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HDFC Standard, Max Life approve insurance merger terms

Merged entity HDFC Life will be largest private life insurer in India

Salil Panchal
Published: Aug 8, 2016 06:17:57 PM IST
Updated: Aug 8, 2016 10:45:35 PM IST
HDFC Standard, Max Life approve insurance merger terms
Image: Amit Verma
Analjit Singh, founder and Chairman Emeritus of Max Group

The boards of HDFC Standard Life Insurance, Max Life Insurance and Max Financial Services and Max India on Monday approved the terms of agreement for the merger of their businesses, the completion of which will create the largest private sector life insurance company in India.

As part of a complex three-part transaction: Max Life will merge into its parent Max Financial Services (a listed company); in the second step the combined entity will demerge the insurance business and merge it into HDFC Life; in the third step the non-insurance business of Max Financial Services will be merged with group firm Max India (also listed).

The relative valuation will be 69 percent for HDFC Life and 31 percent for Max Life.

HDFC Life, the merged entity, will then list at the stock markets, with HDFC Ltd and Standard Life (Mauritius Holdings) as promoters. The proposed transaction is likely to be completed in the next 12 months.

This combined entity of two of the biggest players in the insurance industry – HDFC Life and Max Group -- will have a 10.8 percent market share. This merged entity will be the largest private life insurance company, second only to the state-owned Life Insurance Corporation (LIC) of India.

After the merger, HDFC Life will pay non-compete fee of Rs 850 crore to the promoter group of Max Financial Services. This includes an upfront payment of Rs 501 crore, while the balance Rs 349 crore will be paid in three equal annual installments.

The number of employees in the merged entity will rise to 23,620, total branches to 601 serving over seven million individuals, through 134,000 agents.  The assets under management will be Rs 1,10,00 crore for the new entity.

“The consolidation in the private sector will create large insurance companies, which is inevitable,” Deepak Parekh, chairman of HDFC said.The top 4 private insurers today constitute 65 percent of the private insurance market, while the remaining 19 private insurers have a combined market share of 35 percent.

Analjit Singh, founder and Chairman Emeritus of Max Group said: “We see structural changes in the life insurance companies [through bancassurance distribution]; we see shorter horizon products being more palatable with future markets and see that margins will come under pressure, if expense management is not brought to the fore.”

“This merger will help optimize costs and help boost health of the merged entity.” Singh said, who joked that “in this marriage [merger], they were the bride”.

To ensure that policy holders are safeguarded, existing policies will continue on an ‘as is’ basis with same terms until their tenures, officials said.

India remains the fastest growing major economy with a GDP growth of 7.6 percent for FY16 but insurance penetration is very low. Life insurance penetration in India stands at only 2.6 percent of GDP.  With 66 percent of India’s population being below 35 years of age, the favourable demographic provides great potential for the life insurance industry. India’s insurable population is expected to be 750 million by 2020 and over the next 5 years, the total life insurance premium market is estimated to touch US$ 100 billion.

HDFC Life was the first private life insurer to launch operations in FY 2001 and has since grown steadily over the years and crossed the half million customer mark in FY 2007. The total premium income crossed Rs 100 billion in FY12 when the company declared a profit for the first time. In FY16, total premium income crossed Rs 160 billion and assets under management were over Rs 700 billion.

For FY16, the total insurance premium growth on a 5-year CAGR basis stood at 6 percent. However, FY16 was a watershed year as the combined market share of private life insurers in the individual segment stood at 52 percent, which for the first time, was higher than the share of LIC.

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