HDFC Chairman Deepak Parekh and Max Group Chairman Analjit Singh announced a deal merging their life insurance businesses to create what will eventually be India's largest listed life insurance company with an estimated market value of Rs.67,000 crore once the all-share transaction is completed in about 12-15 months. The Max promoter group will be paid a non-compete fee of Rs.850 crore over four years.
The boards of HDFC Life, Max Life and Max Financial Services approved the scheme of arrangement for merging the insurance businesses on Monday.Arpwood Capital was the lead financial adviser to the deal.
“As per the agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69% and 31%, respectively,“ HDFC Life said in a release on Monday . The merged entity will retain the HDFC Life name. Once regulatory and other approvals come through, the companies will engage in a series of transactions before the deal is completed: Max Life will be absorbed by listed parent Max Financial Services. Max Life shareholders will get one share of Max Financial for approximately five of theirs. The life insurance business will be separated from Max Financial and absorbed by HDFC Life, becoming the merged entity. Shareholders of Max Financial will get 2.33 shares of HDFC Life for each of theirs. Max Financial, holding the residual business, will be absorbed by Max India.
HDFC Life -the new entity -will become a listed company with HDFC Ltd and Standard Life (Mauritius Holdings) 2006 Ltd as its promoters. In the merged entity, HDFC will own a 42.5% stake, Standard Life 24%, the Max Group 6.6%, Mitsui Sumitomo 7.8% and Axis Bank 1.2%. Mortgage company HDFC and Standard Life currently own 62% and 35%, respectively, of HDFC Life.Max Financial and Mitsui Sumitomo currently hold 68% and 26%, respectively, of Max Life.
“We view this merger as long-term value creation for shareholders of HDFC Life,“ Parekh said.
Max Life and HDFC Life have complementary strengths, Singh said. “We are the bride in this marriage,“ he said. “We see structural changes in the industry, distribution and bancassurance. We see shorter-horizon products being more palatable. We see margins will come under pressure... The future of the merged entity will bring much more value through HDFC.“
HDFC Life CEO Amitabh Chaudhry will head the merged entity.
The Max brand can be used for seven years. “HDFC Life has also entered into a trademark licence agreement to use the Max brand as part of life products that will transition from Max Life for seven years post completion of the proposed transaction,“ HDFC Life said.
The HDFC-Max deal is expected to spark a wave of consolidation. Insurance companies with well-regarded products and innovative approaches have not been able to sell policies to a wider audience due to lack of distribution. Bancassurance is seen as an efficient and important channel of low-cost distribution for life insurance. Most of these companies have been lagging with less than half a percentage point market share even after eight years of operation.
This is the second takeover for the mortgage company this year after HDFC Ergo, its general insurance arm, bought L&T General Insurance for Rs 551 crore, becoming the third-largest private sector insurer in the space.
The merged HDFC Life will become the second-biggest insurer in the country with a 10.8% market share, behind state owned Life Insurance Corp of India (LIC), which commands a 70% share. The merged entity will have an embedded value of over Rs 15,000 crore. The combined entity will have assets under management of Rs 1.10 lakh crore.
HDFC Life has 15,108 employees while Max Life has a workforce of 9,000. HDFC Life operates through 398 branches and Max Life through 210. HDFC Life generates 76% of its premium income through HDFC Bank branches. Max Life has a corporate agency tie-up with Axis Bank, which generates 67% of its policy premium income.
Chaudhry said HDFC Life will seek to keep all staff.
“We are trying to create a growth franchise and retain every employee and give them scope to grow,“ he said. “There will be overlapping but we want to retain as many as possible. There is an integration committee to look at which people will do what job.“
Apart from shareholders, the merger will need the approval of the Insurance Regulatory and Development Authority of India, the Securities and Exchange Board of India, the Competition Commission of India and courts.
The Indian insurance market has been through several cycles affecting the scale of growth. The life insurance industry grew at a compounded annual growth rate of 35% between 2000 and 2008, slowing to 6-8% in the years since then.
