Insurers on fund-raising spree as ratings soar
Promoters of insurance companies are raising money on the back of high valuations being assigned to their businesses by brokerages.
By Gaurav Pai, TNN |
MUMBAI: Even as the Reserve Bank of India (RBI) awaits comments on its proposals for holding companies, promoters of insurance companies are raising money on the back of high valuations being assigned to their businesses by brokerages.
After ICICI Bank, HDFC, and Max India, Kotak Mahindra Bank is the latest entrant to the list of insurance promoters raising funds. Meanwhile, analysts have been valuing the insurance business at high multiples. They believe that investors are yet to factor in the value that these entities would add to their parent company’s share price.
ICICI Bank and State Bank of India had recently expressed their intent to create holding companies for insurance and asset management businesses. However, RBI had expressed concerns over the proposed structure, saying that the holding company would be in a regulatory grey area.
“For a long time, companies like ICICI Bank have pumped in money into their insurance arms,” says IDBI Capital banking analyst Ravikant Bhat. He, however, cautions that this cannot go on forever. “Insurance industry in India is a fast-growing business and parent companies will have to tap the market to keep their insurance subsidiaries growing at full potential,” he says.
Insurance, as a business, needs large amount of capital to meet risk management norms. The insurance regulator IRDA’s rules mandate that all private insurance companies should be listed within the first 10 years of existence. But a company is not allowed to list on the exchange unless it makes profits for three consecutive years.
Currently, most private insurance companies in India are making losses. Analysts say that before these entities actually list, investors can expect them to contribute handsomely to the net asset values of their parent companies. Kotak Securities recently increased its fair value estimates for insurance players by 10-15%, mainly due to higher premium income growth, higher capital investment and strong new business achieved profit (NBAP) margins — an insurance term for the present value of all future potential profits.
“We believe the insurance business would generate steady profits, an internal rate of return of more than 25% and a return on equity of more than 45-50%,” said Kotak Securities’ Tabassum Inamdar, explaining the rise in valuations of companies.
“Companies seem to be taking maximum advantage of the current situation before RBI comes out with proper regulations about holding companies,” said a fund manager who did not wish to be quoted while explaining the fund-raising spree of companies with insurance businesses.
After ICICI Bank, HDFC, and Max India, Kotak Mahindra Bank is the latest entrant to the list of insurance promoters raising funds. Meanwhile, analysts have been valuing the insurance business at high multiples. They believe that investors are yet to factor in the value that these entities would add to their parent company’s share price.
ICICI Bank and State Bank of India had recently expressed their intent to create holding companies for insurance and asset management businesses. However, RBI had expressed concerns over the proposed structure, saying that the holding company would be in a regulatory grey area.
“For a long time, companies like ICICI Bank have pumped in money into their insurance arms,” says IDBI Capital banking analyst Ravikant Bhat. He, however, cautions that this cannot go on forever. “Insurance industry in India is a fast-growing business and parent companies will have to tap the market to keep their insurance subsidiaries growing at full potential,” he says.
Insurance, as a business, needs large amount of capital to meet risk management norms. The insurance regulator IRDA’s rules mandate that all private insurance companies should be listed within the first 10 years of existence. But a company is not allowed to list on the exchange unless it makes profits for three consecutive years.
Currently, most private insurance companies in India are making losses. Analysts say that before these entities actually list, investors can expect them to contribute handsomely to the net asset values of their parent companies. Kotak Securities recently increased its fair value estimates for insurance players by 10-15%, mainly due to higher premium income growth, higher capital investment and strong new business achieved profit (NBAP) margins — an insurance term for the present value of all future potential profits.
“We believe the insurance business would generate steady profits, an internal rate of return of more than 25% and a return on equity of more than 45-50%,” said Kotak Securities’ Tabassum Inamdar, explaining the rise in valuations of companies.
“Companies seem to be taking maximum advantage of the current situation before RBI comes out with proper regulations about holding companies,” said a fund manager who did not wish to be quoted while explaining the fund-raising spree of companies with insurance businesses.
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