Star Health and Allied Insurance Company Limited (STARHEALTH) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Star Health and Allied Insurance Company Limited Q2 and H1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Devyanshi Dave from Adfactors PR Investor Relations team. Thank you, and over to you, [ ma'am ].

Good morning, everyone. From the senior management, we have with us Mr. Anand Roy, Managing Director and Chief Executive Officer; Mr. Amitabh Jain, Executive Director and Chief Operating Officer; Mr. Himanshu Walia, Executive Director and Chief Marketing Officer; Mr. Nilesh Kambli, Chief Financial Officer; Mr. Aneesh Srivastava, Chief Investment Officer; and Mr. Sombit Bhattacharyya, Head of Investor Relations. Before we begin the conference call, I would like to mention that some of the statements made during the course of today's call may be forward-looking in nature, including those related to the future financials and operating performances, benefits and synergies of the company's strategies, future opportunities and growth of the market of the company's services. Further, I would like to mention that some of the statements made in today's conference may involve risks and uncertainties. Thank you, and over to you, Mr. Roy.

Thank you. Thank you, Devyanshi, and a very good morning to everyone, and thank you for joining Star Health's earnings call for the second quarter and the first half of the financial year '26-'27. As we enter the festive season, let me also wish you and your loved ones a very happy Diwali in advance. My remarks today will comprise 3 parts. First, we will talk about our operating performance for quarter 2 and H1 of financial year '27. Second, we will also see how the second half and beyond is shaping up for Star Health. And finally, we will also just give a brief perspective on the recent regulatory developments, which all of you are much aware of. So let me begin with the first part, our operating performance for quarter 2 and the first half of the year FY '26, '27. The recalibration of our strategy that we started last year has delivered a turnaround in underwriting performance in FY '26 and the run has continued through H1 of FY '27. Quarter 2 of FY '27 has marked the fifth successive quarter of improvement in our loss ratios and underwriting results. This is a clear evidence of a structural turnaround in our operating performance. The highlights of our performance for quarter 2 and H1 FY '27 are as follows. The gross written premium on reported 1/N basis increased 19% year-on-year to INR 5,275 crores for quarter 2 and also by 19% year-on-year to INR 9,562 crores for the H1. The fresh retail health GWP sustained its growth momentum. On a reported 1/N basis, the fresh retail health has grown by 35% year-on-year for the quarter and 36% year-on-year for the half year. The new to insurance mix rose to 93% for the quarter from 89% in quarter 2 FY '26, reflecting our continued focus on first-time buyers of health insurance and selecting more healthier pools. The growth during the quarter was led by both volume and value with the number of new to insurance policies growing over 10% year-on-year and the average sum insured also rising 13% year-on-year. A brief note getting into financial numbers. From this quarter, we have discontinued the practice of recognition of insurance finance charges. The previous periods have also accordingly been restated for comparability. There is no impact of this treatment on profitability metrics such as PAT and underwriting results. Now coming to the underwriting results for the quarter was INR 99 crores compared to a loss of INR 40 crores in quarter 2 of last financial year. This is a positive swing of about INR 139 crores for the quarter. For H1 FY '27 our underwriting results stood at INR 210 crores as against a loss of INR 24 crores in H1 of FY '26, giving a positive swing of INR 234 crores for H1. The underwriting results for H1 FY '27 surpassed the full year FY '26 underwriting result of INR 198 crores. The combined insurance service ratio, CISR, improved by 2.9% to 98% in quarter 2 FY '27 and by 2.4% to 97.9% for H1 of FY '27. The profit after tax for the quarter increased over threefold to INR 265 crores from INR 80 crores of the last year same quarter. And the PAT for the half year increased by 57% year-on-year to INR 815 crores. To provide the right perspective on profitability insulated from short-term mark-to-market volatility, we report the normalized PAT pegged at a normalized annual investment yield of 8%. Under the normalized framework, our profit after tax for quarter 2 increased 70% year-on-year to INR 390 crores and the profit after tax for H1 increased 56% year-on-year to INR 775 crores with a normalized ROE on an annualized basis increasing from 11.2% of last year H1 FY '26 to 15.1% ROE in H1 FY '27. On the business side, we continued to build a diversified and granular retail franchise with disciplined and prudent risk selection across geographies, segments, channels and products that meet our defined ROE threshold. Our retail health market share stood at 29% for H1 FY '27 and 30% for the quarter. As