Star Health and Allied Insurance Company Ltd. share price target

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.

Star Health’s (STAR) dominant market position potentially makes it a key beneficiary of India’s growing health insurance sector. This is underlined by its FY23 performance (reported/adjusted PAT of Rs6.2bn/7.7bn) with combined ratio/retail health market share/adjusted RoE of 95.3%/34%/15.4%.

Star Health’s (STAR) dominant market position potentially makes it a key beneficiary of India’s growing health insurance sector. FY23E performance (we expect reported PAT of Rs6.3bn including one-off ESOP costs) will likely solidify expectations of Rs10bn PAT in FY24E. New regulations of open architecture and EOM guidelines can further boost the company’s position, which has significant moats in the form of distribution, hospital network tie-ups, and claim management track-record.