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ERGO to hike holding in HDFC insurance venture to 48.74%

Livemint:  December, 2015

Mumbai: HDFC ERGO General Insurance Co. Ltd on Thursday said Germany’s ERGO Insurance Group will raise its holding in the company to 48.74%, buying an additional 22.63% stake for Rs.1,122 crore.

At present, mortgage lender Housing Development Finance Corp. Ltd (HDFC) owns 73.63% in the insurance joint venture. After the deal goes through, it will come down to 50.73%.

Under the agreement, ERGO will acquire 123 million shares of HDFC ERGO at Rs.90.973 per share, aggregating to Rs.1,122 crore. The deal values HDFC ERGO at Rs.4,900 crore. HDFC ERGO remains a subsidiary of the corporation.

HDFC ERFO offers general insurance products ranging from motor, health, travel, home and personal accident in the retail space and customized products like property, marine and liability insurance in the corporate space.

Under the shareholders’ agreement between HDFC and ERGO, ERGO had the right to increase its shareholding from 26% in HDFC ERGO as and when laws permitted such increase. The transaction is subject to receipt of all necessary approvals.

The deal makes HDFC ERGO the latest insurance company to see a hike in foreign holding after the government raised the foreign investment cap in insurance companies.

Foreign investors started ploughing in capital in their Indian counterparts after they were allowed to increase their stake from 26% to 49% in March this year.

Not all companies have disclosed deal values. A Mint analysis of deals where value has been announced suggests that foreign partners have committed over Rs.10,000 crore.

The largest deal was struck by Nippon Life Insurance Co. which invested Rs.2,265 crore in Reliance Life Insurance to increase its stake to 49%.

Some of the foreign investors who have increased their stake or have offered to dial up include HSBC Insurance Holdings Ltd in Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd, Standard Life Plc in HDFC Standard Life Insurance Co. Ltd, Aviva Plc in Aviva India Life insurance, Insurance Australia Group Ltd in SBI General Insurance.

According to a September report of India Brand Equity Foundation, India’s life insurance sector is the biggest in the world with about 360 million policies, which are expected to grow at a compound annual growth rate (CAGR) of 12-15% over the next five years.

The report adds that the general insurance business in India is currently a Rs.78,000 crore ($ 11.7 billion) premium per annum industry and is growing at a healthy rate of 17%.

Though the insurance sector has managed to raise large amounts of capital in just seven months, what remains to be seen is the growth of the industry, which hasn’t picked up over the last three-four years.

Almost all foreign partners in insurance joint ventures have offered to raise their stakes, making it one of the largest sectors for investments in the financial services space during the year.

Generally, life insurance companies are valued higher than general insurance companies as they have longer term premium visibility whereas general insurance is valued on the potential business for next five-ten years and then discounted by its exiting book value.