ONGC to revalue assets to $13.5b

MUMBAI: The ONGC senior management on Monday decided to increase the valuation of the company’s assets by almost 20% to $13.5 billion. The move to increase valuation is in order to take advantage of the soft global reinsurance market. India’s largest oil and gas company expects a reduction in premium despite the increase in valuation.

Speaking to ET, ONGC chairman RS Sharma said the company is approaching the market with a clean slate since no claims are now pending. ONGC’s assets are currently valued at $12.9 billion and no major revaluation has been carried out since 2003, he said. ONGC’s programme is the biggest insurance deal from India. Last year, the company had paid a premium of around $41million when the sum insured was around $12 billion.

The management has decided to increase the value to $13.5 billion, though the market had expected a much steeper increase. The company’s claim of $386m for the loss of the BHN platform off Mumbai High was settled earlier this month. The policy provides that a claim for a total loss can be settled within 45 days.

A revaluation ensures that the company will receive a claim settlement closer to market value in the event of a loss. The flip side is that it increases the capacity risk of the corporation. Capacity risk is the term used by the insurance industry to describe an insurance proposal where the sum insured is so high that it requires balance sheet support from most players in the industry to cover it. Companies that face a capacity risk do not have room to pit one insurer against the other as the entire market is involved in its insurance.

Insurers point out that the single event loss limit for ONGC is around 750 million which is almost half of the capacity of the entire reinsurance market. This is because of the concentration of assets in Bombay High under a single ownership.

Although there are other energy giants in the West, these companies are in a position to reduce their dependence on the reinsurance market by structuring sourcing their protection through multiple providers which include captives, oil mutuals and the reinsurance market.

The expiring cover is presently with United India Insuranace with reinsurance programme arranged by the combine of Jardine Lloyd Thompson and Heritage reinsurance brokers. Next week, reinsurance brokers will scout the market for the best deal for ONGC and based on the feedback offer quotes to ONGC the week after. The brokers who are participating this year are Aon, Marsh, JB Boda-Benfield Greig, and Dastur-Cooper Gay.