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Self-correcting business model will mitigate loss ratio

We initiate coverage on Star Health Insurance (Star) with a BUY rating due to the following key reasons (1) While loss ratio is currently undergoing a spike, the same will be mitigated via various factors, including a self-correcting business model (2) Star runs a judiciously structured business strategy, which leads to superior, differentiated outcomes (3) Star will continue to benefit from an unparalleled physical distribution network that cannot be replicated easily by competitors (4) Star displays sound expense control and has the lowest expense ratio among standalone health insurers

While loss ratio is currently undergoing a spike, the same will be mitigated via various factors, including a self-correcting business model

Loss ratio (incurred claims ratio) for Star for 1HFY25 is 70.2%, which is materially higher than the loss ratio for FY23/24 at 65.0/66.5%. Rise in health segment loss ratio is an industry-wide phenomenon due to medical inflation and behavioural changes in the insured pool. However, this will be well mitigated by Star through price hikes, inherent business seasonality, hospital negotiation, fraud detection, improved cashless turnaround, investment in wellness, tele-medicine and home care. It may be noted that average price hikes of ~10% have been taken for 10-12% of business and, by the end of the year, 50-60% of business will be similarly repriced. While Star is playing catchup to medical inflation, its self-correcting business model will ensure price hikes will address this inflation in 18-24 months. Furthermore, there is material seasonality in the business model with average loss ratio for 4Q amounting to 53.3% over FY17-24 (excl. FY21) compared with an overall average loss ratio of 67.1% (excl. FY21)

Star runs a judiciously structured business strategy, which leads to superior, differentiated outcomes

Star is the most retail-oriented standalone health insurer with a retail share of 91.3% in 1HFY25 GDPI compared with 39.5-70.3% for peers. While retail health is a slow-burn business, once established, is stickier. Star has decided to pursue some Group business but relatively cautiously. Its share of Group business has inched up from 6.2% in FY23 to 8.7% in 1HFY25, mainly due to the addition of Banca partners, which have risen from 27 as of March 2022 to 44 as of September 2024, which is positive. On the EmployerEmployee Group business, Star has been cautious owing to low brand loyalty, its share being just 3% of GWP. Importantly, Star has focused on selling Indemnity products as opposed to Benefit products, the latter's share in overall business being kept down to 2.5-3%. This and disciplined right-selling have aided business renewal, with retail health renewal ratio for Star being 95% compared with 83-88% for the industry

Star will continue to benefit from an unparalleled physical distribution network that cannot be replicated easily by competitors

Star Health has by far the highest number of agents on the field in our 13-player comparison universe with 741 thousand agents, with Care Health a distant second at 321 thousand. Star Health has the second largest branch network with 902 branches in our comparison universe behind New India, which has more than 1700 branches but the latter is a diversified general insurer from the PSU space. The hospital network size seems to be steady at around 14000 since FY23, which is indicative of the lack of need to materially increase the hospital count in the near term. Importantly, agent productivity for Star is Rs 1.7 lac (1 lac = 0.1mn) in 1HFY25, which is the highest among standalone health insurers, which range between Rs 0.5-1.3 lac. Agency force contributed as much as 79.3% of gross direct premium in 1HFY25, which is by far the highest share among peers, indicative of low dependence on corporate distribution partners. Ultimately, Star’s physical distribution network underpins its guidance of doubling FY24 premium over 4 years in FY28, which implies a 16-18% premium CAGR.

Star displays sound expense control and has the lowest expense ratio among standalone health insurers

The expense ratio for Star in 1HFY25 amounted to 31.5%, which is the lowest among standalone health insurers, which range between 35.0-46.0%. Opex ratio for Star at 17.2% compared with other standalone health insurers ranging between 21.0-26.4%, barring Care Health, which is at 17.3%. We initiate coverage on Star with a BUY rating and a price target of Rs 625 We value Star at 35x FY26E P/E (4.4x FY26E P/B) for an FY24-27E EPS CAGR of 17%