IGI Logo

Roadshow feedback: Well poised for profitable growth

We hosted management of Star Health and Allied Insurance Company in Mumbai on 23rd Mar’22 for meetings with a large number of DIIs to discuss the company’s business performance and growth trajectory and address investor concerns. The key highlights: 1) the company is well on track to return to profitable growth; 2) its capital position is comfortable to support growth in coming years.

* Investors positive on retail health insurance: Most of the investors were confident about the strong growth potential of retail health insurance business in India and acknowledged Star Health's MOAT in this business segment. At the time of the IPO, the hesitation of DIIs was mainly on valuation grounds, and worse-than-expected results of Q3FY22 further dented confidence. However, after the recent correction in the stock price and increasing prospects of a quicker turnaround in profitability in the wake of blunting Covid-19 severity, investors are looking at Star Health closely.

* Profitability turnaround to start from Q4FY22: Management appeared confident about a profitability turnaround in Q4FY22. Management believes that in the absence of any further Covid-19 wave, Star Health’s performance in FY23 will reflect normalcy in business, with the loss ratio at ~65% and CoR at 94-95%. Benign hospitalization needs during the Omicron wave led to an improvement in claim frequency, while the gradual withdrawal of Covid-19 compliance-led overheads on non-Covid procedures eased claims severity. Easing claims frequency and severity should drive a quicker improvement in the claims ratio.

* Growth has a long runway: On growth, the company sees a long runway and has reiterated its focus on the retail segment. Management is confident of delivering above-industry growth at ~23-25% in retail health. On the group side, the company will focus on the profitable SME segment but will reduce its already small exposure in large corporate group health. On retail health, Star Health has reiterated its focus on volume (new policy)-led growth and sees a large demand base in rural and younger population. In the post-pandemic world, the company is seeing increasing demand for health insurance from youngsters and increasing demand for higher sum assured.

* Capital position comfortable: On capital, management does not see the need for any capital raise in the next two years, as once the profitability normalizes, the required solvency margin will move to premium from claim, and the available solvency margin will benefit from net income accrual. Beyond this, a risk transfer based reinsurance treaty may be considered as another alternative to manage capital. If at all needed, Star Health can resort to raising sub-debt as well.

* Agency remains core of distribution: On the distribution front, the agency channel remains the core of its distribution strategy and the company will continue to add ~100,000 individual agents a year for the next 3-4 years. The company is working to strengthen its bancassurance channel. However, management clarified that its approach is driven by profitable growth and not just topline growth, and hence it will not go for any large bank distribution channel if terms make business unprofitable. In the web aggregator and direct online segment, the company is doing well and growth in these channels will be faster than overall company growth.

* Hospital network expansion in selective manner, new addition with pre-agreed rates only: With ~12,000 hospitals under its network, Star Health has a reasonably expansive hospital network. This means that the company is expanding its hospital network selectively in some geographies, mostly semi-urban and smaller towns. The company maintains its focus on increasing the network of hospitals with pre-agreed rates (hospitals with which the company has pre-agreed rates for a list of standard medical procedures), and the addition of hospitals is done on this basis only. The existing network hospitals that currently do not have pre-agreed rates are also being transitioned to pre-agreed rates. This helps the company manage the claims costs better.

* Product innovation and shift to Wellness from Illness to be key growth drivers: Star Health has been a pioneer in product innovation. It was the first company to offer products focused on senior citizens, people with pre-existing conditions, etc. It continues to innovate in product offerings. It has launched a women-centric product on the International Women's Day in 2022. In the initial weeks of the launch, the product has seen good traction. Star Health is also actively looking to expand the product horizon by offering Wellness products vs. the current Illness-focused mix.

* Price hike taken in flagship product: The company has taken a ~15% price hike in its flagship Family Health Optima plan. For other products, a price hike will be taken only if required. The company maintained that increasing the price of a product is the last option to be exercised only after other options to maintain product profitability are exhausted. The company highlighted that it has never increased the prices of its senior citizen plan in the last 14 years, as it remains profitable. On the reserve front, the company is comfortable with its IBNR of Rs3.38bn as of Q3FY22.

* Star Health remains an attractive profitable growth story: Overall, Star Health remains an attractive story in a sunrise sector. 1-2 quarters of profitable growth delivery will likely lead to a material outperformance of Star Health’s shares, in our view. We reiterate Buy with our Mar’23 TP of Rs1, 040, implying an FY25E P/E of ~46x and P/GWP of 2.8x.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer