{"id":1013,"date":"2020-12-01T18:12:00","date_gmt":"2020-12-01T18:12:00","guid":{"rendered":"http:\/\/oscillationss.blogspot.com\/?p=1013"},"modified":"2020-12-01T18:12:00","modified_gmt":"2020-12-01T18:12:00","slug":"insurance-and-reinsurance-sector-truth-is-beyond-time-and-space","status":"publish","type":"post","link":"https:\/\/oscillations.in\/?p=1013","title":{"rendered":"Insurance and Reinsurance sector- Truth is Beyond Time and Space"},"content":{"rendered":"

Stocks covered in this study: GIC RE and Cholamandalam financial holdings Ltd<\/span><\/b><\/span><\/p>\n

Dear all, this study is mainly about
\nthe dynamics and factors affecting and governing the growth of insurance sector
\nand not about any particular insurance stock. I have tried to list out the
\nfactors affecting the functioning and growth of this one of the most complex
\nsector. But insurance sector (General insurance in particular) is going to see
\nthe huge growth for next 10-15 years in India and I feel this is going to be
\none of the sectors to produce future multibaggers. The growth and performance we
\nhave seen in Indian insurance sector up to now is nothing compared to the massive
\ngrowth lies ahead. So I have tried to find out the most relevant factors which
\nare going to shape this sector in the future and which stocks are going to be
\nthe major beneficiaries is just a matter of time and space and we will continue to find
\nout more such stocks opportunities. As of now, I have selected GIC RE and
\nCholamandalam financial holdings Ltd (CFHL).<\/p>\n

This study I have shared with the
\nsubscribers of this blog some 10 days back but due to some reason could not share
\nthe same here and in the meantime CFHL has witnessed good buying
\nand has<\/span> already touched 540 from 430 at
\nthat time. So not wasting any further time, I have decided to share the same here. The study is detailed spanning 42 pages so it will take some time in reading and understanding due to the complexity of the subject. I have also tried to cover issues related to valuation of businesses especially of financial firms. The second part of this study will be released soon covering the detailed study of stocks like GIC Re and CFHL. The full version of this study is available for the subscribers of this
\nblog so I am sharing some samples from this study report here. Those who are
\ninterested in getting the full report please contact at oscillationss@yahoo.in<\/u><\/b><\/p>\n

Sample study:<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
\n

CONTENTS<\/b><\/p>\n<\/td>\n<\/tr>\n

\n

Paragraph<\/b><\/p>\n<\/td>\n

\n

Description<\/b><\/p>\n<\/td>\n

\n

Page no.<\/b><\/p>\n<\/td>\n<\/tr>\n

\n

(A)<\/b><\/p>\n<\/td>\n

\n

Insurance- Role and impact on business and economy <\/u><\/b><\/p>\n<\/td>\n

\n

4<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

Risk management in insurance and law of large numbers<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

2<\/p>\n<\/td>\n

\n

Law of large numbers is everywhere<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

3<\/p>\n<\/td>\n

\n

Concentration risk and Reinsurance<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(B)<\/b><\/p>\n<\/td>\n

\n

Insurance is complex but Reinsurance is even more complex<\/u><\/b><\/p>\n<\/td>\n

\n

10<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

Law of large numbers and correlated or concentrated risk events<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

2<\/p>\n<\/td>\n

\n

Reinsurance to manage concentrated\/correlated risks<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(C)<\/b><\/p>\n<\/td>\n

\n

Time for Reinsurance is yet to arrive in India <\/u><\/b><\/p>\n<\/td>\n

\n

16<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

General Insurance has a long way to go in India<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(D)<\/b><\/p>\n<\/td>\n

\n

Reinsurance to play big role in India for the growth of
\n specialty insurance <\/u><\/b><\/p>\n<\/td>\n

\n

20<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

Cyber Insurance and Catastrophic Insurance- The big game for
\n Reinsurance<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(E)<\/b><\/p>\n<\/td>\n

\n

Cyber Insurance-The next big thing in insurance and Reinsurance<\/u><\/b><\/p>\n<\/td>\n

\n

23<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

Valuation of Intangibles- where traditional accounting is useless<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

