Sell Star Health and Allied Insurance Ltd for the Target Rs. 520 by Motilal Oswal Financial Services Ltd
Navigating growth with caution
* Star Health (STARHEAL) has reported lower growth than its SAHI peers, which has led to market share loss for the company in the health segment to 11.4% (YTDFY26) vs. 15.7% in FY21. However, we believe that a pickup in fresh premium growth recently should help the company sustain its market share.
* Its retail health performance has been lower than the industry level due to lower retention after price hikes and intensifying competition, which led to market share erosion. Its exit from group health accounts has lowered the diversification opportunities for the company.
* Multiple rounds of repricing done last year, along with annual price hikes expected this year, will help in managing the claims ratio. However, the company’s aging back book will keep the claims ratio elevated.
* STARHEAL’s expense ratios have improved consistently (30.8% in FY25 from 30.2% in FY24), despite strong new business growth. While the commission ratios will remain elevated due to rising share of fresh business (15% in FY26/FY27), operational efficiency will aid improvement in opex ratio (15.4%/14.6% in FY26/FY27).
* STARHEAL has been trying to diversify its distribution mix with increasing bancassurance tie-ups and broker relationships. However, agency channel continues to dominate with 82% share. We see open architecture for agency as a possible risk.
* The proposed GST exemption on insurance premiums could lower effective prices and improve affordability for customers, aiding retail health penetration. However, if insurers lose access to input tax credit for their operating costs, the profitability would be hit.
* IFRS accounting will have a positive impact on the industry’s profitability due to deferred acquisition costs and discounting of claim reserves. We expect STARHEAL’s profitability to improve by 15-20% on the back of IFRS accounting
* We expect a CAGR of 14%/8% in IGAAP GWP/PAT over FY25-27E, with the combined ratio improving to 98.6% in FY27E. We maintain BUY rating on the stock with a TP of INR520 (valuing the company at 29x FY27E P/E).
Product mix – Retail health remains the cornerstone but market share is declining.
Retail Health
* STARHEAL’s business is dominated by retail health, but the recent trends point to a moderation in growth and some erosion of market share. Retail health segment performance has been lower than the industry level, with FY25 growth at 10% vs. industry growth at 15.2%, leading to a decline in its retail health market share to 32.6% (from 33.1% in FY24). We expect a CAGR of 15% in retail health premiums over FY25-27E.
* The deceleration in retail health business is partly due to the repricing of renewal cohorts and higher ticket sizes limiting affordability, but it also reflects heightened competition. While the company’s fresh business growth has been in the range of 20-25% YoY, retention ratios declined below 95% from 3QFY24 to 4QFY25, likely due to price hikes.
* Repricing was done on 2/3rd of retail portfolio in FY25, aimed at aligning loss ratios. Rising claim severity and frequency, along with aging back book, have led to an elevated claim ratio in the range of 69-71% for the last few quarters. However, some improvement in the loss ratio would likely start reflecting in the next 6-9 months. Further, incremental price revisions are proposed again as a part of annual repricing in FY26.
* STARHEAL’s distribution continues to be heavily skewed toward the agency channel (~82% of GWP), with bancassurance (~9-10%) and digital/direct (~8%) making only modest contributions, resulting in concentration risk. While agency distribution has historically been a strength, the possible open architecture regulation for agents could impact growth for STARHEAL. Agency-driven growth is harder to scale up in metros and affluent segments, where customers are increasingly purchasing via digital platforms or bank/aggregator tie-ups.
Group Health
* The company has exited large corporates and co-insurance accounts, which had proven unprofitable due to unfavorable loss ratios.
* STARHEAL will remain selective in this segment with a focus on SME, where underwriting is more prudent. SME contribution in the business mix has improved to 60% in 4QFY25 from 40% in 1QFY25. STARHEAL has also implemented price hikes in employer-employee portfolios to improve loss ratios.
* While its strategy to reduce group business contribution has helped avoid unprofitable volumes, it has also reduced revenue diversification opportunities for the company
IFRS impact on growth
* Earned premiums will be accounted on a 1/n basis. Since STARHEAL follows 1/365 accounting for unexpired risk reserve, there would not be any impact on growth due to a change in accounting.
* IFRS better aligns revenue with policy tenure and enhances comparability with global insurers. The real gauge of growth will be fresh retail volumes and persistency trends, which remain firmly intact.
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