highlighted earlier, the reported market share continues to be influenced by the share of long-term policies and the consequent 1/N reporting and like-for-like comparability will be restored only by FY '28. More fundamentally, our scale reflects our deliberate focus on preferred segments and our conscious avoidance of riskier pools. Our proprietary channels, agency and digital D2C contributed over 90% of our retail business, giving us greater control over customer selection, quality of sales and the economics of acquisition. We added 39,000 new agents during H1 FY '27, taking our network to 8.7 lakh agents. Our agency productivity improved by 19% year-on-year during H1. The agency continues to deepen penetration where it matters most with fresh business growth from semi-urban and rural geographies at over 3x that of metro and urban geographies. Our proprietary digital D2C channel remains the fastest growing with 137% year-on-year growth in H1, led by younger customers, higher sum insured levels and rising participation from non-metro and Tier 2 markets. Our D2C channel continues to have superior combined ratios. Beyond our proprietary channels, bancassurance and alternate channels remain focused on profitable segments, while our group SME business through our agency network remains our priority within the segment. Our sustained trajectory of underwriting profitability reflects the rigorous execution of 4 levers that we have deployed, which is enhanced risk selection, portfolio optimization towards preferred segments and our risk-based pricing strategy, our robust mitigation of fraud, waste and abuse and the scaling up of our wellness-focused consumer ecosystem. In a seasonally demanding quarter, as you all know, the quarter 2, our expanded home health care and telemedicine capabilities gained significant traction and served as a critical mechanism to manage our fever and infection-related cases. Our customer focus metrics continue to demonstrate improvement. Our retail claims settlement ratio increased by over 1% to 92.4% for H1 FY '27. Our renewal ratio improved by 4% to 102% and overall company level NPS also improved by 4 points to 65 as of September 2026. We settled 2.5 lakh claims during the first half of this year and 83% of those claims were settled on a cashless mode, which is probably the highest in the industry. Digital and AI remains central to our long-term growth strategy, serving as key drivers of operating leverage and productivity. During the quarter, we upgraded our core customer relationship management platform to Salesforce. This upgrade optimizes our D2C acquisition by enhancing the lead management position and conversion. We have also scaled up deployment of AI bots across both our customer acquisition and service channels. Initial trends are highly encouraging. The bot processed over 7.5 million minutes of call volume while operating at less than 20% of the cost of equivalent human deployment. To further refine our digital acquisition strategy, we scaled our AI-driven quality assurance capabilities, analyzing over 10 million minutes of customer interaction across 9 languages. Concurrently, our service bots operated autonomously, independently resolving over 1,000 customer interactions per day. On the distribution side, ecosystem engagement on our proprietary ATOM Pro platform continued to deepen and with more than 50% of our active agents are utilizing the platform. In underwriting and claims, our partnership with Amplify Health has gone live with automation of FWA capabilities. Sharper analytics is increasingly refining our risk selection and claims decision. And our detection of fraud, waste and abuse has been considerably strengthened across billing, tariff and medical necessity parameters. Our analytics capabilities based on extensive proprietary data, which remains an enduring competitive advantage for Star Health. Details of our operational and financial performance are provided in our quarterly update presentation, which is available on the stock exchanges and on our website as well. We would request you to refer to it for a more detailed analysis. Now let me come to the second part of my remarks, our preparation for H2 and beyond. As we enter the second half, last year's GST-led growth becomes part of the base and headline growth rates will start to normalize for the industry as well as for Star Health. What matters most is the quality and durability of our operating performance, and we believe it is structurally sound and resilient for the following reasons. First, our underwriting performance is anchored in the strength of our vintage book, which accounts for about 80% of our portfolio. The improvement in our underwriting performance began in quarter 2 of FY '26 well before the GST-led growth set in, and it has now sustained for 5 successive quarters. This is the outcome of prudent management of the entire portfolio through risk-based pricing, better portfolio selection through our data and analytics and a highly efficient claims processing and FWA savings, our provider relationship and our negotiation with them and also the strong wellness program