A Public Health Foundation of India worker conducts a blood glucose test for a patient during a free door-to-door screening programme. (Photographer: Prashanth Vishwanathan/Bloomberg)

Why Private Equity Firms Are Betting On Private Health Insurers

Falling profits and operating losses of Indian health insurers failed to deter private equity firms from acquiring two insurance companies in the last seven months. The reason for their optimism: prime minister’s health scheme for nearly 10 crore Indians and the opportunity presented by low insurance penetration in India.

A consortium of WestBridge Capital, Madison Capital and billionaire-investor Rakesh Jhunjhunwala acquired Star Health & Allied Insurance Company Ltd. in August last year at a valuation of Rs 6,300-6,500 crore. Private equity fund True North, this month, bought 51 percent in Max Bupa Health Insurance Company Ltd. for Rs 511 crore, valuing the company at Rs 1,001 crore.

“Private equity funds are betting that insurance penetration will rise in India with awareness and economic growth,” according to Anirudh Jain, head-insurance at financial services firm, Centrum Capital. “Health insurers are attractive more because of their future growth potential than their present financial position.”

At 3.69 percent, insurance penetration in India is much lower than the 6.13 percent global average, according to Insurance Regulatory and Development Authority of India’s 2017-18 annual report. Also, Prime Minister Narendra Modi’s health insurance scheme, called Ayushman Bharat, aspires to increase India’s healthcare spends to 2.5 percent of the GDP by 2025 from the existing 1.4 percent—the lowest among BRICS peers and below the global average of 5.9 percent.


The consortium of WestBridge, Madison and Jhunjhunwala acquired Star Health at 1.48 times its trailing 12-month gross written premium—equivalent to sales. True North bought Max Bupa at 1.14 times its gross premium book. Comparable industry valuations aren't available as there have hardly been any deals involving pure-play health insurers.

Still, the private equity firms bought the companies despite Star Health’s widening operating losses and Max Bupa’s declining operating profit, which nearly halved to Rs 39 crore as of December. That stemmed from underwriting losses—when claims and expenses are higher than premium earned, reflected in their combined ratio of more than 100 percent.

Star Health and Max Bupa have yet to respond to BloombergQuint’s emailed queries.

Fastest-growing health segment contributes a fourth to India’s Rs 1.5-lakh-crore general insurance industry as of March 2018, according to Investec Securities’ February note. There are just seven standalone health insurers in India, said Anirudh Jain. “While few are willing to sell, many are interested in buying and that's driving up the valuations.”

The total number of policies sold by standalone health insurers grew the fastest at a 25 percent annualised rate compared with general insurers’ 11 percent between fiscals 2013 to 2018, according to the brokerage.

Too Early To Judge

Still, it’s too early to expect that health insurers will outperform other segments. Standalone health insurers were allowed much later than the general and life insurance companies, and their businesses are still evolving, said Nidhesh Jain, financial services analyst at Investec. “At this stage, it’s difficult to value them by traditional measures such as earnings or book value as these companies are not making consistent profits. They're valued mostly on their future potential and scale.”

While these may be potentially good bets for private equity funds, they do come with risks. Health insurance had the highest claims ratio at 92 percent—they paid Rs 92 in claims for every Rs 100 earned as premium. That, according to the regulator’s annual report, compares with the claims ratio of 84 percent for motor, 82 percent for fire and 65 percent for marine segments.

The health insurance segment may also be a risky investment as it’s tightly regulated in the country and has high government involvement, said Investec’s Jain. “If the government decides to increase coverage under Ayushman Bharat and states continue with the trust model [a pool of funds] approach, it is likely to further dampen the profitability of private health insurers.”