The best proxy to potentially profit from India’s health insurance boom

Similarly, we all have consistently come across one narrative: that the low penetration of health insurance in India will propel growth in the sector, and, as a result, propel stocks to unprecedented heights. Yet, over five years have passed, and this narrative has yet to materialize.

Star Health, India’s largest standalone health insurance company’s performance, reflects a similar trend. Since its listing in December 2021, it has posted a disappointing -46.5% return in just over three years. Currently, it is trading near its all-time low of ₹485 per share. There is no recovery in sight, either.

Many factors contribute to underperformance, but the claim ratio remains a significant driver of Star Health’s profitability. A high claim ratio lowers profits, while a low claim ratio boosts them. This makes investing in Star Health very volatile and risky.

That is why this theme could be perhaps better played via Medi Assist, a leading third-party administrator (TPA). As the market leader and the only publicly listed TPA, it is a proxy for capitalizing on the health insurance theme. How? Let’s dig in.

TPAs are the backbone of the health insurance sector

Initially, insurers in India's health insurance sector managed all aspects, including claims processing and customer support. However, as demand grew, managing customers became more complex. In response, the Insurance Regulatory Development Authority of India introduced the TPA regulation in 2002 to manage claims processing.

TPAs play a vital role in supporting the global health insurance sector. They act as intermediaries connecting insurers, healthcare providers, and policyholders. Initially functioning only as claims processing units, they have broadened their scope to include policy management and customer service. Additionally, they manage claims for various insurers, lessening dependence on a single company.

On the other hand, insurers who outsource these functions to TPAs focus more on their core operations: underwriting risks, setting premium rates, and marketing. This benefits them by improving efficiency and reducing costs while providing valuable support and assistance to policyholders. 

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TPAs are expected to outpace the growth of the health insurance sector.

In India, health insurance premiums have grown significantly, primarily due to increased awareness caused by the 2020 pandemic. TPAs' crucial role ​​during this time has made them indispensable within the industry. The total health insurance premium served by TPA has grown at a CAGR of 18.5% over the last five years. Notably, this growth rate is in line with the growth rate of the health insurance sector.

However, health insurance volumes are growing faster than ever, and the claims process is becoming even more complex. Claims have also increased after the pandemic. As a result, insurance companies are expected to rely more on TPAs for cost savings and client-centricity.

The increasing reliance on TPAs is expected to drive their growth faster than the health insurance sector in the coming years. As a result, based on the total premiums they manage, TPAs are projected to grow at a CAGR of 24.8% over the next five years. This growth is expected to be driven by an increase in premiums managed by TPAs from 54.7% in FY22 to 61.2% in FY28.

61.2% of premium will be serviced by TPA by FY28F

Further, there has been an increase in the penetration of TPAs ​​in claim settlement, which was otherwise stagnant till FY20. This is expected to increase going forward as health insurance claims continue to grow.

76.3% of claims were settled by TPAs ​​in FY22

TPAs oversee more than 60% of group insurance policies in India. This is expected to increase as companies improve their employee health coverage and implement wellness programs, further fueling the demand for TPAs to manage costs and handle claims.

Total HI Premium Serviced by TPAs will Grow at a CAGR of 25% till FY28.

Overall, from FY18-22, premiums managed by TPAs increased at 18.5% and are projected to rise even more rapidly, at a 25.1% CAGR by FY28. This growth will likely be fueled by increased insurance penetration and claims settlement.

Also Read: Can this market leader reclaim its past glory in the ₹1 trillion sector?

Irdai mandating 100% cashless claims will boost TPA business

According to Nuvama, TPAs processed 58.7% of total claims in a cashless format, accounting for a higher 78.7% share of cashless claims serviced. With Irdai mandating 100% claims processing on a cashless basis, this opens a big growth area for TPAs.

According to Business Standard, only 56% (as of FY23) of claims are processed cashless, leaving ample room for expansion. As the cashless facility scales toward 100%, TPAs are poised to benefit due to their higher share of servicing these claims.

Medi Assist is poised to benefit most from the expanding TPA market share. Let’s examine the company in more detail.

About Medi Assist

Established in 2002, Medi Assist is a leader in the TPA space. It has a market share of 19.2% and a premium of ₹19,050 crores (as of FY24) under its management. It is recognized as the first and oldest TPA in India.