There are currently 24 life insurance companies in India, most of them with foreign partners. Many overseas investors have raised their equity to 49% after the foreign direct investment limit was hiked from 26%.
The boards of HDFC Life, Max Life and Max Financial Services approved the scheme of arrangement for merging the insurance businesses on Monday.Arpwood Capital was the lead financial adviser to the deal.
“As per the agreed valuation and exchange ratio, the relative valuation of HDFC Life and Max Life would be 69% and 31%, respectively,“ HDFC Life said in a release on Monday . The merged entity will retain the HDFC Life name. Once regulatory and other approvals come through, the companies will engage in a series of transactions before the deal is completed: Max Life will be absorbed by listed parent Max Financial Services. Max Life shareholders will get one share of Max Financial for approximately five of theirs. The life insurance business will be separated from Max Financial and absorbed by HDFC Life, becoming the merged entity. Shareholders of Max Financial will get 2.33 shares of HDFC Life for each of theirs. Max Financial, holding the residual business, will be absorbed by Max India.
HDFC Life -the new entity -will become a listed company with HDFC Ltd and Standard Life (Mauritius Holdings) 2006 Ltd as its promoters. In the merged entity, HDFC will own a 42.5% stake, Standard Life 24%, the Max Group 6.6%, Mitsui Sumitomo 7.8% and Axis Bank 1.2%. Mortgage company HDFC and Standard Life currently own 62% and 35%, respectively, of HDFC Life.Max Financial and Mitsui Sumitomo currently hold 68% and 26%, respectively, of Max Life.
“We view this merger as long-term value creation for shareholders of HDFC Life,“ Parekh said.
Max Life and HDFC Life have complementary strengths, Singh said. “We are the bride in this marriage,“ he said. “We see structural changes in the industry, distribution and bancassurance. We see shorter-horizon products being more palatable. We see margins will come under pressure... The future of the merged entity will bring much more value through HDFC.“
HDFC Life CEO Amitabh Chaudhry will head the merged entity.
The Max brand can be used for seven years. “HDFC Life has also entered into a trademark licence agreement to use the Max brand as part of life products that will transition from Max Life for seven years post completion of the proposed transaction,“ HDFC Life said.
The HDFC-Max deal is expected to spark a wave of consolidation. Insurance companies with well-regarded products and innovative approaches have not been able to sell policies to a wider audience due to lack of distribution. Bancassurance is seen as an efficient and important channel of low-cost distribution for life insurance. Most of these companies have been lagging with less than half a percentage point market share even after eight years of operation.
This is the second takeover for the mortgage company this year after HDFC Ergo, its general insurance arm, bought L&T General Insurance for Rs 551 crore, becoming the third-largest private sector insurer in the space.
The merged HDFC Life will become the second-biggest insurer in the country with a 10.8% market share, behind state owned Life Insurance Corp of India (LIC), which commands a 70% share. The merged entity will have an embedded value of over Rs 15,000 crore. The combined entity will have assets under management of Rs 1.10 lakh crore.
HDFC Life has 15,108 employees while Max Life has a workforce of 9,000. HDFC Life operates through 398 branches and Max Life through 210. HDFC Life generates 76% of its premium income through HDFC Bank branches. Max Life has a corporate agency tie-up with Axis Bank, which generates 67% of its policy premium income.
Chaudhry said HDFC Life will seek to keep all staff.
“We are trying to create a growth franchise and retain every employee and give them scope to grow,“ he said. “There will be overlapping but we want to retain as many as possible. There is an integration committee to look at which people will do what job.“
Apart from shareholders, the merger will need the approval of the Insurance Regulatory and Development Authority of India, the Securities and Exchange Board of India, the Competition Commission of India and courts.
The Indian insurance market has been through several cycles affecting the scale of growth. The life insurance industry grew at a compounded annual growth rate of 35% between 2000 and 2008, slowing to 6-8% in the years since then.
There are currently 24 life insurance companies in India, most of them with foreign partners. Many overseas investors have raised their equity to 49% after the foreign direct investment limit was hiked from 26%.
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