Motilal Oswal Financial Services has issued a BUY recommendation for Star Health and Allied Insurance Company with a target price of Rs 520, representing a potential upside of 17% from its current market price of Rs 444. Despite facing headwinds including market share erosion, elevated claims ratios, and intensifying competition, the brokerage maintains confidence in India's largest standalone health insurer's ability to weather current challenges through strategic repricing initiatives and operational efficiency improvements. The report projects a combined ratio improvement to 98.6% by FY27E, with projected PAT growth of 8% CAGR over FY25-27E, underpinned by the company's dominant retail health franchise and ongoing cost optimization measures.

Retail Health Dominance Under Pressure

Market Share Erosion: Star Health's retail health segment, which constitutes the bedrock of its operations, has experienced a concerning deceleration in growth momentum. The company's retail health expansion slowed to 10% in FY25, substantially trailing the industry's robust 15.2% growth trajectory. This performance disparity has resulted in a contraction of Star Health's retail health market share from 33.1% in FY24 to 32.6% currently, marking a significant shift in competitive dynamics.

Repricing Strategy Implementation: Management has undertaken comprehensive repricing initiatives across two-thirds of its retail portfolio during FY25, specifically targeting loss ratio optimization. While these measures have temporarily impacted retention ratios, which declined below 95% from Q3FY24 to Q4FY25, the company anticipates improved profitability metrics materializing over the next 6-9 months.

Claims Management and Profitability Pressures

Elevated Claims Ratios: The company continues to grapple with persistently high claims ratios, hovering between 69-71% over recent quarters. This elevation stems from multiple factors including rising claim severity and frequency, coupled with the natural aging of the company's back book portfolio. The deterioration represents a significant departure from historical norms and requires sustained management attention.

Future Trajectory: Motilal Oswal projects a gradual improvement in claims ratios, forecasting 69.5% for FY26E and 69.0% for FY27E. This optimization relies heavily on the successful implementation of annual repricing initiatives scheduled for FY26, alongside enhanced underwriting discipline and risk selection protocols.

Operational Efficiency and Distribution Challenges

Commission Expense Management: Despite facing upfront commission pressures, Star Health remains committed to its agency-centric distribution model, resulting in an elevated commission ratio of 14.4% in FY25 compared to 13.2% in FY24. The company's strategic decision to reduce commission rates for senior health insurance renewals from FY26 is expected to provide some relief.

Distribution Concentration Risk: The company's heavy reliance on the agency channel, which accounts for approximately 82% of gross written premiums, presents both opportunities and vulnerabilities. While bancassurance contributes 9-10% and digital/direct channels 8%, this concentration exposes Star Health to regulatory risks, particularly regarding potential open architecture requirements for agents.

Strategic Repositioning in Group Health

Selective Market Approach: Star Health has strategically withdrawn from large corporate and co-insurance accounts that previously generated unfavorable loss ratios. The company now focuses primarily on the small and medium enterprise (SME) segment, where underwriting discipline can be more effectively maintained. SME contribution has increased significantly to 60% in Q4FY25 from 40% in Q1FY25.

Revenue Diversification Impact: While this strategic pivot has successfully eliminated unprofitable volumes, it has simultaneously reduced the company's revenue diversification opportunities, creating increased dependence on retail health performance.

Investment Performance and Regulatory Landscape

Investment Yield Improvement: Star Health has demonstrated strong investment management capabilities, with yields improving to 7.8% in FY25 from 6.9% in FY23. The company maintains 17.5% of assets under management in high-performing equity, ETFs, REITs, and alternative investment funds, while preserving a conservative debt portfolio comprising predominantly sovereign securities and AAA-rated corporate bonds.

GST Exemption Implications: The proposed GST exemption on insurance premiums presents a double-edged scenario. While reduced headline prices could enhance affordability and boost penetration, particularly in retail health segments, insurers may lose access to input tax credits, potentially compressing margins if operating costs cannot be adequately passed through to consumers.

IFRS Transition and Future Outlook

Accounting Standard Impact: The transition to International Financial Reporting Standards (IFRS) will introduce both positive and negative elements for Star Health. While deferred acquisition costs and claim reserve discounting will benefit profitability, additional risk adjustments related to claims may create modest headwinds.

Financial Projections and Valuation: Motilal Oswal forecasts a 14% CAGR in gross written premiums and 28% CAGR in profit after tax during FY25-27E. The combined ratio is projected to improve from 101.1% in FY25 to 98.6% in FY27E, reflecting operational efficiency gains and successful repricing initiatives.

Investment Recommendation and Price Targets

Valuation Metrics: The brokerage values Star Health at 29x FY27E price-to-earnings ratio, establishing a target price of Rs 520. Current trading multiples include 40.3x P/E for FY25 and 3.7x price-to-book value, indicating potential compression as earnings normalize.

Risk Assessment: Key risks include continued market share erosion, regulatory changes affecting distribution models, persistent claims inflation, and competitive pressures from both established insurers and emerging fintech players. However, Star Health's established market position, operational expertise, and strategic repositioning efforts provide defensive characteristics.