Risks and Challenges in M&A of a
General Insurer
Ritesh Kumar
May 19, 2017
HDFC ERGO General Insurance Company Limited
Why is this topic important?
 Insurance M&A is expected to rise in the coming years owing to a variety of reasons, as listed below
(Source: Willis Towers Watson, 2016)
 Expansion through consolidation
 Modern distribution options and innovative technology
 Capital management
 Asia is rising
 An analysis of 778 transactions involving
insurance companies between 1990 and 2014
found that only 51% created value and 49%
destroyed value (Source: BCG, 2016)
 This is consistent across industries, with another
report by Accenture saying – only 53% of M&A
deals created value, while 47% resulted in
value erosion (source: Accenture Research;
Accenture / Economist Global M&A Survey of Top
Managers)
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Rationale of a typical M&A transaction
 How do we define ‘success’ in M&A?
 A successful M&A transaction is one where the Buyer is able to realize synergies as envisaged as per its
business plan
 What does ‘synergy’ mean?
 Synergies are what makes a whole more than the sum of its parts, i.e. Value (A+B) > Value (A) + Value
(B)
 Strategic drivers for M&A (shareholder considerations)
 Revenue synergies:
 New customer base
 New distribution channels
 Product function expertise
 Cost synergies / Economies of scale:
 Buyer has unutilized in-house capacities – people (productivity), infrastructure, etc..
 Buyer enjoys favourable terms with business partners (compared to the Target)
 Service providers – for e.g., Garages, hospital networks, loss assessors etc.
 Reinsurers
 Capital efficiencies due to product diversification
 Other considerations – for e.g., the Buyer has a stronger brand
 Acquisitions can be funded via cash, share swaps or capital raise
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Considerations of General Insurance M&A
 Characteristics of General Insurance business in India
 Short-term business – contracts are typically valid for one year
 By contrast, other businesses are typically medium- to long-term businesses
 Life insurance, Asset management, Financing / Banking
 High growth market
 Quality of business is known with a lag of 6-9 months from origination
 Provisioning / reserving play an important role in determining profitability
 Challenges in General Insurance M&A are the risks to achieving the business plan
 While the nature of business is short-term, the M&A process is longer
 End-to-end M&A process is longer (~12-18 months) compared to the short-term nature of the business
 Delays in any stage of process have a wider impact in GI than in other businesses
 Announcement of an M&A transaction leads to uncertainty among policyholders, business partners &
employees (of Buyer and Target), increasing the risk of achieving business plan
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A typical General Insurance M&A transaction: Process
Ownership of Seller
Pre-Signing
Signing
 Strategic & commercial  Milestone: Signing of
evaluation of Industry
binding agreement
and Target by Buyer
between Buyer and
Seller (subject to
 Business plan and
regulatory approvals)
valuation
 Milestone: Non-binding  Communication with
offer
employees,
policyholders,
 Due diligence including
channel partners and
Management meetings
other stakeholders,
Business evaluation
as needed
Financial, actuarial,
secretarial, tax & legal
 Milestone: Revised
business plan and
valuation
Signing to Closing
 Two alternatives:
One-stage or twostage M&A process
 Regulatory
approval(s)
 Company to be
managed as per
terms agreed
between Buyer and
Seller
 Other conditions as
agreed, to effect
change in ownership
Ownership of Buyer
Closing
Post-Closing
 Payment of Offer
Price
 Communication with
employees,
policyholders,
 Milestone: Change in
channel partners and
shareholding
other stakeholders,
(change in
as needed
ownership)
 Re-alignment of
reinsurance program,
if needed
 Integration of Target
with Buyer
 Corporate approvals
 Milestone: Binding offer
 Milestone: Finalization
of Offer Price
 Negotiations on Share
Purchase Agreement &
related documents
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Pre-Signing stage: Potential challenges
 Understanding business of Target
 Buyer gets limited time and opportunities to analyse the performance of Target (via financial and
actuarial, tax, legal due diligence) and to interact with management (via management meetings)
 For example, assumptions and accounting practices play an important role in assessing adequacy of
reserving methodologies for claims, gross receivables (co-insurance and re-insurance) and net
receivables (co-insurance and re-insurance), etc..
 Formulating the business plan for Target
 Typically, this is different from the Business Plan that the Target company may internally have
 For example, in case of overlap in corporate relationships between the Buyer and the Target, it may be
difficult to retain 100% of the business from corporates.
 Similarly, in case of overlap in distribution relationships between the Buyer and the Target, retaining
similar business contribution from the common distributors may be challenging
 Customers/distributors which may not want to work with the Buyer
 Customers/distributors which Buyer may not want to work with
 Gap in valuation expectations between the Buyer and the Seller
 Seller expects 100% value of standalone business
 Buyer expects to make an offer based on the value it can realize
 Risks to Business Plan arising out of delay in timelines and/or uncertainty due to deal announcement
 For example, negotiations of binding agreements may get protracted leading to Signing happening later
than anticipated
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Signing to Closing stage: Potential challenges
 In this phase, the Seller manages the company as per the terms contractually agreed with the Buyer.
