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Loss ratios likely to moderate from the elevated 3QFY24 levels  

* As a follow up to our SAHI thematic report, we analyze the industry trends along with the financial performance of SAHIs and the health segment of key private players.

* Slow growth and high loss ratios have been the key concerns for STARHEAL. However, we note that the growth has been steady (16-18% YoY) and is driven by price hikes and the sum assured. The policy growth rate has been restricted, though, owing to the company’s conscious strategy of exiting certain cohorts.  

* Loss ratios for HDFC Ergo/ICICI Lombard/BAGIC rose 210bp/110bp/1,520bp YoY in 3QFY24, while Star Health/Care Health/Aditya Birla Health reported 390bp/620bp/ 360bp YoY increase in loss ratios during the quarter. The increase was primarily due to the elevated claims for respiratory disorders until Oct'23.

* However, our channel checks have indicated an improved trajectory over the past three months, which would help improve the loss ratios in 4QFY24.  

* Overall premiums in the health insurance segment continue to grow at a healthy pace, with 10MFY24 growth at 20.8% YoY vs. overall general insurance industry growth of 13.1% YoY. The segment contributed 37.7% of the total premium vs. 35.3% in 10MFY23.

* The retail health insurance segment recorded healthy growth of 19.1%/21.5% YoY in 10MFY24/Jan'24. Within this, SAHIs/Private/PSUs grew 24%/17%/10% YoY over 10MFY24 and rose 26%/17%/14% YoY in Jan'24.

* With EOM regulations in force, the group segment posted a robust growth of 20%/ 16% YoY in 10MFY24/Jan'24. Within this, SAHIs/Private/PSUs grew 36%/31%/9% YoY over 10MFY24 and rose 36%/19%/1% YoY in Jan'24.

* Considering the long-term growth potential for the industry, along with investments by STARHEAL in profitable channels and products, we reiterate our BUY rating on the stock with a TP of INR730 (based on 30x FY26E EPS). 

Premium growth remains healthy across segments  

* During 10MFY24, the overall health insurance industry posted a growth of 20.8% YoY fueled by 19.1%/20.0%/27.0% YoY growth in Retail/Group/Govt. schemes. SAHIs/Pvt/PSUs recorded a growth of 27%/41%/5% YoY. Ex-BAGIC, which saw a 126% YoY surge, the private players posted a growth of 28% YoY.

* In the retail health segment, SAHIs/Pvt/PSUs registered growth of 24%/ 17%/10% YoY. The growth was fueled primarily by the price hikes implemented and increase in the sum assured.

* In terms of growth in retail health, CARE led the SAHI pack (~46% growth) over 10MFY24. Growth for STARHEAL was restricted to 17% YoY, owing to its conscious strategy of exiting certain high-loss ratio cohorts. Similarly, among private companies, TATA AIG/ILOM/HDFC Ergo/BAGIC reported growth of 30%/ 20%/14%/12% YoY.

* During 9MFY24, the policy growth rate for STARHEAL/CARE/Manipal Cigna/Aditya Birla Health stood at 1.8%/13.1%/2.8%/6.7% YoY. For private sector players, the rate of policy growth/decline for ILOM/Tata AIA/HDFC Ergo was 6.8%/6%/-3.2% YoY.

* In terms of growth in group health, Niva led the SAHI pack (~75% growth) over 10MFY24. Among private companies, TATA AIG/ILOM/HDFC Ergo/BAGIC reported growth of 25%/31%/24%/46% YoY.  

Profitability to rebound

* During 2Q and 3QFY24, loss ratio for the industry was elevated due to the spike in monsoon-related respiratory disorders. Against previous year trends, the incidences were significantly higher in Oct'23, as the month had sporadic rains.

* However, our recent channel checks have indicated that the loss ratios have normalized since Nov'23, and have extended in 4QFY24 as well.  

* Among SAHIs, STARHEAL/CARE/Aditya Birla posted an increase in the loss ratios to 67%/60%/76% for 9MFY24. Manipal Cigna, on the other hand, recorded a slight moderation in the loss ratio to 66% during the period.

* Among private health insurance players, ILOM/HDFC Ergo/BAGIC reported an increase in the loss ratios to 80%/82%/84% for 9MFY24. TATA AIG, on the other hand, recorded a moderation in loss ratio to 77.6% during the period.  

* The insurance companies have implemented price hikes across the retail and group health insurance products. The benefits of these hikes will be reaped over the next 3-4 quarters.  

* From a profitability perspective, the claim ratios would normalize as price hikes would offset medical inflation. The Expense of Management (EOM) ratios should moderate with scale benefits. The EOM regulations will help companies manage between commissions and expenses, thus enabling growth across all channels. Consequently, with these benefits, we believe that the overall combined ratio will improve going forward.

* Among SAHIs, STARHEAL/CARE/Aditya Birla reported an increase in combined ratios to 98%/97%/121% for 9MFY24. Manipal Cigna, on the other hand, posted a slight improvement in the combined ratio to 116% for the period.

* Among private health insurance players, ILOM/HDFC Ergo recorded an increase in combined ratios to 107%/104% for 9MFY24. TATA AIG/BAGIC, on the other hand, posted an improvement in the combined ratios to 112%/101% for the period. 

Valuation and view

* Considering the long-term potential, the overall health insurance industry is well poised for growth and is on track to achieve 5x-8x industry size by 2030. We remain optimistic on the overall prospects for STARHEAL, backed by: a) its strong growth in the retail health industry, given the under-penetration, b) its increasing focus on tightening the underwriting standards, c) the strong push from the banca channel, where it will underwrite benefit-based products that have a relatively better profitability, d) the sustained growth in specialized products, and 5) its deepening presence. We expect STARHEAL to report a NEP/PAT CAGR of 17%/34% during FY23-26. We reiterate our BUY rating with a TP of INR730 (based on 30x FY26E EPS). 

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