IFRS Adoption And Digital Expansion Will Improve Future Prospects In Health Insurance

Key Takeaways

• Regulatory changes and IFRS adoption could enhance transparency, financial alignment, and improve margins and earnings.
  
• Growth in health insurance, agency vertical, digital expansion, and strategic pricing boost revenue and manage loss ratios.
  
• Regulatory changes, increased claims ratios, and competitive pressures may negatively impact profitability and financial metrics in group health insurance.

Catalysts

Provides health insurance products in India.

• Regulatory changes such as the new reporting framework for long-term policies and adoption of IFRS standards could lead to improved transparency, alignment of revenue and expenses, and strategic financial reporting, positively impacting net margins and earnings.
  
• Continued growth in the health insurance sector, with strong performance in retail health and strategic expansion in SME and MSME segments, may boost revenue significantly.
  
• The agency vertical shows strong business growth with an increase in the number of agents, contributing to sustained revenue growth and wider customer reach.
  
• Expansion of digital business, with substantial fresh growth and robust app user engagement, indicates potential for high revenue generation and cost efficiencies in acquisition.
  
• Strategic pricing interventions and new product launches like Super Star, along with volume growth in fresh policies, are expected to drive revenue growth while managing loss ratios, ultimately improving net margins.

Star Health and Allied Insurance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Star Health and Allied Insurance's revenue will grow by 19.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 5.8% in 3 years time.
• Analysts expect earnings to reach ₹15.2 billion (and earnings per share of ₹26.03) by about January 2028, up from ₹7.9 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹11.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, down from 32.7x today. This future PE is lower than the current PE for the IN Insurance industry at 59.0x.
• Analysts expect the number of shares outstanding to decline by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.21%, as per the Simply Wall St company report.

Star Health and Allied Insurance Future Earnings Per Share Growth

Risks

• The new reporting framework for long-term policies will lead to a reduction in the reported gross written premium by annualizing it, potentially affecting revenue recognition and financial results. This could impact net earned premium metrics as well.
  
• Adoption of the IFRS standards may introduce changes in the alignment of revenue and expenses, impacting key financial metrics such as net earned premium, investment income, and acquisition costs, potentially affecting net margins.
  
• The increase in the claims ratio from 67.3% (9 months FY '24) to 70.7% (9 months FY '25) indicates a potential increase in claims expenses, which could negatively impact net margins and profitability.
  
• Regulatory challenges and changes, such as the need to maintain an EOM to gross written premium cap, may put pressure on operational flexibility and could impact expense management.
  
• The competitive pressures and elevated loss ratios in the group health insurance sector, where the company has a smaller market share, might present challenges to maintaining profitability in this segment, affecting overall earnings.

Valuation

• The analysts have a consensus price target of ₹582.18 for Star Health and Allied Insurance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹750.0, and the most bearish reporting a price target of just ₹460.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹264.5 billion, earnings will come to ₹15.2 billion, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹438.6, the analyst's price target of ₹582.18 is 24.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.