Government's mega merger plan for general insurance firms hits fresh roadblock

The government's plans for the mega merger of three general insurance firms to create one large and strong entity seems to have hit a roadblock. The Department of Financial Services (DFS), which oversees the operations of state-owned insurance firms, has written to the DIPAM not to proceed with the merger plan in haste and let it examine the proposal afresh and untangle complex operational issues first.

The fresh impediment has already removed the merger plan from this year's disinvestment calendar prepared by the Department of Investment and Public Asset Management (DIPAM). Sources now say that with the Finance Ministry raising fresh concerns, it would be difficult for the merger plan to go through even next year when a new government comes in at the Centre.

The government had announced the merger of three public sector general insurance firms: National Insurance Company, United India Insurance Company and Oriental India Insurance Company, in Budget 2018. The move was billed as the biggest ever merger in the insurance sector with the new entity having a valuation exceeding Rs 1 lakh crore. It intended to complete the exercise in FY19 itself.

"The DFS is concerned that a merger without looking at the exercise from different angles could lead to problems for the new entity emerging from the coming together of three general insurance firms. Besides, there are also issues of further cutting losses and making operations of companies efficient and low cost. These have been highlighted by the DFS in its letter that virtually stalls the process and seeks more time to complete the merger," said an official source privy to the development.

"The proposed merger of the three state-owned general insurance firms will happen only in the next fiscal now. Even this could be delayed if the tasks identified by the DFS are to be implemented and observed in detail."

Though the government hoped that the financial position of general insurance firms would improve before commencing the merger, the plan has not moved on the desired lines. In the quarter ended September last year, the three insurers had posted a combined loss of around Rs 1,800 crore. Moreover, a few of the insurance firms have also lost market share.

Besides financial issues, officials maintain that a thorough review of HR practices across the three firms is also needed before any merger could be considered. This is important as a combined entity could clock growth only if synergies are built. Right now there are no synergies and commercial interest of each company is clashing with others.

Rather than strengthening operations, state-run general insurance companies have gone deeper into the red this year. Oriental had posted a loss of Rs 240 crore in the second quarter of this fiscal, against a profit of Rs 200 crore in the July-September quarter of 2017. The companies' market share has also fallen with market share of National Insurance Company with respect of gross direct premium till December 2018 fell to 8.63 per cent. United India Insurance share also came down by around 4.88 per cent.

"There is need to bring down the losses of insurance firms further before any merger and subsequent listing is considered. The idea of the exercise is to create a larger and stronger entity and not one that remains weak and unable to take competition," said a sector analyst not willing to lend his name.

As part of the strengthening exercise, the government has also directed the firms to undertake monetising their assets including real estate to raise revenues. It is expected that some capital support will also come from the Centre as there is also a plan to list the merged entity. In 2017-18, the Centre had listed National Insurance and General Insurance Company, divesting 11.65 per cent and 12.5 per cent stakes respectively.

Last year, the merger process moved a step ahead with the government floating a request for proposal (RFP) for appointment of consultants to oversee the merger process. But it did not move any further thereafter.

(Subhash Narayan can be contacted at subhash.n@ians.in)

--IANS

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