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Star Health, the market leader in the Indian Health Insurance industry, with retail market share of 31%, is poised to grow at a relatively faster pace vis-à-vis the overall Health Insurance industry.

Indian health insurance is grossly underpenetrated – the penetration (premium as % of GDP) and density (premium per person) stand at 0.4% and USD5, respectively. Relatively, China / the US has penetration of 0.7%/4.1% and density of USD66/USD2,679.

Only 3.5% of India’s population is covered under the retail health insurance plan, and out-of-pocket expenditure is high at 63% (world average of 18%). These statistics indicate a large opportunity for health insurers going ahead.

Standalone health insurance companies (SAHIs) have outperformed in the Retail segment (39% of the overall Health Insurance market), with their market share increasing from 40% to 50% in the past five years. This outperformance has been driven by 1) a single product focus, which has ensured product innovation; 2) a strong agency network; and 3) a strong association with hospitals. Among the SAHIs, Star Health has seen its market share increase to 32% in 10mFY22 (from 20% in FY18).

In terms of distribution, it has the highest number of agents at 0.53m, with 786 branches. Also, it has tie-ups with 12,000+ hospitals.

The company leads the market in product approvals acquired from the IRDAI. It is also a leader in specialty products, such as Cancer, Cardiac, Senior Citizens, and Diabetes, among others.

With regard to profitability, pre-FY21, the company had been delivering a claims ratio in the range of 60–66% and a combined ratio of 92–94%. The opex ratio saw sharp improvement to 19.6% in FY21 from 27.8% in FY17. Performance has been better than that of peers.

Going ahead, we expect Star to report a gross premium CAGR of 25% over FY21– 24E, going from loss of INR8.3b in FY21 to PAT of INR10.8b in FY24E. At 32.5x FY24E P/E, we find the valuations reasonable. We value the company at 40x FY24E EPS to arrive at fair value of INR750.

Retail Health Insurance – a large opportunity

The Health Insurance industry is poised to see a CAGR of 18%/23%/15%/11% in the Total/Retail/Group/Government segment over FY21–25 (CRISIL estimates). The stark under penetration of the market would be the primary growth driver. Currently, only 3.5% of the population is covered under retail health insurance plans. With government and corporate schemes, the coverage increases to 37% of the population. Relative to other major economies, India’s health insurance premium as a percentage of GDP (0.36%), density (USD5), and out-of-pocket healthcare expenditure (63%) are worse off. Furthermore, the COVID-19 pandemic created a pull for health insurance demand, reflected in 29%/17% growth in retail health insurance premiums in FY21/10MFY22. Growth was driven by 1) a surge in the number of individuals subscribing for health insurance; 2) an increase in the sum assured by existing customers; and 3) price hikes implemented by companies in the past fiscal.

Market share of SAHIs at 50%+ in Retail Health; dominance to sustain

SAHIs dominated the Retail Health segment with market share of 50% in 10MFY22. Since FY18, market share has improved 10.3%. The overall market share in the Health segment was 26% and has improved ~5%. The single product focus of SAHIs (v/s the segment-wide presence of multi-line insurers) allows them to innovate in the product segment and launch a variety of products. A further boost comes from corporate agents adopting open architecture being allowed to have an association with three SAHIs over and above three multi-line general insurance companies.

STAR – largest retail player with 32% market share

STAR is, by far, the largest retail health market player with 32% market share and the second largest player in overall health with 14% market share. Over FY18-21, STAR has increased its market share in Retail Health by 8.3%, with its premium CAGR at 31% v/s the industry CAGR of 18%. It further gained 200bps and 25bps in the retail/group segment respectively during 10MFY22 on YoY basis. One of the key drivers of these gains in market share has been its product suite – it has the highest number of retail health products empaneled with the IRDAI. It has unmatched distribution strength, with the highest number of agents among SAHIs (0.53m) and tie-ups with ~90 corporate agents. It has a pan-India presence, with 786 health insurance branches spanning 25 states and five union territories. It has been steadily growing its hospital network tie-ups and now has 12k+hospitals under its umbrella. The management pedigree at STAR is top-notch, with Mr Venkataswamy Jagannathan, erstwhile CMD of United India Insurance, at the helm. Other key management persons also have vast experience in the Insurance industry.

Profitability marred by one-offs in FY21; expect significant improvement going ahead

Empirically, STAR has reported a claims ratio of 60–66% and combined ratio of 92– 94%, better than that of most peers. The outperformance has been possible on the back of 1) a higher share of retail health in its product mix v/s the industry, 2) a higher focus on SMEs in the Group Health segment, and 3) higher agent productivity vis-à-vis other SAHIs. FY21 was an exceptional year, wherein several one-offs dented performance, namely 1) the discontinuation of the Reinsurance Voluntary Quota Sharing Treaty (VQST), which led to an impact of INR9b on NEP, 2) the shift to the 1/365 calculation of unexpired risk reserve v/s the 50% method earlier, and 3) high COVID claims. Adjusted for these one-offs, the incurred claims ratio came in at 67% vis-à-vis the reported incurred claims ratio of 87%. During 9MFY22, the claims ratios remained elevated for the company at 94% on back of 3rd wave of Covid. The expense ratio saw steady decline to 19.6% in FY21 (from 27.8% in FY17) which further declined to 17.6% in 9MFY22, primarily on the back of scale benefits. This was also reflected in healthy average RoE of 18% during FY17–20. Going ahead, we expect the normalization of the claims ratio from FY23 and sustained improvement in the expense ratio, resulting in the combined ratio improving to 93% by FY24E. RoE should improve to 17.5% in FY24E.

Valuations at 32.5x FY24E P/E reasonable; we value it at 40x

STAR Health would be the first SAHI to be listed in India. Among the general insurers, ICICI Lombard and The New India Assurance Co are direct plays, whereas GIC Re is an indirect play on the overall general insurance growth story. However, STAR offers a unique proposition to play the fastest growing segment in the General Insurance space. Given the market leadership in the Retail Health business, strong earnings growth prospects (25%+ CAGR), limited cyclicality risk (commercial lines and motor insurance have high cyclicality), and healthy RoE profile (15–17% over the medium term), we believe the stock deserves a premium. We have taken the discounted PAT approach to calculate fair P/E of 40x. On consensus estimates, ICICI Lombard trades at FY24E P/E of 25x. The relative premium for Star is justified as Star is focused on the fastest growing segment in the GI business – on the other hand, ICICI Lombard relies on cyclical segments. Moreover, Star’s higher earnings growth and higher contribution from underwriting profit v/s investment income strengthens the case. Based on these factors, we arrive at fair value of INR750 and initiate coverage with a Buy rating.

Key risks

While the COVID-19 pandemic did bring a pull for demand for health insurance, it also brought along with it a higher claims ratio. Further COVID waves could be detrimental to earnings given the severity of COVID-19 claims is 2x non-COVID19 claims. During FY21/H1FY22, on account of COVID-19, gross incurred claims amounted to INR16.4b/INR18.1b, whereas net incurred claims amounted to INR12b/INR17b. During 9MFY22 claims ratios for star health had remained elevated at 94% on back of covid claims, excluding which the claims ratio would have been at 66.5%

The increase in competition from multi-line general insurers could pose a risk to STAR’s growth.

The extension of coverage of government schemes, such as Ayushman Bharat, to ‘beyond BPL’ families could slow the industry growth rate.

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