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Higher claims ratio dents performance

* STARHEAL reported a PAT of INR931m in 2QFY23 vs INR2.1b in 1QFY23. This was 17% below our estimates. While net earned premium was broadly inline with expectations, higher-than-expected loss ratio and lower-thanexpected investment income led to the disappointment in profit.

* The management has maintained its guidance of 63-65% loss ratio and 93-95% combined ratio for FY23. The confidence in the guidance stems from 1) Loss ratio for Oct’22 stood at 63.5% and 2) a likely price hike in flagship product that contributes to ~50% of the premium. Also, the company is looking for a growth of 20-22% in premium for FY24.

* We lower our FY23/FY2/FY25 PAT estimates by 4%/3%/2% to account for higher loss ratios. We have also trimmed our GDPI assumption, especially on the group health segment. Our combined ratio estimates are higher by 80bp/20bp/20bp for FY23/FY24/FY25 to 94.9%/93.9%/93.5%, respectively. We reiterate our Buy recommendation with a revised price target of INR810 (40x Sep’24 EPS).

Weak performance in terms of profitability

* Net earned premium grew 4% QoQ to INR28b in 2QFY23, in line with our expectations. GDPI grew 11% YoY to INR32b in the quarter. Retail Health/Personal Accident segments grew 21.5%/20.3% YoY, respectively, while the group health segment declined 53% YoY in the quarter.

* Incurred claims were 4% higher than our estimates, leading to loss ratios of 68.2% v/s our estimates of 65%. Incurred claims for 1QFY23 was at 66.3% in the quarter.

* While the commission ratio at 13% was lower than our estimates, expense ratio at 16.6% was higher than estimates. Overall, in 2QFY23, the combined ratio at 97.9% (v/s 98.2% in 1QFY23) was weaker than our forecast of 95.6%.

* Investment income in policyholders’ account at INR1.2b was 5% weaker than our forecasts, while shareholders' investment income at INR846m was in line with our estimates in the quarter.

* Profit for the quarter at INR931m missed our estimates by 17% (INR1,119m). The weakness was led by higher claims ratio and lower than forecasted investment income.

* For 1HFY23, NEP grew 18% YoY to INR55b. Underwriting profit stood at INR1.4b vs a loss of INR9.3b YoY; combined ratio stood at 97.9% vs 119.2% and PAT stood at INR3b vs a loss of INR3.8b in 2QFY23.

* Solvency ratio for 2QFY23 stood at 1.94 as compared to 1.87 in 1QFY23.

Key takeaways from the management commentary

* The company expects more than 1% reduction in claims ratio for 3QFY23 and in October 2022, the loss ratio stood at 63.5%.

* Star Health is looking to take a price hike in its flagship product, Family health optima, in 3QFY23. This product accounts for more than 50% of the premium.

Cut estimates to factor in weak performance

* We lower our FY23/FY2/FY25 PAT estimates by 4%/3%/2% to account for higher loss ratios. We have also trimmed our GDPI assumption, especially on the group health segment. Our combined ratio estimates are higher by 80bp/20bp/20bp for FY23/FY24/FY25 to 94.9%/93.9%/93.5%, in 2QFY23.

* We expect STARHEAL to deliver 18% gross premium CAGR over FY22-25, led by strong growth in the Retail Health Insurance. With increasing losses in the Corporate Health book, the management has decided to exit certain large corporate businesses, leading to a segmental decline in growth in FY23.

* Claims ratio is expected to improve with the impact of the pandemic receding and the company seeing benefits of 1) higher share of specialized products, 2) increase in sum assured per policy, 3) lower share of group business and 4) increasing contribution of network hospitals in claims. Scale benefits will result in expense ratio declining 210bp over FY22-25E.

* As a result, we expect the combined ratio to improve to 93.5% in FY25 from 117.9% in FY22. We expect RoE to improve to ~15.3% in FY25 from 11.3% in FY23.

* We reiterate our Buy recommendation with a revised target price of INR810 (40x Sep’24 EPS).

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