HDFC ERGO Deal Not A Forced Sale But A Strategic Exit, Says Apollo Munich Head
HDFC ERGO’s Ritesh Kumar and Apollo Group’s Shobana Kamineni explain the deal rationale.
HDFC ERGO General Insurance Co. Ltd. is looking to ramp up its health insurance portfolio, its Chief Executive Officer Ritesh Kumar said a day after its parent agreed to buy a majority stake in Apollo Munich Health Insurance Co. Ltd.
“Health insurance as a segment is the fastest growing within the general insurance space,” Kumar, also the managing director of HDFC ERGO, told BloombergQuint in an interview. While the general insurance market in India is growing at an annualised rate of 17 percent, health insurance, Kumar said, is growing at 24 percent. That, according to him, was the “core rationale” behind the HDFC-Apollo Munich merger deal.
The stake purchase by Housing Development Finance Corporation Ltd. for Rs 1,347 crore will pave the way for HDFC ERGO-Apollo Munich merger—expected to take place over nine months pending regulatory approvals.
The combined entity will be the second largest private insurer in the accident and health segment with a market share of 8.2 percent
Shobana Kamineni, chairperson of Apollo Munich, told BloombergQuint in a separate interaction that the deal would ensure both the companies work with the same partner—Munich Reinsurace Co. “This was not a forced sale, this is a strategic exit,” Kamineni said, adding the deal would help Apollo Hospitals Enterprise Ltd. pare debt.
While Apollo Hospitals seeks to deleverage its balance sheet, HDFC Ergo is looking at consolidation. ERGO, a subsidiary of Munich Re, has been divesting its businesses around the world and focusing on its key markets of Germany, India and China. The merger will consolidate Munich Re’s 49 stake in HDFC ERGO and 49 percent stake in Apollo Munich.
Watch the full interviews with Shobana Kamineni and Ritesh Kumar here:
Edited Excerpts From Shobana Kamineni’s Interview:
You are getting close to Rs 300 crore for the listed entities. Will the proceeds from the Apollo Munich stake sale be utilized to payoff debt and how will the funds be deployed?
On all accounts, this was not a forced sale. This is a strategic exit. We have the ability to deploy funds, wherever there is more shareholder value. There is enough in India to be able to create more greenfield, to invest and also to reduce debt. So, we will be judicious.
There is lot of concern over the promoter pledge in the last few quarters. Are the promoters now looking to reduce the pledge via this fund infusion? Can you give us a ballpark figure of how much fund will be used to bring down promoter pledge in the company?
I can’t say clearly, because the HDFC ERGO-Apollo Munich merger still has to go through IRDAI approval and many other things. At the point when it comes, the funds will be deployed very judiciously. We do believe in safety. Promoters had a pledge and it was too high and, I think that will be reduced.
When was the process started to exit this business? Were there any other contenders or just the HDFC Group?
We (HDFC Group and Apollo Munich) have the same partner. You must understand that Munich is sitting on both sides. The entire process was done so that we could work with same partner and HDFC was natural. So, we explored that avenue first. They came up to a valuation expectation and that’s where the deal got done in a record time.
There were many other interested. It is not like there were no contenders. Everyone was interested, because it was great asset. But it is just that we didn’t run a formal process.
Are you happy with valuations that you have got with this deal?
Yes, definitely. For a Rs 300 crore investment over ten years, we made four times. So, I think it is good.
Is there any non-compete clause that was signed because of this deal?
Yes. We won’t invest into insurance for the next three years.
Edited excerpts from Ritesh Kumar’s interview:
Our calculations show that the combined entity—HDFC ERGO and Apollo Munich—would have a combined market share of 6.4 percent. Would that be a correct estimate?
The combined market share of the two entities would be 6.4 percent as of financial year 2019. We have a market share of 5.1 percent. Apollo Munich has a market share of 1.3 percent. So, put together the market share adds up to 6.4 percent.
Most analyst say that you got this deal at a fairly decent valuation. Was that a comfortable number for you to give? We presumed you would be more hungry. Is that the ballpark number you believe insurance players would be valued at currently?
Also, if you could talk about synergies, considering Apollo Munich was not performing well as it would now do, under the umbrella of HDFC?
Let me tell you the core rational behind the deal. Health insurance segment is the fastest growing segment within the general insurance space. While the general insurance has been growing at 17 percent compound annual growth rate, health insurance within that has grown at 24 percent CAGR. Our expectation is that in the next five years, the health and accident (insurance) combine would emerge as the largest segment within the general insurance space. That is the core rationale. For any deal to happen, there is a price expectation which needs to be matched between the buyer and the seller and that’s how it has happened.
We expect significant synergies to come in by way of this deal. The combined market share on accident and health (insurance) put together adds up to 8.2 percent. Apollo Munich has a wonderful book. However, given the fact that they were only Rs 2,200 crore company and significantly investing in the future, that is why their profitability is slightly lower than what logically it should have been.
Once the merger is effective, both HDFC ERGO and Apollo Munich will benefit from further economies of scale and that is how the future profitability will improve.
Can you give us the combine entities key ratios?
Generally, insurance is measured by the combined ratio and that is the key metric on which we measure the performance. HDFC ERGO’s combined ratio is 98.9 percent, as of March 2019. Apollo Munich’s combined ratio is 100.7 percent. If you put these two numbers together, the combined ratio would be sub 100 percent. And any number below 100 percent is fairly good number.