Home / Markets / Mark To Market /  Apollo Munich may be a good catch for HDFC, but comes at a huge cost

Why is there such a hefty price tag for a piece of the health insurance market? Last year, 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.

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 are expensive, especially given the poor profitability metrics 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 involves a two-step process, wherein HDFC Ltd will first acquire the stake of Apollo Munich’s local promoters for about 1,350 crore. In about nine months, the company will be merged into HDFC Ergo General Insurance Co. Ltd.

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(Naveen Kumar Saini/Mint)

While Apollo has a decent market share (about 9%) among private health insurance providers (~4.5% market share including public sector companies), it still ran underwriting losses, according to Jefferies’ calculations. The return on equity of Apollo Munich Health Insurance Co. Ltd is a mere 2-3% for fiscal year 2019, which is significantly 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 deal will help the HDFC group expand its presence in the health insurance market, where its share is low. The deal will give HDFC a combined market share of about 7.2% of the gross written premium in FY19, 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. Besides, some synergistic benefits could also play out in the long run. Domestic penetration of health insurance is low, which is probably another reason for the stiff price.

Of course, given HDFC’s large size, the premium valuation doesn’t hurt much. The 1,350 crore price tag compares with a market capitalization of 3.78 trillion for HDFC.

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