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NEP surprises positively, claims remain elevated

* Net underwriting profit stood at INR1.6b in 1QFY23 (v/s our underwriting loss estimate of INR415m). The beat was led by a 25% outperformance on NEP, which was driven by a release in unexpired risk reserve.

* Incurred claims came in 29% higher than our expectation at INR17.8b. Resultantly, incurred claims ratio stood at 66% (est. 64%).

* Overall, the combined ratio stood at 98.2% (est. 94.5%) v/s 121%/98.4% in 1Q/4QFY22.

* PAT, at INR2.1b, was higher than our forecasts of INR1.4b. The solvency ratio stood at 1.9 as compared to 1.7 in 4QFY22.

Subdued premium growth with a decline in Group premium

* Total GWP stood at INR24.6b (7% lower than our estimate), a growth of 13% YoY. Within GWP, Retail Health saw decent growth of 13% YoY to INR22.7b, thereby maintaining its share in overall premium to 92%. The Group Health business declined by 43% YoY to INR1.6b. Personal Accident premium grew 31.5% YoY to INR358m.

* STARHEAL saw an improvement in the Retail Health renewal ratio to 94% in 1QFY23 v/s 90% in 1QFY22.

* Investment income at INR1.2b was 4% below our estimate, denoting a growth of 40% YoY.

Elevated claims impact the combined ratio

* Incurred claims remain elevated at INR17.8b. It declined by 13% YoY, but remained flat sequentially. The loss ratio stood at 66% v/s 91%/68.1% in 1Q/4QFY22.

* Commission ratio, at 13.7%, was marginally higher than our forecast (13.5%). Expense ratio, at 18.2%, was also above estimate of 17%. Overall, the combined ratio, at 98.2%, was higher than our forecast of 94.5%. The combined ratio remained flat sequentially, but improved by 2,300bp.

* The company reported to underwriting profit of INR1.6b in 1QFY23, after reporting an underwriting loss for the past many quarters.

Highlights from the management commentary

* The management maintained its Retail Health premium guidance at 20- 25%, with 8-9% contributed by price hikes. However, it expects overall premium growth to stay muted, due to a decline in the Group business.

* For FY23, it guided at a claim/combined ratio of 65-66%/93-95%.

* ESOP expense stood at INR550m in 1QFY23. For 2Q/3QFY23, the management guided at an ESOP expense of INR550m/INR360m.

Valuation and view

We remain optimistic about the overall prospects for STARHEAL, backed by: a) a strong growth in Retail Health, given its under-penetration, b) healthy earnings growth, led by normalization in the claims ratio, c) limited cyclicality risk (Commercial lines and Motor Insurance have high cyclicality), and d) healthy RoE profile (15-17% over the medium term). In 1QFY23, although claims were higher than our expectation on back of COVID-related medical inflation, its Retail Health business continued to grow better than the industry. While we broadly retain our FY24 estimate, we have cut our FY23 EPS by 9% to factor in higher ESOP costs. We also introduce our FY25 estimate, wherein we expect GWP/ underwriting profit/PAT growth of 19%/46%/30%. We roll forward our TP to 40x Sep’24E from 40x FY24E to arrive at a revised fair value of INR850. We maintain our Buy rating.

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