Two is better than one. That’s certainly true for India’s standalone health insurance (SAHI) sector, which currently has only one listed company, Star Health and Allied Insurance Co Ltd. The upcoming listing of Niva Bupa Health Insurance Co will provide another option to investors looking to participate in the SAHI growth story.
Based on net earned premium (NEP) in FY24, Niva Bupa is almost one-third the size of Star Health, the market leader. Niva Bupa has tried to address common concerns of Mediclaim policy buyers by launching products that allow buyers to carry forward the sum assured, lock the premium at the initial price, and so on. It has also clocked a superior compound annual growth rate (CAGR) in NEP, albeit on a lower base; and its claims ratio is lower.
Also read: Star Health firm on profitability path amid rising competition
In the two years to FY24, Niva Bupa clocked a CAGR of 47% in NEP compared to 15% for Star Health. Its claims ratio (indicating NEP spent on paying claims) stood at 59% in FY24 against 66% for Star Health. In fact, Niva Bupa’s claims ratio was the lowest in the industry. A lower claims ratio indicates better risk assessment of insured persons, or underwriting standards in insurance parlance. Given this, Niva Bupa may well fetch a valuation premium over Star Health on listing.
Star Health shares trade at a market capitalisation (mcap)-to-NEP multiple of 2.6x based on FY24 financials. Assigning a 25% premium to the multiple means the potential mcap of Niva Bupa could be around ₹12,000 crore. At this mcap, the total issue size, including the offer for sale component of ₹3,000 crore, works out to about 25% – the minimum public shareholding or non-promoter shareholding required for listed companies.
Also read: Centre directs states to link patient records with Ayushman Bharat health account to maximize benefits
Niva Bupa seems to be adequately capitalised with an solvency ratio of 2.5 as against the regulatory requirement of 1.5 for insurance companies. The solvency ratio is similar to the capital adequacy ratio for banks.
Standalone health insurers have the edge
SAHI companies have an edge within general insurance as the industry is growing relatively faster. In FY24, growth in premiums for the SAHI industry was 26% year-on-year as against 13% for general insurance. Also, general insurance companies are exposed to potential losses from frequent events such as natural calamities while SAHI companies face risks from events such as pandemics, which are rare.
Also read: LIC looks to buy a standalone private health insurer
To be sure, the risks from existing competition and Life Insurance Corporation of India’s potential entry into the health insurance business – if composite licences become a reality – are well-known. However, the growing coverage of the population under the Ayushman Bharat scheme is a bigger risk for the health insurance sector. Free hospital treatment available under the scheme could hamper the penetration of private Mediclaim insurance, especially among lower income groups and in rural areas.
But will investors overlook competition in the industry and see only the long runway for growth? Their response to the IPO will answer this question.