India’s Largest Mortgage Lender to Own 42.5% in Listed Insurer

  • New insurer to have a valuation of about $9.73 billion
  • HDFC to sell some stake in new entity to Standard Life

Housing Development Finance Corp., India’s largest mortgage lender, will control 42.5 percent of the nation’s second-largest insurer that is being created through a merger.

HDFC Standard Life Insurance Co. will merge with Max Life Insurance Co. in two stages, which will create a merged entity with a valuation of about 650 billion rupees ($9.7 billion), HDFC Standard Life Managing Director Amitabh Chaudhry said in Mumbai on Monday. Max Life will first combine with its publicly traded parent Max Financial Services Ltd., which will then merge with HDFC Standard Life, according to a statement from HDFC.

The combination will help realize HDFC’s goal of listing its insurance unit and may spur more mergers and investments in the country’s life insurance sector, estimated at about $50 billion by KPMG. The merged entity will be the biggest insurance company in the private sector, Chaudhry said in June.

Standard Life Plc will control a 24 percent stake in the combined insurer, which will be known as HDFC Life, said Deepak Parekh, chairman of HDFC. The mortgage lender will sell some stake to Standard Life to help the U.K. company increase its stake above 26 percent, he said. Max Life shareholders will get one share of Max Financial for every 4.98 shares held. Max Financial shareholders will then get 2.33 shares of HDFC Life for each share.

‘Supportive Shareholder’

HDFC and Standard Life will be the owners of the listed HDFC Life and Max’s Analjit Singh will continue to be “supportive shareholder” of the merged entity, said Parekh. Max Group will own about 7 percent in the combined insurance company, while Axis Bank Ltd. will hold 1.2 percent stake, Parekh said.

Max Financial, which has a market value of 145 billion rupees ($2.2 billion) fell 1.7 percent to 542.2 rupees in Mumbai. The company will be broken up into two entities and the arm holding the insurance company will be merged into HDFC Life and the residual business will be merged into Max India Ltd., according to the statement.

Non-compete Fee

The merged entity will also pay the owners of Max Financial 8.5 billion rupees as non-compete and non-solicitation fees. About 5 billion rupees will be paid upfront with the balance in three equal yearly installments.

"We see structural changes in life insurance business over the coming years," said Max Group founder and Chairman emeritus Analjit Singh. "As margins come under pressure managing expense ratio will be important. The merged entity will be able to do that."

HDFC last year sold a 0.95 percent stake in the insurance unit to PremjiInvest, a fund set up by Indian outsourcing billionaire Azim Premji, in a deal that valued the insurer at about 209.5 billion rupees ($3.1 billion), data compiled by Bloomberg show. Edinburgh-based Standard Life boosted its stake in the Indian venture to 35 percent, from 26 percent, in a deal completed in April. Max Life is a joint venture with Mitsui Sumitomo Insurance Co.

Arpwood Capital acted as the lead financial adviser to the deal, according to the statement. Morgan Stanley advised HDFC Life while Ambit Capital Pvt. aided Max Life. Citigroup Inc. and Kotak Mahindra Bank Ltd. provided fairness opinion to the HDFC Life board and CLSA India Pvt. provided fairness opinion to the board of Max Financial Services.

The proposed transaction is expected to be completed in 12 to 15 months and is subject to regulatory approvals.