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Elevated loss ratio hits profitability, PAT miss of 29%

* Star Health (STARHEAL)’s net earned premium grew 16% YoY to INR37b (in line). For 1HFY25, net earned premium rose 16% YoY.

* Total investment income stood at INR3.6b (15% above est.), up 39% YoY. For 1HFY25, it came in at INR6.5b, a growth of 29% YoY.

* Claim ratio stood at 72.8% (vs. our est. of 70.5%). It increased 410bp YoY mainly due to the rising share of the group segment (leading to a higher loss ratio), heightened medical inflation, and elevated claims.

* The increase in loss ratio led to a 380bp YoY surge in the combined ratio to 103% (est. 100%) in 2QFY25. The company is confident of achieving a 95-96% combined ratio in the long term, but heightened medical inflation remains a challenge in the short term.

* The underwriting loss for the quarter came in at INR1.9b vs. INR784m YoY.

* A higher-than-expected loss ratio led to a 29% miss in PAT in 2QFY25 to INR1.1b (down 11% YoY). For 1HFY25, PAT grew 4% YoY to INR4.3b. Management guides for PAT to increase to INR25b by FY28.

* Considering the weak performance in 2QFY25 and structural headwinds in the form of elevated medical inflation, we cut our earnings estimates by 7.4%/12.2%/14.7% for FY25/FY26/FY27. We reiterate our BUY rating on the stock with a TP of INR630 (based on 26x Sep’26E EPS).

Claims ratio at 73%, the highest since Covid-19, hits profitability

* Gross written premium at INR43.7b grew 17% YoY (in line) in 2QFY25, led by 15% YoY growth in retail health premium and 42% YoY growth in group health premium. Management guides GWP to reach INR300b by FY28.

* New business contributed ~25% of the overall premiums, +31% YoY in 1HFY25. Growth was driven by value as well as volume. 12% of the new business was contributed by portability. New customers to Star Health as well as industry will be drivers for growth in new business.

* The commission ratio at 13.8% (est. 13.2%) was largely flat YoY, while net commission grew 13% YoY to INR5.5b (5% above our est.).

* Expense ratio at 16.4% (est. 16.2%) declined 40bp YoY on account of a 60bp decline in other expenses, while employee expenses increased 30bp as a % of NWP. Operating expenses were in line with our estimates.

* To maintain the loss ratio, STARHEAL has carried out repricing of products, contributing 10-12% of the premiums. The company is planning a repricing of ~50-60% of the product portfolio, following the differential pricing method based on cohorts.

* The solvency ratio for 2QFY25 was 2.2x vs. 2.1x in 2QFY24.

* For 2HFY25, we expect NEP/PAT to grow 16%/31% YoY to INR77.5b/ INR5.7b. The Loss ratio and combined ratio for 2HFY25 are likely to be 66% and 96% (flat YoY), respectively.

Key takeaways from the management commentary

* Claims ratio increased owing to: 1) a seasonal impact in 2Q because of the extended monsoon, 2) 10% increase in severity, 3) 6% increase in frequency led by a jump in medical claims, 4) higher reinsurance business taken last year, and 5) a rising share in the group business.

* Price corrections, investments in wellness initiatives, and hospital network management will help in keeping the loss ratio under control.

* Management is confident about achieving the guided 50bp improvement in opex ratio; however, improvement in claims ratio will be uncertain due to elevated claims and medical inflation.

* Management maintains the overall growth guidance at 18% for FY25 and anticipates to reach a GWP of INR300b and PAT of INR25b by FY28.

Valuation and view

Claims ratio witnessed an increase of 410bp YoY owing to the prolonged monsoon impact, increased severity, higher claims, and rising share of the group business. While scale benefits will help reduce the expense ratio, the loss ratio will be driven by pricing actions and product mix apart from external factors such as medical inflation. We cut our earnings by 7.4%/12.2%/14.7% for FY25/FY26/FY27. We reiterate our BUY rating with a TP of INR630 (based on 26x Sep’26E EPS).

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