2<\/p>\n<\/td>\n

\n

Valuation of data, information, and intangibles- a must in today\u2019s
\n world<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

3<\/p>\n<\/td>\n

\n

Valuing the data assets- The starting point of cyber insurance<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(F)<\/b><\/p>\n<\/td>\n

\n

Crop insurance and Aircraft insurance- other Reinsurance heavy
\n sectors <\/u><\/b><\/p>\n<\/td>\n

\n

31<\/p>\n<\/td>\n<\/tr>\n

\n

(G)<\/b><\/p>\n<\/td>\n

\n

Something about Float and Investment Income in Insurance
\n business<\/u><\/b><\/p>\n<\/td>\n

\n

32<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/p>\n<\/td>\n

\n

How life insurance industry
\n adds value<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

2<\/p>\n<\/td>\n

\n

Solvency Ratio<\/p>\n<\/td>\n

\n

\n<\/td>\n<\/tr>\n

\n

(H)<\/b><\/p>\n<\/td>\n

\n

Government role is crucial in catastrophe insurance and GIC Re
\n will be a key player for India<\/u><\/b><\/p>\n<\/td>\n

\n

36<\/p>\n<\/td>\n<\/tr>\n

\n

1<\/b><\/p>\n<\/td>\n

\n

Catastrophe Bonds<\/p>\n<\/td>\n

\n

\n<\/td>\n<\/tr>\n

\n

(I)<\/b><\/p>\n<\/td>\n

\n

Individual valuation of GIC RE (CMP 127)<\/u><\/b><\/p>\n<\/td>\n

\n 40<\/td>\n<\/tr>\n
\n

1<\/p>\n<\/td>\n

\n

Valuation of financial sector business- Book Value multiple or
\n Earnings Multiple<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
\n

(J)<\/b><\/p>\n<\/td>\n

\n

Cholamandalam Financial Holdings Ltd (CMP 430, Market Cap. 8100
\n cr)<\/u><\/b><\/p>\n<\/td>\n

\n

43<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

One friend once told me that he
\nwas fortunate to be born into his present religion as his life could have been
\nuseless had he been born into some other religion. But I told him that he was
\nnot that fortunate because truth is beyond space and time. Truth is absolute,
\never-existing and ever-lasting. It is not affected, directed and objectified\/represented
\nby variations in time and space. I told him that he would have felt the same
\nhad he been born into some other religion. However my friend argued that still
\nhe felt good about his religion. But I told him that I was not denying that
\n(feel good) but that which can be affected so much by time and space can\u2019t be
\nthe reality. It can be whatever it is but it is not the TRUTH. You aren\u2019t\/can\u2019t
\nbe defined by these temporal and spatial phenomena. I have seen people having a
\nfeeling of greatness, ego and class because of money. But I always tell them
\n(wherever I can) that this is not the reality because this reality is bound by
\ntime and space. They could have born into a poor family and they absolutely
\nhave no control over this.<\/p>\n

This misconception engulfs every
\nsphere of life and Stock market does the same mistake when it thinks that
\nquarterly numbers (time)<\/b> and issues (often temporary) affecting industry
\n(space)<\/b> are the truth. <\/b>As i<\/b>t focuses on time and space so
\nit misses the truth. It sees bad quarterly numbers and reshuffling of Industry
\nas an end of the game. But restructuring, reallocation and consolidation in any
\nindustry are indispensible for long term growth and sustainability of the
\nIndustry. This restructuring takes care of the misallocation of the resources
\nin the industry and so the same is corrected through reallocation and
\nconsolidation. It is not the sign of a disease but it is a much needed surgery
\nto cut off the cancer. So, quarterly results are not the truth (may be bad due
\nto industry or company specific issues)\u2026Industry problems are not the truth.<\/p>\n

