Opinion
Kotak bank’s insurance stake sale to Zurich group a signature Uday Kotak deal
Summary
- The sale is sensible as it helps cut losses and put capital to better use in its bank business
Uday Kotak, the promoter of India’s fourth-largest private bank, Kotak Mahindra Bank, is known to drive a hard bargain, having spent years in the investment banking and stock broking business.
In 2006, when one of the top global investment banks, Goldman Sachs, exited its joint venture with the Kotak group and started operating on its own in India, Kotak struck a smart deal, buying out the overseas partner for $70 million. The founder-promoter of Kotak Mahindra Bank now seems to have swung another good deal. The bank has announced that Zurich Insurance Group is acquiring a controlling stake of 51% in its general-insurance subsidiary at an attractive valuation, especially considering that the subsidiary reported a net loss of ₹117 crore in FY23 and has a market share of 0.5% in the crowded Indian non-life insurance market.
Exiting a business whose performance has been underwhelming for about a decade is sensible. In an industry with more than 30 players, of which about a dozen control 90% of the market, Kotak General Insurance Company has been a laggard. With Zurich investing $488 million or Rs. 4,051 crore for a 51 % stake in the company, with the option to buy another 19% over the next three years, the Kotak group’s worries about infusing funds to grow the insurer will ease. More importantly, the foreign investment (the biggest in the Indian non-life segment) will be put to better use – bolstering the promoter bank’s capital base of over 21.7 % of of the end of September, cutting its losses in the general insurance unit, and helping to drive growth in the banking business, where the returns are far more promising.
Zurich group’s entry into the Indian market, which it has been eyeing for long, comes at a time when its earnings growth, capital position, return on equity and solvency ratio have been strong in the first half of this year. The foray into the Indian insurance industry fits its ambitious growth plans over the next few years. The group reported a $3.7-billion gross business operating profit in the first six months of 2023, an indication of the financial muscle and organisational strength that the group can use to stay invested in an under-penetrated insurance market in a growing economy for the medium to long term.
The Indian market may hold potential but – as many incumbents, including those with foreign partners, have realised – is extremely challenging. After having recovered from the hit they took after the covid pandemic in FY22, many general insurers who have business categories such as health, motor, marine and transport are trying to get their risk management, pricing and underwriting strategies right. Though the industry has been growing in double digits, it has been hard for many companies in this segment to get the right mix of growth and profitability.
Zurich, which has strengths in areas such as risk analysis, digital innovation, product portfolio and customer services, can leverage the Kotak franchise. The Indian market, with growing digitisation and some digital-first models, should be of great interest to the group, which collaborates with what are called ‘insurtech’ startups. For its local competitors and the regulator, it will be interesting to see how the latest entrant unveils its global strategy of simplification and transforms the customer experience, and whether it gets its risk pricing, costs and customer services model right in a competitive and price-sensitive market like India.
It will be no surprise if there is a shakeout in this industry segment over the next few years, given the limited ability of some of the incumbents to provide capital and drive growth.
