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HDFC-Max deal: Why LIC need not worry just yet

09 August, 2016

On Monday, the boards of Analjit Singh-promoted Max Financial Services Ltd and mortgage lender Housing Development Finance Corporation froze a deal that would create the largest private sector insurance company in the country. 

The new entity will be the largest private-sector insurer, but it should not worry the state-run Life Insurance Corporation (LIC). At least not yet. 

This is because not only does LIC remain the most dominant player, by a mile, it also continues to outgrow most of its private competitors. While the HDFC-Max combined entity will manage assets of Rs 11 trillion, it will still be some distance away from LIC, which manages assets worth more than Rs 21 trillion.

Moreover, LIC has maintained its market share around 70% between 2014-15 and 2015-16 and its first-year premium income has risen faster than most private-sector insurers.

LIC, however, has problems of its own.

The insurer has to contend with a problem of burgeoning non-performing assets (NPAs) on its books. Although, at Rs 65,000 crore, NPAs on the insurer’s books are just about 3% of its assets, it was recently reported that LIC was the biggest lender figuring on a list of willful defaulters and defaulting borrowers prepared by the Reserve Bank of India.

Also, on several occasions in the past, LIC has virtually been bullied into bailing the government out by mopping up huge chunks of shares of public-sector companies in a bid to meet the government’s fiscal deficit targets. Not all these market operations have been profitable for the insurer, and but for it being a government-owned entity, commercial logic would demand it not get into several of them. 

Also, LIC chief SK Roy had resigned in June two years before his scheduled departure.

India has as many as 24 life insurance companies including LIC. If one considers the first-year premiums paid by insurers, LIC’s domination in the life insurance market becomes apparent, both in terms of market share and growth.

LIC’s first-year premium income grew 24.7% in 2015-16, according to data from the Hyderabad-based Insurance Regulatory and Development Authority. Although Kotak Mahindra Old Mutual Life and SBI Life did grow faster than LIC, they command only 1.5% and 5.1% of the market, respectively.

Incidentally, among the top 10 non-LIC insurers, at least two—Reliance Life and IndiaFirst Life—saw their market share drop, indicating that the government-owned insurer continues to hold its own even when others are facing headwinds.

The fight really is for the non-LIC market, which could consolidate further. Data show that the entity borne out of the HDFC Standard Life-Max Life would have a market share of 6.7%, surpassing SBI Life’s 5.1%. While this is not enough to bother LIC’s pole position, it does signal that a round of consolidation in the life insurance sector might be imminent. 

Already, Bajaj Finserv is said to be in talks to buy out its German partner Allianz SE’s stake in their two insurance joint ventures in a deal estimated at Rs 10,000 crore, Mint reported in June.

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HDFC-Max deal: Why LIC need not worry just yet

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