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Friday, March 02, 2007

General insurers seek banks' help for IPOs

Public sector non-life insurers have sought the help of their banking counterparts for launching their initial public offerings, IPOs during the next financial year.

According to sources, banks' help is required for valuation purposes. Two weeks ago, the Group of Ministers had indicated that the Government was willing to dilute stakes in the PSU insurers to 74% without any divestment.

Currently, the Government holds the entire paid-up equity capital amounting to Rs 450 crore in the four non-life insurance companies, after General Insurance Corporation transferred its holdings in 2004.

The reason for seeking help is also largely on account of the underwriting losses suffered by the insurers, almost entirely contributed by motor third party liability covers and the wafer thin insurance margins.

Banks had faced a similar situation when they made their IPOs. They were weighed down by non-performing assets as high as eight per cent and low interest margins.

The underwriting losses combined with shrinking returns on investments are now beginning to exert solvency pressures on the insurance companies. In the case of National Insurance Company, the solvency margin is at 1.1, well below the IRDA mandated 1.5.

The remaining three PSU insurers were able to meet the solvency norms through sale of equity holdings taking advantage of the high prices. Moreover, the Finance Minister had also suggested that insurers should also start trading more aggressively in their holdings of Government security holdings. Insurers are reluctant to do so. They hold several high coupon securities in their investment portfolios. Coupon flows on these securities have helped their liquidity, the sources said.

Infusing equity

Consequently the alternative now before the insurers is to infuse equity funds. But the Chairman of the General Insurers' Public Sector Association and CMD of Oriental Insurance Company, M Ramadoss, said, "The Government is not ready to pump in more equity into the insurance companies and have asked us to look at alternatives.

We are now awaiting clearance of the enabling provision in the Insurance Act for raising equity funds."

Therefore, an entry into the markets appears imminent, to sustain the growth momentum.

The sources said equity placements would be made during the next financial year. Pricing has not yet been decided. New India Insurance is likely to command a premium in excess of Rs 200 a share and Oriental Insurance close to Rs 100, reports The Hindu Business Line.

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