that we run for our customers. Second, the share of the multiyear policies in our portfolio has risen steadily over the last few quarters. Premium on these policies is earned over the term of the contract and a growing portion of our future earned premium is already contracted. This lends visibility and stability to our earned revenue base, while multi-tenure policies also strengthen persistency. Third, our growth engine is proprietary. We continue to add agents and expand our distribution network at a very consistent pace. deepening our presence in semi-urban and rural markets and at the same time, scaling our D2C channel amongst the digitally native segments such as the younger customers and salaried professionals. More than 9 in 10 of our fresh customers are new to insurance, drawn from preferred geographies and segments. This is the profile of a franchise that expands the market rather than one dependent on an external catalyst alone. We, therefore, entered H2 from a position of strength and confidence. The GST exemption demonstrated how strongly affordability unlocks demand for retail health insurance, particularly amongst the first-time buyers. And we believe the distribution reforms proposed by the authority represent the next lever of affordability. This brings me to the third part of my remarks, our perspective on the recent regulatory developments. The IRDAI has set out an ambitious reform agenda for the sector over the past few months, and let me touch upon the key developments. We welcome the proposed public insurance registry, envisaged as a digital public infrastructure for insurance. By enabling policyholders, insurers and other participants to discover, verify and exchange information in a consistent manner, the PIR can meaningfully reduce information asymmetry, strengthen underwriting controls, simplify claims processing and strengthen fraud detection across the ecosystem. It marks a decisive step towards a more transparent and efficient insurance market, and we look forward to participating in its development. Turning to the IRDAI consultation paper recalibrating economics of insurance distribution released on 23rd September on which we have already submitted our views to the authority. At the outset, we welcome the direction of the proposed reforms and support the intent of better outcomes for customers. The framework envisaged in the paper is closely aligned with the distribution model that Star has built over 2 decades. We are prepared to meet the new requirements and play our part to contribute meaningfully towards the national ambition of insurance for all by 2047. Our core business model is very resilient with over 90% of our retail business being sourced through proprietary channels. Individual agents remain the better rewarded distributors under the proposed framework, and we are engaging closely with our agents to sustain and enhance their earnings through higher productivity. As commercials cease to be a differentiator, insurers will increasingly focus on the strength of the product and -- product proposition, claims experience, service and brand and distribution in which we believe we are very strongly positioned. Several other proposals are also encouraging. Quoting commissions aligned to renewal rates removes incentive for commission-driven churn between insurers, which we see happening in large numbers, as you know. This shift will encourage insurers to expand insurance penetration by enrolling new customers as against market cannibalization through higher commissions. Equally, the proposed higher commissions for smaller towns and rural areas and the requirement that an agent represent only one insurer with the product segment are well aligned with our distribution footprint. Our internal estimates indicate a credible path to the proposed expense of management limits as a combination of prudent management, operating leverage and productivity enhancement through our digitization and automation initiatives. Star Health has a consistent track record of demonstrating compliance with the EOM requirements and is committed to maintaining that standard in the future as well. We are cognizant of the authority's sharp focus on dark patterns in digital journeys, and we fully share the emphasis on consumer first. As digital channels account for a growing share of how consumers buy and service their policies, we continue to review our digital journeys and will ensure full alignment with the evolving framework. We believe that consent-led data collection, transparent access to product features and pricing and clear disclosures will over time reinforce the advantage of trusted and direct brands. Our comments pertain to the consultation paper in its current form, and we await the final regulations. In the evolving paradigm, our advantage rests on a principle that is central to the paper, which is dedicated distribution, which builds lasting customer relationships and is rewarded appropriately. With that, we come to the end of our opening remarks. I once again thank you for your continued trust in Star Health, and I look forward to your questions. Thank you so much.

