Profit Rule for Life Insurance IPOs Scrapped

anthony (Finance) (7918 Points)

07 July 2011  

The insurance regulator has scrapped the minimum threeyear profitability clause for life insurers to float initial public offerings, throwing a lifeline for many companies that would have struggled for capital. The Insurance Regulatory and Development Authority, or Irda, took the decision in a recent board meeting, two people familiar with the matter said. The decision to do away with the requirement, which was part of the draft guidelines for IPOs, follows lobbying by insurance firms that the absence of higher foreign investment and access to public funds could cripple their businesses. This would be a relief to a number of insurance companies such as ICICI Prudential, HDFC Life and Max New York Life, which have been in operation for 10 years but do not have a three-year profitability record. The industry raised concerns on the profit requirement, said an Irda official who did not want to be identified. We are addressing them. IPO norms for life insurance companies have been dragging on for years as Irda debated how to be in line with the requirements stipulated by the market regulator and also facilitate fund-raising by insurers. Insurance officials believe their business is unique and cant be clubbed with other businesses for which the Securities & Exchange Board of India sets rules. Foreign direct investment in insurance is promised to be increased to 49% from 26%. Valuing insurance companies in India may become tricky with some arguing they are at a growth stage and the market has huge potential. While insurers may look for high valuations due to market potential, their losses could be talked down as it happened in the case of dotcom companies. The insurance regulator had prescribed a minimum embedded value for which the insurers objected to and sought flexibility. Embedded value is the current value of future profits of a company. Embedded value cannot be the magic ratio. Minimum stipulations do not help investors to take a decision. There are other factors like persistency, conservation ratio, productivity of the sales force, new business written and the analysts report investors can look at, said Sanjiv Pujari, appointed actuary at SBI Life. –