Insurers face valuation hurdles

Kolkata: Call it the ‘real value’. Even as politics dogs the opening up of the insurance sector, the issue of valuation - that will determine the buying or selling of strategic stakes - is proving to be contentious.

This is more so since none of the insurance companies in the country are listed.

Increasing the foreign direct investment (FDI) cap in insurance from 26 per cent to 49 per cent is slated to infuse additional capital of around Rs 4,000 crore, either by buying out the Indian promoter’s stake or inducing fresh capital.

But as the frustration builds up, with the government yet to take a call and insurance companies not being listed, a latent discontent among different shareholders on the valuation of their respective businesses cannot be ruled out.

With most insurers, particularly life companies, exhibiting phenomenal growth in recent times, valuation is likely to emerge as perhaps the most critical aspect in unfolding the real value of the company and the relationship among the shareholders.

“Valuations for insurers are increasing rapidly and this will have an impact on the capital required to buy a stake in the future and on existing JV arrangements.

There could be disputes on valuations as different shareholders would cite different valuations,” Bert Paterson, CEO, India and Sri Lanka, Aviva said.

“We are all strategic investors and are betting big business from life - hence getting the best returns for exiting or giving up some stake is very important.

While it is early to predict what will happen, there could be arguments over the price of shares if the company is not listed.

The buyer may feel that the valuation is much lower, whereas, we as one of the Indian partners would feel the opposite,” said a strategic investor with one of the insurance companies, who did not wish to be named.

Almost echoing the same feeling, T V Ramanathan, managing director and chief executive officer, Exide Industries, which holds a 50per cent stake in ING Vysya Life Insurance, said: “If the sector sees an increase in FDI cap, there is no compulsion to sell off our stake. Valuations are very important”.

“Valuation of a life insurer essentially takes into account the embedded value, which is a combination of the NAV or book value and the in-force value along with the goodwill of a company.

In-force value is subjective and takes into account discounting of future cash flows that the current portfolio would receive,” Jean Francois Izac, director, mergers and acquisitions, Aviva said.

While most companies point out that the underlying agreement will spell the later course of action, it is for time to tell whether things will remain as they are now.

According to Merrill Lynch, the best valuation of Indian companies is assessing them on the basis of a multiple to their new business achieved profit (NBAP), which apparently is the only valuation tool that can be applied to Indian insurance companies.

NBAP is the present value of the profits arising from new business during the year.

“Although the embedded and appraised value methods are probably the best traditional measures of valuing life insurers over their life cycle, these measures cannot be applied to Indian insurers at this stage as most of them are at an early stage of their life cycle and even more importantly are still exhibiting exceptionally strong growth rates,” a Merrill Lynch report said.

Source: DNA Money