Nuvama Institutional Equities has upgraded its rating on Star Health and Allied Insurance Company to ‘Buy’, citing improving fundamentals, better cost efficiency, and favourable regulatory dynamics. The upgrade follows a steep 58.5% fall in the company’s stock price over the past eight months, which Nuvama believes has sufficiently priced in the near-term headwinds.
The brokerage has revised its target price on the stock to ₹440 (down from ₹490 earlier), based on a reduced valuation multiple of 20.5x FY27E earnings. Nuvama noted that corrective steps taken by the insurer — including repricing of the retail portfolio and selective underwriting in the group segment — are likely to help moderate elevated loss ratios.
Loss ratio improvement on the horizon
During its Q3FY25 earnings call, Star Health had announced premium hikes on 65% of its retail portfolio by 8–12%. The impact of this repricing is expected to reflect over the next four quarters. Additionally, the company has tailored premium hikes for different customer profiles within its flagship products — for instance, non-claimants under the Family Health Optima (FHO) plan saw increases of 6.5–7%, while claimants faced hikes of 10–15%.
Nuvama expects these hikes, along with migration options to retain high-quality customers, to meaningfully improve loss ratios in the retail segment. In the group business, where claim ratios remained elevated at 90.4% in 9MFY25, management has planned recalibrated underwriting, especially in the banca channel. This is likely to deliver a 100 bps improvement in overall loss ratios.
Retail momentum and agency recalibration
Star Health’s retail fresh business growth has remained robust, with estimates pointing to further acceleration in January and February 2025 over the 22% growth seen in 9MFY25. Nuvama highlights that long-term business now comprises a greater portion of new policies, which improves renewal visibility and reduces claim volatility.
Notably, the insurer’s recalibrated agency channel — which contributes over 80% of total business — delivered a 14% YoY growth in fresh premium (adjusted for 1/n accounting). As this premium gradually flows into the earned premium line, Nuvama expects continued improvement in the loss ratio profile.
Regulatory support and structural positives
Nuvama also believes that IRDAI’s likely stricter enforcement of Expense of Management (EoM) norms will lead to reduced competitive intensity in the sector. With Star Health’s EoM ratio already at 33% — below the regulatory ceiling — the company is well-placed to benefit from any industry-wide tightening.
While the upcoming composite license regime may intensify competition, Nuvama argues that Star Health’s diversified distribution and dominance in agency channels should help it weather the challenge better than peers.
Disclaimer: This article is for informational purposes only. Investors are advised to consult their financial advisors before making any investment decisions.