It manages public healthcare schemes with central and state governments and government agencies. Additionally, it provides claim management and various other services for insurance firms and corporates through contractual agreements.

Typically, these agreements with companies last one year, whereas those with insurance companies can last one to three years. At the end of the term, insurance companies renew these agreements at their sole discretion. The good part is that it retains 94.3% of the contract in group policies, which account for 88% of its premiums under management.

How does it earn its revenue?

It generates revenue through services offered to the group and retail portfolios, which is a percentage of the premiums under management. On the other hand, the government pays either a fixed fee per family per year or a fixed fee per claim for its plans.

Most of its revenue comes from a fixed percentage of the premiums under management, paid by health insurance companies. Its core TPA business derives a yield of 2.75% (as of FY24). This makes it a safe bet, as TPAs like Medi Assist are expected to benefit greatly from rising premiums and insurance penetration.

Furthermore, it collaborates with several health insurance companies at once. This enables diversification of its income sources and ensures a steady revenue flow, even if the business of one insurer declines.

What about financials?

The company's financial performance has been strong, marked by consistent growth and increased market share. In the first half of FY25 (H1FY25), its premiums under management grew 18.2% year-on-year (YoY). Notably, 88% of premiums under management were generated from group policies, while the remaining came from the retail segment.

Total Premium Under Management Surged 18.2% in HI1FY25

The group portfolio premiums under management have seen a robust growth of 15.6%, while the retail has seen a growth of 41.2%, albeit on a lower base. Although the retail portfolio represents a smaller share, it is now looking to grow this due to its strong growth potential.

Medi Assist has also steadily increased its market share, rising 0.7% to 19.2%, driven by increased market share in the group and retail portfolios. Its market share in the group portfolio stands at 28.4%, while in the retail segment, it is 5.6%. It is now looking to increase its share in the retail portfolio, which is expected to grow at a higher rate.

Revenue and PAT grew by 15.4% and 65% in HIFY25.

In the last three years, its revenue and PAT have grown at a CAGR of 17.2% and 13.5%, respectively.

In H1 FY25, its revenue rose 15.4% YoY to ₹348.5 crore. This revenue comprises 9.8% from government business and 4.7% from international business. Meanwhile, its PAT grew 65% to ₹40 crore, with an operating margin of 21.1%.

Successful track record of driving growth through M&A

Medi Assist is known for growing its business through inorganic means and then integrating and scaling it. All past acquisitions have yielded better results. Over the past few years, it has acquired five firms, the most recent being Paramount TPA.

Paramount is the fourth-largest TPA by total revenue, with a 4% market share per total premiums under management of ₹3,866 crore. It is the second-largest by premiums under management in the group segment, with a market share of 6.3% (as of FY24), trailing Medi Assist.

Through this acquisition, Medi Assist will further consolidate its position as the market leader, with a market share surging past 23%. According to management, this acquisition will likely be earnings accretive from FY27.

What about valuations?

Medi Assist has no listed peers, so it can be challenging to assess its valuation as a newly listed company with only one year of historical data. Its current price-to-earnings (P/E) of 47.1x has settled lower as compared to its peak multiple of 60x.

Although its current valuation is undoubtedly high, Nuvama believes Medi Assist warrants a scarcity premium in the absence of any listed peer. The company's annuity-like revenues, market-leading position, and anticipated synergies from the Paramount acquisition further support this valuation.

For more such analysis, read Profit Pulse.

Conclusion

The TPA market is highly concentrated, with the top 5 players accounting for 80% of industry revenues. As per Nuvama, among them, Medi Assist, owing to its business moat, has achieved best-in-class revenue growth, margins, and PAT growth over the years. It is the market leader, and acquiring Paramount will further strengthen its position. As health insurance penetration grows in India, premiums under management will continue to grow, benefiting Medi Assist, which has a presence in 19,305 hospitals, as per Medi Assist FY24 Annual Report.

Additionally, the approval for composite licensing in insurance is expected to boost outsourcing to TPAs, enabling life insurance companies to leverage TPAs for market entry. This trend will likely further stimulate industry growth, with Medi Assist positioned as potentially the primary beneficiary, being the market leader.

Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.  

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does not hold the stocks discussed in this article.