Star Health and Allied Insurance (Star), a leading health insurer in the country is coming with an IPO after having gone through 2 major spells of a raging pandemic in the last 20 months. The insurer’s financials at the end of 1H-FY22 are recuperating from the hit, further to be aided by the expected infusion of Star Health IPO proceeds - fresh issue of ₹2,000 crore to support its capital adequacy ratios. The balance ₹5,249 crore in total issue size of ₹7,249 crore is an offer for sale, the bulk of which is from one promoter Safecorp Investments. The larger promoter group which also includes prolific investor Rakesh Jhunjhunwala, will hold around 55 per cent of shareholding post-issue as well.
Star Health, established in 2006, is the largest company in Indian retail health insurance space (31.3 per cent market share). Even in the wider health insurance market involving group and personal accident covers, it is the second largest (15.8 per cent market share) in FY21, competing against PSUs and well-funded bank-based insurers. The company has established itself in the retail segment (88 per cent of revenues in FY21) and has group insurance contributing 11 per cent of revenues.
Health insurance is a crowded space with 5 standalone health insurers (SAHI), 18 private sector and 4 public sector general insurers in the fray for an industry the size of ₹58,300 crore in premiums in FY21. In the last 6 years, the industry recorded a growth of 19 per cent CAGR and is estimated to grow by 18 per cent till FY25. According to CRISIL research, SAHI operators , a relatively new model, increased their share in health insurance from 10 per cent to 26 per cent in the last six years, growing at 39 per cent CAGR. In addition to fast growth in this segment, the retail sub-division offers lower claims ratio as well (73 per cent Vs 88 per cent for government and group policies), owing to a waiting period clause, a case-by-case evaluation (unlike group insurance) and better control on underwriting.
Most operators utilise their captive bancassurance channels, direct relations and tie-ups for distribution, but health insurance, with a higher need for assisted purchase has sourced 34 per cent from agents, with Star’s vintage helping it operate at 78 per cent through agents. The company is also well diversified geographically with top three states accounting for the low concentration of 43 per cent and a hospital network of around 11,700 hospitals.
Star Health reported Gross Written Premium (GWP) growth of 32 per cent CAGR from FY2018-21 in overall health insurance. The reported premium of ₹9,349 crore in FY21 grew 35 per cent from FY20 and included only ₹150 crore from one-time policies such as Corona Kavach and Rakshak, indicating a strong sustainable demand growth for the company.
In addition to normal reinsurer cut and adjustments, FY21 gross-to-net premium was impacted by exceptional charges in revenue account of ₹920 crore. This was on account of termination of certain reinsurance and accompanying one-time provisions as mandated by IRDAI to provision for the higher risk. From 1H-FY22 company intends to lower the reinsurance cost to 5-6 per cent from 23-25 per cent earlier, likely increasing the risk undertaken for retaining a larger portion of the premium.
Star Health has had claims ratio of 62-66 per cent of net premium for FY18-20 which increased to 91-94 per cent during FY21 and H1-FY22 as Covid accounted for 30 and 41 per cent of net claims in that period, respectively. The management expects that as Covid claims normalise (now account for 5 per cent of claims in the recent quarter) and even with rise in pent-up demand from postponed treatment, the all-important claims ratio should return to earlier 65-67 per cent range from Q4-FY22 and beyond. The company’s c ombined ratio (claims + expenses) at 93 per cent in FY18-20 similarly increased to 120 per cent range in FY21.
IRDAI mandates a solvency margin of 150 per cent, which implies that companies must maintain the required capital - proportional to the risk undertaken.
A higher growth in policy book (at 30 per cent annual growth) and high upfront acquisition costs imply that Star has had to raise capital to meet solvency margin. Star has raised close to ₹2,600 crore largely towards the end of FY21 (at ₹488 per share - Star Health IPO priced at a premium of 85 per cent) to shore up the solvency ratio to 223 per cent at the end of FY21 which now stands reduced at 152 per cent (end of Q2-FY22). The fresh issue proceeds of ₹2,000 crore are expected to buffer the solvency margins again.
The first standalone health insurer’s IPO valuation at ₹50,000 crore would need all the tailwinds from the industry to have a smooth sailing post the pandemic and to support the valuations. The Star Health IPO values the company at close to 10.3 times net premium earned in FY21 or 12 times Price/Book value.
The nearest listed peer, ICICI Lombard with 22 per cent health insurance contribution in FY21 is valued at price to net premium of 6.1 times and 6.6 times Price/Book. Star Health Insurance would have to grow at 20-25 per cent till FY23 with claims ratio gradually normalising to around 70 per cent for a valuation range of 4 times FY23 net premium or 7.3 times FY23 price/book value.