<\/p>\n

\"\"<\/a><\/div>\n<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

<\/p>\n

Truth is something else. Consciousness
\nis the truth as consciousness exits beyond time and space. Businesses\/Firms
\nhave their own consciousness which has the ability to create a superior product
\nwith scale with high entry barriers. This consciousness can travel beyond time
\nand space. Promoters\/management is just one of the part of business
\nconsciousness which comprises technical capabilities, superior R&D
\nabilities and focus, Networking effects, superior and vast supply chain etc. Businesses
\nare not alive beings still we can feel they have their own consciousness\u2026they
\nhave their own aura\u2026employees feel it (different feeling with different
\nemployers), other stakeholders feel it. The legacy <\/b>of a business, work
\nculture, integrity and focus attract, nurture and develop like-minded
\npeople…just like the ones who have created the original legacy (Like Tata, I feel
\neven when Ratan Tata is gone the legacy and style of Tatas will prevail and
\nthis shows that business consciousness is real and shape all and everything
\naround it). <\/p>\n

Brilliance
\nis not the rarity but the opportunity and expression of it is. <\/span>So Steve
\njobs, Gates and Ratan Tata are not the exceptions\u2026they will keep coming. They
\nwill keep coming into Microsoft and Tata attracted by their business
\nconsciousness. Strong businesses are not one product wonders but they are
\nbecause they create and develop a work culture (consciousness) which automates
\nthe generation of new ideas, innovation, expression and resilience. This is the
\nreal strength of a company\u2026its soul\u2026its most important asset. This is what
\nmakes companies to fight at the face of adversity and lead to their
\nresurrection. A business becomes more resilient to outside threats (competition
\nand existential) when it has technical expertise, high entry barriers due to
\nbusiness model and complex supply chain. A great warrior is not who can hit
\nothers hard with his power but he should have the will power to withstand the
\nhard blows of opponents\u2026only then he can win fights and be a great warrior. So,
\nstrong business model and technical expertise are not enough. A business has to
\nbe resilient\u2026it should have the strength and will power to withstand tough
\nperiods\u2026periods of droughts.<\/p>\n

Future growth is extremely
\nuncertain as it is impacted by thousands of variables\u2026more so now because the
\nworld has become a big single market (and it may stay so). I don\u2019t think it is
\npossible to assess the impact of these vast numbers of variables into the
\ndistant future with a high degree of certainty and then assigning a value for
\nthis assessment (growth rate). This assessment or guesswork becomes
\nincreasingly difficult and complex for an emerging line of business or when
\nthere are structural shifts happening in an economy. But it is possible to
\nassess the technical expertise, strength and resilience of a business. The
\nchances of a traveller crossing a tough terrain are not determined by the risk
\nof dangers which may come during the travel but more by his strength and
\nresilience. He can defeat those dangers. So rather than focusing alone on
\nassessing the future dangers (guesswork) the better approach is to assess the
\nstrength of the traveller. Same is also true for a business. Future growth is
\nnot determined by the external threats but by the capability of a business to
\nfight of those threats.<\/p>\n

But I have seen business analysts
\nputting all efforts to declare a growth figure. I always wonder how they
\ncalculate the growth rates i.e. at CAGR of 15% or 20% because 90% of the times
\nthese estimates are wrong. But if I am a great analyst charging hefty fees then
\nI have to give a figure otherwise I can\u2019t claim to be a God\u2026I need to
\ndemonstrate. I am not saying that all such efforts are futile and misdirected
\nbut that they should not be the sole basis for assessing the worthiness of a
\nbusiness. The value of a business should not be determined by these estimates.
\nI always feel that the major portion of the value of a business is determined
\nby the individual capability to fight and survive. Financial ratios are linear
\nbut consciousness (strategy) is multi-dimensional.<\/p>\n

Last year I have written a
\ndetailed post on Homeschooling explaining the pain points of our education
\nsystem. One school principal asked me that day what I think is the major limitation
\nof our study books and teaching. I told him that our books lose the purpose
\nwhen they declare, present and demonstrate that they know everything and what
\nthey know is unquestionable and absolute. I always feel that schools should not
\nonly teach what we know but also what we don\u2019t know. Science books should also
\nhave strong focus on what we don\u2019t know as of now. This will create more
\nEinsteins\u2026more children will feel interested and motivated. Similarly, I think
\nwe need to understand that we can\u2019t assess thousands of variables projecting
\ntheir future behavior in an excel sheet\u2026rather than giving inconclusive and raw
\nfigures it is better to declare that this we can\u2019t assess or can assess with
\nlower degree of certainty.<\/p>\n

GIC RE- Its
\nrecent business performance is not the TRUTH<\/span><\/u><\/b><\/p>\n

