HDFC Life-Max Life deal a win-win

Shareholders of both companies will gain from synergies and being part of a larger entity

Mergers and acquisitions are back in the insurance business. Exactly a fortnight earlier (June 3), HDFC’s general insurance arm, HDFC Ergo, took over L&T’s general insurance business. Now its life insurance business HDFC Standard Life Insurance (HDFC Life) is working on merging with Max Life Insurance and Max Financial Services (MFSL; the listed parent of Max Life). While HDFC’s stock rose two per cent, MFSL’s zoomed 10 per cent on Friday. There are reasons for the Street to be exuberant.

Despite being the fourth player among private life insurers with assets under management (AUM) of Rs 35,824 crore as on March’16, Max Life is among the most profitable players in the business. Max Life’s net profit for FY16 stood at Rs 439 crore versus Rs 818 crore of HDFC Life on an AUM of Rs 74,247 crore. Given the better return profile of Max Life, analysts feel the deal will be highly value accretive for the shareholders of Max Life and MFSL (which holds 68 per cent stake in Max Life). The transaction will also give a leg-up to its distribution model.

According to Kotak Institutional Securities, growth of average premium equivalent for Max Life has been shaky in the recent times (up eight per cent versus 13.35 per cent of private life insurers) due to its relatively weak banking channel arrangement. “Merger with HDFC Life will bring in stable partner (HDFC Bank) for its distribution”, explains Alpesh Mehta, Deputy Head of Research - Institutional Equities, Motilal Oswal Securities.

HDFC Life also stands to gain from the deal, with the obvious one being access to equity market though reverse merger route as MFSL is a listed entity. This relieves HDFC Life of going through the initial public offering (IPO) process. “This is the biggest advantage for HDFC Life, though there are also geographical synergies”, Mehta adds.

HDFC Life is a strong player in western India while Max Life is dominant in North India. The deal also elevates HDFC Life to the No. 1 slot (among private players) in terms of AUM and new business premium, thereby pipping ICICI Prudential Life and SBI Life, respectively (though it will be second on profit basis after ICICI Prudential Life). Operationally, HDFC Life has high exposure to unit liked insurance policies or ULIP (54 per cent versus 23 per cent of Max Life). The merger will broad-base the product offering too. Deutsche Bank feels that the product mix of Max Life should enable it clock premium growth higher than over private sector players.