Govt to merge 3 general insurance companies

Transcription

1 Govt to merge 3 general insurance companies

2 . P R O F I L E PRASHANT MAVANI MSc. in Management, University of Surrey (UK) Senior Faculty: StudyIQ Follow/Contact Download PDF notes of this lecture from my FB Page

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4 Merger of 3 PSUs The government s plan to merge the three unlisted public sector general insurance companies (PSGICs) 1. National Insurance Company 2. United India Insurance Company 3. Oriental Insurance Company. Types of Companies in India The companies registered under the Companies Act 1956 (Now Companies Act 2013) in India are of three types as follows: A. Unlimited Company/Proprietary kind B. Company Limited by Guarantee C. Company Limited by Shares: These are of two types- I. Private company II. Public Company

5 Basic difference-

6 Key difference: Listed vs Unlisted Company Main objective: Profit Maximization Difference because of: Size, Structure and Methods of raising capital Ownership: listed companies are owned by many shareholders whereas unlisted companies are owned by private/public investors. Listed companies are the companies that are listed on a stock exchange where its shares are freely tradable and investors can purchase and sell shares at their discretion. Listed companies are subjected to various rules and regulations and have specific requirements to meet in terms of preparation of financial statements.

7 Unlisted Companies- Unlisted companies are companies that are not listed in stock exchanges. They are privately (Govt.) held. Since they are not listed, they do not have the opportunity to raise finance through share offer to public investors. The trading of shares are over the counter where the specifications of the deal can be made according to the requirements of the parties involved (buyers and sellers); thus, the exchange of controls that is found in stock markets is avoided.

8 Unlisted Companies- Unlisted companies exert better control over their business operations. Note: It is not mandatory for a company to be listed to be successful. Unlike in listed companies, the reporting requirements of financial results are not subjected to strict regulations, thus are flexible and less complicated.

9 Coming back to this merger- Mid-January-17, the Cabinet Committee on Economic Affairs (CCEA) had approved listing of five state-owned general insurance companies. New India Assurance: Nov 2017, Rs9,096 crore Oriental Insurance National Insurance United India Insurance General Insurance Corporation of India: Rs9,804 crore Reducing the government s stake in them from 100% to 75%. There are nearly three-dozen public sector units that are likely to be listed in the fiscal year Merger announcement: they will have now to halt the listing process.

10 Health of these companies- But, Oriental and United have reported solvency ratio of 1.11 and 1.15, respectively, falling below the regulatory mandate. Increased competition has eroded solvency margins of general insurers. Every insurer has to maintain an asset value at 150% of liabilities. Oriental India and United India had reported a loss last fiscal.

11 Merge or sink This merger will create a giant. A giant much bigger than New India Assurance Company, India s largest general insurer, going by the insurance regulator s data for FY2017. Insurance Regulatory and Development Authority of India: New India Insurance Company was the country s biggest general insurer, with gross direct premium (GDP) collection of D21,598 crore in FY2017. i.e % GDP of general and health insurers The GDP of the unlisted three PSGICs put together amounted to D41,462 crore in FY2017. Collectively: 32% of the GDP

12 Expert Opinion K Sanath Kumar, Chairman-cum-Managing Director of Kolkata-headquartered National Insurance Company, said that as a single entity, the merged company would emerge stronger and its valuations improve. The four PSGICs collectively accounted for 48% of the GDP of general and health insurers in FY2017. This will create a behemoth that will control a third of the non-life insurance market and be listed on stock exchanges to fetch better valuation.

13 Expert Opinion- This new merger will make it an entity that could be a dominant player in the Rs 1.5-lakh-crore-a-year motor, health and industrial insurance industry, which is seeing intense competition from private players. G Srinivasan, Chairman, New India Assurance: A. The merger will lead to higher retention capacity B. Subsequent listing and raising of capital will make them stronger. C. It will reduce the competitive intensity D. It will lead to better pricing and better underwriting profitability.

14 Expert Opinion- It is a very positive move. It is the government s resolve that CPSEs achieve scale, heft and strengthen their balance sheets, said Ajay Bodke, chief executive and chief portfolio manager at brokerage Prabhudas Lilladher Pvt. Ltd. We have seen consolidation happening in oil and gas, and the banking sector. It is just a continuation of that trend in the insurance sector, Bodke added. Since the financials of the three insurance companies are not so attractive to individually list them, the government is looking at merging them so as to reduce the overheads, improve their financials and solvency positions and then list them, said an analyst.

15 Expert Opinion- Pushan Mahapatra, MD & CEO, SBI General Insurance said, The merged entity and its subsequent listing could lead to improved operational efficiencies, adoption of suitable risk based pricing model while looking at a sustained growth rate, positively impacting both the insurance sector and the customer in the long term. Further, this would encourage domestic and foreign investors to positively review their investment decision in the sector. The impact of the merger and listing, on the end consumers, would be visible only 5 6 quarters post the merger as the process is long, added Mahapatra. Officials of the respective insurance companies refused to comment.

16 Possible outcome- National Insurance's solvency margin rose to 1.90 from 1.26 in the previous year. Post merger, a 15% divestment can fetch the government at least Rs 9,000 crore, an equity analyst estimates. The company may be valued at Rs60,000 crore based on its investment book, net worth and real estate, but the final valuation could be way off the estimate due to market conditions. Disinvestment target of Govt. of India for is Rs80000 crore. This merger and subsequent listing will help government meet its target.

17 What and Why Disinvestment? Disinvestment can also be defined as the action of an organisation (or government) selling or liquidating an asset or subsidiary. It is also referred to as divestment or divestiture. In most contexts, disinvestment typically refers to sale from the government, partly or fully, of a governmentowned enterprise. A company or a government organisation will typically disinvest an asset either as a strategic move for the company, or for raising resources to meet general/specific needs.

18 Bad health of PSU and Govt. Negative rate of return on capital employed. Under utilisation of capacity A drag on the government s resources turning to be more of liabilities to the government than being assets. Many undertakings traditionally established as pillars of growth had become a burden on the economy. Price policy of public sector undertakings Problems related to planning and construction of projects Problems of labour, personnel and management Lack of autonomy

19 Health check-

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21 Possible outcome of disinvestment- To reduce the financial burden on the Government To improve public finances To introduce, competition and market discipline To fund growth To encourage wider share of ownership To depoliticise non-essential services

22 Possible outcome of disinvestment- Financing the increasing fiscal deficit Financing large-scale infrastructure development For investing in the economy to encourage spending For retiring Government debt- Almost 40-45% of the Centre s revenue receipts go towards repaying public debt/interest For social programs like health and education

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