Consolidation Likely Now in Insurance Sector

A likely era of consolidation begins in the insurancesector with Friday's board approval for merger of Max Financial Services and Max Life with HDFC Life. The second such deal this month; earlier, it was announced that L&T General would merge into HDFC ERGO General Insurance (a Rs 551 crore deal). The sector has 24 life insurance and 29 general insurance companies, including five standalone health insurers. Till now, not a single merger or acquisition has been completed. Some talks were conducted in the past for possible deals but weren't fruitful.

For instance, in March 2013, L&T, Kishore Biyani'sFuture Group and Generali Group had signed a non-binding term sheet for the merger of L&T General Insurance and Future Generali India Insurance. This was a first-of-a-kind proposed. L&T was to hold 51 per cent stake, Generali 26 per cent and Future 23 per cent. However, in April 2014, L&T General and Future Generali India said they were calling off the venture, due to 'inordinate delay' in finalising a transaction. 

To reach the next phase of growth, apart from mergers and acquisitions (M&A), listing on the stock exchanges would be the next logical step. Sector officials said the regulator feels those completing 10 years should do so. However, only HDFC Life and ICICI Prudential Life have announced an intent to list.

Joydeep K Roy, partner at PwC India, said while the Indian insurance market has been through several cycles in a relatively short time, the expenses are still to reduce to international levels and scale is not increasing exponentially any more. "Logically, one will see consolidation, which can come out of desire to have larger scale and ability to address different clientele, and better synergy in expenses, leading to higher value for customer and shareholder," he added.

In April, Housing Development Finance Corporation (HDFC) said it would sell up to 10 per cent stake in HDFC Standard Life, through an Offer for Sale. The latter is a joint venture (JV) between HDFC and Standard Life Plc, a provider of financial services in the UK. Standard Life (Mauritius Holdings) Ltd holds 35 per cent stake in the JV. Earlier, HDFC had sold a nine per cent stake in HDFC Life to Standard Life, for Rs 1,705 crore, valuing the company at Rs 18,951 crore.On the proposed merger of the Max entities with HDFC Life, Roy said this could open the way for more. The first private life insurance company to be granted a licence, HDFC Life was launched in 2000. It was also the first insurer to clearly state it was planning an Initial Public Offer (IPO) of equity, though the company was waiting for market conditions to improve and also for foreign direct investment (FDI) norms to be eased. This was enabled in February 2015, when the law was changed to allowed FDI up to 49 per cent, from 26 per cent.  

Ashvin Parekh, managing partner of Ashvin Parekh Advisory Services, said the time was ripe for much developments, especially for cash-rich promoters. Sector experts expect consolidation, both between large entities and between large and smaller ones. Especially at entities with heavy backing from public sector banks, as the latter are renewing a focus on their core areas and reducing it on others.

There have been exits. In January 2013, Exide Industries said it would acquire 50 per cent of its remaining stake in ING Vysya Life Insurance for Rs 550 crore, after ING decided to exit the venture. In July 2013, realty major DLF decided to sell its 74 per cent stake in a life insurance joint venture, DLF Pramerica, to Dewan Housing Finance; the company was re-named DHFL Pramerica Life.Even big names in the financial sector have made exits. In September 2014, Religare Enterprises said it was planning to exit from its joint venture, AEGON Religare Life Insurance. Religares sold its entire shareholding in the company, 44 per cent, to Bennett, Coleman and Company, holding company of the Times Group.

A senior insurance consultant said there could be more such. "Smaller insurers where promoters are cash strapped or those with no bank partner will be likely candidates," he said. HDFC Life is the third largest private life insurance company with respect to new premiums. In FY16, it collected premiums of Rs 6,488 crore, up 18 per cent. Max Life collected premiums of Rs 2,882 crore and is also among the top five private ones.