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Commendable all-round performance

* Star Health (STARHEAL) reported a PAT of INR1.02b in 4QFY23 v/s INR2.1b in 3Q. This was 25% above our estimate fueled by better-than-expected claims and expense ratio. Hence, operating profit came in at INR751m v/s our estimate of INR514m. GDPI grew 14% YoY to INR42b during the quarter.

* Management has guided for a higher-than-industry growth in premium and an improvement in combined ratio in FY24. The confidence in the guidance stems from: a) price hikes, b) strong growth in benefit-based products within the banca channel, and 3) significant benefits arising from fraud claim detection.

* We raise our FY24/25 earnings estimates by 3%/6% mainly led by lower expense ratios. These gains were partially offset by weaker-than-forecasted investment performance. Our combined ratio estimates are lower by 30bp/60bp for FY24/FY25 to 93.5%/92.7%. Reiterate BUY with a revised TP of INR720 (based on 36x FY25E EPS).

Improvement in claims & expense ratio drives profitability

* STARHEAL’s net earned premium grew 11% YoY to INR29b in 4QFY23. GDPI rose 14% YoY to INR42b. Retail Health/Personal Accident segments grew 17%/3% YoY, while group health segment dipped 16% YoY in 4QFY23.

* Incurred claims were lower than our expectations and thus the loss ratio came in at 62%, which is below our estimate of 63.7%.

* While the commission ratio came in at 14.1% (slightly higher than our estimates), expense ratio stood at 15.3% (marginally lower than our estimates). Overall, the combined ratio came in at 91.4% (v/s 98.4% in 4QFY22), which was better than our forecast of 92.7%.

* Investment income in policyholders’ account (at INR1.4b) was 15% higher than our forecast. However, the shareholders' investment income came in at INR790m that was 16% below our estimate during the quarter.

* Profit for the quarter was at INR1,018m v/s our estimate of INR812m (25% beat). The beat was primarily driven by better-than-estimated expense & claims ratio.

* For FY23, STARHEAL’s NEP was at INR113b (+11% YoY); Underwriting profit stood at INR2.05b (v/s a loss of INR20.6b YoY); Combined ratio was at 95.3% (v/s 119.7%); and PAT stood at INR6.2b (v/s a loss of INR10.4b).

* Solvency ratio for 4QFY23 was at 2.14 (v/s 2.17 in 3QFY23).

Key takeaways from the management commentary

* Growth in retail health for FY23 was a mix of 50:50 in terms of volumes (NOP growth of 9%) and value. In FY24, growth will be driven more by value than volume (60:40) because of the price hikes implemented.

Maintain estimates to factor in the strong performance

* We raise our FY24/25 EPS estimates by 3%/6% mainly led by lower expense ratios. These gains were partially offset by weaker-than-forecasted investment performance. Our combined ratio estimates are lower by 30bp/60bp for FY24/FY25 to 93.5%/92.7%.

* We expect STARHEAL to deliver 19% gross premium CAGR over FY23-25, led by strong growth in Retail Health Insurance. With exit from group insurance now in the base, management expects a strong growth in group segment as well.

* Claims ratio is likely to improve as the company benefits from: 1) higher share of specialized products, 2) increase in sum assured per policy, 3) lower share of group business, 4) increasing contribution of network hospitals in claims and 5) price hikes. Scale benefits will result in the expense ratio falling 160bp over FY23-25E.

* Hence, we expect the combined ratio to improve to 92.7% in FY25 from 117.9% in FY22. We also expect RoE to improve to ~16.4% in FY25 from 11.1% in FY23.

* Reiterate BUY with a revised TP of INR720 (based on 36x FY25E EPS).

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