In the past few years, the profits and losses of India’s second-largest general insurance company, United India Insurance (UII), are undergoing a massive swing without any striking reason.
Girish Radhakrishnan, chairman and managing director of the state-owned company, has told his employees in a year-ender mail the financial situation is precarious and alarming.
For the September quarter, the company posted a loss of Rs 14.29 billion. To put the number in perspective, for the entire year of 2017-18 the company had made a profit of Rs 10.03 billion. But this figure was surprising since UII had reported a huge loss in the year before, of Rs 19.14 billion. In just half year of operations, the company is close to the annual loss of 2016-17. Its profits were thin in the previous years, with Rs 2.5 billion in 2015-16 and Rs 3.19 billion in 2014-15.
The losses are also surprising in the context of the insurance sector, which is expanding at a compounded annual growth rate (CAGR) of about 34 per cent. This is why SBI Life Insurance had found buyers for a 10 per cent stake in the company. According to an Economic Times report of 27 December, Carlyle and GIC will buy the shares at Rs 510-520 apiece, creating a deal size of over Rs 51 billion, which would make it the second-largest transaction in the sector this year.
Contrast this picture with sustained losses at UII. For the losses in 2016-17, the company said it had to make a major technical provision. And then, it was suddenly profitable for a year. One of the reasons for the unseasonal profit in 2017-18 was a bar on taking on new business in the corporate sector. But despite all those measures losses have again piled up rapidly in this financial year because it stopped taking on new business last year, the company is losing its customers. In last eight months of this financial year, the company has booked fewer premiums than the year before. UII has been dumping all group health sector policies because of runaway claims, which the letter from the chairman admits is panic-driven.
So, instead of a projected over 10 per cent growth in premium, business has shrunk by 6 per cent till September. It has slightly recovered according to Insurance Regulatory and Development Authority of India (Irdai) figures till November, with the gap narrowing to 3 per cent. The profits were announced by former chairman MN Sarma, the losses by his successor, Radhakrishnan. There is only one other company in this league, another state-run general insurer National Insurance Company.
The company accounts continue to maintain a solvency ratio of 1.53, a measure of the adequacy of its assets, compared to the premium it generates.
Radhakrishnan writes, “We only managed to achieve this solvency with huge effort at headquarters and with forbearance obtained from our regulators. It is not clear what was the effort made at the headquarters since business for any insurance company is mostly not booked there. As an unlisted company, since price to book value would not be available, the solvency ratio is a good approximation of the company’s profile. The emails sent to the company did not get any response.
The insurance sector, independent of the troubles at UII and possibly at the other two National and Oriental, is in the middle of a boom. In this financial year, gross direct premiums of general insurers have reached Rs 962.05 billion, recording a YoY growth rate of 12.40 per cent. In 2017, the insurance sector in India saw 10 merger and acquisition deals worth $903 million. The BSE and Ebix, a US-based insurance exchange, have applied to the regulator, Irdai to create an insurance exchange platform, before the end this financial year. Yet, the scare among the state-run insurers could knock the stuffing out of these developments. It is essential to merge the three of them before someone like UII keels over.
What went wrong
- For the September quarter, the company posted a loss of Rs 14.29 bn
- For the entire year of 2017-18 the company had made a profit of Rs 10.03 bn
- This figure was surprising since UII had reported a huge loss in the year before, of Rs 19.14 bn
- In just half year of operations, UII is close to the annual loss of 2016-17
- Its profits were thin in the previous years, withRs 2.5 billion in 2015-16 and Rs 3.19 bn in 2014-15
- Grown its topline at a CAGR of 40.28% from Rs 2,222.4 crore in FY12 to Rs 8,606.1 crore in FY16
- Grown its profits at a CAGR of 51.85% from Rs 60.4 crore in FY12 to Rs 321 crore in FY16