In its latest equity research note, Motilal Oswal has reaffirmed its BUY recommendation on Star Health and Allied Insurance with a revised target price of Rs 460, reflecting an 18% upside from the current market price of Rs 390. While the insurer’s Q4FY25 results highlighted strain from elevated claims and tepid investment income, long-term growth levers remain intact. The company’s dominant position in the retail health segment, supported by pricing interventions and digitization efforts, underpins confidence in a gradual margin recovery and profitability rebound by FY27.

Mixed Q4 Performance: Elevated Claims Pressures Margins

Star Health posted a net earned premium (NEP) of Rs 38 billion in Q4FY25, marking a 12% YoY growth, but its profitability was hampered by a spike in claims.

The claims ratio rose to 69.2% in Q4, up 510bps YoY, surpassing analyst estimates of 68.1%. This increase was attributed to higher claim frequency, severity, and a shift toward costlier tertiary care.

The combined ratio surged to 99.2%, exceeding expectations (97.3%) due to persistent underwriting losses and marginal operating income.

Q4 PAT came in at a marginal Rs 5.2 million, down sharply from previous quarters. On a full-year basis, FY25 PAT declined 24% YoY to Rs 6.5 billion.

Underwriting Weakness and Investment Drag Drive Earnings Miss

The company recorded a Q4FY25 underwriting loss of Rs 2.8 billion, compared to Rs 0.9 billion loss in Q4FY24.

Gross written premium (GWP) for the quarter stood at Rs 51.4 billion, up 35% YoY, primarily driven by a robust 37% growth in the retail health segment.

However, total investment income remained flat at Rs 2.9 billion, missing estimates by 24%, as lower equity profit bookings weighed on overall returns.

FY25 investment yield was reported at 7.8%, only marginally higher than FY24, reflecting conservative asset allocation amid market volatility.

Segment Dynamics: Retail Dominance vs Group Rationalization

Star Health continues to focus on the retail health business, which comprised 94% of its GWP in FY25.

Fresh retail business grew 25% YoY, supported by stronger agent productivity and digital distribution.

The contribution from the group segment fell to 7% in Q4FY25, down from 9% in Q2, as the company strategically pulled back from unprofitable group policies.

Average sum assured per policy increased 10% YoY to Rs 1.6 million, with over 87% of policies offering Rs 500,000+ coverage.

Operating Metrics: Cost Ratios Stable, Commission Slightly Elevated

The expense ratio stood at 14.2% in Q4, slightly better than the estimated 15.2%, aided by a decline in employee costs.

However, the commission ratio rose to 15.8%, higher than the estimated 14%, as fresh business continued to dominate the mix.

Combined ratio for FY25 stood at 101.1% including accounting adjustments, versus 96.7% in FY24, underlining the margin squeeze.

Distribution Network and Digital Acceleration

The agency channel remained the backbone of distribution, accounting for 82% of GWP in FY25. The company added 74,000 new agents and is targeting a 1 million agent network, especially in Tier-2/3 cities.

Bancassurance grew 13% YoY, while the digital platform contributed 8% of GWP, with 78% of that coming from Star’s proprietary tech infrastructure.

The SME-focused corporate channel grew fresh business by 21% YoY, strengthening its share in the MSME segment.

Strategic Levers: Pricing Recalibration and Technology Enablement

Management has initiated 20–40% price hikes across 60% of the portfolio, expected to reduce product-level loss ratios by 2–3%.

Unlike earlier uniform increases, current hikes are cohort-based, rewarding low-risk customers and improving persistency.

Enhanced preventive screening, digitized claims processing, and real-time servicing are expected to drive long-term cost efficiency.

IFRS-based RoE was 9.5% in FY25, slightly lower due to MTM losses in Q4 investment book.

Valuation and Earnings Outlook

Motilal Oswal has revised its FY25 and FY26 PAT estimates downward by 13% and 2%, respectively. Despite near-term earnings volatility, Star Health’s structural levers remain strong.

Target Price: Rs 460 based on 25x FY27E EPS

EPS Projections: Rs 13.6 in FY26E and Rs 18.4 in FY27E

RoE trajectory: 9.5% in FY25 → 10.8% in FY26E → 12.9% in FY27E

Key Financial Snapshot (FY25–FY27E)

Final Word: Short-Term Pains, Long-Term Promise

Despite a difficult Q4, Motilal Oswal’s stance on Star Health remains optimistic, banking on the insurer’s retail dominance, strategic product repricing, and digitization efforts to drive a rebound.

“We expect margin pressure to ease gradually and the business to deliver superior earnings by FY27,” the report noted.

For investors seeking exposure to India’s expanding health insurance market, Star Health remains a core retail-centric play, albeit with near-term volatility.