[Operator Instructions] The first question comes from the line of ="Swarnabha Mukherjee with 360 ONE Capital.

Congratulations for the superb performance this quarter. I have 2 questions. First of all, sir, it is very encouraging to see the level of fresh growth that is panning out for a few quarters now. Just wanted to understand that now that the GST change, et cetera, are in the base, in October, how are you seeing the quantum of fresh growth, particularly in the agency channel? And if you could call out maybe how you are seeing through in the different channels, that would be very helpful. That is one. And secondly, specifically for this quarter, how the markets have moved, both the yield curves as well as the equity markets. I just wanted to understand, it seems that from your asset mix, your investment performance has come out to be significantly better than what we would have estimated. So just wanted to understand that whether -- either on the fixed income side or the equity side, you have done any active positioning to manage how the portfolio performance will play out in terms of maybe some duration movement or active equities. If you could highlight that, sir, that would be very helpful. Yes, these will be my 2 questions, sir.

Thank you, Swarnabha. I think I'll request Aneesh to handle the second question, but let me answer your first question on the fresh growth. See, the GST reform last year was a very significant development, and it led to a huge growth in the market, as you all are aware. So that base is available for quarter 3 and quarter 4 for all the players. Some kind of moderation on the growth rate will definitely happen optically. But we are looking at the number of policies that we sell and the number of activation of agents in our digital platforms. So as a company, we aspire to grow at 20% plus on fresh business consistently for a long period of time. We hope to maintain that for this year as well. On the investment side, I'll request Aneesh to add. Aneesh?

Yes, Anand. So, Swarnabha when we invest in markets, we are basically looking at the markets from a long-term perspective, given the fact that we have a continuous growth in the AUMs and the portfolios. From this perspective, our equity positions have remained where they were in last quarter. As you are aware that we have around slightly less than 14% exposure in equities. And at this point of time, we have not done any incremental purchases, but we may decide to do it depending upon the attractiveness of the asset classes because today, given the fact that the yields have gone up, many of the asset classes are trading at very, very attractive levels. So that is one. Secondly, in terms of your question regarding duration, yes, we have increased the duration of the portfolio. Given the fact that G-Sec yields have substantially shot up, we have taken some long duration assets in the portfolio. Our desire is to be somewhere between around 4 years duration for the portfolio. Currently, we are somewhere there. But if yields continue to increase, which is the possibility, given the fact that we still expect policy rate hikes by RBI, so we may start looking at relatively longer duration assets in this environment. So this is what -- the only thing that we have changed today is that we have started looking at longer durations. We have taken some G-Sec calls on longer durations. Otherwise, broadly, the strategy remains the same.

Yes, sir. So just a follow-up. I wanted to check that in your this 14% equity book, would it be primarily passive or would there be also active positions there. And secondly, I mean, in terms of the investment performance, say, if you could give some color on what proportion of the new money has gone at higher yielding part of the portfolio, that would be useful. I'm just trying to understand the investment performance, that's why, sir.

Yes, yes. So we don't take stock calls, but we do take sector calls. So some sector biases are there in the portfolio. And most of these sector biases are through either index fund, through investing in index or through ETFs. And besides that, in terms of high-yielding portfolios, as you are aware that we do invest in REITs and InvITs and we do invest in AIFs. So that is one portfolio, which takes time. Actually, AIF portfolio takes time to build. So it's a slow and gradual process. So we are building that. And as far as REITs and InvITs are concerned, that is something that we have invested. We are kind of fully invested in REITs and InvITs as of now. So that is what we have done as of now in high-yielding assets.

[Operator Instructions] Next question comes from the line of Shreya Shivani with Nomura.

Sir, I wanted to check how are we thinking about -- I mean I got your comments around the EOM guidelines. But how are we thinking about product pricing? I'm sure that the regulator's intention is to reduce the pricing for the end customer. Will we be taking any decision in that regard? And also as far as your EOM caps are concerned, to reach 20%, there may be major changes you may have to make in the other OpEx apart from the commission numbers as well. So any calculation or any estimates that you've made on how much efforts you'll have to make on the other OpEx line item?

So Shreya, on the product pricing piece, see all our products -- we have more than 35 health insurance plans catering to different segments of the population. So the product pricing will continue to be determined by the performance of the portfolio. And we believe that Star Health products are reasonably priced at different levels with different zoning across the country. And that's why our growth is coming because of our affordable products, which we are selling in Tier 2, Tier 3 cities and the semi-urban areas as well. I think -- so that we will await any further regulation. But right now, we don't have any intent to do anything particular. As far as our EOM guide, I mean, as I have already mentioned in my opening speech, I think probably we are one of the few companies which is operating under EOM regulation as we speak today and amongst all the SAHI companies. And we are very well compliant, and we are very mindful of our operating expenses. And the guidelines, whenever it becomes a regulation, we will definitely comply with it. So we have our plans in place. We'll speak about it once we have more clarity on the regulation.

