Star Health and Allied Insurance Company Ltd. share price target

We believe Star Health (Star) is on a steady earnings growth trajectory driven by better incremental balance between volume growth and profitability, as witnessed in its Q1FY26 result (14% YoY growth in GEP while IFRS PAT grew 44% YoY).

Star Health (STARHEAL) has reported lower growth than its SAHI peers, which has led to market share loss for the company in the health segment to 11.4% (YTDFY26) vs. 15.7% in FY21.

Star Health’s (STARHEAL) net earned premium rose 12% YoY to INR39.4b (in line) during 1QFY26. Claims ratio at 69.5% (in line) grew 190bp YoY, driven by a 15% YoY increase in net claims incurred to INR27.4b (in line).

The company is currently facing challenges due to the new accounting standards and a surge in claim frequency and severity, which are affecting its profitability. However, recent price adjustments are expected to mitigate the impact of rising medical costs and hospitalisation trends, potentially leading to a gradual decline in the claims ratio over the next few quarters. A potential reduction in expense ratios and stable commission ratios are expected as the company grows. Additionally, the company is adopting a targeted approach by focusing on specific market segments...

Star Health reported weak performance for Q3FY25, with GWP growth at 5.3% (at a 1.8% miss) impacted by implementation of the 1/n regulation and Combined Ratio at 103.3% vs our estimate of 100.5% driven by higher Claims and Expense Ratio (affected by 1/n premium accounting of long-term policies).

Star Health and Allied Insurance’s (Star) Q1FY25 profit of INR 3.2bn was in line with our estimate driven by better than-expected investment performance, offsetting the impact of higher-than-expected claims ratio.

We attended Star Health’s (Star) ‘Investor and Analyst Day’ on 27 Jun’24 in Chennai. Star is building well on its vantage in the retail segment via a well-concerted strategy encompassing distribution, product innovation, superior claims processing and enhanced underwriting.

Overall, the company aims to double its GWP and triple its PAT by FY28. We estimate STARHEAL to deliver FY26E combined ratio/RoE of 94.9%/17.0%. We reiterate our BUY rating with a TP of INR730.

At 92.8% for Q4FY24 (and 96.7% for FY24), the combined ratio (CoR) of Star
Health was slightly worse than our estimates.

Profit jumped 40% YoY in 4QFY24 to INR1.4b, in line with our estimate.

Lower-than-expected volume growth and higher-than-expected combined ratio have set up a weak H1FY24 for Star Health (Star). The balance between premium price hike and tighter underwriting, leading to optimal volume growth and combined ratio, would be key in setting the trajectory back to the long-term targets of 20% RoE, 20% growth with 200% solvency.

Star Health (Star) has reported PAT of INR 2.9bn in Q1FY24 with claim/combined ratio to 65.4/97.8% YoY, respectively. The guidance of the company remains at 20% total premium growth (retail premium may grow by ~15-16%), 63-65% of loss ratio and 93-95% of combined ratio in the near term.