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|Friday, 26 November 2021|
Star Health and Allied Insurance Company
Largest private health insurer
Consistent improvement in market share with largest network of hospitals and expanded distribution network
Star Health and Allied Insurance Company is the largest private health insurer in India with a market share of 15.8% in the Indian health insurance market in FY2021 in terms of Gross Written Premium (GWP). The company was the first standalone health insurance company established in India in 2006. With the comprehensive health insurance product suite, the company insured 20.5 million lives in FY2021 in retail health (89.3% of total health GWP) and group health (10.7%).
The company is strategically focused on the retail health market segment and had retail health GWP of Rs 8215.09 crore in FY2021 and Rs 4339.92 crore in H1FY2022 and consistently ranks first in the retail health insurance market in India based on retail health GWP. In FY2021, retail health GWP was over three times the retail health GWP of the next highest retail health insurance market participant, positioning the company well to continue to grow business and market share.
The company offers a range of flexible and comprehensive coverage options primarily for retail health accounting for 87.9% of total GWP in FY2021, group health 10.5%, personal accident 1.6% and overseas travel 0.01%. The products target a variety of customer segments, including individuals, families, students, senior citizens, as well as persons with preexisting medical conditions across the broader middle market customer segment.
The products include family floater products, in which the sum insured covers the entire family on the payment of a single annual premium; individual products, which are tailored to the needs of the individual; and specialized products, which focus on customers with pre-existing conditions after accounting for associated risks. From FY2018 to September 2021, the company has launched 56 new products.
The senior management team includes founders, Venkatasamy Jagannathan (Chairman and CEO), Subbarayan Prakash (Managing Director) and Anand Shankar Roy (Managing Director), who have been with the company since the first year after inception. Venkatasamy Jagannathan has over 47 years of experience in the insurance industry and prior to founding the Company, served as Chairman and Managing Director of United India Insurance Company and is currently serving on the Insurance Regulatory and Development Authority of India (IRDAI) advisory council, a position which he has held since its inception. Subbarayan Prakash has many years of experience in the health insurance industry and prior to founding the company, was a practicing general surgeon and has been instrumental in creating large health insurance hospital network. Anand Shankar Roy is an expert in the health insurance business with over 21 years of experience in the health, non-life insurance and banking sectors and manages sales, distribution, and marketing.
The company distributes its health insurance policies primarily through individual agents, which accounted for 78.9% of GWP in FY2021. Individual agents are the primary method of distribution in the health insurance industry, since health insurance is largely an assisted product in which customers often require help in selecting the policy best suited to their needs and during the claims process. The total number of individual agents grew at a CAGR of 27.3% from 0.29 million end March 2019 to 0.46 million end March 2021 and rose to 0.51 million end September 2021.
The agency distribution channel also includes corporate agent banks, which accounted for Rs 220.92 crore of GWP in FY2021 and Rs 141.54 crore in H1FY2022. Other corporate agents accounted for Rs 19.1crore of GWP in FY2021 and Rs 31.8crore in H1FY2022.
The company has led the non-public health insurance market in terms of number of new branch openings since FY2018. Its distribution network had grown to 779 health insurance branches spread across 25 states and 5 union territories in India. The existing branches are also supplemented by an extensive network of over 562 Sales Managers Stations (SMS), which are small individual service centres, and over 6,892 in-house sales managers end September 2021. The other origination channels include distribution by direct online sales through telemarketing and website, brokers, insurance marketing firms and web aggregators.
The claims process is the most sensitive part of a customer experience with health insurance and entirely in-house claims management capabilities of the company are a key part of its customer service proposition. It enables to reduce the costs associated with the claims process, improve the accuracy and cost-efficiency of the actual claim amounts, and better detect fraudulent claims.
The company employs technologies during the claims process, which proactively assists customers through every stage of a cashless claim. The investments in digital technologies, data platform and automation will continue to be key drivers that improve the effectiveness, efficiencies and innovations within business. The company has invested in advanced technologies to develop a flexible and integrated information technology platform across business processes. It has also actively focused on streamlining the underwriting and claims processes for customers through proprietary information systems.
The company has successfully built one of the largest health insurance hospital networks in India, with 11,778 hospitals end September 2021. It has entered pre-agreed arrangements with 7,741 hospitals, or 65.7%, of the total number of hospitals. The agreed hospital network enables to monitor the quality of medical service provided to customers and provides access to competitive pricing at attractive, pre-negotiated rates, which lowers claims costs and increases customer engagement. These agreed network hospitals typically offer better negotiated package-based pricing and the average claims amount in these hospitals is typically lower than average claims amount in non-agreed network hospitals, which has a positive impact on claims ratio and profitability.
The company had a solvency ratio of 1.52x end September 2021, compared to the IRDAI prescribed control level of 1.50x.
The Offer and the Objects
The initial public offer (IPO) consists of a fresh issue to raise Rs 2000 crore issuing 2.30 crore shares at lower price band of Rs 870 per share and 2.22 crore shares at the upper band of Rs 900 per share.
