There has been some excitement in a couple of stocks like ICICI Bank and Bajaj Auto in the past because of the embedded value of their insurance businesses. In the next 1-2 years, one expects to hear a lot of stock market activity from the insurance businesses in India. So far, they have been outside the stock market but in the foreseeable future, that will change.

A lot of the listed companies do have insurance plays within them and part of the valuation ascribed to them by the market is derived from those businesses. It’s perhaps important then to understand how this business should be valued. Ashwin Parekh of Ernst & Young and Anuroop Tony Singh, Vice Chairman at Max New York Life Insurance express their views on the same.

Singh believes that the insurance business should be valued on embedded strength and goodwill. He observes that there is a lot of interest in the insurance sector because it is a new category and there is huge opportunity as the industry is growing dramatically.

He explains, "We need to understand the basic fundamental valuation process. In the insurance business, because it is long term oriented and is based on a lot of factors, which are generally not easily available in terms of information, you use the methodology, which is a function of embedded value and goodwill gives you appraisal value. The appraisal value plus market dynamics gives you the share value in the stock market."

Parekh would like to look at the size of the insurance companies' portfolio for valuation. "The composition of the portfolio is not easily available. But I suppose the size itself reflected by the amount of capital that the companies have put in. So to my mind, the way the whole thing functions is that the overheads are absorbed over the portfolio, the larger the portfolio, the better is the performance of the portfolio. So the size of the capital that the companies have been required to put out is certainly a very good indication of the embedded value."

He adds, "Second is the market appetite - how the market will take the stock when it hits the market 2 -3 years later. And third is of course, the Indian market will be very different because the duration of the relationship in case of policy holders is very different. So these things will play a significant role in the valuation of the equity."

Singh feels that there are still a couple of years before insurance companies could come out with IPOs. "I think the timing of entering the market for an IPO purpose is based not only on the business but is also based on the market factors, which are specific to our country and every company will have to pretty much make up its mind."

"But one common rule that everybody follows is that you need to come to the market, when is the best time for you to come into the market and in the insurance industry because the gestation time of the industry is long and it takes time to build a critical mass of business," he adds.

For complete interview, watch video