, the company’s solvency margin stood at 2.04%, which is an indication of the company’s prudent underwriting practices, unlike other PSU general insurers.
“This is a very positive move by the government for the general insurance industry," G. Srinivasan, chairman and managing director of New India Assurance, said.
“Listing will help the companies with better capital, a retail shareholder base, more transparency in corporate governance and better credibility in the public," he said.
New India plans to seek a listing in the next 6-8 months and dilute the government’s stake by 25% in tranches, he added.
New India’s closest rival United India recorded underwriting losses to the tune of Rs1,533 crore, while Oriental and National Insurance suffered underwriting losses of Rs1,465 crore and Rs991 crore, respectively, in the first half.
Due to the huge underwriting losses, two of the state-owned non-life insurers, United India and Oriental, suffered net losses of Rs429 crore and Rs382 crore, respectively, in the first half.
United’s solvency ratio stood at 1.56, while Oriental’s solvency ratio was at 1.14 during the six-month period.
National Insurance booked a net profit of Rs128 crore but continued to have a low solvency ratio of 1.26 against the regulatory requirement of 1.50.
“Capital is always good for insurance companies that want to grow businesses. So listing will definitely help these PSU general insurers if they are indeed serious to compete with private insurers," said Santosh Singh, head of research at Haitong Securities.
“GIC and New India Assurance are the two best performing non-life insurers in the industry. If they get listed it will help them with the capital to grow business globally and investors too will be keen to put money in their shares. For the other three PSU insurers profitability is a major issue and they should first work on ways to improve their businesses to survive rather than looking at listing and getting capital," he added.
GIC and New India Assurance could be valued at around Rs50,000-60,000 crore and Rs35,000-45,000 crore, respectively, according to Singh.
Profitability of non-life insurers depends on its underwriting structure and returns on investments. The amount underwritten by a non-life insurer depends on the pricing of the product sold and the quality of the insurance cover. On the other hand, a non-life insurer may either get recurring returns from regular fixed income investments or from old one-time investments in equity shares or real estate.
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