 Typically, Buyer expects the company to be run by the Seller as per its ordinary course, such that there is
 No value erosion
 Business relationships with partners and customers are continued as usual
 Key employees are retained
 No new material obligations are undertaken without explicit consent of Buyer.
 Key challenges include:
 Actual Business progress of Target in this period may differ from assumptions made by Buyer
 Plan of Action to be in place to cater to:
 Protection of Policyholder’s interests: Policy servicing, Claims servicing, Renewal servicing
 Ensuring no disruption to relationships with Channel partners and other business partners
 Reinsurers
 Provider network including hospitals, motor garages, TPAs, loss assessors etc.
 Regulatory compliances
 Risks to the business plan arising out of delay in timelines and/or uncertainty of closing date
 For example, fulfilment of conditions necessary to effect the change in ownership may take longer
than anticipated, or employee attrition may increase owing to the uncertainty
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Post-Closing stage: Potential challenges
Post-merger integration can be challenging due to a variety of reasons
 Maintaining adequate communication with employees, policyholders, channel partners and other
stakeholders to address their concerns and uncertainties around how business would be conducted going
forward
 Employee integration – an M&A transaction leads to uncertainty among employees of both the Target
company and the Buyer company
 Cultural alignment of employees of Target company with that of the Buyer company
 Alignment of compensation structures and designations
 Organization structure alignment – redefined roles and responsibilities
 Retention of key talent
 Distribution integration (customers and distributors)
 Integration of relationship management of Target with Buyer
 Customer / distributor acquisition and onboarding process integration
 Reinsurance integration
 Operations & Customer service integration
 Alignment on service standards for seamless experience to customers and business partners
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Post-Closing stage: Potential challenges
 Product & Underwriting integration
 Product integration – from the combined product bouquet, which products to continue and which ones to
be phased out / discontinued with adequate disclosure to policyholders and channel partners and
ensuring continuity of renewal related benefits
 Alignment of Underwriting guidelines and policy issuance process
 Claims integration
 Integration of relationships with loss assessors, hospital networks, garages, lawyers, etc..
 Alignment of claims decision guidelines and claims processing practices – e.g. Migrating from TPAmanaged claims processing (by Target) to in-house claims processing (by Buyer)
 IT & Facilities integration
 Migration of data and system integration
 Branch integration
 Integration of relationships with service providers
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Mitigating potential challenges in General Insurance M&A
 Communicate, communicate and communicate
 Proper communication to all stakeholders at every stage of the transaction
 Pre-Signing stage:
 Proper strategic fit developed basis rigorous strategy and target analysis
 Deep understanding of industry dynamics
 Thorough analysis of Target – due diligence, management meetings, etc..
 Sound documentation - Tightly worded binding agreements, minimizing the room for interpretation
 Rights and obligations of both parties at every stage of the transaction, are defined and protected, and
the consequences thereof
 Signing to Closing stage: Strong deal execution in the Signing to Closing phase
 Transition plan agreed between Buyer and Seller
 Initiate detailed integration planning exercise
 Separate functional plans – Distribution, Product, UW, Claims, IT, Operations, HR, etc..
 Post-Closing stage: Focused implementation of integration plan
 PMO approach to execution with appropriate governance mechanism, e.g. Steering committee, periodic
reviews, etc..
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HDFC ERGO’s acquisition of L&T General Insurance
Marked the beginning of consolidation in Indian insurance industry
 L&T General: 100% subsidiary of L&T, commenced operations in 2010, 0.4% market share
 Rationale for the acquisition: Good strategic fit
 High standards of corporate governance
 Complementary product mix and channel mix
 Access to key partnerships
 Relatively smaller size of L&T General enabling seamless integration
 Integration progressing as per plan
 Employee integration: Employees integrated in HDFC ERGO structure
 Business integration: Relationship management aligned with HDFC ERGO for seamless experience
to clients and distribution partners
 System & process integration: Parallel ecosystems for both organizations being merged
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HDFC ERGO’s acquisition of L&T General Insurance
Marked the beginning of consolidation in Indian insurance industry
 Milestones so far:
 Execution of Share purchase agreement (Jun 3, 2016)
 In-principle approval from IRDAI
 Approval of Competition Commission of India
 Share transfer from L&T to HDFC ERGO (Sep 9, 2016) – L&T General becomes 100% subsidiary of
HDFC ERGO; Renamed as HDFC General Insurance
 Application for merger filed with High Court of Bombay (Oct 5, 2016), subsequently transferred to
National Company Law Tribunal (NCLT)
 Key steps going forward:
 Approval from NCLT for merger
 Final approval from IRDAI
 Merger of HDFC ERGO and HDFC General
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Thank You
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