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Capturing growth without compromising profitability

We hosted a Singapore roadshow with STARHEAL. Below are the key insights from the meet:

* The management expects the Retail Health segment to clock 20-25% CAGR over the next two-three years. The key growth drivers will be: 1) increased focus on lower-tier cities, 2) tie up with new banca partners, with the aim to double its share to 8% in FY23, and 3) increased share of digital sales.

* It aims to raise the sum assured by: 1) expanding the share of policyholders increasing their sum assured at the time of renewal in FY23 (7-8% currently), and 2) rising awareness of adequate sum assured.

* The company derives 15% of its GWP from specialized products. It has been the pioneer in specialty products such as newborn baby cover from day one; transplantation, where the donor is also covered; artificial insemination; among others.

* Senior citizen products, which constitute significant portion of specialized products, had a claim ratio better than the company level claim ratio in the preCOVID period.  To improve its claim ratio, STARHEAL is: 1) taking action against hospitals 2) increasing tie ups with hospitals, wherein it plays the role of claim scrutinizer, and 3) improve the share of its preferred hospital network with agreed pricing.

* Within the Group business, the company is looking to exit large corporates and focus only on SMEs, with a combined ratio of 95-96%. It aims to drive the SME segment at a significantly faster rate.

* The agency channel, with a share of 75-80%, is expected to reduce significantly in the next few years, led by aggressive growth in banca, digital, and other channels. The share of banca channel will increase to 8% in FY23 from 4% in FY22.

* The management is confident of growing its Retail Health book at 20-25% CAGR, with a combined ratio of 92-94% and no further need to raise capital over the next two years. It aims to improve its OPEX ratio by 50-100bp annually and maintain the combined ratio between 92% and 94%, with a RoE of 16-18% over the medium term. Solvency ratio will improve to 1.95x by end of FY23, with the calculation shifting from claims to commissions.

* We remain optimistic about the overall prospects of STARHEAL, backed by: a) strong growth in Retail Health, given its under-penetration; b) healthy earnings growth, led by normalization in the claim ratio; c) limited cyclicality risk (commercial lines and Motor Insurance have high cyclicality). We expect the gross premium to clock 25% CAGR and claim ratio to normalize ~64%, with a combined ratio of ~92% over FY22-24. We upgrade our FY23/FY24 earnings estimate by 6.6%/5.5% respectively driven by profitable business mix and maintain our Buy rating on the stock with a revised TP of INR840 (based on 40x FY24E P/E).

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