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Star Health (Star) hosted its Analyst Day in Chennai, where the company demonstrated its strength across the functions and product life cycle stages of the health insurance business. Star has developed formidable expertise in product design, pricing, underwriting, distribution, and claims processing, given its 15 years of approach towards the health insurance business, particularly retail health. This expertise across the health insurance business functions gives management the confidence to continue its profitable growth journey (93-95% Combined Ratio, with ~20% premium growth) over many years, despite a fast-changing regulatory environment and heightened competition. On the regulatory front, the new Expense of Management (EoM) regulations would put additional pressure on smaller SAHIs and many multiline general insurers that are presently non-compliant. This would give an advantage to Star, which has far better expense ratios. Star’s shares have materially underperformed the market, owing to a combination of expensive valuation and earnings volatility, and currently trade on FY25E P/E of 23x, which looks appealing with growth and profitability expected to accelerate going ahead. We reiterate our BUY rating on the stock with a Dec-23 TP of Rs670/share.

Well-positioned to grow amid changing regulations: The recently notified EoM Regulations 2023 for general and health insurance have put a cap of 35% on EoM for health insurance and 30% for general insurance. This gives Star an advantage because all other SAHIs and the majority of general insurers (except for 5-6) are presently non-compliant with EoM limits and will be more disciplined in the coming years as they submit their plans to become compliant in three years. The removal of the commission limit also opens many new distribution avenues, especially the Public Sector Bank channel, as a big opportunity, which can now add more partners as they can receive higher commission in a transparent manner. Given the high touch and high frequency nature of health insurance products, management believes it will be difficult for life insurers to establish retail health indemnity business and is confident of maintaining its pole position in retail health.

The optimal confluence of technology and human expertise fortifies Star’s strengths across business functions: Star has capitalized well on its large policy and claims database in retail health insurance of over 15 years to innovate on product offerings ranging from claims settlement to renewal. We believe Star continues to have a significant moat when dealing with three key stakeholders of the health insurance business – Customers, Distributors, and Service Providers (hospitals) – owing to optimal confluence of technology and human expertise across functions. This medical expertise is extremely valuable in underwriting, fraud detection, and claims settlement.

Claims processing is a mix of art and science, requiring both technology and human expertise: The claims processing function is the core of a health insurance company, and it has an impact on customer loyalty and the company's profitability. On the one hand, it is desirable to have the shortest possible turnaround time, while on the other hand, it is essential to get the best possible rates from hospitals and detect all frauds committed by errant customers and hospitals. This combination of diverging requirements necessitates sophisticated use of technology to speed up the process and make use of the database, as well as deep human expertise of the medical domain to use learnings from each fraudulent activity to feed into the rule engines and models.

Execution of profitable growth strategy to drive stock performance; reiterate BUY: Since its IPO, Star’s shares have materially underperformed the broader market due to a variety of factors related to economic and regulatory environments, as well as company-specific growth and profitability issues. However, in recent quarters, the company has been on track to deliver profitable growth. Going ahead, management continues to maintain its 93-95% combined ratio and ~20% premium growth. In this context, we believe Star’s shares should follow the company's profitable growth journey. We reiterate our BUY rating on the stock with a Dec-23E TP of Rs670 (implying FY25E P/E of 23x).

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