Last year, UnitedHealth Group (NYSE:UNH) announced the acquisition of Brazilian healthcare provider Amil Participações SA for $4.3 billion.  The U.S. based health insurance company planned to capitalize on Brazil’s burgeoning middle class using Amil’s established healthcare network. Brazil’s National Health Care System, Unified Health System or SUS, provides free health care to all Brazilian residents, citizens and foreigners. However, the coverage of the services provided by the government has been a matter of debate. Healthcare was one of the concerns raised by protesters participating in public demonstrations earlier this year.  As a result of the Government’s inability to provide sufficient facilities, the country’s affluent and middle class are turning to private facilitators. Nearly 25% of Brazil’s population of 200 million is now covered by private health care insurance. 
At the end of 2012, UnitedHealth, through Amil, had around 4.4 million international enrollments, earning $88 in monthly premiums. This indicates a market share of nearly 9% among private health insurance companies in Brazil. At the end of the third quarter of 2013, the figure had grown to 4.8 million, with the company earning an average of $110 in monthly premiums from each participant. We believe that the company can expand enrollments in the country in the coming years, but pricing and margins will be crucial for the venture’s future prospects. In this article, we look at the market potential for UnitedHealth and will cover the pricing strategy in a follow up article.
Our $73 price estimate for UnitedHealth’s stock is in line with the current market price.
Expansion Potential Is Immense
Health insurance in Brazil is highly regulated by the Agência Nacional de Saúde Suplementar (ANS). There are several health care providers in the country, including insurers such as Bradesco and Sul America, and health maintenance organizations (HMOs) Amil and Omint. The country’s population currently stands at just over 200 million, with a median age of 30.3 years.  The population growth rate is relatively low at 0.83% (Brazil ranks 133rd in the world in terms of population growth rate) while the life expectancy is over 73 years, indicating the populace will gradually age in the coming years. The real GDP growth rate has dipped drastically, from 7.5% in 2010 to an estimated 0.9% for the current year.
However, the income distribution amongst the Brazilian population is improving, shown by changes in the Gini Index, which dropped from 57.7 in 2004 to 51.9 in 2012.  (A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality) The income share earned by the middle 40% (second and third 20%) of the population has increased from 17% in 2004 to more than 20%.  The expanding middle class, as well as the high literacy rate of over 90%, will lead to higher demand for high-quality health care services in the coming years.
Another factor contributing to growing demand is the healthy job market. The unemployment rate recently fell to a record low of 5.2% for the month of October.  As in the U.S., where 96% of all companies with 50 or more employees already offer health insurance to their employees, we expect employer-provided health insurance services to expand in Brazil in the coming years. 
Brazil’s population is expected to reach 212 million by 2020.  If private health penetration increases from 25% to 33%, then there will be 69 million people enrolled in private health insurance by the end of the decade. Given UnitedHealth’s experience and Amil’s reputation, we expect the venture’s market share to expand to at least 10%. The company would have 6.9 million international enrollments in this scenario. However, there is an upside of 10% to our valuation if the company can achieve a market share of 15%, reaching 10 million enrollments from Brazil by the end of the decade.Notes:
- UnitedHealth to Buy 90% of Brazil’s Amil for $4.3 Billion [↩]
- Protest-hit Brazil ‘missed chance’ to improve services [↩]
- Brazilian Private Health Care Market—Ready for Liftoff, International News, January 2012 – Issue No.55 [↩]
- CIA Factbook [↩]
- GINI index, World Bank [↩]
- Income share held by third 20%, World Bank [↩]
- Brazil October Unemployment Rate Falls to Record Low for Month [↩]
- White House Report [↩]
- World Population Review [↩]