Profit clause out of their way, insurers jive to IPO tune

Now that the profit provision is gone, the sector may see a series of value unlocking. And that's good news for shareholders.

Shishir Asthana July 07, 2011 18:09:54 IST
Profit clause out of their way, insurers jive to IPO tune

Insurance companies have got a breather with the insurance regulator deciding to scrap the minimum 3-year profitability clause for life insurers to float initial public offerings (IPO). The Insurance Regulatory and Development Authority (IRDA) took the decision in a recent board meeting, says a report in The Economic Times.

Profit clause out of their way insurers jive to IPO tune

The insurance sector has proved to be a money guzzler for most of the players. Jayanta Dey/Reuters

Holding companies which have stakes in companies doing insurance business in India will now be able to unlock value through the listing of these companies. The profit criterion was one of the major hurdles for companies trying to raise funds for growth. Being a long gestation and an extremely competitive industry, the insurance sector has proved to be a money guzzler for most of the players. ICICI Prudential, HDFC Life and Max New York Life have been in operation for 10 years, but still they do not have a 3-year profitability track record.

Insurance companies have seen their businesses taking a hit after Sebi banned 14 private insurance companies from issuing any ULIP products. ULIPs accounted for over 70 percent of new business premiums of insurance companies at the time when the ban was announced. Companies have still not been able to come out of that shock. New product launches and clever marketing initiatives have to some extent put the companies back on their feet.

On Thursday, share prices of HDFC were higher by 1.77% to Rs 723.50, ICICI rose 1.31% to Rs 1,089.50 while Max was up by 2% to Rs 183 as the market digested the IRDA move.

The point, however, remains how these companies will get a good valuation in the market if they are in a loss making mode. How will shareholders be rewarded by investing in such loss-making enterprises? Though industry experts point to various ratios of valuing insurance companies, unless a company makes profit at the cash or net level consistently, there is little reason for an investor to look at such companies. Dotcoms and biotechnology companies, too, came out with all kinds of valuations to prove their business model, but what happened to investors is folklore.

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