Star Health gains from retail growth and improved claims management

Investment View and Key Drivers

Motilal Oswal Financial Services Ltd. retains its Buy recommendation on Star Health following a 1QFY27 operating performance that was ahead of its expectations. The broker sees retail health growth, improving claims management and operating efficiency from scale as the central drivers of the investment case.

The broker also sees a long-term opportunity from the under-penetration of retail health insurance and its GST exemption. Investments in profitable channels and products are expected to support Star Health's long-term growth.

1QFY27 Financial Performance

Star Health reported gross written premium (GWP) of Rs 4,220 crore in 1QFY27, up 19 per cent year on year. Fresh retail-health GWP increased 37 per cent year on year to Rs 730 crore, although management expects this elevated growth rate to normalise gradually as the base catches up.

Insurance revenue grew 13.4 per cent year on year to Rs 4,917 crore, broadly in line with Motilal Oswal's estimate. Revenue growth was below GWP growth because of the accounting treatment of long-term policies. Management expects insurance revenue growth to improve to 15-16 per cent as the long-term business mix stabilises. Star Health transitioned to Ind AS accounting from 1QFY27, and Motilal Oswal has prepared its estimates accordingly.

Claims Management and Underwriting Improvement

Management attributed the improvement in the loss ratio to better portfolio quality, calibrated pricing and enhanced claims management. Wellness investments and teleconsultation are intended to contain claim frequency and severity. Teleconsultations increased to 50,000 in 1QFY27 from 9,000 a year earlier.

The retail-health portfolio and a lower contribution from the relatively higher-loss group-health business supported profitability. Management noted that the second quarter is historically the weakest quarter for claims and expects the same seasonal trend this year. Pricing revisions are generally implemented in the fourth quarter, with benefits accruing progressively in the subsequent year.

Distribution, Efficiency and Balance Sheet

Distribution remains a key strength in Motilal Oswal's view. Proprietary channels generated 91 per cent of GWP, supported by 850,000 agents after the addition of 20,000 agents during the quarter. Agent productivity improved 19 per cent year on year to Rs 1,50,000.

• Agency: Accounted for 85 per cent of GWP, while fresh retail business grew 26 per cent year on year.
• Direct-to-consumer (D2C): Accounted for 5.5 per cent of GWP and grew 142 per cent year on year.
• Partnerships: Accounted for 7 per cent of GWP and grew 33 per cent year on year.

Within digital business, 74 per cent was sourced through D2C and 26 per cent through digital partners. Management expects a further 30-40 basis point improvement in the expense ratio through technology and process automation.

Reinsurance costs should decline as a large 2023 treaty for long-term business runs off. Discussions with GIC Re may also improve treaty economics. Assets under management reached Rs 21,900 crore, while solvency remained stable at 2.1 times.

Motilal Oswal's Forecasts and Valuation

Motilal Oswal values Star Health at 25 times FY28E IFRS PAT to derive a target price of Rs 770. The recommendation remains Buy.

Factors That Could Temper the Thesis

• Normalisation in fresh retail-health growth as the base catches up.
• Seasonally weaker claims performance in the second quarter.
• Possible regulatory changes affecting distribution economics.

The broker believes Star Health's high proprietary-channel mix provides resilience against potential pressure on distribution economics.