GIC RE has been hit badly in last one year and
\ntrading at extremely lower valuations. But the truth is completely different
\nfrom its recent quarterly numbers. In the coming paragraphs we will try to
\ncapture the truth.<\/p>\n

GIC Re is India\u2019s biggest reinsurer with around 60% market
\nshare. Insurance business is one of the most complex businesses and reinsurance
\nis even more complex. So no wonder people are trying to assess the fourth
\ndimension with 3D tools.<\/p>\n

Sample 1:<\/u><\/b><\/p>\n

Insurance- Role and impact on business and
\neconomy<\/u><\/b><\/p>\n

Insurance is basically a process
\nby which risk is spread among vast number of people across geographies. As I
\nhave shared earlier, future is extremely uncertain and there are existential
\nthreats for all whether for an individual or a business. So the focus was
\nalways on as to how to eliminate these existential risks. Insurance tried to
\nfill this void with its innovative business model.<\/p>\n

To understand the model, let\u2019s
\nassume a small town with some 1000 families. As there is a risk of untimely
\ndeath due to accident or disease so every resident is worried about the safety
\nand future of his family. The best way for him is to build an emergency fund
\nfor his family. As per his estimates, the fund he needs is Rs. 1 crore and so
\nsaves this much money. But this threat is for every family hence every family
\nis focusing on saving around 50 lacs to 1 cr in order to ensure the safety of
\ntheir families. This means that people will try to save 500-1000 cr in this
\nsmall town and the same will be parked in safe instruments like FD. But the
\nsavings of this huge sum also means that people will spend less and take very
\nless risk for staring new ventures. And this will certainly hit the growth of
\nthe town very badly and the question will come as to how they will save this
\nmuch money in the presence of low economic growth. Interest rates will be low
\nbut still even at lower rates there won\u2019t be much takers of credit as everybody
\nhas become risk averse.<\/p>\n

But then, a smart guy comes into
\nthe town. He does his homework and finds that on an average every year some 10
\npeople die of accidents. So he understands that there is no need for everyone
\nto create emergency fund. In fact, he can create a fund sufficient to pay Rs. 50
\nlac to 1 crore to the family of each deceased fellow which will be around 5-10
\ncr and for that he can charge a small amount as premium from each family in the
\ntown. The premium he will decide based on his cost of capital, administration
\nand other charges. So if everything goes according to his estimates (of 10
\ndeaths) then he will make money from this business. Most importantly, people
\nwill be very happy to pay small annual insurance premium (say Rs. 20-30K) to
\nsafeguard the future of their families and avoiding the need to save huge money
\nfor emergency fund.<\/p>\n

So we can see this arrangement is
\na win-win situation for everyone but most importantly this will ensure the good
\ngrowth of the economy as a whole as people will feel comfortable to spend and
\nto take risks for new ventures. So we can see the big role being played by
\nInsurance for the growth of economy also not just ensuring the safety of the
\npeople alone.<\/p>\n

\"\"<\/a><\/div>\n

But the major factor here is to
\ncover large population under insurance because only then law of averages will
\ncome into play and this will further reduce the insurance premiums. Insurance
\nis mainly about vast coverage because if in the small town in our example only
\n100 people opt for insurance then there are high chances that out of these
\nhundred 7 people die of accident resulting in high claim payouts for insurance
\ncompany which is not a viable model. So the expertise of Insurance firm here is
\nto assess the mortality rate accurately and increase the insurance coverage to
\nlarge number of population. Hence, Insurance is
\nbasically a risk management mechanism where the insured manage his risk by
\ntransferring the same to the Insurer while the Insurer manages his risk by
\naccumulating\/pooling the risks of similar large number of individuals.<\/span><\/p>\n

Non-life insurance (General
\ninsurance) follows the similar model and just like the life insurance it has to
\nassess the risk events accurately like motor accident rates, Fire and
\ncatastrophe risks. But the focus here also is to cover the large geographical
\narea in order to spread the risks. Like in our small town case, effectively
\n1000 people are taking care of the families of 10 people expected to die of
\naccidents in the current year because instead of each family taking care of
\nthemselves 1000 families are taking care by pooling money for an adequate fund.
\nSo the core competency of insurance business is to spread risk because the
\nrisks associated with different policies are not perfectly correlated so the
\ntotal risk of a portfolio of policies is smaller than the sum of the policies\u2019
\nrisks- for example, 100 policies having insured value of 100 cr\u2026now the risk of
\neach policy is 1 cr but total risk of 100 policies is not 100 cr due to
\nnonlinear correlation between all the policies.<\/p>\n

