Why is there is so much premium in Indian Insurance market for a piece of stake in good health insurance companies? In 2018, investor Rakesh Jhunjhunwala, along with West Bridge AIF and Madison Capital Ltd, acquired Star Health and Allied Insurance Co. Ltd at about 6.5 times its book value.
Similarly, This time around, the HDFC group is acquiring a majority stake in pure health insurance company Apollo Munich Health Insurance Co Ltd at about 6.1 times its book value.
Analysts say these valuations of insurance companies are very expensive, especially given the poor profitability and margin ratio of pure health insurance companies.
“Standalone health insurers still struggle to build sufficient economies to profitability, reflected in low return on equity,” said analysts at Jefferies India Pvt. Ltd in a note to clients. “In this context, we find deal valuations for Apollo Munich and Star Health expensive.”
The deal includes a two-step process, wherein HDFC Ltd will first acquire the stake of Apollo Munich’s local promoters for about ₹1,350 crore. In step two after nine months, the company will be merged into HDFC Ergo General Insurance Co. Ltd.
While Apollo Munich has a fair market share of around 9% among private health insurance providers (~4.5% market share including public sector companies), it still ran underwriting huge amount of losses, according to Jefferies’ calculations and reseacrh study. The return on equity of Apollo Munich Health Insurance Co. Ltd is a mere 2-3% for fiscal year 2019, which is drastically very low.
Additionally, raising the market share further for standalone health insurance players is not likely to come without a cost. “Apollo is valued at ₹2,600 crore, or 1.2x FY19 gross premiums, but earnings are still low (profit of ₹11 crore and return on equity of 3% in FY19). Therefore, synergies and cost savings post-merger will be key to improve profitability; it may also need capital infusion to support growth,” said CLSA India Pvt. Ltd in a note to clients.
Still, the new acquisition deal will boost the HDFC group expand its presence in the health insurance market, where its market share is very low. The deal will give HDFC a more stronghold in the insurance market and will also create a combined market share of about 7.2% of the gross written premium in Financial Year 2019, and will also make it the second largest private sector health insurance player.
A positive has been that public sector insurers have been reducing their aggressive pricing of health insurance products.
This should improve the profitability of health insurance companies. However, couple of synergistic benefits would also be very beneficial and could play out in the long term. Domestic penetration of health insurance is very low, which is probably another reason for the stiff pricing.