Niva Bupa Health Insurance is the second standalone health insurance (SAHI) IPO in recent times after Star Health. The fast-growing company in a fast-growing segment does offer a strong proposition for investors for long-term growth. But the valuation is at a premium, which transfers the risk of growth to investors at the current levels. The company reported ₹82 crore PAT in FY24 and the upper band of IPO values it at ₹13,520 crore or 165 times PE, which is a premium to Star Health (33 times PE). The nascent operator with lower profitability has inflated PE multiples, but on a Price to book ratio is similar to the industry at 4.5 times its FY24 book value (Star Health 4.4 times). We recommend investors track the profitability expansion over the years before investing in the stock. The IPO has a fresh issue of ₹800 crore and OFS of ₹1,400 crore from promoters Bupa Singapore and Fettle Tone (True North).

Strong tailwinds

The retail health insurance sector has shown 10 per cent volume growth and 7 per cent price growth in the last five years and can be expected to maintain similar growth levels into the next five years. The under penetration of health insurance, high medical inflation, rising middle class and other factors aiding financialisation and consumption can sustain the growth.

Niva Bupa has gained from the tailwinds in growing faster. It is the second fastest-growing SAHI with 42 per cent CAGR in FY18-24 in gross premium, which is twice that of the sector. The company has built a critical mass of 17.3 per cent market share in SAHI in FY24.

The strong parent-backing has aided the company. The company started in 2008 with Max and Bupa, but Max was replaced with current shareholder True North in 2019 and the company gained critical mass in 2020 (but soon faced the pandemic). Bupa, the promoter organisation, is a multinational health insurance major with operations in several countries. This aids technology integration, product design, execution and management capabilities.

Profitability

Niva Bupa reported a PAT margin of 2 per cent on Net premium in FY24 compared with 6 per cent of Star Health. This can be attributed to combined ratios (CR) which is the sum of claim expenses and operating expenses. As seen in the table, the CR of Niva Bupa has decreased leading to profitability, but is still behind Star Health, which has a mature profile.

Despite lower profitability, Niva Bupa is valued comparably to Star Health on the book value at 4.5 times vs 4.4 times for Star Health on expectation of growth. As premium profile of Niva Bupa matures and gains in size, the opex portion can decline leading to lower CR ratio – of around 94-95 per cent implying higher profitability. However, there is a risk; as Niva Bupa’s premium profile matures, the claims expenses can increase as probability of a claim increases with age — age of the policy and policyholder, especially after the exclusivity period of three-four years. The company underwriting and the incorporation of technology in underwriting, which has so far contained claim expenses, is expected to counter the natural rise in claims, otherwise likely to impact the CR and then profitability.

Drivers, valuation

Niva Bupa has executed well on volume and pricing, aided by the strong industry tailwinds. The pricing lever has been aided by periodic inflation adjustment, improved product design and improving coverage. The medical inflation has necessitated yearly price pass-through, which the industry has adopted to (compared to three-year gaps). The products with enhanced features offered by Niva encompassing wellness, millennial aspirations or digital channels for claims have allowed for better pricing. Niva Bupa has maintained covers of more than ₹10 lakh at 70 per cent plus in the last two years in an industry where the covers start from ₹2 lakh, indicating its ability to address mass-affluent segment compared with entry levels. These factors have allowed a 14 per cent CAGR in average ticket size per policy for Niva Bupa in FY22-24 compared with 7/10 per cent for Care Health and Star Health. While Niva Bupa has delivered 40 per cent CAGR in FY22-24, the low base and post-Covid impact may have played a part. The impact of consistent price pass-through on the strong volume growth in the next five years has to be gauged at the industry level as well.

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