Star Health and Allied Insurance Company
Star Health and Allied Insurance Company is coming out with a 100% book building; initial public offering (IPO) of 8,14,29,127 shares of Rs 10 each in a price band Rs 870-900 per equity share.
Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
The issue will open for subscription on November 30, 2021 and will close on December 2, 2021.
The shares will be listed on BSE as well as NSE.
The face value of the share is Rs 10 and is priced 87 times of its face value on the lower side and 90 times on the higher side.
Book running lead manager to the issue are Kotak Mahindra Capital Company, Axis Capital, BofA Securities India, Citigroup Global Markets India, ICICI Securities, CLSA India, Credit Suisse Securities(India), Jefferies India, Ambit Capital, DAM Capital Advisors, IIFL Securities and SBI Capital Markets.
Compliance Officer for the issue is Jayashree Sethuraman.
Profile of the company
The company is and continues to be the largest private health insurer in India. It offers a range of flexible and comprehensive coverage options primarily for retail health, group health, personal accident and overseas travel. Its products target a variety of customer segments, including individuals, families, students, senior citizens, as well as persons with preexisting medical conditions across the broader middle market customer segment. Its products include family floater products, in which the sum insured covers the entire family on the payment of a single annual premium; individual products, which are tailored to the needs of the individual; and specialized products, which focus on customers with pre-existing conditions after taking into account the associated risks. It developed these specialized products through its innovation-driven product development process and analysis of market demand and coverage gaps using its market leading claims processing experience of approximately 6.7 million claims processed since its inception until September 30, 2021. It distributes its health insurance policies primarily through individual agents.
The company has invested in advanced technologies to develop a flexible and integrated information technology platform across its business processes, including omni-channel applications, such as its agent application, STAR ATOM, which assists agents to complete the policy sales process remotely in an effective and efficient manner, and its customer self-service application, STAR POWER, which enables it to deliver, in a consistent and personalized way, a customer experience that meets customers' insurance needs through a seemingly single channel regardless of customer entry points. It has also actively focused on streamlining the underwriting and claims processes for its customers through its proprietary information systems that it has developed in-house.
Proceed is being used for:
Augmentation of the company’s capital base and maintenance of solvency levels.
Undertaking the company’s existing business activities.
Receiving the benefits of listing of the equity shares, including to enhance visibility and brand image among existing and potential customers.
Industry overview
The global health insurance market is estimated to be around $1.5 trillion in 2019. The health insurance industry is mainly driven by rise in health expenses and increase in prevalence of chronic diseases. Also, governments across countries are taking initiatives to increase health insurance coverage through different ways of funding. The outbreak of COVID-19 pandemic has further accelerated the growth of health insurance industry. Asia region is expected to see relatively higher growth due to enhancement of health facilities and rising awareness about health insurance resulting in higher demand for health insurance in high populous countries such as India and China. The health insurance penetration in India is low at just 0.36% of GDP whereas the global average comes around 2% of GDP. Countries like the UK, China, Argentina and the United States have higher penetration level of 0.61%, 0.65%, 0.78% and 4.1%, respectively. Health insurance density is an important indicator of whether the health insurance sector of the country has developed. India is much behind in terms of health insurance density as compared to other developing and developed nations.
India's current healthcare expenditure is skewed more towards private expenditure as compared to public expenditure. Government expenditure on healthcare has remained at 20-30% of the healthcare expenditure from calendar year 2010 to 2018. The rest of the expenditure is private in nature (expenditure from resources with no government control, such as voluntary health insurance, and the direct payments for health by corporations (profit, non-for-profit and non-government organisations) and households. Health insurance premiums have grown at a CAGR of 19% in the last 6 years ending Fiscal 2021. In addition, in the first six months of Fiscal 2022, the health portfolio grew by approximately 29%, which was significantly higher than the approximately 18% growth during the corresponding period of Fiscal 2021. This growth in premium was due to the strong surge in premium income of standalone health insurance companies as the premium grew at a 39% CAGR during the last 6 years (Fiscal 2015-Fiscal 2021), admittedly on a low base, while that of private companies surged at a 21% CAGR. On the other hand, the growth of public sector companies has been relatively low as compared to others at 13% for the same period.
Pros and strengths
Largest private health insurance company in India: The company is the largest private health insurance company and the largest retail health insurance company in India by health GWP, with a 15.8% overall health insurance market share and a 31.3% retail health insurance market share in Fiscal 2021. As of March 31, 2019, 2020 and 2021, it issued 4.3 million, 5.1 million and 7.0 million health insurance policies, which was the highest among all health insurance providers. Its retail health GWP was over three times the GWP of the next highest retail health insurance market participant in Fiscal 2021. It is the largest SAHI insurer in India and the only SAHI company among the top five health insurance businesses in India in Fiscal 2021. As of March 31, 2021, it had the largest number of individual agents among SAHI insurers, at approximately three times that of the SAHI company with the next highest number of agents. Its total number of individual agents grew at a CAGR of 27.3% from 0.29 million as of March 31, 2019 to 0.46 million as of March 31, 2021 and was 0.51 million as of September 30, 2021.