Insurance is a unique business
\nand a very complex one because unlike other businesses where they sell goods or services but in insurance they sell promises\u2026a promise to indemnify the
\nother in case risk\/loss event happens in the future. So the indemnity event is
\nalso contingent upon the loss event happening in the future which may or may
\nnot happen. So, Insurance companies are required to keep adequate liquidity and
\ncapital to meet out their future obligations in the form of insurance claims.
\nInsurance companies are required to maintain a solvency ratio of 150% in India
\n(will touch this in the coming paragraphs).<\/p>\n

A strong and efficient insurance
\nindustry is vital for the growth of an economy because in the absence of
\ninsurance support businessmen won\u2019t be able to take the risk of setting up new
\nfactories\/projects. Take the case of a setting up of a power plant costing Rs.
\n5000 cr which is exposed to the natural catastrophic risks like earthquake,
\nhurricanes or other risks like war and terrorist attacks. In the absence of
\nstrong and solvent Insurance industry it is not possible for any businessman to
\ninvest such a huge amount. Banks can\u2019t provide credit to businesses in the
\nabsence of Insurance…..<\/p>\n

\n

Sample 2:<\/u><\/b><\/p>\n

Concentration Risk and
\nReinsurance<\/u><\/b><\/p>\n

This is what insurance business
\nis all about and the most important strategic decision for any insurance
\ncompany. The holy grail of Insurance business is to avoid concentration risk. This
\nis the most important factor which affects the demand and profitability of
\ninsurance business however surprisingly there is not much information about
\nthis in any of the coverage reports on Insurance business. They only talk about
\nregulatory and mass retail Motor insurance, health or fire which are required
\nby law and are non-discretionary. But due to easy money there is high
\ncompetition in these sectors. <\/p>\n

The major risk for an insurance company is to have high
\nnumber of claims as compared to expected claims upon which they have built and
\npriced their insurance policies. Now this high claim risk can be due to two
\nfactors- first, their assessment was wrong and their data collection and
\nanalysis models were wrong or outdated; second they have accumulated\/distributed
\ninsurance policies in such a way that it has concentrated the risk for them\u2026\u2026..<\/p>\n

Sample 3:<\/u><\/b><\/p>\n

Insurance is complex but
\nReinsurance is even more complex<\/u><\/b><\/p>\n

I have not seen a business as
\ncomplex as Insurance where growth and demand dynamics are extremely difficult
\nto assess. But I have seen people treating both insurance and Reinsurance on
\nthe similar lines\u2026analysts predicts linear relationship between insurance and
\nreinsurance business and growth in retail insurance will result in the same
\ndegree of growth in reinsurance. But this is not the case. Both have distinct
\ndemand and growth dynamics.<\/p>\n

Once one analyst associated with
\nlarge broker house was telling me that their analysis about reinsurance is that
\nwith the growth in Motor, health insurance in India more business will come to
\nReinsurers. But I told him that I did not feel the same and instead as far as I
\ncan see growth catalysts are very different for Reinsurers. Actually here
\nthings are very complex- risks associated with Motor and Health insurance are
\nnot co-related\u2026means one car accident does not create the chances of another
\ncar accident. In other words, if one car insured by insurance company X gets
\ninto an accident in area A then it does not affect the possibility of another
\ncar accident in area B nor it creates a chain where another car accident may
\ntake place due to one car accident in area A\u2026means each risk event is different
\nand independent and does not even out the other risk event. Car accidents are
\nnot mutually occurring and each car accident is a mutually exclusive event and
\nindependent of other car accident unlike catastrophes like hurricane where one
\nhurricane can do big damage in multiple and correlated risk events in a
\nparticular area and further you can\u2019t pin point the area in advance\u2026\u2026<\/p>\n

