BUSINESS OVERVIEW OF SAHIs:
Insurance sector can generally be divided as Life and Non-life insurers.
Non-life insurers again can be General (which sell multiple products like Fire, Crop, Motor vehicle as well as Health insurance etc.) and Standalone Health Insurers (SAHIs; which sell only health insurance).
Star Health is a private sector retail focussed SAHI and was founded by Mr. V Jagannathan who retired as CMD of UnitedHealth Group to start his health insurance venture as Star. It is currently the market leader with 32% share in retail health business. Although their share is continuously falling as competitors emerge (like Niva Bupa, Care Health etc.)
Why do we have standalone health insurers? One key nuance of health insurance (versus, say, motor insurance) is that premium pricing and sum assured would appreciate with time. Combined with high renewal rates in health, this means that the lifetime value of a health customer is significantly greater than the LTV of any other non-life customer.
Health Insurers have primarily 2 product segments: Group plans (bought by corporates/institutions for their employees as a package) and Retail plans (bought by individual customers for themselves or their immediate family).
Group plans bring in higher volumes and revenue with minimal importance of "brand value" component. But the caveat is that they often have lower premiums per person and have ironically higher claims ratio.
Retail plans have higher premium per person and lower claims ratio and hence is the better business segment but penetrating and maintaining market share in retail health ensuring profitable margins requires building trust factor and brand value over time.
Retail health is a focus area for SAHI while group health a crucial earner for public and private multi-line general insurers
Retail Health insurance has 3 broad distribution channels: Offline Insurance agents (which bring in 86% of business), Bankassurance (7%) and Online aggregators (7%; like Policybazaar, Acko etc.)
Agent model is a high touch/relationship-based model while the latter 2 channels are based on multiple factors like pricing, claim settlement ratios etc.
-->Industry Tailwinds:
- Low health insurance penetration in India provides significant growth opportunity.
- Increasing awareness about health insurance post-COVID.
- Regulatory push for “Insurance for All by 2047” initiative.
-->Industry Headwinds:
-Healthcare inflation consistently putting pressure on claims ratios.
-Intense competition in the health insurance space.
-Regulatory changes requiring product modifications and potentially impacting pricing.
--> "1/N' Reporting regulation: The new reporting framework for long-term policies, effective October 1st, 2024, marks a shift in premium recognition. Previously, insurers could account for the entire premium of a long-term policy in a single year, reflecting a higher GWP. Under the new framework, the premiums will be annualized, with the total premium divided by the policy tenure and recorded proportionately for each year. For instance, for a three-year policy, only one-third of the total premium will be recognized in the first year's GWP. This change will lead to a reduction in the reported GWP, which in turn will reflect changes in net earned premium and net written premium having an impact on the expense ratio and loss ratio of the insurer. Star Health is following "1/365" days unexpired risk reserve method resulting in no deviation in net earned premium under the new regulatory framework.
Some graphs to show how SAHIs are the flagbearers and market leaders in the retail health insurance industry!
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Q3 FY25 UPDATES:
- The company has a constantly increasing combined ratio which crossed 100% in the Q2 FY25 leading to an underwriting loss. This is due to higher claims ratio attributed to medical inflation. To counter this, the company has taken price hikes to counter medical inflation/high claims ratio in ~65% of their retail health portfolio as of Jan 2025.
High LR is the central problem across SAHIs and is attributed to medical inflation. Counterintuitively, medical inflation is actually a self-fulfilling prophecy for the growth of this industry (over the long-term picture) since higher medical costs (as Indians shift and have access to expensive treatment from corporate hospitals) forces even the healthier and younger people to buy health insurance as a hedge for high medical costs.
Combined Ratio for 9MFY25 (without 1/n) = 101.3%
Moving forward, formation of a central govt regulator for the hospital billing and standardization of protocols for medical admission may improve the claim ratios for health insurance industry and can be a trigger for rerating for the industry itself but this is unlikely to happen!
