Financial Daily from THE HINDU group of publications
Wednesday, Jun 22, 2005
Money & Banking
Markets - IPOs
General insurers may opt for IPO route to raise capital
Bangalore , June 21
FACED with large capital requirements to sustain growth, general insurance companies are keen on raising additional capital.
Sources said that both public sector and private sector companies are facing the pressure. However, the public sector companies have sufficient capital to meet immediate requirements.
The additional requirements are for meeting long-term growth expectations.
Till now capital strengthening was done through Treasury operations, by selling some equity holdings acquired at very low prices. Some insurers have been unloading some of their non-bluechip equity investments in small lots in a bid to book profits.
Currently, the solvency margins of the public sector insurers are being maintained by the high net worth, in particular through reserves. The additions to the reserves are made through profits booked by way of liquidation of some investment.
This has been happening in a situation where the core business of underwriting continues to remain red-lined. The underwriting losses are neutralised by income earned from investments and coupon flows.
But, the sources said, insurers are increasingly becoming reluctant to sell their investments to raise capital.
This resistance is partly because it would dilute their investment portfolios and the fear that it would shrink the mean yield on investments.
During the last three years, however, insurers have been beefing up their capital through accretions to reserves.
A large chunk of these accretions from profits earned out of sale of equity was credited to the capital reserves, the sources said. As a result, the net worth of the four public sector companies was close to Rs 12,000 crore for the last fiscal, the results for which are still being compiled.
Now, insurers want to increase their paid-up equity. This was on account of the high GDP growth projected and consequent impact on the insurance industry.
Currently the sensitivity is around four per cent (one per cent GDP growth translates into four per cent general insurance premium growth).
The insurers currently have a paid-up equity of Rs 100 crore each and an authorised capital of Rs 200 crore.
However, the sources said, the Government is unwilling to pump in additional capital to any of the PSU insurers.
The PSU insurers are also not interested in obtaining capital from the Government, partly due to valuation issues and the methods adopted for capital infusion.
The Government capital infusion into the banking sector was done in the form of recapitalisation bonds for 10 years.
Here, the preference is for placement of a small issue through the IPO route priced at a substantial premium.
This route is now being explored by at least two private sector companies, the sources said, especially since the Government has not relaxed the foreign equity cap beyond 26 per cent for foreign insurers. The domestic partners in the joint venture are unwilling to pump in more capital, since they are capital-hungry themselves.
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