Sample 4:<\/u><\/b><\/p>\n

General Insurance has a
\nlong way to go in India<\/u><\/b><\/p>\n

However, Indian general Insurance
\nindustry as of now is very backward and needs huge resources and innovation to
\nstart the new growth path. To have an assessment as to where India stands now,
\ntwo ratios are used across the globe to measure the development of insurance
\nindustry. First is Insurance penetration which measure the development of
\ninsurance sector i.e. circulation rate of the insurance products in an economy
\nand second one is Insurance density which is the ratio of total insurance
\npremiums earned in a given year to the total population.<\/p>\n

Insurance penetration rate is
\nmeasured as the ratio of premium underwritten in a particular year to the GDP. India\u2019s
\ninsurance penetration was 2.71% in 2001, when the world average was 7.83%. The
\nsame in 2016-17 was at 3.49% (2.72% Life and a mere .77% for non-life). The
\nsame now stands at 3.7% against global average of 6.8% which shows that we have
\ntoo much to cover as of now.<\/p>\n

But i don\u2019t like this ratio much
\nand don\u2019t think that this ratio is expressing the status which is desired
\nbecause:<\/p>\n

(1) If we can see then this ratio
\nattempts to show the relation between premiums and GDP. But I think the focus
\nof Insurance is not on protecting GDP DIRECTLY. <\/p>\n

(2) In fact, Insurance aims to
\nprotect the GDP generating assets not the GDP.
\nSo I think the focus should be on to check how much of the income
\ngenerating assets (Like factories\/power plants) are insured. <\/p>\n

(3) Also, insurance premiums are
\naffected by competition and interest rate in an economy (because insurers can
\nset low premiums to attract more business to invest the premiums in high
\ninterest generating assets like Bonds).<\/p>\n

(4) So I feel instead of focusing
\non insurance premiums received in a year the better way is to focus on the
\nvalue of income generating assets insured as a percentage of total income
\ngenerating assets in an economy. I mean focus should be on sum insured not on
\npremiums paid. For example, if an economy has Rs. 10 lac cr worth of assets
\nthen the penetration should be measured as how much of these assets have been
\ninsured not the premium paid for ensuring these\u2026\u2026.<\/p>\n

Sample 5:<\/u><\/b><\/p>\n

Cyber Insurance-the next
\nbig thing in Insurance and Reinsurance<\/u><\/b><\/p>\n

Data is God. As you all know I am
\na firm believer of this. And as things are changing in the structure, growth factors
\nand catalysts of economies across the globe the same is going to be recognized
\nby all the businesses and insurance providers. The world, economies and
\nbusinesses as we know today are defined by one factor- DATA. Just see the top
\ncompanies of the world- Google, Facebook, Alphabet, Apple, Amazon, Microsoft,
\nUBER, Netflix, Linkedin. They are not our conventional companies selling
\nphysical goods but they are the ones selling information, digital goods and
\nservices. For these firms, Data is all and everything. Companies selling and
\ndealing in physical goods are no longer the global giants. Goods are replaced
\nby DATA.<\/p>\n

This Data orientation of the
\nbusinesses has fundamentally changed the risks associated with the businesses.
\nTwo-three decades ago, businesses were about investments in machines, plants,
\ninfrastructure and raw materials. Business meant physical assets but now is the
\ntime of intangible assets\u2026\u2026<\/p>\n

Sample 6:<\/u><\/b><\/p>\n

Valuation of Intangibles-
\nwhere traditional accounting is useless<\/u><\/b><\/p>\n

Once I was sitting among the
\ngroup of stock market enthusiastic and CAs when one passionate investor told me
\nthat my being a qualified CA helps me a lot in analyzing the stocks. But I
\ndisagreed with him. I have seen CAs considering themselves as depositories of
\naccounting laws and fundamentals so they have a feeling that they can value
\nstocks and businesses. But I usually tell them that this is not the case
\nbecause stock analysis starts where traditional CA ends. In mergers and
\nacquisitions, intangibles are accounted for some 70% of the business valuations
\nwith traditional assets in books accounting only for some 30%. The problem with
\nthe traditional accounting is that it has no tools to evaluate intangible
\nassets. Our so called balance sheets comprise of just physical and financial
\nassets and liabilities and accounting says that the difference of the assets
\nand liabilities is the net worth which is the value of the business as per
\naccounting. But we all know that net worth in fact is the minimum value as
\nbusinesses get maximum value from the intangibles like brands, technology,
\nPatents, customer loyalty, information and data which is not assigned any value
\nin the balance sheets by traditional accounting. So we can feel the uselessness
\nof our accounting systems. The uselessness of our accounting is more pronounced
\nat present with the onslaught of digital economy as more and more resources are
\ninvested in the formation of digital and intangible assets\u2026..<\/p>\n

