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HDFC ERGO to buy L&T General Insurance for $82 mn

07 June, 2016

Business conglomerate Larsen & Toubro (L&T) Ltd has inked an agreement to sell its general insurance arm to HDFC ERGO for Rs 551 crore ($82 million), a move that would mark its exit from insurance as a business, it said on Friday.

HDFC ERGO General Insurance Company Ltd, a joint venture between India’s largest mortgage lender Housing Development Finance Corporation Ltd (HDFC) and German insurer ERGO International, will subsequently merge L&T’s general and health insurance firm.

L&T General Insurance Company Ltd earned gross premium of Rs 483 crore for the year ended March 31, 201, up 40% over the previous financial year and had a net worth of Rs 142 crore as of March 31, 2016.

The firm that had started operations in October 2010 has 28 offices and over 800 employees. It is one of the two dozen private general insurers in the country.

L&T had previously toyed with different options for its insurance business. Three years ago, Kishore Biyani-promoted Future Group was looking to divest majority stake in Future Generali India Insurance Ltd through a merger with L&T General Insurance besides part stake sale to its other partners.

As per the proposal, Future Generali was to merge with L&T General Insurance with Italian firm Generali maintaining its 26% holding, L&T picking 51% per cent and Future Group owning the rest in the merged entity.

However, this deal was scrapped due to delays in the transaction and obtaining approvals.

L&T that runs much of its financial services under a separate listed arm, held 100% stake in the loss-making general insurer.

Deepak Parekh, chairman of HDFC and HDFC ERGO General Insurance, said: “Considering the importance of scale in the insurance business, consolidation within the insurance industry is inevitable. This transaction marks the beginning of this consolidation phase.”

He added that the combined size and expertise will result in improved cost efficiencies in the merged entity and benefit policy holders and other stakeholders.

Arpwood Capital was the exclusive financial advisor to HDFC ERGO in this deal.

This deal comes right after HDFC completed a share transaction where its foreign partner hiked its holding. ERGO, which in turn is part of Munich RE, bought 22.9% additional stake in its Indian general insurance JV for Rs 1,122 crore. The transaction, which was announced last December, valued HDFC ERGO at Rs 4,900 crore.

ERGO’s stake in HDFC ERGO General Insurance has risen to 48.74% while HDFC’s stake has shrunk to 50.73%.

HDFC ERGO closed FY2015-16 with gross premium income of Rs 3,467 crore with net profit of Rs 151 crore. It operates through 108 offices and has 2007 employees. It is the fourth-largest private general insurer in the country.

Deal counter ringing in insurance

The insurance sector has witnessed a slew of transactions in the last one year. Much of this was triggered by the liberalisation in the sector with the government raising the foreign investment limit from 26% to 49%.

Early this year, South African financial services group Sanlam said it is acquiring additional stake in Chennai-based Shriram group’s life and non-life insurance businesses, exercising its contractual option. Sanlam already owns 26% indirect stake in Shriram Life Insurance Company Ltd (SLIC) and Shriram General Insurance Company Ltd (SGIC) through its stake in Shriram Capital.

Fairfax Financial Holdings Ltd, the Canadian investment firm founded by India-born Prem Watsa, agreed to buy an additional stake in ICICI Lombard General Insurance Company Ltd from ICICI Bank Ltd to expand its presence in the country. Fairfax now owns 35% stake after purchasing an additional 9% in India’s largest private-sector general insurer.

Japan’s Nippon increased its stake in Reliance Life Insurance while Australian insurer QBE Group bought more in Raheja QBE General Insurance Company Ltd.

UK insurer Aviva Plc also raised its stake in Aviva India, its local JV with Dabur Group, to 49%.

Japan’s Tokyo Marine raised its holding in Edelweiss Tokio Life Insurance from 26% to 49% and Axa hiked its stake in Bharti Axa.

Also, Aegon raised its stake in Aegon Religare Life Insurance to 49% as part of a larger deal where Religare sold its stake in the firm to media house and existing investor Bennett, Coleman & Co. Ltd.

Australia’s Insurance Australia Group Ltd has also said it would increase its stake in a general insurance joint venture with India’s largest lender, State Bank of India, to 49%.

The general insurance business in India is dominated by state-owned companies. In the private sector, ICICI Lombard is followed by Bajaj Allianz, IFFCO-Tokio, Reliance General and HDFC ERGO.

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HDFC ERGO to buy L&T General Insurance for $82 mn

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