Right. And just to follow up on the product pricing bit. The price hikes that we took in this calendar year, have we done it for all the products? Or are some products still getting repriced through the year? If you can remind us on that.

[ We follow -- okay, Amitabh. ]

Yes. So whatever we had taken in the last cycle, that was close to 80% of the book. So largely, we had covered the entire thing. But whatever got left out, we are taking it this year and we have a plan in place for that.

Right. So the 80% of the book got repriced last financial year. This financial year, probably remaining 20% you're doing. Is that what you mentioned?

No, whatever got left is there. And anyway, whatever further needs correction basis our loss ratio requirements, that will anyway happen.

Next question comes from the line of Supratim Datta with Jefferies.

My first question is on the loss ratio where you have been surprising positively for the last 5 quarters here. Wanted to understand if you could give us some color on how much the loss ratio in the older policies being trying to triangulate whether the loss ratio improvement is particularly driven by new fresh book? Or is the older book also seeing a similar kind of improvement? And so if you could give us some color there? And how is the retail loss ratio been tracking? If you could give us some color there, that also will be helpful. And secondly, coming to that expense of management question, I do understand that you'll give us more color down the road. But wanted to understand that in the previous framework, there was a separate expense of management threshold for health insurers and another one for multiline insurers. Is there any proposal to go to a similar kind of structure considering that they are 2 different business models? Have you had any discussion on that front with the IRDAI? Those were my 2 questions.

So I'll just answer the last question first, and then I will request Amitabh to talk about the loss ratios. We believe that as the consultation paper puts it, general insurance companies and stand-alone health insurance companies should have a common EOM structure. But what we also believe is that products which are driven by regulations and by mandate, for example, motor third party or crop insurance or, let's say, the government-sponsored health insurance programs, which ideally should come at 0 cost, should be removed from the base so that the EOMs are more reflective of the actual cost that is being used for distribution of consumer-facing products. So I think that's the way we are thinking about this. Let's see how it eventually pans out. Amitabh, on the [ loss ratio ].

Yes. So on the loss ratio, see, group now makes a very small portion of our overall premium. So the loss ratio and its improvement is largely reflective of the retail loss ratios. And you've seen the improvement in the overall loss ratio. We do not disclose fresh and renewal loss ratios separately. But directionally, pricing interventions work mainly on the renewal book. So if you've seen the kind of improvements we've been doing over the last 2 years, that is what is now very, very clearly coming out in the portfolio loss ratios. Fact is that the sustained points on improving the loss ratio in the vintage book as well as the fresh book at around 20% slice of the portfolio could not have driven outcomes on its own. So that's how the improvement has happened.

And just to add to what Amitabh has just mentioned, we've been highlighting that over the last many quarters, we've been focusing on the right geographies and right set of consumer cohorts, avoiding portability and largely focused on new to insurance. And that has led to quite a significant improvement in the loss ratios. That is more to say on how the portfolio has behaved on overall basis. But as far as renewal book on stand-alone basis is concerned, that is now operating less than 100% combined ratio.

Sorry, if I got the last point correct, the renewal book is operating at less than 100% cost?

Yes.

Next question comes from the line of Nidhesh Jain with Investec.

So first question is what will be your market share on the fresh business? Should I straight take all my questions or should we go one by one?

No, please give all your questions.

Yes. Second question is, so it's very heartening to see that your D2C business is showing very strong growth. So if you can throw some light that how are you sourcing these customers? What is the marketing expense on D2C? And what percentage of customers are, let's say, completely digital versus driven by call center? And how do you see this business shaping up with the new proposal where -- around dark patterns? That is the second question. And third question is on home care and telemedicine. There also, I think there is a significant development over -- on a Y-o-Y basis. So if you can share some quantification that what percentage of claims or what is the claim savings that you have been able to show because of these initiatives, home care and telemedicine.

