The Hindu Business Line : Equity investments bring big gains for PSU insurers

PUBLIC sector insurers have bolstered their net worth and strengthened their solvency ratios by selling some of their equity investments and booking large profits.

The four public sector insurers - New India Assurance Company Limited (NIACL), National Insurance Company Limited (NICL), United India Insurance Company Limited (UIICL) and Oriental Insurance Company Limited (OICL), made profits in excess of Rs 300 crore each. Mr B Chakravarthy, General Manager and Director of UIICL, said, "We have used the profits to strengthen our net worth."

Insurers have preferred this route for improving their capital and solvency ratios to prepare for higher growth this year. They are expecting a higher business growth during the current year as against the 6 per cent last year. This was in view of the high GDP growth of 8 per cent projected this year.

The sources said that the profits from equity sales would allow them to partly neutralise the impact of the reduction in operational profits and investment incomes. Core profits of the insurers continue to be under pressure from high claims in the motor insurance sector. Motor insurance claims continued to be in excess of 150 per cent. Other portfolios, which include fire, marine and marine hull, remained profitable sectors, with claims ratios of under 70 per cent.

What also weakened the profits were the falling yields. The mean yield on investments had fallen to below 7 per cent, industry sources said. Besides, last year reinsurance markets were also tight for most of the year.

The profits realised through equity sales also neutralised the impact of the high provisioning made during the last financial year. Typically general insurance companies make large provisions for unexpired risks and for incurred but not reported events. Large provisions consequently implied lower net profits.

The sources said that the equity sales also helped the insurers absorb the cost of the VRS. The average cost incurred by each of the four ensurers was about Rs 450 crore. Although the payments were made upfront, the costs could be amortised only over a 5-year period. This implied that the insurers could claim exemptions only on Rs 90 crore for tax purposes.