MUMBAI: HDFC Ergo , a joint venture between home loan major HDFC and German insurer Ergo International , has agreed to buy L&T General Insurance for Rs 551 crore in the first buyout in the country’s general insurance industry.
“This transaction marks the beginning of this consolidation phase,” Deepak Parekh , chairman of HDFC and HDFC Ergo General Insurance, said on Friday.
“The combined size and expertise will result in improved cost efficiencies in the merged entity and benefit policy holders and other stakeholders,” he said.
The deal is valued at 1.1times the gross premium, which is 3.9 times the book value of L&T General Insurance Company.
HDFC Ergo will now apply to sector regulator Irda and fair trade authority Competition Commission of India (CCI) for getting regulatory approvals to acquire 100% share of L&T General Insurance.
The acquisition will help HDFC Ergo become the third-largest private general insurer, behind ICICI Lombard and Bajaj Allianz General Insurance, overtaking Iffco Tokio.
The industry is dominated by state-owned insurers New India Assurance, United India, National India and Oriental Insurance Company.
Experts said many insurers are struggling to make money. “In insurance, we see far many players and they are not making money,” said Abizer Diwaji national head financial services EY.
“L&T was a solo model and were not able to grow the franchise so they had to sell,” he said. L&T General Insurance, which started operations in 2010-11 and has about 28 offices and 800 employees, reported Rs 102 crore loss in the last fiscal. It is the 14th largest player in the sector with 0.5% market share.
It earned gross written premium of Rs 483 crore during 2015-16, focusing mainly on private motor and retail health insurance. The company had a share capital of Rs 705 crore as on March 31.
L&T General Insurance, owned by India’s largest engineering company L&T, has tried in the past to merge with smaller rivals to expand its network and attain scale and size.
In 2013, L&T attempted to merge its general insurance subsidiary with Future Generali Insurance but called off the plan due to differences over valuation.
HDFC Ergo, in which HDFC owns 51% and reinsurance giant Munich Re’s Ergo the remaining 49%, operates out of 108 branches spread across 91 cities in the country. The company had gross written premium of Rs 3,467 crore in the year ended March 2016 across motor, health, property and crops insurance. It reported profit of Rs 151 crore during the year.
Ritesh Kumar, managing director at HDFC Ergo, said, “We expect cost synergies arising out of business, technology optimisation and rationalisation of offices.”
HDFC Ergo will now sell its products through branches of L&T Finance. At present, HDFC sells one-third policies through HDFC Bank branches. HDFC Ergo will integrate L&T branches. L&T General Insurance has 2,000 retail agents and sells policies through L&T Finance branches.
The insurance sector is in a consolidation phase with foreign insurers stepping up their share in the Indian joint ventures after the government last year increased foreign direct investment limit in the sector to 49% from 26%.