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Higher claims & expense ratios lead to a higher combined ratio

* Star Health (STARHEAL) reported a PAT of INR1.3b in 2QFY24 vs. INR934m in 2QFY23. PAT was 32% below our estimate due to higher-than-expected claims and expense ratios.

* STARHEAL had taken a price revision in Family Health Optima (w.e.f. 1 st May’23 on the renewal book), which will be reflected over the next 12 months. The policy renewals (both in volumes and in value) were in line with the company’s expectations.

* As compared to the earlier guidance of 63-65% loss ratio, management now expects to exceed the same given the rising incidences of fever and respiratory diseases. We have cut our EPS estimates by 13%/4% for FY24/25 to factor in higher claims and expense ratios in 1HFY24. Considering the long-term growth potential for the industry along with investments by STARHEAL in profitable channels and products, we reiterate our BUY rating with a TP of INR730 (based on 33x FY25E EPS).

Higher claims and expense ratios hurt profitability

* STARHEAL’s net earned premium grew 15% YoY to INR32b in 2QFY24. GDPI rose 17% YoY to INR37b. Retail Health/Group Health/Personal Accident segments grew 17%/26%/14% YoY during the quarter.

* Incurred claims were broadly in line with our estimate, but the claims ratio at 68.7% was higher than our estimate of 67%. It was up 50bp YoY/ 330bp QoQ. Claims ratio was elevated owing to severity rather than frequency.

* Commission ratio of 13.7% was in line with our expectation; however, expense ratio of 16.8% was higher than our expectations by 50bp. Overall, the combined ratio, at 99.2%, was higher than our forecast of 97%. The ratio stood at 97.9% in 2QFY23.

* Investment income in the policyholders’ account, at INR1.5b, was in line with our forecasts while shareholders’ investment income at INR1,066m was 3.2% lower than our estimate.

* Profit for 2QFY24 was at INR1.3b vs. our estimate of INR1.8b; a miss of 32%. For 1HFY24, NEP/PAT grew 14%/35% YoY to INR62.5b/INR4.1b. ? Solvency ratio for 2QFY24 was at 2.13 vs. 2.0 in 2QFY23.

Key takeaways from the management commentary

* STARHEAL has launched four new products during the quarter. The Star Smart Health Pro is a digital-first product, where customers can avail online discounts. It is also augmenting the existing product suites by launching various add-on covers, such as Young Star Extra Protect, Home Care Treatment covers and Flu Vaccination covers.

* The company has tightened its underwriting standards to enhance focus on quality business, leading to the recalibration of some geographies and portability businesses, which have poor LTV.

Valuation and view: Cut our estimates but maintain BUY

* STARHEAL had taken a price revision in Family Health Optima (w.e.f. 1st May’23 on the renewal book), which will be reflected over the next 12 months. The policy renewals (both in volumes and in value) were in line with the company’s expectations.

* Guidance: NEP growth of 20%, ROE growth of 20%, and solvency ratio of 200%.

* As compared to the earlier guidance of 63-65% loss ratio, management now expects the claims ratio to exceed the guidance range given the rising incidences of fever and respiratory diseases across the country. We have cut our EPS estimates by 13%/4% for FY24/25 to factor in higher claims and expense ratios in 1HFY24. Considering the long-term growth potential for the industry along with investments by STARHEAL in profitable channels and products, we reiterate our BUY rating with a TP of INR730 (based on 33x FY25E EPS).

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