The Hindu Business Line : Non-life insurers book sizeable trading profits

Taking stock
General insurers permitted to park up to 30% of their total assets in equities.
Most companies already have solvency ratios in excess of mandated 150%
PSU insurers now intend to improve retail, cross border mix in portfolios.

C. Shivkumar

Bangalore, Oct. 18 With stock markets rocking, non-life insurers — both public and private — have liquidated some of their equity holdings and booked large profits.

Sources said that in the first half of this year alone, the four insurance Public Sector Undertakings (PSU) — New India Assurance Company Ltd, Oriental Insurance Company Ltd, National Insurance Company Ltd and the United India Insurance Company Ltd — have earned profits in excess of Rs 250 crore each.

The profits earned from trading in investments were used to beef up the general reserves and consequently the capital of the respective companies, the sources said.

The sources said that even some of the fresh investments made during the current year were liquidated when the Sensex had touched 19,000 points.

General insurers are permitted to park up to 30 per cent of their total assets in equities.

Solvency ratios

The improved capital has resulted in insurers’ improving their respective solvency ratios.

Most companies already have solvency ratios in excess of the mandated 150 per cent prescribed by the Insurance Regulatory and Development Authority.

Under these guidelines, the capital (paid up equity plus general reserves) and the value of the investments are expected to be at least 1.5 times more than the value of the insured liabilities.

In the first half of this year, the actual solvency was well over the prescribed margins, after the Sensex closed at 17291 points the sources said.

However, the sources said, the risk of solvency coming under pressure due to reversal in investment values was high.

Accordingly, insurers opted to take advantage of the high investment valuations to improve the solvency on a long term basis by booking profits and strengthening the general reserves. As a result, some of the companies, both public and private had solvency ratios in excess of 200 per cent. Treasury operations, the sources said, was one way to protect solvency.

This was in view of the Government’s vacillations to allow insurers raise capital from the financial markets, either through bonds or through initial public offerings.

Domestic retentions

The improved solvency resulted in improving insurers’ domestic retentions, implying reduced reliance on global reinsurance markets.

Private sector insurers have consistently used the reinsurance route for growing business since the parents were reluctant to increase capital for the time being. Improved investments valuations and profits from trading have reduced their capital demands, the sources added.

With the high solvency, PSU insurers now intended to expand their business further, by improving the retail and cross border mix in their respective portfolios. This was possible, the sources said, since tariffs were no longer constraints after deregulation.

Moreover, some of the insurers, including New India and Oriental, were already accepting cross border business from East Asian and West Asian corporates.

Most of this business was done through the coinsurance route. Both retail and cross border business, the sources said, would help the converting, underwriting business to move into the black by this financial year.

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