Mega merger of PSU general insurers stuck in first step

M Saraswathy

Moneycontrol News

The ambitious mega merger between the three state-owned general insurance companies has got stuck in the very first step.

Though three months have passed since the merger of the three state-owned general insurance companies was announced in the Union Budget, there has been little progress. The three insurers are yet to agree on a consultant.

The insurers - National Insurance, Oriental Insurance and United India Insurance - have been unable to come to a consensus on the appointment of a consultant as there have been differences on the way the companies will be valued and who will get a better deal in the merger.

The consultant will be responsible for the pricing and the valuation of the merger.

Sources told Moneycontrol that the process has been delayed because the past meetings have been inconclusive. “We have had three meetings in the past two months but the stakeholders have not been able to agree on the terms and conditions for appointment of a consultant,” an official said.

The Union Budget, presented on February 1, 2018 by Finance Minister Arun Jaitley, had called for a merger of United India Insurance, National Insurance and Oriental Insurance.

What are the concerns?

Before appointment of a consultant, the insurance company boards want to ensure that the process flow is smooth for the merger. This includes getting a fair valuation for the assets as well as minimal disruption to the work-flow till the ‘scheme of amalgamation' is initiated.

Except National Insurance, which had a solvency margin of 1.53 at the end of the December quarter, solvency for both United India (1.08) and Oriental Insurance (1.43) are below what is mandated by the insurance regulator. Insurance Regulatory and Development Authority of India (IRDAI) rules require insurers to maintain 1.5 solvency margin at all times.

Solvency margin is the amount of capital an insurer has, in comparison to the risks (business) that it has taken. Higher the solvency, better is the claims payment ability.

“Considering that the solvency margins for the two insurers have to be pulled up to 1.5, we want the consultant to consider this factor before making the pricing decision. This is crucial because both the insurers are likely to improve their solvency soon,” added the person quoted above. The fourth quarter results for these companies have not been released.

How the process will fold out

Once an expression of interest (EOA) process is done, consultants will express their views on the process. In the second stage, there will be a request for proposal (RFP) floated in the market which will invite proposals from eligible bidders.

Post the bidding process, the consultant for the merger process will be selected. An official told Moneycontrol that this consultant would set up committees for the amalgamation process including those on pricing, listing as well one on manpower.

Subsequently, a series of presentations will be made to the ministry and then a final decision on the exact quantum of sale, pricing as well as the timing of the listing of the merged entity.

“This process will stretch well into the second quarter of FY20. The primary objective is to get adequate market value for the combined entity,” added another source.

Stakeholders unable to reach consensus

Once the merger proposal was announced, informal discussions within the concerned insurers began. The senior management of insurance companies 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 how the merger will be structured nor has there been any consultations on the human resource matters.

The company executives informally met last week too to gauge how the situation has progressed. However, even there the consultant appointment was not finalised.

Budget proposal

"We will merge the three companies and subsequently list them," Jaitley said while presenting the Budget. 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.

Among the public sector general insurers, New India Assurance is already listed on the stock exchanges. Government-owned reinsurer, General Insurance Corporation of India, was also listed in FY18.

Original Source: https://www.moneycontrol.com/news/business/companies/mega-merger-of-psu-general-insurers-stuck-in-first-step-2573081.html