Financial Daily from THE HINDU group of publications
Saturday, Mar 12, 2005
Money & Banking
Markets - Stock Markets
PSU insurers liquidate equity investments
Bangalore , March 11
PUBLIC sector general insurance companies have begun liquidating some of their equity investments during the year to strengthen their bottomlines and bolster their solvency ratios.
Sources said here that if the Sensex continued its bull run for the rest of the year, the four public sector insurers New India Assurance Company, Oriental Insurance Company, United India Insurance Company and National Insurance Company would make profits in excess of Rs 400 crore on their divestments, industry sources said.
These profits would be used to strengthen the respective capital bases of the insurers. Insurers have opted for this route of bolstering their capital since the Government was not prepared to provide additional equity support to the companies.
Besides, the sources said, the Government had still not allowed any of them to raise equity from the financial markets as in the case of the public sector banks.
Insurers need capital since all of them anticipated business growth to accelerate in the coming months in view of the high industrial growth, sources added.
Non-life insurance business tends to grow by at least three per cent for one per cent growth in the gross domestic product. Accordingly, with the GDP growth for the estimated at about 8 per cent, insurers were expecting a double-digit business growth, the sources said.
The sources said that with the Sensex poised to punch the 7,000 points barrier, insurers have taken the opportunity to book profits. Insurers, though, were selling only small lots in a bid to maximise their profits. These profits would then be credited to capital reserve funds, which would enable them increase their business.
However, during the whole of this financial year, none of the insurers was able to book profits on their Government securities portfolios.
In fact, with 10-year yield-to-maturity at 6.55 per cent, at least 1.5 per cent below the corresponding levels of the previous financial year, the sources said that insurers would actually be making provisions for depreciation, leading to some deterioration in their solvency.
Equity sales, the sources said, would help the companies offset the impact of depreciation, they added.
In fact, for the current financial year, the sources said, profits of the general insurers are expected to be pushed by these non-core activities.
Their core activity - underwriting - continues to be in the red, with the average claims ratios in excess of 100 per cent for this year as well. This year also, most companies have incurred large losses on third-party motor claims.
Claims ratios on third-party motor portfolios alone are about 150 per cent of the premiums collected.
The losses on motor cover have negated the profits made on fire portfolios where the claims ratios were below 60 per cent, the sources said. But this year, all the insurers have also prepared for high provisions on unexpired losses and on events that have incurred but not reported.
This was being resorted as a method of prudential accounting, the sources said.
Consequently, these provisions were likely to impact the profitability.
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