Govt calls off merger of 3 PSU general insurers

The Union government said on Wednesday that the merger of three ailing public sector general insurance companies has been shelved and the focus will be on making them profitable instead.

The Cabinet also approved capital infusion of ~12,450 crore into the three firms — Oriental Insurance Company, National Insurance Company, and United India Insurance Company. This sum includes the ~2,500 crore already infused in February. “...given the current scenario, the process of merger has been ceased so far and instead focus shall be on their solvency and profitable growth, after capital infusion”, a release by Press Information Bureau (PIB) read.

Of the ~12,450 crore, the government will release ~3,475 crore immediately and the remaining ~6,475 crore will be infused later. In this year’s Budget, the government set aside ~6,950 crore for re-capitalisation of the three entities as all three were struggling on the solvency ratio front.

The Cabinet also approved raising the authorised capital of National Insurance Company to ~7,500 crore and that of United India Insurance to ~5,000 crore to give effect to the infusion. “The capital infusion will enable the three public sector general insurers to improve their financial and solvency position, meet the insurance needs of the economy, absorb changes and enhance the capacity to raise resources and improved risk management”, said the PIB release.

“In these times, the merger process would have been difficult,” said an executive of one of the insurers.

Experts said the aim was to augment capital by listing the merged entity, which would have brought down government equity. In the current scenario, given that the firms are not in good shape, the government would have netted lesser than expected if it would have gone ahead with the merger.

In the 2018-19 Budget, the government had proposed the merger and subsequent listing on the bourses. In January, the boards of all three firms had approved this plan. Last year, the three firms had appointed EY to prepare the roadmap. It had recommended completion of the merger by December 2020 or within 18 months starting July. However, the merger was put on the back burner because of the pandemic.

As of the third quarter of 2019-20, National Insurance had a solvency ratio of 1.01, against the regulatory requirement of 1.5. Solvency ratio is a key indicator of financial health. Its combined ratio — a measure of profitability for non-life insurers — stood at 173 per cent. If the ratio is below 100, it indicates that the firm is making underwriting profits.

Oriental had a solvency ratio of 1.54 and reported a combined ratio of 132 per cent. United reported a solvency ratio of 0.94, much below the regulatory requirement, with combined ratio at 127.62 per cent.