The Hindu Business Line : Public general insurers for total capital rejig

With the Group of Ministers (GoM) due to meet this week on amendments to the insurance statute, the four public sector insurance companies have made out a case for complete capital restructuring.

Official sources said that the GoM meeting’s focus would be on the capital raising plans for the four public sector insurers.

The sources said that there was wide agreement in the government on the need for raising the paid-up equity base of the four PSU insurers from the current levels.

Cushion for expansion

This was largely to provide sufficient cushion for the insurers to expand their rural portfolio, for which the solvency margins would have to be raised. PSU insurers also have global ambitions.

The Chairman of the General Insurance Public Sector Association, Mr. M. Ramadoss, said, “We need additional capital to meet our expansion needs, particularly if we are to make our presence in the international markets.”

The proposed amendments included insertion of an enabling clause in the General Insurance Business (Nationalisation) Act of 1972, allowing the four public sector insurers, New India Assurance Company Limited (NIACL), National Insurance Company Ltd (NICL), United India Insurance Company Limited (UIIL) and the Oriental Insurance Company Limited (OICL) to raise capital from the markets, through initial public offerings (IPO).

Premium-priced IPOs would help boost the reserves and the capital. The sources said that accretion of share premium reserves would in turn push up the solvency ratios and increase the capacities of the domestic general insurers.

The increased capitalisation would help reduce reliance on reinsurance capacities for solvency compliance, the sources said.

Buy-back favoured

Insurers are, however, pitching for a restructuring of the capital. This involve buying back a part of the government equity stake or converting part of the government stake into preference shares and making a premium priced issue, on the same lines as some of the public sector banks had done in the past.

Central Bank example

In the case of Central Bank of India, the Government had converted Rs 800 crore of equity into cumulative preference shares in July 2007. The PSU insurers made the capital make-over case since none of them have received capital support since nationalisation in 1972.

PSU insurers so far have bolstered their capital by selling some equity investments and transferring profits earned to the general reserves.

Insurers are now reluctant to resort to this method continuously in view of limitations.

Tricky issue

Insurance IPO pricing is a tricky issue. Currently, there are no listed insurance companies in the country.

Moreover, PSU general insurers have high book values after derisking their third party motor insurance liabilities since the last financial year. Banks at the time of initial entry into the primary markets had priced their issues close to their respective book values.

More Stories on : General Insurance | Restructuring

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