Buy Star Health Insurance Ltd For Target Rs. 535 By Yes Securities Ltd
Early signs of performance improvement
Our view – Combined ratio better adjusted for new accounting approach
Combined Ratio – Combined ratio better excluding the optical impact of 1/n accounting: The incurred claim ratio was at 71.4%, up by 375bps YoY but down by - 135bps QoQ. For the retail business alone, the decline in loss ratio has been 180 bps QoQ. The company has repriced 65% of the product portfolio as of January 2025 and hence, has carried out most of the repricing. The impact of the same would be felt in the coming quarters. The company reported an expense ratio of 31.9%, up by 172bps YoY and 160bps QoQ. The expense ratio excluding the impact of 1/n accounting was 30.6% in 9MFY25. Thus, on a like for like basis, there has been no change in Expense Ratio. For 3Q, the Combined ratio was at 103.3%, up by 545bps YoY and 29bps QoQ but this would be better excluding the impact of 1/n accounting.
Premium Growth – Overall gross written premium growth remained reasonably healthy, adjusted for the optical impact of 1/n accounting: Reported gross written premium was up 5.3% YoY in 3Q. However, excluding the impact of 1/n accounting, GWP for the company grew by 16% YoY for 9MFY25 and 13.4% in 3Q, whereas the retail segment GWP grew by 14% for 9MFY25 and retail segment fresh GWP grew by 22% for 9MFY25. The Superstar product has taken off and overall growth in new business is comfortable. Management stated that the company should grow on a roughly 18% growth path, which would double FY24 premium in FY28.
We maintain BUY rating on Star Health with a revised price target of Rs 535: We value STAR at 30x FY26 P/E for an FY24-27E EPS CAGR of 16%. At our target, the implied FY26E P/B is 3.8x for an FY25/26/27E RoE of 9.8/13.2/14.8%
(See Comprehensive con call takeaways on page 2 for significant incremental colour.)
Other Highlights (See “Our View” above for elaboration and insight)
* Net premiums earned: Net premiums earned grew 2.6%/15.4% QoQ/YoY, driven higher sequentially by growth in retail health segment.
* Loss ratios: Overall loss ratio has improved/deteriorated by -135bps/375bps QoQ/YoY to 71.4%.
* Expense control: Expense ratio rose 88bps QoQ to 31.8% where opex fell -3.5% QoQ and commission and brokerage fell -8.3% QoQ
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