Moody's Investors Service said on July 16 that the Rs 12,450-crore capital injection in three state-run insurance companies is 'credit positive' as their capital had been significantly depleted over the last few years.
Last week, the Union Cabinet had decided to put on hold the merger of National Insurance, The Oriental Insurance and United India Insurance and approved a Rs 12,450 crore capital infusion into these three general insurers.
"The capital infusion is credit positive for the insurers, which are among the largest non-life companies in India's insurance market, because their capital has been significantly depleted by several loss-making underwriting years and significant top-line growth," Moody's said in a statement.
Further, focusing on the insurers' profitability will ensure that the improvements in capital and risk management are maintained, it added.
"After the capital injection we expect renewed focus on improving the insurers' risk management and profitability. We expect the insurers to enhance their risk-based pricing and underwriting discipline to ensure organic capital growth and attract foreign reinsurance coverage, which will further aid capital adequacy," Moody's said.
It further added that, the government's goal of listing the companies on the stock market will become feasible only after this.
"The stock market listing itself brings in prospects of foreign ownership, which would diversify funding sources, reduce exposure to high-risk assets, enhance actuarial-led reserve and pricing and enhance the risk-based capital management.
"Additionally, given these state-owned insurers' dominant position in India and ability to undercut other companies' pricing, improved pricing discipline will benefit the wider market's underwriting performance," Moody's said.
However, if after the capital injection the three insurers continue to write business on loss-making terms and profitable growth is not achieved, their capital depletion and volatile required solvency margins (RSMs) will persist, which would put the plans to list the insurers at risk, it added.