Jefferies Reiterates Buy on Star Health with Rs 650 Target, Cites Operational Recovery

Jefferies has reiterated its Buy call on Star Health & Allied Insurance Company Limited, assigning a price target of Rs 650, which suggests a significant upside potential from current levels.

The brokerage firm highlighted that Star Health's September quarter results indicated a recovery in its operating performance, primarily due to a reduction in loss ratios and sustained premium momentum.

A key positive noted was the 130 basis-point year-on-year improvement in the loss ratio, bringing it down to 71.5%. The company's combined ratio, which measures underwriting profitability (loss ratio plus expense ratio), also improved to 101.8% on a like-for-like basis, moving closer to underwriting breakeven.

However, the reported profit after tax (PAT) for the quarter stood at Rs 54.9 crore, a decrease from Rs 109.4 crore in the prior year. This was attributed to upfront costs amounting to approximately Rs 150 crore associated with a 30% sequential growth in long-term policies, which are recognized immediately under accounting norms.

Despite the lower reported profit, core insurance metrics showed strength. Gross Written Premium (GWP) increased to Rs 4,371 crore from Rs 4,238 crore in the previous quarter, and Net Earned Premium (NEP) climbed to Rs 3,704 crore, indicating continued traction in Star Health's dominant retail segment.

Investment income was slightly below expectations, but the core insurance metrics like loss ratio, commission, and operating costs showed the improvements the market was looking for. Jefferies expects premium growth to continue, driven by retail health penetration and product mix shifts. They anticipate a gradual recovery in combined ratios as the front-loaded costs normalize and loss ratios remain stable.

Impact: This news indicates a positive outlook for Star Health & Allied Insurance, with a strong Buy recommendation and a considerable price target from Jefferies. Investors may see this as a signal for potential stock appreciation, assuming the company executes its growth strategy and manages claims effectively. The focus on operational recovery and sustained premium growth suggests a path towards improved profitability and potential valuation re-rating. Rating: 7/10

Difficult Terms: Loss Ratio: The ratio of claims paid out to premiums earned by an insurance company. A lower loss ratio indicates better profitability for the insurer. Combined Ratio: The sum of the loss ratio and the expense ratio (which includes operating costs and commissions). A combined ratio below 100% suggests that the insurer is profitable from its underwriting operations. Gross Written Premium (GWP): The total amount of premium written by an insurance company before any deductions for reinsurance or return premiums. Net Earned Premium (NEP): The portion of an insurance company's written premiums that it has earned over a specific period. Underwriting Performance: Refers to the profitability of an insurer's core business of accepting risks and assuming liabilities. Basis Points (bps): A unit of measure equal to one-hundredth of a percent (0.01%). Used to express small changes in percentages. PAT (Profit After Tax): The net profit of a company after all expenses, interest, and taxes have been deducted. Upfront Costs: Expenses that are recognized and paid immediately, rather than being spread over a period of time. Discounted Cash Flow (DCF): A valuation method used to estimate the value of an investment based on its expected future cash flows. This method discounts future cash flows back to their present value.