The Union Budget in presented on February 1, 2018 by finance minister Arun Jaitley called for a merger of United India Insurance, National Insurance and Oriental Insurance and a subsequent listing.
The much-touted merger of the three public sector general insurance companies - National Insurance, Oriental Insurance and United India Insurance - has been pushed to financial year 2019-20.
Sources told Moneycontrol that the companies will function as separate entities this financial year and the merger will be implemented from the next financial year as the timeline for the process has been extended.
It was initially expected that the merger process would be initialized in the first quarter of the current financial year and would be completed by the end of the third quarter or beginning of the fourth quarter.
A senior official close to the development said that a committee with general managers of the concerned insurance companies has been set up. This committee will look into the process of appointing an external consultant to value the firms.
“The merger will only be implemented in the next financial year. Once the merged entity is operational, it will be listed on the exchanges within the next few quarters,” the official added.
A surprise announcement
The Union Budget presented on February 1, 2018 by Finance Minister Arun Jaitley called for a merger of United India Insurance, National Insurance and Oriental Insurance.
"We will merge the three companies and subsequently list them," Jaitley said. This is expected to the biggest ever merger in the insurance sector with the merged entity having a valuation exceeding Rs 1 lakh crore.
This announcement came as a surprise to the market, especially since National Insurance was ready with its IPO process and could have been listed by June 2018.
Informal discussions begin
Once the merger proposal was announced, informal discussions within the concerned insurers began. They also formally met the finance ministry officials on February 16 to discuss the modalities of the scheme. Here, the appointment of a consultant for valuation and setting up of the committee was discussed.
Internally too, the company boards have not yet met formally to discuss the structure of the merger. Also, there haven't been any consultations on the human resource matters.
The three entities combined are said to have an employee strength of around 50,000. Once the merger goes through, it is anticipated that at least 10-20 percent of the staff will either be let go off or asked to take a voluntary retirement.
The original Budget proposal
In his budget speech in February 2016, Finance Minister Arun Jaitley had said that the general insurance companies owned by government will be listed on the stock exchanges. He had also added that said that the public shareholding in government-owned companies is a means of ensuring higher levels of transparency and accountability.
The cabinet approved the scheme in January 2017. This was followed by individual boards of the insurance companies meeting and clearing the proposals. The quantum of divestment in the initial tranches was also discussed with an understanding that the government would dilute their stake by 25 percent over a three year period.
New India Assurance and General Insurance Corporation of India (GIC Re), the largest general insurance and reinsurance companies respectively, had subsequently finalised their initial public offering (IPO) plan.
In October 2017, GIC Re was listed while New India was listed in November 2017. Meanwhile, the remaining general insurers, especially, National Insurance had finalised its IPO plans and would have been ready to hit the market in FY19.
Solvency concerns mount
On one hand, while the listing of the remaining three state-owned general insurance companies, United India Insurance, Oriental India Insurance and National Insurance was being finalised, concerns about solvency ratios arose.
Facing losses from the 2015 Chennai Floods, United India Insurance was reeling from heavy claim payouts. Similar was the case with Delhi-headquartered Oriental India. Both their solvency ratios had fallen below 1.5, which is the minimum prescribed by Insurance Regulatory and Development Authority of India (IRDAI) rules.
Of the four public sector general and health insurance companies, none paid dividends during the year 2016-17 against a dividend payment of Rs 482 crore in the year 2015-16.
During the year 2016-17, Insurance Regulatory and Development Authority of India (IRDAI) had granted dispensation to National Insurance, United India Insurance and Oriental Insurance to amortize Motor TP Liability on straight line basis over a period of 3 years commencing from 2016-17 and to consider 30 percent of fair value change account for solvency purpose.
IRDAI had also decided to give time to the companies to up their solvency requirements so that they would be better equipped to list. However, there is no law barring companies whose solvency drops below 1.5 from getting listed.
As of December 31, 2017, United India Insurance’s solvency ratio stood at 1.08 while that of Oriental Insurance stood at 1.43. National Insurance also had its solvency ratio drop below 1.5 in the past but was able to pull it back up by reduction in exposure to loss- making group health cover, re-pricing of health and motor products as well as lower subordinate debt. It stood at 1.53 at the end of Q3 of FY18.
While no regulations stop insurers with below-par solvency from getting listed on the exchanges, a better valuation would be received if basic financial parameters are met.
The original plan to list the general insurance companies separately was also deferred because of the fact that the government wanted to not only get a positive response from the retail and institutional investors but also ensure that they were spaced out evenly.The personnel challenges also remain key to the merger. How the employee unions react to the merger as also the senior management composition is something to watch out for. But at least for FY19, it is business as usual for these three public sector general insurers.