Sidhanth Paul
Niva Bupa Health Insurance (formerly known as Max Bupa), a Joint Venture between the Bupa Group and Fettle Tone LLP, is planning an IPO to raise 2,200Cr. As of FY24, it is India’s third-largest and second-fastest-growing SAHI in terms of overall Health GDPI.
The IPO is going to hit the Indian primary markets on 7th November and will remain open till 11th of November.
Health insurance is the fastest-growing segment in India’s non-life insurance sector. Historically, motor insurance has held a dominant position, representing 39.3% of the non-life GDPI in FY18.
However, over the last 6 years, health insurance has experienced substantial growth, expanding its GDPI share from 24.6% in FY18 to 37.1% in FY24. During FY18-24, health insurance GDPI grew the fastest at 19.5% CAGR in comparison to the overall non-life insurance growing at 11.5%
As per Redsheer estimates, the total health GDPI is estimated to reach 1.8 – 2.0 Tn by FY28, from 1.08 Tn in FY24.
*Source: Niva Bupa’s DRHP.
This growth majorly comes on the back of :
- Increasing awareness of insurance as protection against healthcare inflation.
- Significantly lower insurance penetration when compared to developed global economies.
- Out-of-pocket medical expenses and rising disease burden in India.
- Increasing affordability with customized health insurance products provided by specialized players, etc.
In India, health insurers can be broadly categorized into three types: Private Insurers, Public Insurers, and Standalone Health Insurers (SAHIs).
As of March 31, 2024, there are seven IRDAI-recognized SAHI companies in India: (1) Aditya Birla Health Insurance, (2) Care Health Insurance, (3) Manipal Cigna Health Insurance, (4) Niva Bupa Health Insurance, (5) Star Health & Allied Insurance, (6) Narayana Health Insurance, and (7) Galaxy Health Insurance.
SAHIs dominate the retail health insurance market, holding a 56% market share in FY24, while public insurers lead the government health insurance sector with a 68% market share. In group health insurance, public insurers account for 46% of the market, whereas private insurers and SAHIs hold 39% and 16%, respectively.
*Source: Niva Bupa’s DRHP.
The retail health insurance segment is expected to be the focal point for growth due to its higher average premium per life, elevated renewal rates, and lower combined ratios compared to group health insurance. This segment is projected to grow at a CAGR of 18-21%, while group business to grow at a rate of 13-16%.
*Source: Niva Bupa’s DRHP.
How do Health Insurance companies make money?
Insurance companies have two main sources of revenue: Underwriting Profit & Investment Income.
Underwriting Profit
Insurance is the business of transferring monetary risk from the insured to the insurer for a price. That price is determined by the process of underwriting, which is about quantifying the risk to the insurer of providing insurance.
The more likely the event being insured against, the higher the price an insurer would charge for providing insurance. For example, when underwriting an auto policy, since the insurer does not have a way to figure out exactly how likely you are to dent your car in the next year, they rely on the law of large numbers, i.e. on average, how many people like you dent their cars.
This assessment of risk and consequent premium pricing is done by specialised professionals called Actuaries. The better the risk-assessment process of an insurer, the more suitable their premiums will be to the risk involved. For example, a sophisticated auto-insurance underwriting process would go beyond the basics and price your premium based on your driving habits and track record.
In the case of health insurance, Actuaries depend on individual characteristics, such as gender, age, income, habits & geographical location. Individuals go into risk buckets based on these characteristics. Higher the risk, the higher the premium. Premiums paid by all customers go into a pool. When some customers claim coverage, the insurance company takes money out of this pool to pay them. The pool will also take care of operating expenses & administrative costs.
Underwriting Profit = Premiums Collected – Claims Paid – Expenses.
This underwriting profit is measured by a metric called – Combined ratio. If the combined ratio is below 100%, it indicates that the company is making an underwriting profit. If the ratio is above 100%, it is paying more money in claims settlements than the premiums received.
Investment Income
The underwriting profits will be invested into instruments like G-secs, Bonds, Stocks, etc. The money earned from these investments, like dividends, interest, realized capital gains etc., are classified as Investment Income.
Now that we have a fair bit of understanding of how the industry works, let’s dive deeper into Niva Bupa and its IPO.
Niva Bupa is one of India’s largest and fastest-growing Standalone Health Insurers (SAHIs). As of FY24, its overall health Gross Direct Premium Income (GDPI) reached 5,494 crore. From FY22 to FY24, Niva Bupa’s health GDPI grew at an impressive CAGR of ~41%, nearly doubling the industry average of around 21%. Consequently, its market share in the SAHI segment climbed to 16% as of FY24.
In FY24, Niva Bupa also expanded its distribution network, increasing its agent count to 143,000 and operating 22 branches across 22 states and 4 union territories in India.
The company is looking to raise 2,200 Cr within a price band of 70 to 74, which includes 800 Cr from a fresh issue and 1,400 Cr as an offer for sale.
Niva Bupa primarily focuses on health insurance products, both retail and group. While it also provides accident and travel insurance, these categories constitute a small portion of its Gross Written Premium (GWP). Here is a breakdown of its GWP across segments:
Let us now compare Niva Bupa fares among its SAHI peers, across various metrics.
Referring to the table above, Niva Bupa stands out as a competitive player among its peers. Over the last three years, its GDPI has grown at an impressive rate of ~41%, placing it just behind Aditya Birla, which achieved a growth rate of ~48%.
It boasts the best claim settlement ratio and solvency ratio in the industry. Furthermore, its combined ratio—an important metric for assessing underwriting profitability—is below 100%, indicating that its core operations are profitable.
However, it does lag in terms of retention ratio, with Manipal Cigna leading in this metric.
Fully priced for growth potential
At the upper band of 74, the company is looking at a valuation of ~13k Cr and a Price to Book of 4.6, which is very much comparable to its other listed peer, Star Health at 4.1, which is also the market leader in the SAHI segment.
Having said that, STAR is growing at a relatively slower pace when compared to Niva Bupa. If the growth continues, Niva Bupa may command a higher premium than STAR going forward.
Here is a quick rundown of Niva Bupa’s financials in the last 3 years.
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The management expects the return on net worth, should improve from 5.7% in ~FY24 going forward as it would primarily be using the fresh issue of 800 Cr to fund its growth amidst the changing dynamics of the health insurance industry.
All in all, the company has seen good growth amid a lower base and also supported by sectoral tailwinds. At IPO pricing, the growth looks factored in. However, if you are a long-term investor, this can be a decent portfolio bet to accumulate in dips for view of 5 years.
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