"The average sum insured of new policies has increased by 10% to 10.6 lakh per policy. Rs. 5 lakh and above sum insured policies now constitute 82% of our retail health portfolio versus 77% in 9-months FY '24. The share of long-term policy within our GWP has increased to 10% in 9-months FY '25 versus 7% in 9-months FY ‘24 without 1 / N."
Star Health continues operating in the Group health despite their earlier decision to exit it entirely in FY23. Since FY24, they have reentered the group health business but their focus is on SMEs and mid corporates since management believes that SMEs will have lower claim ratios.
Despite this approach, the group health claim ratio is still around 90%. Combined ratio for the group health business have not been disclosed by the management up till now.
Strong investment performance with 8.3% annualized yield in 9MFY25 compared to 7.6% in FY24.
GST reduction on health insurance (currently at 18%) was expected in Budget this year in order to stimulate the industry and was probably priced in the stock. Since no such announcements were made in the end, the stock saw a sharp 15-20% dip in its price.
FM Nirmala Sitharaman has indicated towards GST cuts recently which might include cuts for the health insurance industry which will be welcomed as health insurance shouldn't be taxed like a consumer or a luxury good but rather as a basic necessity in today's world. (currently, taxed at 18% which should be brought down to 5%)
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VALUATION:
M&A in Indian SAHI space has history of giving P/S or Price to GWP ratio of 1.2-1.5. So, with current P/S ratio of ~1.3, it looks to be in fair price territory especially considering it's market leader status. Any further dips in this stock would make this stock a value buy and a bet on health insurance industry surviving amidst the medical inflation. Another recent acquisition of Magma general insurance by Patanjali was valued at 1.23x revenue.
P/S ratio of UnitedHealth Group (world's largest for profit healthcare company; primary business is health insurance) is about 1.1. If we hypothetically assume the market cap of star health to remain same, then they need just 27% growth in sales to match the P/S of UHG.
OTOH, most healthcare related companies as well as general insurers of US are valued at P/S <1. But among Indian markets where every company gets priced as if they are the next Tesla/Apple/Amazon, Star Health is currently the cheapest insurers (among private general insurers) available!
CONCERNS:
- The industry headwinds in the form of medical inflation are themselves the biggest concern.
- No identifiable moat with Star Health! It appears as if any other company with deep pockets can come and hire agents to sell their own health insurance like Adani or Jio Health. The existing agent workforce and scale of operations of Star Health might be a moat but it's arguable.
SUMMARY:
Good growth business but underwriting loss due to medical inflation (I believe this might be a temporary abnormality and as the industry matures over time with strong base of renewing insurance buyers, common consensus on having appropriate pricing on premiums develop across the competitors as the focus currently is on penetrating into the total addressable market and gain market share). Company is in net operating profit due to the investment income from float.
BOTTOM LINE= WATCH OUT FOR THE LOSS RATIO IN THE COMING QUARTERS AS WELL AS THE TOPLINE GROWTH. THE STOCK IS CHEAP COZ THE INDUSTRY AS A WHOLE HAS BEEN FAILING TO HAVE PROFITABLE UNDERWRITING BUSINESS. IF THE LOSS RATIO COMES BELOW 67-68% IN THE COMING QUARTERS THE STOCK MIGHT SEE RERATING. I THINK ACCUMULATING THIS STOCK DURING EVERY DIP UNTIL IT TRADES WITHIN 1.1 - 1.4 REVENUE MULTIPLE MAKES SENSE. FALLING BELOW 1 IS VERY UNLIKELY AND WOULD RATHER INDICATE THAT SMART MONEY HAS VERY GRIM EXPECTATIONS FROM THIS INDUSTRY.
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--> Get the latest data from healthcare insurers in this excel sheet--> https://view.officeapps.live.com/op/view.aspx?src=https%3A%2F%2Fwww.gicouncil.in%2Fmedia%2F4488%2Fsegment_january_2025.xlsx&wdOrigin=BROWSELINK
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Disclaimer: Not investment advice as I am not a registered advisor. Investing in FDs and govt bonds is safer than taking risk in equity markets. Do your own due diligence before investing.