HDFC ERGO General Insurance, the non-life insurance arm of mortgage lender Housing Development and Finance Corporation (HDFC), has decided to acquire engineering major L&T’s general insurance unit in an all-cash deal valued at Rs. 551 crore.
Market shareThe deal will help HDFC ERGO – the fourth largest private sector general insurer – to increase its market share from 3.7 per cent to 4.2 per cent. The acquisition is the first such in the highly competitive domestic market.
“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,” said Deepak Parekh, Chairman of HDFC Ltd and HDFC ERGO General Insurance.
The deal was structured by Arpwood Capital Pvt Ltd., HDFC ERGO said in a statement. The deal is subject to approval from regulatory authorities.
“The acquisition will help HDFC ERGO to further strengthen its presence in the market. The combined size and expertise will result in improved cost efficiencies in the merged entity and benefit policyholders and other stakeholders,” Mr Parekh added.
Cost synergiesHDFC ERGO expects significant cost synergies arising out of business, technology optimisation and rationalization of offices.
“This company (L&T General) does about Rs 500 crore of premium which is 15 per cent of our top line. They do good quality of business and have strong distribution network. We are strong on bancassurance while they strong on other channels,” Ritesh Kumar, managing director and chief executive officer, HDFC ERGO said.
During the financial year ended March 31, 2016, the HDFC ERGO wrote gross premiums of Rs.3,467 crore and made a profit after tax of Rs.151 crore. It has 108 offices with employees strength of 2007.
L&T General Insurance has not been able to break even since its inception in 2010 and reported a Rs.102 crore loss in 2015-16.
HDFC ERGO, started as a 76:24 joint venture of HDFC and Germany’s ERGO International –is a part of Munich Re group, also said the transaction to increase ERGO’s stake to 49 per cent has been completed. The move comes after the government increased foreign direct investment cap in the insurance sector to 49 per cent from 26 per cent.
