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Growth, profitability and capital outlook remain robust

We hosted management of Star Health and Allied Insurance Company in London on June 23-24 for meetings with a large number of FPIs to discuss the company’s business performance and growth trajectory and address investor concerns. The key highlights: 1) investors remain positive on the retail health insurance business in India; 2) the possible entry of life insurers into health indemnity would only mean a little extra competition and nothing more; 3) the company should continue to focus on granular distribution rather than relying on any large distributor.

* Investors positive on retail health insurance in India:

Most of the investors were confident about the strong growth potential of the retail health insurance business in India and acknowledged Star Health's MOAT in this business segment. Notwithstanding short-term volatility in growth, investors were broadly of the view that constantly increasing affluence and rising medical inflation, along with a demand for good healthcare, will keep driving retail health insurance in India over the medium to long term.

* A few external and intrinsic developments explain the material underperformance of STARHEALTH’s stock price:

Investors acknowledged that Star Health shares have underperformed since listing, despite improved financial performance and the absence of major Covid-related challenges. Investors attributed the underperformance to a host of factors, including: 1) equity outflow from emerging markets amid rising interest rates; 2) a relative shift of funds from growth to value strategy; and 3) possible mispricing of the shares in the IPO amid euphoric equity markets. However, investors acknowledged that these developments are in the past now and has no bearings on company’s future fundamentals.

* Possible permission for life insurers to offer health indemnity products means increased competition but nothing radical:

There was a great amount of interest among investors in media reports that life insurers may be allowed to sell health indemnity products. In this context, Star Health management believes that the regulatory and legislative changes will take their own time. If approved, the move would result in more players offering health products, but given the different nature of health indemnity products, there will still be a reasonable ask for the life insurers to make a mark in incremental health business. It is worth noting here that life insurers were allowed to sell health indemnity products till mid-2016 and yet they did not have much success. At this juncture, it is yet to be seen if life insurers will be allowed to manufacture and distribute or only distribute health indemnity products.

* Granular and Omni-channel distribution is the way forward:

A majority of investors were of the view that it serves the company better to have a granular distribution channel like its current extensive agency distribution. Investors acknowledged the need for an omnichannel distribution network, including banca and direct online. However, with developments in the UK General Insurance sector in the back of their mind, investors appreciated the fact that STARHELTH has done really well by not building its distribution model heavily reliant on any large bank distributors or large web aggregators/brokers. Investors were of the view that efforts in building own digital distribution would also pay off better in future.

* Growth, profitability and capital on the right track: Management

appeared confident about the company’s growth, profitability and capital position in FY23 and beyond. The turnaround in profitability has already started from Q4FY22. On the growth front, management remained confident of achieving ~22-24% retail premium growth, driven by the combination of new customer acquisitions and upselling to existing customers. On the profitability front, management is confident of achieving a ~63-65% claims ratio and a ~93-95% combined ratio in the absence of a major Covid-19 wave in the future. On capital, management is comfortable with the current developments. With organic capital accrual and the solvency requirement moving to the premium factor from the current claims factor, solvency should improve to ~190% by FY23 and then may decline by ~7-8% annually as growth will outstrip the RoE. Overall, management does not see any need for an equity capital raise over the next 3 years to support its envisaged growth of ~22-24%.

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