In today’s Finshots, we unpack the Niva Bupa Health Insurance Company IPO and how it could be a bet on India’s healthcare future.
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The Story
Some of the greatest investors have always had a thing for insurance companies. Just look at Warren Buffett with GEICO or Rakesh Jhunjhunwala with Star Health.1 The steady flow of premiums, the promise of protection and the opportunity to invest in an essential but often overlooked industry make insurance alluring.
Take a closer look at health insurance in India, and you’ll see why Jhunjhunwala’s bet made sense. The sector has been on a tear, growing at an impressive 20% CAGR (compounded annual growth rate) between FY18 and FY24. And right now, there’s even more buzz, with one of India’s biggest standalone health insurers — Niva Bupa Health Insurance, stealing the spotlight as its ongoing IPO wraps up on Monday.
But before we dig deep into the IPO, here’s a TL;DR of how health insurance works.
At its core, health insurance is a pact. You pay a premium, and in return, the insurer promises to cover your medical costs. While this sounds simple, the reality is all about a delicate balance between ensuring that enough people are paying premiums while covering claims for those who need it. It’s a lot of money flowing in and out, and the key is maintaining that balance while turning a profit.
And how’s Niva Bupa doing here?
Well, Niva Bupa is one of India’s biggest and fastest-growing health insurers. As of March 2024, it’s protecting over 14 million lives and holds a 17% market share. What’s even more impressive is that its revenue has surged from ₹1,884 crores in FY22 to ₹4,118 crores in FY24, marking a CAGR of a whopping 45%. Besides, flipping the switch to profitability during this time.
But Niva Bupa wants to be more than just an insurer. It’s branching out with services like diagnostics, wellness programs, digital consultations and even doorstep medicine delivery, all with the goal of building a full-fledged healthcare ecosystem.
However, expanding and staying ahead in the insurance business doesn’t come cheap, which brings us to why Niva Bupa is knocking on the public's door for more funds.
You see, the Insurance Regulatory and Development Authority of India (IRDAI) requires insurance companies to keep a solvency ratio of at least 1.5 (or 150%). Think of it like a safety net which ensures that the company has enough cash to cover its liabilities and policyholder claims in case of emergencies.
Now, Niva Bupa’s solvency ratio was 2.6 as of March 2024, well above the minimum required. But to fuel its growth plans, the company is raising more funds through this IPO. Out of that, ₹800 crores from the fresh issuance will go towards strengthening its capital and boosting its solvency levels.
So yeah, that’s a good sign. It shows that the company is on track to become a strong and reliable insurer. And with only around 30% of Indians having any form of health insurance, Niva Bupa sees a massive growth potential.2 Going public will help it put money where its mouth is — into more customer acquisition, partnerships, new products and of course, boosting brand recognition.
But is that enough for you to take the plunge?
To figure that out, we’ll have to take a closer look at Niva Bupa’s IPO valuations.
At the upper end of its IPO price band, i.e., ₹74 per share, Niva Bupa's price-to-book value (P/B) ratio sits at 6.1x, giving the company a post-IPO valuation of around ₹13,500 crores.3 And while some investors might wince at the thought of such a high price compared to its bigger players, others might see it as a premium worth paying.
Now, if you compare Niva Bupa to one of its competitors, Star Health Insurance, there’s still some catching up to do. Star Health holds a larger market share of about 30% in the retail health insurance space and has a consistent track record of profitability, while Niva Bupa holds around 17% of the market. But Niva Bupa’s broader approach, the mix of wellness, diagnostics and digital health services we spoke of earlier, could be its long-term advantage.
But here’s something you need to know about valuations. Look, insurance companies can be tricky to value. So. you need to keep an eye on three main factors — the money coming in (cash flows), the money invested and whether the company has enough savings to pay for claims. And profitability means that the premiums collected should exceed what they pay out in claims over time. All this requires a lot of estimates and forward projections, which experts called Actuaries specialize in.
That said, Niva Bupa still faces some challenges.
To begin with, its earnings are a bit of a rollercoaster — profitable in FY24 but dipping into losses in Q1FY25. This kind of volatility might make conservative investors nervous. But it could also look enticing to those banking on long-term growth in the health insurance space. After all, IPOs aren’t just about quick gains. They’re about the long game too.
For Niva Bupa, if we look at Gross Written Premium (GWP) — basically, the total cash collected from policy sales saw rapid growth, up by 41.3% between FY22 and FY24, which is fast. For context, retail health GWP specifically from health insurance sold to individuals grew by 33.4%.
Then there’s efficiency, which in insurance is often measured by something called the Combined Ratio. This ratio is calculated by adding up the percentage of net premiums used to pay claims (claim settlement ratio) and the expenses of running the business (expense ratio). Insurers ideally like to keep this below 100%. And a lower ratio means they’re managing costs well, which is a key factor for long-term profitability.
For Niva Bupa, the Combined Ratio has improved, dropping from 107% in FY22 to 97% in FY23, with a slight rise to 99% by FY24. This trend might make it look like it’s getting better at managing expenses over time. But don’t get excited just yet because when you break these up, the picture isn’t quite as rosy.4
To put things in perspective, Niva Bupa’s claim settlement ratio was just 91% in FY24. That’s much lower than the industry average of 96%. And with a smaller hospital and agency network than competitors like ICICI Lombard, HDFC Ergo and New India Assurance, it faces even more challenges. To attract policyholders and agents, it might have to offer lower prices and higher commissions, which has led to an average expense ratio of nearly 43% from FY22 to FY24 — one of the highest or let’s just say worst in the industry. And that’s likely part of the reason it needs more capital to maintain its solvency as it grows.
So, to sum it up — the Niva Bupa IPO isn’t exactly an easy call.
If you’re considering passing on it but still want a piece of the insurance pie, you might want to look at companies like HDFC Bank, which hold strong stakes in reputable insurance firms. That way, you get indirect exposure to the sector, but with a bit more diversification.
At the end of the day, two big factors count when it comes to health insurers — credibility and reasonable valuations. And it’s the valuation side that has some market experts raising an eyebrow over Niva Bupa’s IPO.
Still, this offer is clearly a bet on a high-potential sector and on Niva Bupa’s vision to go beyond insurance and reshape health management.
So, what do you think? Is Niva Bupa worth the leap, or will you let this one slide? Let us know.
Until then…
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Story Sources: Economic Times [1], Business Standard [2], CNBC TV18 [3], Value Research [4], Company RHP [5]
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