Bonanza for PSU insurers: National, Oriental and United may get Rs 12,000 crore after merger

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Updated: September 16, 2019 6:59:29 AM

Since the Budget 2019-20 hasn’t made any provision of funds for insurers, the department of financial services (DFS) will soon seek supplementary demand of Rs 12,000 crore for this purpose, the source added.

United Insurance, public sector banks, department of financial services, National insurance, Oriental insuranceThe three insurance companies together accounted for 200 insurance products and a market share of around 35% as of March 2017.

Having announced plans to provide Rs 70,000-crore capital to public sector banks (PSBs) this fiscal, the government is likely to soon infuse Rs 12,000 crore into three state-run non-life insurers — National, Oriental and United — that it has proposed to merge.

However, while infusion into PSBs in recent years has been mostly through recapitalisation bonds that are off-Budget items, funds for the insurers will be provided from the Budget, a top source told FE. So, this allocation will fully reflect in the government’s fiscal balance sheet.

Since the Budget 2019-20 hasn’t made any provision of funds for insurers, the department of financial services (DFS) will soon seek supplementary demand of Rs 12,000 crore for this purpose, the source added. The infusion will take place just before or immediately after the “legal merger” (on paper) of these three insurers, which is expected in the current fiscal.

However, the operational part of the merger will take some more time to be over, given the sensitivity and human resource challenges associated with any such exercise, said an official of one of the insurers.

The latest proposal for infusion comes after Irdai chief Subhash Khuntia flagged the issue of low solvency level of state-run insurers at the last meeting of the Financial Stability and Development Council (FSDC), chaired by finance minister Nirmala Sitharaman, in June, another source had told FE. The three insurers have struggled to maintain the minimum required solvency ratio of 1.5 in recent years.

While United India Insurance had a solvency margin of 1.52 as of March 2019, Oriental Insurance’s solvency ratio stood at 1.66 as of March 2018 and National Insurance’s was 1.55. Analysts have said without infusion to shore up capital base, any merger exercise will be unwise. Although the DFS had submitted a proposal for infusion even earlier, the latest Budget didn’t make any provision for it.

An increase in underwriting losses and higher claims have eroded the profitability of many general insurance companies, including the state-run ones, in recent years, causing their solvency ratio to slip.

According to initial estimates, the larger entity formed by the merger of Oriental, United and National will be the largest non-life insurance company in India, with a value of Rs 1.2-1.5 lakh crore.

The process of the merger — announced in the Budget for 2018-19 — had started last fiscal, with the shortlisting of management consultancy firm EY to advise on the proposed move. However, the merger has been delayed beyond the budgeted target of 2018-19, as various issues — ranging from the rationalisation of branches and workforce to integration of software — are in the process of being sorted out. The government initially wanted to list the broader entity after the merger.

The three insurance companies together accounted for 200 insurance products and a market share of around 35% as of March 2017. Their combined net worth was to the tune of Rs 9,243 crore and employee strength of around 44,000 across 6,000 offices. The government had in 2017 raised over Rs 17,500 crore by listing state-run New India Assurance Company and General Insurance Corporation of India.

Already, to help state-run banks meet regulatory requirement and ensure greater flow of credit, the government has been infusing capital into them in recent years. Last fiscal, it infused Rs 1.06 lakh crore into PSBs, on top of Rs 88,139 crore in FY18. Since FY15, the government had infused a total of Rs 2.51 lakh crore into state-run banks.

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