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Sunday, January 2, 2011

Mergers must protect policyholders: Irda

The insurance regulator will allow mergers in the sector only if they protect the interests of policyholders and create a stronger insurer.

“Any M&A should enhance the value of the merged entity. There is no point in a merger if one plus one equals two. It should be more than two,” Irda Chairman J Hari Narayan told ET in an interview.

Valuing an insurance company is much more complex than a listed manufacturing company. The value of a manufacturing company is generally based on the price-earning multiple—a measure of the price paid for a share relative to the profit earned per share. A high PE multiple suggests that investors expect higher earnings growth in the future.

In contrast, the profit of an insurer can fluctuate because claims and yield on investments could spike in a year.

So, a commonly accepted benchmark will be crucial when Indian partners dilute their shareholdings in insurance joint ventures through an initial public offering (IPO) at the end of the tenth year of operations. HDFC Standard Life and ICICI Prudential feature—the insurance arms of mortgage lender HDFC and ICICI Bank—top the list of life companies that qualify to tap the market.


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