HDFC Life IPO to hit market by year-end

Private sector life insurer HDFC Life plans to raise funds through an initial public offering (IPO) of 10 per cent of the current capital base. The insurer is planning the IPO by the year-end.

HDFC Life is a joint venture between Housing Development Finance Corporation (HDFC) Ltd and UK-based insurer, Standard Life. While HDFC holds a stake of 74 per cent, the British insurer holds the remaining 26 per cent – the maximum permitted under Indian laws.

While most private insurers plan to wait for a rise in the foreign direct investment (FDI) limit in insurance — from 26 per cent to 49 per cent — HDFC Life is prepared for a domestic issue, even if the FDI limit is not raised. “Even if the FDI limit is not raised to 49 per cent, HDFC Life will go ahead with a domestic issue, where each shareholder will dilute on a parity basis,” said a senior HDFC Life official. This means in case of a domestic issue, the stake of the foreign partner — Standard Life — could decline to below 26 per cent.

Currently, the Insurance Bill, which seeks to increase the FDI limit in the insurance sector to 49 per cent from the current 26 per cent, is pending in Parliament.

“Whenever we decide to go for an IPO, the dilution would happen on a parity basis. Both the shareholders are committed to list the company next year,” the official told Business Standard.

“There are a lot of things to be considered while going for a public offering. There is a need to access what should the business model and acceptable margins be in the future. Then, the valuation of the company has to be considered. The combination of all these would decide the timing and the size of the issue,” he said.

The insurer would also take into account the fund requirements for the first three years of listing. According to current guidelines, public shareholding in a company must be at least 25 per cent within the first three years of its listing.

The official did not comment on the valuation. However, HDFC Standard Life was one of the first private life insurers to disclose the embedded value of its business. It stood at Rs 3,380 crore as of March 31, 2010. The embedded value of a company is arrived at after taking into account the total net worth of the company and the future profits from policies that have already been written, apart from the lapse of policies, mortality charges and other expenses.

During 2010-11, HDFC Life collected Rs 4,065 crore by writing new policies, a rise of 12.26 per cent compared to the previous year. However, according to analysts, based on its current performance, the valuation of HFDC Life is estimated at Rs 10,000 crore. “Taking the Reliance Life-Nippon Life deal as a benchmark, the valuation of HDFC Life should be in the region of Rs 8,000-10,000 crore,” said an analyst with a domestic brokerage house. In March, Japanese life insurance major, Nippon Life Insurance, had signed an agreement to acquire a 26 per cent stake in Reliance Life for Rs 3,062 crore.

Other private life insurers like ICICI Prudential, SBI Life and Reliance Life have also expressed interest to tap the capital market.

The Insurance Regulatory & Development Authority is expected to come out with the IPO guidelines over the next two months.