Prajna Capital - An Investment Guide

VALUATION of insurance companies is back on the regulator’s radar. The insurance regulator Irda is on course to develop commonly accepted benchmarks and disclosures to value insurance companies, as this would be crucial when Indian partners dilute their shareholding from 74% to 26%. The present regulation requires Indian promoters with a majority shareholding to dilute their stakes through an initial public offering ( IPO ) at the end of the tenth year of operations. The value of insurance companies hinges on several assumptions, which could result in wide variations. It is different from valuing, say, brick-and-mortar companies listed on the stock exchange. Their valuation 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. But this exercise is much more complex for insurers. Once an insurance company receives the premi...