Star Health: Good opportunity for long-term investors

The health segment is growing at mid-teens CAGR. India is under-penetrated with gross premium at less than 0.5 per cent of GDP. The CAGR until 2024-25 is expected to be 18 per cent; Star has consistently beaten industry growth rates. Retail, which is Star’s strong suit, is expected to grow slightly faster than overall health. The pandemic has created a pull towards health insurance and individuals with group insurance have, in many cases, also opted for retail. Star has a comprehensive portfolio, which should fit most needs.

The financials are adequate. The solvency ratio is 220 per cent —enough to cover double the outstanding risks. The higher the solvency ratio, the better. Another key measure is the combined ratio —calculated by dividing the loss plus expenses by total premium collected. The lower the combined ratio (CR), the better. A CR of below 100 is healthy, while a ratio of over 100 indicates losses.

Generally, Star has had a CR of 93-95 per cent. But in FY21, it incurred a loss at bottomline, due to elevated claims payout. The CR spiked to 115 per cent. It settled 150,000 Covid-related claims with gross payout of Rs 1,640 crore and net payout post-reinsurance of Rs 1,200 crore. Moreover, Covid claims averaged Rs 80,000 versus other claims at Rs 40,000.

Insurer profitability finally depends on returns from investment of surplus premium. The CR indicates Star usually ekes out a surplus of 5-6 per cent. In essence, this is free money to be invested for the long term. The portfolio return has been over 10 per cent in the past two financial years and it is at 12.6 per cent in the half year of FY22. The investment corpus (AUM) is Rs 8,812 crore, with an income of Rs 430 crore — about 77 per cent in AAA securities and GSec.

The growth factors are obvious. Star is the market leader in a new, growing segment. The pandemic is still very much a live factor though, and that’s a major risk. Nevertheless, it looks like a good bet for the long term.