HDFC Ergo buys L&T Insurance for Rs 551 crore

First such consolidation in India's general insurance sector

HDFC Ergo General Insurance, the insurance arm of mortgage lender HDFC, has acquired L&T General Insurance for Rs 551 crore, the first such consolidation in India’s crowded general insurance sector, which currently has 29 players.

L&T General Insurance had reported gross earned premium (GEP) of Rs 483 crore for the last financial year, which puts the deal value at 1.14 times of the GEP.

“Considering the importance of scale in the insurance business, consolidation within the insurance industry is inevitable,” said Deepak Parekh, chairman of HDFC and HDFC Ergo General Insurance. “The combined size and expertise will result in improved cost efficiencies in the merged entity and benefit policyholders and other stakeholders,” he said.

HDFC Ergo expects significant cost synergies arising out of business, technology optimisation and rationalisation of offices.

L&T General Insurance is a wholly-owned subsidiary of infrastructure and engineering major Larsen & Toubro. The move marks an exit from the insurance business for the infrastructure behemoth. The company received licence to operate general insurance in 2010 and it has not been able to break even since then. It reported Rs 102 crore loss for 2015-16.

L&T had invested Rs 705 crore by way of share capital in L&T General Insurance, and the sale means it is exiting the business at a loss of Rs 154 crore on its investment.

The general insurance firm had a net worth of Rs 142 crore at the end of the last financial year. Once the deal goes through, this would be the first-ever merger of two insurance companies in India. “The share sale is part of the company’s strategy of exiting from its non-core activity,” L&T stated.

The company is also believed to be in discussion to dilute its holding in its mutual fund business L&T Mutual Fund.

L&T General Insurance is among the few companies in the sector without a foreign partner.

The Insurance Laws (Amendment) Act of 2015 has allowed foreign direct investment up to 49 per cent in insurance companies. HDFC Ergo is a joint venture between HDFC and Germany-based Ergo Insurance Group. Mumbai-based Arpwood Capital was the banker to HDFC Ergo for the deal.

“A large number of general insurance players are operating at sub-optimal scale, which is affecting their potential for profitability,” said Raj Kataria, co-founder and director at Arpwood Capital. “This is the beginning of a consolidation drive in the sector.”

This is not the first attempt of L&T to sell its general insurance business. Earlier, it had entered into an agreement with Kishore Biyani’s Future Group along with Italy-based Generali Group to sell 49 per cent stake in March 2013. However, the deal was called off a year later due to ‘inordinate delay’ in finalising the transaction.

HDFC Ergo, a 51:49 joint venture between housing finance major HDFC and global insurance major Ergo International Germany, is the fourth largest private sector general insurer in India. During the financial year ended March 2016, the company wrote gross premiums of Rs 3,467 crore and made a profit after tax of Rs 151 crore. HDFC Ergo is in expansion mode and it would absorb all employees of L&T General Insurance, said Keki Mistry, vice-chairman, HDFC.