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STARHEALTH in pole position to 'penetrate the underpenetrated'
STARHEALTH seems ideally positioned to penetrate the health insurance sector, thanks to heightened post-covid awareness, improving operational efficiency, and better business focus. We are LONG.
STARHEALTH was incorporated in 2006. The company offers products for health insurance (including retail as well as group), personal accident, and overseas travel insurance. Retail health is one of the key focus areas, having a substantial 88% share of the revenue pie. With a market share of c. 16% in total health insurance, STARHEALTH is positioned as number two after New India Assurance and is the largest retail health insurer in India.
Increased health insurance awareness in the post-covid era bodes well for the sector
India accounts for lowest health insurance penetration at 14% in rural and 19% in urban areas, as against 91% in US and 95% in China. The health insurance industry is currently sized at $122bn and is expected to grow at a CAGR of c. 10% to reach $198bn by FY27. In H1FY23, the retail health insurance industry witnessed a growth of 14% on a Y-o-Y basis, primarily driven by increased awareness of health insurance products in the post-covid era coupled with govt pilot schemes such as Ayushman Bharat Yojna, Pradhan Mantri Suraksha Bima Yojna and Aam Aadmi Bima Yojna.
How STARHEALTH will outperform other players
STARHEALTH is the largest standalone retail health insurer in India. Product portfolio comprises 88% retail health, 10% group health, 1.5% personal accident and marginal overseas travel insurance exposure. The share of retail health insurance has increased from 84% in FY20, indicating a clear shift away from lower margin products.
The distribution is majorly led by Individual agents (82%), followed by Digital (11%), Corporate Agents (4%), Other Direct (2%) and Brokers (1%) as at H1FY23. There has been a clear shift to online platforms, which are currently driving c. 61% of the business.
The bancassurance channel drives 4% of the product distribution and has grown by 44% in H1FY23 on a Y-o-Y basis. This was primality driven by new partnership with IDFC First bank, along with existing relationships with PNB, BOB, ICICI Securities, TATA Capital, Paytm and PhonePe.
With 14% penetration, management is keen on exploiting opportunities in rural areas thanks to a new partnership with Common Services Centres (Govt. Portal), 300 new spoke locations and 200 branch offices.
Improving operational efficiency combined with increasing market share
Net premium earned stood at INR98bn in FY22, having increased by 112% from FY21. The claims ratio decreased from 194% in FY21 to 98.4% in FY22, while the Net Retention ratio stood strong at 94.3% in FY22, increasing from 76.5% in FY21.
As at Q2FY23, the expense ratio decreased from 30.5% to 29.2% while the claims ratio decreased from 85.6% to 68.2% and combined ratio decreased from 117.3% to 97.9% on Y-o-Y basis. Operating expenses for the period increased by 4% against a 16% increase in net premium earned. Solvency ratio improved from 1.87x to 1.95x indicating increased liquidity. AUM stood at INR117bn, growing by 32%. The investment yield was 1.79% (not annualized). Leverage is fairly accommodative with Debt-equity ratio decreasing from 0.15x to 0.11x during the period.
Valuation looks slightly on a higher end, though justifiable by a higher room for growth
The stock is currently trading at a P/BV Ratio of 6.13x. Close comps ICICI Lombard & New India Assurance (NSE: ICICIGI & NIACL) trade at P/BV ratio of 5.58x & 0.63x respectively. FY23E PE of 79.9x stacks up vs. ICICIGI at 60.3x & NIACL at 19.4x. STARHEALTH’s higher multiples are demonstrated by a higher annual NPE growth in FY22 at 112% vs. ICICGI’s 31% and NIACL’s 10%.
Potential risk factors include investment risk, reinvestment risk and regulatory risk but not unique to STARHEALTH. The promoters hold 58% share, while FIIs hold a substantial 35% followed by DIIs holding 4% and retail investors holding 2%.
Health insurance is the lowest penetrated product in non-life insurance sector with 63% of the health care expenses being out-of-pocket. Heightened awareness in the post-covid era provides a meaningful runway for sectoral growth. With improving operational efficiency, digital transformation business, focus on specialized products and an aim to provide services to the untapped rural sector, STARHEALTH seems favorably positioned to outperform its peers in the retail health insurance market. We are LONG.
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Disclaimer: The views expressed here are the views of Arkvega Partners LLP, and are subject to change at any time based on market and other conditions. This is neither an offer nor solicitation for the purchase or sale of any security, and should not be construed as such. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. We strongly advise you to do your own research and consult an accredited investment advisor before investing based on what you read here. Arkvega Partners LLP or its employees may have exposure in the financial instrument discussed above and can close positions in the future without prior intimation.