Money & Banking

HDFC Life, Max likely merger will pave way for consolidation in private life insurance space

Radhika Merwin BL Research Bureau | Updated on January 20, 2018 Published on June 17, 2016

Creating a behemoth From (left) Mohit Talwar, Managing Director, Max Financial Services, Analjit Singh, Founder and Chairman Emeritus, Max Group; Deepak Parekh, Chairman, HDFC; Rahul Khosla, President, Max Group; and Amitabh Chaudhry, MD and CEO, HDFC Life Insurance, at a press conference to announce the partnership in Mumbai on Friday PAUL NORONHA

Will result in synergies in product and distribution mix and intensify competition

Deals in the insurance space, which until now were in the nature of foreign partners increasing stakes in their joint ventures with Indian players, have taken a new turn. With the boards of Max Financial Services and HDFC Standard Life exploring a possible merger of Max Life and Max Financial Services into HDFC Life, the ball has been set rolling for consolidation in the sector. The merger of two of the top five players in the life insurance space will be a game changer for the entire space and is likely to intensify competition within other leading players. It also brings good tidings for shareholders of Max Financial Services, the holding company of Max Life.

On the top

The merger will bring together two life insurers that are currently at the top of the pecking order within the private space, across multiple parameters.

Max Life delivered a growth of 13 per cent in total business premium in 2015-16. The company now ranks fourth among private players. The company is also one of the profitable life insurance players in the country. HDFC Life ranks second among private life insurers in terms of total premium. For fiscal 2016, its total premium grew 10 per cent over the previous year.

For both insurers and investors, the long-term nature of a life insurance product is important, as most of the expenses are taken upfront and the return is generated over the life of a policy. Hence, persistency in life insurance policies, which measures the number of policies retained with an insurer across different time periods, is a critical factor.

HDFC Life and Max Life have been at the top among the private players in terms of persistency. Max Life’s persistency ratio for the 61{+s}{+t} month persistency is 43 per cent — which means by the end of the fifth year, 43 per cent policies got renewed. This is much higher than the 25 per cent in average for top private players. HDFC Life’s persistency is also a healthy 47 per cent.

The two players have also shown a consistent growth in their embedded values over the years. Embedded value is a measure used to value a life insurance business which, among other parameters, takes into account the future earnings of the company.

Max Life’s embedded value grew 17 per cent in 2015-16 to ₹5,617 crore, while HDFC Life’s grew 16 per cent to ₹10,210 crore.

In the recent past, deals in the life insurance space have happened at two to three times the embedded value of life insurance business.

The merger of these two players will also result in synergies as far as product and distribution mix goes.

Product mix

Life insurance policies are broadly categorised into traditional and ULIP policies. Diversification is important, as dependence on a single product can be risky from a regulatory perspective much like what happened to ULIPs in 2010 and NAV-guaranteed products in 2013. A merger of HDFC Life and Max Life will help widen the product portfolio and drive better margins. HDFC Life, for instance, has a higher proportion of ULIPs (56 per cent of portfolio), while Max Life has a traditional (policies) heavy portfolio (72 per cent of portfolio).

The well-balanced product mix of the combined new entity will give an edge over other players that have their product portfolio skewed in favour of either ULIPs or traditional policies. For instance, ICICI Pru has a higher proportion of ULIPs, while Reliance Life and Bajaj Allianz lean towards traditional policies. SBI Life, though, has a balanced mix of traditional policies and ULIPs.

Distribution is a critical part of the insurance industry given the push nature of the product. In the last four to five years, bancassurance-led players have gained market share at the expense of agency-led players. While for sometime to come, the bancassurance model will continue to drive market share gains, over the long run, agency channel is equally important. Insurance players that have a diversified distribution model will be better placed to drive growth.

SBI Life, ICICI Pru Life and Max Life have a more comprehensive multi-distribution model. Max Life has a strong relationship with Axis Bank, driving 58 per cent of its business in 2015-16. It also has an efficient agency channel (32 per cent), ranking among the top within private players in terms of agent productivity. The channel mix for HDFC Life on the other hand is led by bancassurance (75 per cent).

The combined assets under management for the merged entity will be around ₹1,10,000 crore, a tad higher than ICICI Prudential Life’s ₹1,03,939 crore as of March 2016. Currently, Max Financial Services, which has a 68 per cent stake in Max Life, has a market cap of about ₹12,600 crore. HDFC Life can be valued based on its 9 per cent stake sale to its foreign partner last year, which works out to about ₹19,000 crore. Hence, the merger could lead to creation of an entity that has a combined market cap of over ₹35,000 crore.

Given that the per share value of Max Financial Services, Max Life and HDFC Life is ₹472, ₹96 and ₹95 respectively, shareholders in Max Financial Services and Max Life are likely to get about 5 and 1 share respectively, in HDFC Life when the deal happens.

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Published on June 17, 2016
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