HDFC Ltd, India’s largest mortgage financier, has agreed to acquire the entire 50.8% stake of Apollo Hospitals Group in a health insurance joint venture with German reinsurer Munich Re Group as part of its strategy to tap this potential growth market.
HDFC will pay ₹1,336 crore to Apollo Hospitals for the deal. It will pay an additional ₹10.84 crore to employees of Apollo Munich Health Insurance Co. Ltd to purchase their 0.4% stake in the company.
The total deal size of ₹1,347 crore for the entire 51.2% stake values Apollo Munich Health Insurance at 1.2 times the gross written premium for fiscal 2019, Deepak Parekh, chairman of HDFC, said at a news conference on Wednesday.
HDFC currently runs HDFC Ergo General Insurance Co., a joint venture with Ergo International AG, the primary insurance entity of Munich Re. Separately, Munich holds a 49% stake in Apollo Munich Health Insurance.
In a two-stage transaction, HDFC will first acquire the 51.2% in Apollo Munich, subject to approvals by the National Housing Bank, insurance regulator Insurance Regulatory and Development Authority of India (Irdai) and the Competition Commission of India. “Thus, Apollo Munich will be held as a subsidiary of HDFC,” said Parekh.
“In the second stage, there will be a merger of Apollo Munich with HDFC Ergo, subject to the approval of the National Company Law Tribunal and final approval of Irdai. Post the scheme of amalgamation, HDFC Ergo and Apollo Munich will merge into one entity under the HDFC Ergo brand,” he added.
Munich will hold a 49% stake in the merged entity.
“Over the years, Munich Re Group has enjoyed an excellent relationship with the Apollo group, in building a powerful franchise in health insurance. With this transaction, we are very much looking forward to further strengthening our ties with HDFC Group and consolidating our presence in India,” said Markus Riess, chairman of Ergo Group and member of the board of Munich Re.
The merged entity will have a gross premium of ₹10,807 crore and a market share of 6.4% in India’s non-life insurance market. In the accident and health insurance space, it will be ranked number two with an 8.2% market share.
Parekh said the non-life insurance industry is seeing structural changes, with health insurance expected to become the dominant product in the future, prompting HDFC to seek inorganic opportunities in this space.
“In the general insurance space, it is expected that the share of accident and health insurance will rise from 30% currently to 39% in the next five years. This growth means that accident and health will have a larger share and overtake motor insurance, which currently accounts for the largest component in general insurance,” said Parekh.
He, however, said that unlike the group’s life insurance business, HDFC Life Insurance Co. Ltd, there was no plan to list the non-life insurance business in the near term as the focus would be on expansion. “We will think of the IPO maybe two years later. It will not be happening in 2019 or 2020.”
This marks the second inorganic growth attempt in the insurance space by HDFC. In 2016, the life insurance arm of HDFC said it would merge with Max Life Insurance Co. Ltd, but the deal fell through.
“HDFC has been growing its general insurance business through the inorganic route and the current acquisition is a similar extension of that strategy,” said Anirudh Jain, business director for insurance at Centrum Capital.
In June 2016, HDFC Ergo had acquired 100% of the equity of L&T General Insurance Co. Ltd for ₹551 crore, which helped it expand its distribution network and non-health product portfolio.
“The current acquisition of Apollo Munich will also help the insurer to expand its agency network and premium book in the health insurance segment, giving it a better prospect for growth in its health portfolio,” Jain added.
For Apollo Hospitals, the transaction will help trim its debt. Besides the ₹1,336 crore from HDFC, the Chennai-based firm will receive ₹294 crore from Munich, leading to a total payout of ₹1,630 crore.
“The transaction will improve our cash flows, which we will use to invest in creating new infrastructure as well as for existing infrastructure. It will also help us deleverage our balance sheet,” said Suneeta Reddy, managing director of Apollo Hospitals. Since inception, Apollo has invested ₹300 crore in the insurance business, she said. The deal will help Apollo’s promoters to free up part of their pledged shareholding of listed entity Apollo Hospitals Enterprises.
Apollo Hospitals had a debt of ₹3,430 crore, according to a Bloomberg report in February.
This marks the third health insurance deal in the market.
Private equity firm True North bought Max India’s controlling stake in Max Bupa Health Insurance Co. Ltd last December for₹2,000 crore. In August 2018, Star Health and Allied Insurance Co. Ltd, India’s largest stand-alone health insurer, said private equity firms WestBridge Capital and Madison Capital and billionaire investor Rakesh Jhunjhunwala had jointly agreed to buy the company.