Scouting for resources to make up for any potential shortfall in tax revenues, the government is exploring the feasibility of selling its stake in three general insurers —National, Oriental and United — after their proposed merger with New India Assurance.
“The department of investment and public asset management (DIPAM) is preparing a proposal which will be finalised after detailed discussions with the department of financial services (DFS) and other key stakeholders. Some other options are also being looked at,” a senior government official told FE.
If finally approved, the deal will reflect the government’s increasing reliance on state-run companies to buy out its stake in other central public-sector enterprises to meet disinvestment targets, as private investors have kept away. ONGC, for instance, had bought a 51.11% stake in HPCL in FY18 for Rs 36,915 crore and PFC picked up 52.63% in REC for Rs 14,500 crore last fiscal.
Another option being considered is to merge all the four companies, instead of the proposed three, to create an LIC-type mega insurer in the general insurance space and avoid undercutting each other. Once the merger is complete, the government will go for a dilution of its stake in the broader entity.
“There are some issues, though. If the first option is selected, the government has to evaluate the ability of New India to acquire its stake in three others. In the second option, there are apprehensions that it could hurt New India, which is the strongest of them and is doing well at the moment,” said a senior official with one of these insurers. “Also, merging the four insurers and then going for a stake dilution will be a long-drawn process and may not fetch disinvestment revenue to the government in FY20.”
The government’s initial plan, as announced in the FY19 Budget, was to merge National, Oriental and United and list the broader entity.
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The government’s disinvestment revenue touched Rs 85,045 crore in FY19, against the targeted Rs 80,000 crore, according to the Controller General of Accounts data. For the current fiscal, the interim Budget had raised the target to Rs 90,000 crore. Since selling off Air India is proving to be a Herculean task, the government has to scout for some other big-ticket deals to meet or even exceed the targets and boost non-tax revenue, given that tax-revenue projections in recent years have missed the targets. Already, a big shortfall in FY19 mop-up has raised the required rate of growth to achieve the centre’s gross tax target for FY20 to as high as 22.7%, from the estimated 13.5%. The Interim Budget had pegged gross tax revenue for FY20 at Rs 25.52 lakh crore.
New India Assurance reported a 118% year-on-year jump in net profit in FY18 to Rs 2,201 crore. While United India recorded a profit of Rs 1,003 crore in FY18 from a loss of Rs 1,913 crore in the previous fiscal, Oriental witnessed a profit of Rs 1,510 crore in FY18, after a loss of Rs 1,691 crore in FY17. However, National Insurance saw huge losses of Rs 2,171 crore in FY18.
An increase in underwriting losses and higher claims have eroded the profitability of these insurers in recent years, impacting their solvency ratio. The DFS has sought a capital allocation of Rs 4,000 crore for infusion into these three insurance firms to shore up their solvency, as two of them (barring Oriental Insurance) had been struggling to maintain the solvency ratio requirement of 1.5. New India’s solvency ratio, however, stood at a healthy 2.58%.
While Oriental Insurance’s solvency ratio stood at 1.66 as of March 2018, United India had a solvency margin of 1.54 and National Insurance’s was 1.55. These three insurance companies together accounted for 200 insurance products and a market share of around 35% as of March 2017. Their combined net worth was to the tune of Rs 9,243 crore and employee strength of around 44,000 across 6,000 offices.
