India scraps public-sector merger

July 14 2020 by Nick Ferguson

India’s government has scrapped its plan to merge three state-owned insurers and raise capital through an initial public offering.

The deal never made much sense. National Insurance, United India Insurance and Oriental Insurance all make big underwriting losses and are barely solvent. Combining them might have saved some costs, but the challenges were huge — incompatible technology platforms, different cultures, politically difficult redundancies — and improved profitability was no guarantee at the end of it.

It seems that even the government has now realised that the merger was not worth the effort, though it shied away from saying so. Instead, it blamed the cancellation on the “current scenario”, presumably referring to the pandemic, which seems like a convenient fig leaf to hide behind given that the merger had barely started and an IPO was still a long way off.

Merger or not, the problems at the three companies still need to be addressed. At the end of 2019, Oriental had a combined ratio of 132 and a solvency ratio of 1.54, which is just a fraction above the regulatory minimum of 1.5 — and it is the best of the three on paper. National has a solvency ratio of 0.12.

Capital
The new plan, much the same as the old plan, is for the government to throw more money at the companies in the hope that they will turn around. Last week it announced an extra Rs100 billion (US$1.34bn) bailout, in addition to the Rs250 million it injected in February.

“The capital infusion will enable the three [companies] 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,” the finance ministry said in a statement.

 “There is basically a total lack of understanding of the business reality because the civil service runs these companies like government departments.” Shrirang Samant

New performance targets for the three companies will focus on “business efficiency and profitable growth”, which makes you wonder what they were focusing on previously. It is certainly true that a more commercial approach is needed, but industry insiders don’t see that happening.

“The whole challenge is structural,” says Shrirang Samant, former country head of Travelers in India and an Indian insurance industry veteran. “There is basically a total lack of understanding of the business reality because the civil service runs these companies like government departments.”

Decisions made by experienced and professional executives are often over-ridden by civil servants who control the levers of power, according to Samant. Rather than being commercial entities driven by profit, the companies are frequently used as arms of policy, providing low-cost insurance cover to various sectors at the direction of politicians.

Turnaround
Assuming such practices continue, there is little hope that “profitable growth” will ensue — and nobody seriously believes that it will. This is about kicking the can down the road while the government attends to more pressing matters.

Is there a better option? Politics aside, the most sensible course would probably be to put the companies into run-off or at least shrink their businesses down to a size that matches their capital.

Indeed, a more proactive and independent regulator might have been demanding as much, but the Insurance Regulatory and Development Authority of India, which is run by a career civil servant with no background in insurance, has not had a visible role in the process.

Many years ago, there was serious discussion about merging the three companies into India’s fourth public-sector general insurer, New India Assurance, but that plan was scrapped in favour of New India doing a solo IPO without the baggage of the other three.

The most sensible course would probably be to put the companies into run-off or at least shrink their businesses down to a size that matches their capital

There has been some talk of reviving the idea, but at this point New India’s shareholders would hardly welcome the proposal. EY also considered the option in a confidential report into the government’s options, which included a plan for the merger, but warned that it was challenging.

The EY plan originally envisaged that the three-way merger would take 18 months and could be completed by the end of 2019, though it also flagged challenges related to harmonising the IT platforms and different work cultures. It is unclear whether it has been involved in the latest plan for the three companies.

For now, the merger is officially only postponed and could yet be revived in the future. In fact, that is probably what will happen once the latest round of capital is consumed, but it won’t suddenly become a better idea.

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