Yes. So we could -- for the quarter, we could actually do more than 1 lakh of consultations as well as home care services. That's the number that you already provided. Specific impact on the loss ratio is something that we do not disclose, but that's one of the big contributors in terms of our medical frequency of claims coming down. And even though there was an increase in surgical frequency, but overall, this helped us to manage our frequency below last year Q2.

Can you talk about what percentage of your claims -- let's say, if you're getting 100 claims, how many of them are going through telemedicine/home care?

We do not disclose these details. I think the frequency movement itself should give you some indication.

On the market share, Nidhesh, on the fresh business, fresh business, thankfully, as per the new consultation paper will be divided into fresh, renewal and portability. Right now, the fresh business, which everyone reports includes portability business, which is a significant portion. So I don't -- I'll not be able to give you the exact number, but my estimation is that on new to insurance, Star Health will have a significant market share, probably closer to 40-odd percent. So I think that's our estimate, but we may be wrong. On the digital side, as you have rightly put, it's a very, very, very strong focus area for us. We created a digital SBU, a strategic business unit last year, where we have invested a lot in building the capabilities of that team, both from not only sales point of view, but from technology, from product, from underwriting operations, everything is independently run. And we are seeing good traction in that business, and we'll continue to invest there as well. As far as the regulation goes, that will apply to all industry players whenever it becomes the dark patterns on the data side. And I think we will adopt to it. We don't see any particular challenge in that.

Next question comes from the line of Sanketh Godha with Avendus Spark.

Maybe, Anand, if you can break down your retail GWP growth, just to get a clarity, how much is driven by price hike and how much is driven by NOP? And within that price hike led just qualitatively just wanted to understand whether it is in general price hike or your quality of business with higher sum insured going up also played a role. So if you can give that color on the growth of 19-odd percentage in retail GWP, it will be useful. And the second question is just wanted to check that in 2Q, generally is perceived to be higher on claims because of the vector-borne diseases. And we know that in the current year, the rains probably were not that high. And so probably we are assuming that the incidence of such kind of vector-borne diseases claims were lower. So in any way that has played a role to some extent to report a better loss ratio than usual. I understand that you are reporting an improving trajectory, but whether it played any role in the current quarter to report better loss ratio. And last thing, of that INR 59 crores investment book -- investment-related loss, can you break it down into realized and unrealized other than the interest income what you report? And within that, this investment book, I wanted to understand this entire investment book for us is classified as FVTPL as per the IFRS.

I'll request Nilesh to answer the last question.

Yes. So, Sanketh, for the equity book, the ETF book, the REITs and InvITs is classified fully as FVTPL for the purpose of IFRS.

Nilesh, we don't have any OCIs. So just wondering that even fixed income we classify as FVTPL?

Even equity can be classified as FVTPL or OCI. We have decided to classify it as FVTPL.

Okay. Even debt is FVTPL, right? Just, Nilesh, confirm that point.

No, debt is held to maturity. There is no FVTPL.

Okay. Entire debt is held to maturity. Okay. Understood. Perfect.

Sanketh, on the retail GWP, I think it's a combination of everything. We have always been articulating that our growth is coming from both value and volume, and which I have already spoken about. So it's a mix of price hike, it's a mix of volume, it's a mix of average sum insured being higher, and everything. So not going to put any particular finger on where exactly it is coming from. It's a combination. And your second question here [indiscernible] monsoon is not a factor. It is the home healthcare, it is the telemedicine which is a factor and all the strategies that we deployed, okay? So the improvement in loss ratio has come from efforts and strategies executed by the company. Gods are not playing a role in this, not yet.

Next question comes from the line of Prayesh Jain with Motilal Oswal Financial Services Limited.

Congrats on a good set of numbers. First question, we've seen a lot of fresh growth and a lot of it is also coming from D2C. A good part of that growth is coming from D2C as well. Could you give insights into what is the kind of customer additions that you are doing today compared to the back book in terms of age brackets, income brackets, so that whether the book that we are creating the new book that we are creating in terms of customers is significantly better than what we are having today? That is point number one. Point number two is on the investment income side, again, like how should we think about investment income in terms of equity allocation that you have been doing to date, roughly about 14%, if I recollect well. How do you think about managing this investment income -- managing this investment book over, say, next 3, 4 years, what's your view on it? Yes, that would be my 2 questions.