Sample 7:<\/u><\/b><\/p>\n

But in the absence of
\ncapitalization of intangibles or valuation of Data assets in the balance sheets
\nhave rendered the books of accounts and return ratios meaningless in today\u2019s
\nworld because as pointed out earlier it is very much possible (it happens always)
\nthat the revenue earned today is due to R&D expensed out 5 years ago so
\nthis revenue will distort the return ratios\/metrics big time and
\ninvestors\/analysts will have a false interpretation of high return ratios when
\nthe fact is that the most of the related expenditure is charged off 5 years
\nago. Further, the timing of R&D expenditure may impact the results big time
\nand people may arrive at wrong conclusions when the fact may be that in a
\nparticular year with lower profits the firm actually has invested much higher
\nin R&D for a new breakthrough product. For instance, take the case of
\nPharma biggies like Gilead and Pfizer, aviation giants like Boeing planning a
\nnew aeroplane\u2026all these new products require massive investments in R&D the
\nbenefit of which will be realized in the foreseeable future. So the books of
\naccounts we are seeing and analyzing today (especially of a tech heavy and
\nR&D heavy firms like Pharma) are just superficial. If you ask me, Indian
\nanalysts have very low expertise in recognizing and valuing intangibles (Biocon
\nwas never valued much in 2013-14 when it was spending big in R&D and I saw
\nmany analysts questioning its return ratios at that time. But I picked it at
\nthat time and it is now a 12 bagger). The main reason for this is that Indian
\ncompanies are very backward in investing in R&D so in India these analysts
\nhave the liberty to ignore or deficient in valuing intangibles but still be
\nregarded as great analysts\u2026..<\/p>\n

Sample 8:<\/u><\/b><\/p>\n

How life insurance industry
\nadds value<\/u><\/b><\/p>\n

If we can see, life insurance industry sells
\nthe true interest rate sensitive products or policies. Almost entire profits of
\na life insurance provider arise from the difference in the interest rates they
\nare earning on their assets and the interest rates they have promised to their
\npolicyholders. So falling interest rates negatively affects the future value of
\nits assets which it needs to payout its liabilities in the future which are at
\nmuch higher interest rates. So this can result in the asset liability mismatch
\nand even can threaten the insolvency of the insurance firms. That\u2019s why
\nprediction of long term interest rates is more relevant and imperative for life
\ninsurance firms than non-life firms. <\/p>\n

So the most important thing for
\nthe life insurance firms is their ability to predict the behavior of interest
\nrates over a period of 20-30 years\u2026..<\/p>\n

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your own Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).<\/span><\/p>\n

\n

<\/p>\n



\n<\/span><\/p>\n

<\/span><\/p>\n

\n

\n



\n<\/span><\/p>\n

\n

<\/p>\n

<\/div>\n

<\/p>\n

<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Stocks covered in this study: GIC RE and Cholamandalam financial holdings Ltd Dear all, this study is mainly about the dynamics and factors affecting and governing the growth of insurance sector and not about any particular insurance stock. I have tried to list out the factors affecting the functioning and growth of this one of the most complex sector. But insurance sector (General insurance in particular) is going to see the huge growth for next 10-15 years in India and I feel this is going to be one of the sectors to produce future multibaggers. The growth and performance we…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1013","post","type-post","status-publish","format-standard","hentry","category-blog"],"_links":{"self":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1013","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1013"}],"version-history":[{"count":0,"href":"https:\/\/oscillations.in\/index.php?rest_route=\/wp\/v2\/posts\/1013\/revisions"}],"wp:attachment":[{"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1013"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1013"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/oscillations.in\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1013"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}