Pre-merger blues: PSU general insurers seek Rs 12,000 crore lifeline

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The three state-owned general insurance companies (National Insurance, United Insurance and Oriental Insurance) have sought a capital infusion of Rs 12,000 crore from the Centre, to stay afloat and conduct business.

This has been cited as the pre-condition before the proposed merger process begins.

“Capital is the immediate need of the business. We can have the merger only once the entities have a healthy balance sheet,” said a senior official.

It is likely that this proposal will be considered in the upcoming February 2020 budget. It has been almost two years since the merger was first proposed.

The first use for this capital is to spruce up the solvency or minimum capital across the three general insurers.

At the end of June, United India’s solvency stood at 140 percent while that of Oriental Insurance stood at 156 percent. For National Insurance, the latest solvency figures are available for March 2019 and it stood at 104 percent.

Two of them are below the 150 percent mark stipulated by the Insurance Regulatory and Development Authority of India IRDAI). This roughly means that the assets must be 1.5 times the liability.

Similarly, their combined ratio is a cause of worry.

At the end of June, National Insurance had a combined ratio of 117.76 percent, United India's combined ratio stood at 131.38 percent and Oriental Insurance's combined ratio stood at 132.39 percent. This indicates that the insurer is making underwriting losses or in simple terms, the claims paid are higher than premiums collected. A ratio below 100 percent means that the claims and premiums are proportionate to each other.

"Valuations (during listing) will also depend on our capital. Hence this proposal needs immediate consideration," said the director of one of the merger candidates.

The PSU insurers' merger has been a pet project of the BJP government. It was announced by former finance minister Arun Jaitley in his February 2018 budget speech. The idea was that the merged entity would subsequently be listed on the stock exchanges.

The idea to merge the three insurers was to create a stronger and larger insurance company that was sustainable in the long run. The other two state-owned entities, New India Assurance and General Insurance Corporation of India, are listed on the exchanges.

EY was appointed as the consultant for the process in December 2018. The initial estimates suggest this will be the largest non-life insurance company in India valued at about Rs 1.5 lakh crore.

On one hand, while there has been a delay in the merger process, there are also human resource concerns. The insurers’ unions have also expressed concerns about the merger of the entities, saying this would lead to retrenchment of staff at the mid and junior levels.

Considering these challenges, sources said that the actual merger will only be initiated in FY21. The listing could either be end of March 2021 or the first quarter of FY22.

This has been cited as the pre-condition before the proposed merger process begins.

“Capital is the immediate need of the business. We can have the merger only once the entities have a healthy balance sheet,” said a senior official.

It is likely that this proposal will be considered in the upcoming February 2020 budget. It has been almost two years since the merger was first proposed.

The first use for this capital is to spruce up the solvency or minimum capital across the three general insurers.

At the end of June 2019, United India’s solvency stood at 140 percent while that of Oriental Insurance stood at 156 percent. For National Insurance, the latest solvency figures are available for March 2019 and it stood at 104 percent.

Two of them are below the 150 percent mark stipulated by Insurance Regulatory and Development Authority of India IRDAI). This roughly means that the assets must be 1.5 times the liability.

Similarly, their combined ratio is a cause of worry.

At the end of June 2019, National Insurance had a combined ratio of 117.76 percent, United India's combined ratio stood at 131.38 percent and Oriental Insurance's combined ratio stood at 132.39 percent. This indicates that the insurer is making underwriting losses or in simple terms, the claims paid are higher than premiums collected. A ratio below 100 percent means that the claims and premiums are proportionate to each other.

"Valuations (during listing) will also depend on our capital. Hence this proposal needs immediate consideration," said the director of one of the merger candidates.

The PSU insurers' merger has been a pet project of the BJP government. It was announced by former finance minister Arun Jaitley in his February 2018 budget speech. The idea was that the merged entity would subsequently be listed on the stock exchanges.

The idea to merge the three insurers was to create a stronger and larger insurance company that was sustainable in the long run. The other two state-owned entities, New India Assurance and General Insurance Corporation of India are listed on the exchanges.

EY had been appointed as the consultant for the process in December 2018. The initial estimates suggest this will be the largest non-life insurance company in India valued at about Rs 1.5 lakh crore.

On one hand while there is has been a delay in the merger process, while on the other hand there are also human resource concerns. The insurers’ unions have also expressed concerns about the merger of the entities saying this would lead to retrenchment of staff at the mid and junior levels.

Considering these challenges, sources said that the actual merger will only be initiated in FY21 compared to FY20. The listing could either be end of March 2021 or first quarter of FY22.