The life insurance subsidiary of mortgage player HDFC is acquiring 100 percent shareholding of the Bengaluru-headquartered Exide Life Insurance company from Exide Industries in an Rs 6,687 crore deal. Let's see what HDFC Life is getting in Exide acquisition.
Bottom of the pit in terms of market share
Exide Life is at the bottom of the pit in terms of market share in the first year premium. The company ranks 15th amongst private players when it comes to annual premium income. Take, for instance, HDFC Life garnered the first-year premium of Rs 20,242 crore in 200-21 whereas Exide Life managed to close the same year with only Rs 780 crore. HDFC Life, however, gets the additional infrastructure of branches, networks, and products to scale up the overall premium under the combined network.
Exide Life's cost structure is quite high as compared to HDFC Life or any other well-established players. There are two key parameters --ratio of expenses of management and commission ratio -- that determine the cost efficiency of any life insurance player. Exide Life's ratio of expenses of management to gross premium is 26.5 per cent in 2020-21 as against HDFC Life's 16.32 per cent. Similarly, the commission ratio to gross premium for Exide Life is at 6.4 per cent as against HDFC Life's 4.43 per cent in the same period. While the management cost would be rationalised in a merger, HDFC Life would use its best practices and the digital network to reduce the high commission structure of Exide Life over a period of time.
Some overlapping in big states
Exide Life has a big share of premium coming from states like Karnataka, Tamil Nadu, Gujarat, and Maharashtra. These are the top states in terms of earning from the individual or retail business. These four states also figure in the HDFC Life's top six states that contribute the maximum to the individual premium. HDFC Life will have to rationalise its distribution network in these states because of duplication.
HDFC Life, however, is getting states like Andhra Pradesh, which is the second largest for Exide in terms of premium collection. It is, however, not known whether Exide is present in smaller towns and cities. In a merger announcement, HDFC Life had mentioned the complementary geographical presence with a strong foothold in South India, especially in Tier 2 and Tier 3 locations.
Strong protection business
Exide Life is focused on traditional and protection business, which will enhance the existing embedded value of HDFC Life. The company claims that the embedded value will be enhanced by about 10 percent. In the life insurance business, companies are valued in the stock market on a multiple of embedded value. The embedded value captures the present value of the future profits that will accrue from the existing businesses. It's a big positive for HDFC Life.
Agency channel in smaller geographies
While digital selling of insurance is gaining momentum, the life insurance industry with a low penetration level requires an agency channel in smaller geographies to advise and also service the customers. HDFC Life is focused on expanding its reach by building agency channels. In fact, it has over 1,00,000 financial consultants. Exide merger gives it access to close to 40,000 advisors.
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