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Business model will force more M&A in life insurance sector

Cheni, June 19: The proposed merger of Max Life Insurance/Max Fincial Services with HDFC Standard Life Insurance may pave the way for more such deals in the future due to the current business model of Indian life insurers, say senior industry officials. They also said over the next couple of months, officials of Max group and HDFC Standard Life will be having tough negotiations over aspects like valuation of liabilities, embedded value – the present value of future profits from their existing policies, enterprise value and other aspects and the foreign and domestic shareholders of the two insurers have to be satisfied.

Explaining the proposed deal to the media on Thursday, Aljit Singh, Founder of the Max Group said: “First Max Life Insurance will merge with Max Fincial Services – a listed entity. Then Max Fincial Services will be merged with HDFC Standard Life.” The emerging entity will become a listed company.

“It seems the two companies have followed the principle – united we stand, divided we fall. As a combined entity the two hopes have a better valuation than as individual companies,” V. Manickam, Secretary, Life Insurance Council, said.

“The announcement by HDFC Standard Life and Max Life came as a pleasant surprise. Normally a strong company will acquire a smaller one whereas here two big players are coming together,” Ashvin Parekh, Maging Partner at Ashvin Parekh Advisory Services told IANS, adding the two are an apt fit for each other and the merger would succeed if the integration challenges are properly maged.

Earlier this month, Housing Development Fince Corporation Ltd (HDFC) had announced that its general insurance company HDFC ERGO General Insurance’s board had approved the acquisition of L&T General Insurance Company for Rs. 551 crore.

According to Parekh, the market condition is apt for consolidation not only for life insurers but also for non-life insurers. “More mergers and acquisitions are to be expected. For more than 10 years companies individually have not been able to gain significant market share. The private companies are not able to shake the strong position of (government-owned) Life Insurance Corporation of India (LIC),” he said.

“There may be more reverse mergers happening in the sector so that life insurers are quickly listed,” Manickam said.

Around 10 private life insurers are making profits but not on a consistent basis, an industry official said. “The regulatory changes between 2008 and now have forced the merger and more such mergers may happen. Either one has to build scale or be a niche player with a targeted segment like the Shriram Life. The times are difficult for middle-level players,” Rajesh Dalmia, Partner, Ernst & Young said. “The business model of Indian insurance industry could be termed as a ‘bankruptcy model’ – expense overshooting the income which in turn needs regular capital infusion,” said a senior official of a private life insurer who did want to be identified. Experienced industry officials have been telling IANS that life insurance is a business of distribution and those who master than at lower cost would succeed. (IANS)

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Ankur Kalita