Rising losses and dropping solvency was a trigger for PSU insurers' merger decision.
Finance minister Arun Jaitley in his budget speech announced the merger of three large public sector general insurance companies, National Insurance, United India Insurance and Oriental Insurance.
With rising underwriting losses and solvency dipping below 1.5, which is the minimum requirement according to Insurance Regulatory and Development Authority of India (IRDAI), a merger comes as a measure of last resort.
In an interaction Moneycontrol, K Sanath Kumar, chairman and managing director of National Insurance, said that it is certainly a pragmatic idea. It is a very good move by the government
"I believe that the merger and a subsequent listing will increase the synergies and increase the financial values of the merged undertakings.The merger will help us gain a stronger market share and become a stronger entity as a whole," Sanath Kumar said.
The government did not provide any details about the merger but sources said that the process is unlikely to be completed by the end of in this financial year, and may take another few quarters to be finalised.
In his budget speech of 2016, finance minister Jaitley had first indicated that general insurance companies owned by the government will be listed on stock exchanges. The minister had also said that public shareholding in government-owned companies is a means of ensuring higher levels of transparency and accountability.
Post this, the larger companies like General Insurance Corporation of India (GIC Re) and New India Assurance, which were the largest two companies in the public sector, started taking steps towards listing. In the second half of 2017, both companies were listed on stock exchanges.
Following this, the other three insurance companies were also nudged to begin their IPO process.
The year 2016 was also when the Chennai floods hit and insurance companies took a hit of almost Rs 5,000 crore on their books. Tamil Nadu-headquartered United India Insurance was among the worst hit, which led to its solvency dropping below 1.5. Similarly, state-owned Oriental Insurance and National Insurance also saw their solvency margins drop below 1.5.
With minimum capital dropping below the regulatory norms, concerns were raised on the financials of these players and a question mark was also put on their prospective IPOs. After a few quarters, National Insurance was able to pull up its solvency to 1.9, raising hopes of it being the next possible IPO candidate.
However, the other two insurers were not able to get their solvency up to 1.5 and were also given additional time by IRDAI. "There were serious concerns raised on their underwriting performance and it was considered a viable decision to merge all the entities," said a senior official associated with the development.The first step for this will be to have the respective boards of the companies review the detailed proposal that will be presented by the government in the next few weeks. Post this, the consultants to ascertain the valuation will be appointed and the process will be taken forward.
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