Further, the offer of sale (OFS) comprises issuing 5.83 crore equity share to raise Rs 5074.21 crore at lower price and Rs 5249.18 crore at upper price band.
The issue is to be made through the book-building process and will open on 30 November 2021 and will close on 02 December 2021.
The company proposes to utilize the net proceeds towards augmentation of its capital base and maintenance of solvency levels. Further, the company expects to receive the benefits of listing of the Equity Shares, including to enhance visibility and brand image among existing and potential customers.
Among the promoter group, Safecrop Investments India LLP (offered 3.07 crore equity shares for sale), Konark Trust (0.01 crore shares), MMPL Trust (9518 shares) are looking to dilute their stake in the company. Other investors selling their stake include Apis Growth 6 (0.77 crore shares), Mio IV Star (0.41 crore shares), University of Notre Dame Du Lac (0.74 crore shares), Mio Star (0.41 crore shares), ROC Capital Pty (0.25 crore shares), V Jagannathan (0.10 crore shares), Sai Satish (0.05 crore shares) and Berjis Minoo Desai (0.01 crore shares).
The promoters and promoter group shareholding at 66.22% would decline post issue to 58.3%.
The company is the largest private health insurance company in India with leadership in the attractive retail health segment. The company has overall health insurance market share at 15.8% and strong retail health insurance market share at 31.3% in FY2021. The company has issued highest health insurance policies during last three years.
The overall retail health insurance market share by GWP, increased from 28.6% in Fiscal 2019 to 31.3% in FY2021.
The company has the largest number of individual agents among standalone health insurance companies.
The retail health segment in India is expected to emerge as a key growth driver for the overall health insurance market due to its lower claims ratio of 73%, as compared to government health and group health with claims ratios of 92% and 99%, making the retail health segment more attractive from a profitability perspective, since lower claims results in higher profitability.
The retail health insurance segment, which accounted for 9% of the total number of lives covered by health insurance in India in Fiscal 2020, contributed 45% of the total health GWP generated in the overall health insurance market in FY2021. This was primarily due to higher premium per person for retail health compared to other health insurance segments.
The low penetration of health insurance, high out-of-pocket expenses for healthcare costs and only 10% of the population having insurance policies outside of government plans, provides growth opportunities.
The Indian health insurance market penetration is only 0.36% of GDP in 2019, compared to the global average of approximately 2.0% of GDP. India has one of the lowest health insurance densities globally, based on per capita premium, at US$5 in 2019. A number of demographic factors, including increasing life expectancy and population growth in India, as well as the high portion of out-of-pocket expenses as a percentage of total healthcare expenditure by patients in India (62.67% in 2018), are driving the need of healthcare services and the growth in the health insurance industry in India.
The company has recorded strong growth in retail health GWP at a CAGR of 32.5% from FY2019 to FY2021. It well positioned to continue to capitalize on ongoing market dynamics in the retail health insurance sector with size and established market share.
The company has one of the largest and well spread distribution networks in the health insurance industry and an integrated ecosystem that enables to continue to access the growing retail health insurance market.
The company has a pan-India distribution network and maintains diversified channels of distribution to complement agency network, which include distribution by direct online sales through telemarketing, website and interactive applications, brokers, insurance marketing firms and web aggregators.
The company has a diversified product suite with a focus on innovative and specialized products.
The company has successfully built one of the largest health insurance hospital networks in India, which plays an important role in loss ratio performance and efficient service delivery. The hospital network includes 11,778 hospitals, 65.7% of which had agreed packages.
The company has made substantial investment in technology and innovative business processes. Investments in information technology in digital technologies, data platform and automation are key drivers that have improved the effectiveness, efficiencies, and innovations within the business.
Combined Ratio has historically been stable, amounting to 94.3% in FY2019 and 93.2% in FY2020. In FY2021, Combined Ratio increased to 114.8% primarily due to certain exceptional accounting adjustments primarily related to withdrawal from a reinsurance treaty in FY2021, and the exceptional impact of the COVID-19 crisis in FY2021.
The company is supported by Promoters, which include Rakesh Jhunjhunwala, Safecrop Investments India LLP, and WestBridge AIF I.
The recent global COVID-19 outbreak has significantly affected business with an increase in claims across network, most recentlyduring the resurgence in COVID-19 cases in April and May 2021.
The company has incurred losses in FY2021 and H1FY2022.
The increase in net paid claims due to the COVID-19 accounted for 30.0% of total net paid claims by value in FY2021, primarily due to the increase in COVID-19-related claims and the decrease in non-COVID-19-relatedclaims due to lockdowns and other restrictions. Net paid claims due to the COVID-19 accounted for 41.0% of total net paid claims by value in H1FY2022.
The business depends on the accuracy and completeness of information provided by customers and counter-parties for pricing and underwriting insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of products and disrupt business.
Health insurance business is exposed to the risk of catastrophes such as a pandemics or other catastrophic events that cause many hospitalizations.
The discontinuance of the voluntary quota-share treaty reinsurance treaty and the change in method of accounting for Unearned Premium Reserves has materially impacted financials in FY2021.
The health insurance industry in India is undergoing rapid and significant technological change. Any failure to continue to adapt to technological change and the evolving use of data in the health insurance industry in India, could adversely affect ability to maintain or increase business volumes, profitability, and market share.
The solvency ratio was 1.52x, which is slightly above the regulatory requirement of 1.5x.
Failure to accurately estimate incurred medical expenses or the frequency of claims as compared to the assumptions and estimates used in the pricing of products, or failure to effectively manage the medical costs or related administrative costs, could have a material adverse effect on the business.
A significant portion of business is generated from the retail health insurance sector accounting for 87.9% of GWP in FY2021 and any adverse trends and other developments that may affect the sale of retail health and other insurance products may hurt business.
The retail health insurance sector only accounts for 9% of the total number of lives covered by health insurance in India in FY2020, and the continued growth of the retail health insurance market could be affected by government regulations or changes in consumers preferences towards government health and group health insurance products.
Credit risks related to investments may expose to losses.Investment portfolio is subject to liquidity risk which could decrease its value. About 98.4% of total investment assets were invested in fixed income assets and mutual funds.
Insurers are obligated to invest a minimum of 30% of total investment assets in central and state government securities and other approved securities, including a minimum of 20% in central government securities.
The business is subject to extensive application of laws and is under active supervision of the IRDAI and other regulatory and/or statutory authorities of India.
The business is vulnerable to misconduct and fraudulent activities by employees, customersand third parties.
The business is a highly competitive and subject to intense competition from non-life as well as standalone health insurers. Competition in the health insurance industry in India is affected by many factors, including brand recognition, customer satisfaction, distribution network, pricing, product design, financial strength, a professional team and information technology capabilities.
The insurers have an obligation to underwrite business in rural and social sectors with at least 3.5% of the total Gross Direct Premium Income for each financial year must be from the rural sector and 5% of the total number of human lives underwritten in each financial year in the social sector must be from rural sector.
The company has Rs 650 crore of outstanding debt liabilities end September 2021.
Promoters do not have adequate experience and have not actively participated in the business activities undertaken by the company. Promoters are financial investors and only became promoters in FY2019.
Star Health and Allied Insurance Company is the largest private health insurer with 15.8% market share in the overall healthy industry. The company has strong retail health insurance market share at 31.3% in FY2021. The company has issued highest health insurance policies during last three years. The company has been consistently improving its overall health insurance industry market share from 10.9% in FY2018.
The company has posted net of loss of Rs 825.58 crore in FY2021 and Rs 380.27 crore in H1FY2022. In FY2021, the company incurred certain exceptional expenses in relation to the discontinuance of a voluntary quota share treaty (VQST) for health on a clean-cut basis with effect from 1 April, 2021 resulting in an additional reserve of Rs 437.12 crore with a corresponding increase in loss before tax and reduction in reserves and surplus as of 31 March 2021 in accordance with IRDAI regulations. The impact of withdrawal from the treaty resulted in an impact of reinsurance – portfolio entry on revenue account of Rs 483.27 crore in FY2021. In addition, as a result of the COVID-19 crisis, the company has seen an increase in COVID-19-related claims across its network amounting to gross paid claims of Rs 1528.64 crore in FY2021 and Rs 1786.47 crore in H1FY2022.
Net Incurred Claims Ratio increased to 87.0% in FY2021 compared to 64.2% in FY2019 and 65.8% in FY2020, while it remained higher at 88.2% in H1FY2022. Combined Ratio galloped to 114.8% in FY2021, compared to 94.3% in FY2019 and 93.2% in FY2020. Combined Ratio increased to 119.2% in H1FY2022.
The company had conducted preferential allotment of shares amounting to 2.88 crore share at an issue price of Rs 488.96 per share raising Rs 1407 crore on 30 December 2020 and another 2.49 crore share at a same issue price of Rs 488.96 raising Rs 1216 crore on 31 March 2021.
In December 2020 preferential allotment, the promoter Safecrop Investments India LLP was issued 1.66 crore share, while it has offered 3.07 crore equity share for sale in the IPO through OFS. Among the promoters group, Konark Trust was issued 1.14 lakh shares and it is offering 1.38 lakh shares for sale. Among selling shareholders, Apis Growth 15 was issued 28.30 lakh shares, while Apis Growth 6 is offering 76.8 lakh equity shares for sale. Another selling shareholder, MIO IV Star was issued 12.78 lakh shares, while its offering 41.11 lakh equity share for sale though OFS.
The post issue book value (BV) of Star Health and Allied Insurance Company including shareholders fair value change account is Rs 109.8. P/BV works out to 8.2 times at the upper price band of Rs 900 per share.
There is no directly comparable listed player in the standalone health insurance industry, though the company compares itself with ICICI Lombard General Insurance Company which is trading at 8.2 times its book value and New India Assurance is trading at 0.7 times its book value. ICICI Lombard General Insurance Company and New India Assurance are multiline full-service insurers.