Diversified product suite with focus on innovative and specialized products: The company develops its products through its innovation-driven product development process, which includes extensive market research in which it analyse market demand and coverage gaps, and profitability analyses. In developing products, it focuses primarily on the family and economic profile, the age profile, the disease profile and the geographic profile of its customers. As a part of the product development process, it involves members of its marketing, products, claims, actuarial and underwriting teams, which included in-house medical professionals, in the various stages of the product development process in order to meet the needs of different customer profiles. Its products include family floater products, such as its Family Health Optima Insurance Plan, in which the sum insured covers the entire family on the payment of a single annual premium; individual products, such as Medi classic Insurance Policy (Individual) and Accident Care Individual Insurance Policy, which are tailored to the needs of the individual; and specialized products based on the age of its customers, such as Senior Citizens Red Carpet Health Insurance Policy and Young Star Insurance Policy, as well as on the disease-profile of its customers with pre-existing conditions, such as Diabetes Safe Insurance Policy, Star Net Plus and Star Cardiac Care Insurance Policy.
Made substantial investment in technology and innovative business processes: The company’s investments in information technology in digital technologies, data platform and automation are key drivers that have improved the effectiveness, efficiencies and innovations within its business. It has invested in advanced technologies to develop a flexible and integrated information technology platform across its business processes. Its in-house built digital platform helps it interact with its customers, agents, sales teams, hospitals, diagnostics centres, employees, web aggregators partners, corporate agents, as well as corporate agent banks and other intermediaries, seamlessly. It has integrated platforms such as its new customer relationship management (CRM) program, which manages its relationships and interactions with customers and potential customers and helps to improve customer experience, satisfaction, lead management and provide unified experience to the customer from servicing standpoint, its claims management system and its policy administrative system, as well as on portals for consumers, agents, network hospitals and its mobile applications. It has built these platforms based on its prior claims experience and includes an auto-underwriting engine that facilitates the quick on-boarding of customers.
Consistently demonstrated superior operating and financial performance: The company has undertaken initiatives involving both investments targeted at increasing its profitability and cost reduction measures in order to create an efficient, scalable platform across its pan-India multi-channel distribution network that helps position its business for profitable growth with limited additional investment. These initiatives have focused on reducing costs and exercising strong control over expenses in order to support profitable growth over the longer-term. In particular, it has undertaken a number of cost control measures, including by using technology across its business to conduct meetings electronically across India to save on travel and related costs; using of digital means of communication to save on printing and stationary costs and to process claims; as well as promoting the use of its customer and agent portals for purposes of distributing and receiving policy and claims documents and payments.
Risks and concerns
The company’s investment portfolio subject to liquidity risk: Some of the company’s investments may not have sufficient liquidity as a result of a lack of market makers, market sentiment and volatility, and the availability and cost of credit. In these circumstances, its ability to sell its investment assets without significantly depressing market prices, or at all, may be limited. As an investor in India, it may in the future also hold significant positions in many of the listed stocks that it directly invest in, and any decision to sell or any perception in the market that it intends to sell could adversely affect the liquidity and market price of such security and, in turn, its returns on investments in such securities. If it is required to dispose of these or other potentially illiquid investment assets on short notice due to significant number of insurance claims to be paid, a large claim to be paid, significant fall in value of its liquid investment assets, or other reasons, it could be forced to sell such investment assets at prices significantly lower than the prices it has recorded in its financial statements. As a result, its investment income could be adversely affected, which would in turn materially and adversely affect its business, financial condition, results of operations and prospects.
Rely on third-party contractors and service providers for number of services: The IRDAI (Outsourcing of activities by Indian Insurers) Regulations, 2017 governs the outsourcing arrangements of insurers. It routinely outsource some of its operations to third-party contractors and providers, which accounted for 13.1%, 12.6%, 12.9% and 14.3% of its total workforce in Fiscal 2019, 2020 and 2021 and the six months ended September 30, 2021, respectively. However, it cannot guarantee that its third-party contractors will comply with regulatory requirements or meet their contractual obligations to it in a timely manner, or at all. Third-party providers may breach agreements they have with the company because of factors beyond its control. They may also terminate or refuse to renew their agreements because of their own financial difficulties or business priorities, potentially at a time that is costly or otherwise inconvenient for us. Its operations could be delayed, or its commercial activities could be harmed due to any such event despite having continuity plans in place as required by regulations. In addition, if its third-party providers fail to operate in compliance with regulations or corporate and societal standards, it could be subject to penalties and suffer reputational harm.
Operate in highly competitive, evolving and rapidly changing industry: The company face intense competition from non-life as well as standalone health insurers. Competition in the health insurance industry in India is affected by a number of factors, including brand recognition and the reputation of the provider of services and products, customer satisfaction, distribution network and access to services and service personnel, pricing and quality of services, product design and diversification, financial strength, a high quality and stable professional team and information technology capabilities. Its competitors also have competitive strengths based on operating experience, capital base and product diversification. Competitors of company have in recent years consolidated their businesses and they are likely going to continue to do so as that could provide them with increased financial strength, management capabilities, resources, operational experience, market share, distribution channels and capabilities in pricing, underwriting and claims settlement.
Exposed to significant market risk: As of September 30, 2021, 98.4% of the company’s total investment assets, by carrying value, was invested in fixed income assets and mutual funds. Changes in prevailing interest rates including parallel and non-parallel shifts in yield curve (i.e. the difference between the levels of prevailing short-term and long-term rates) could materially affect its investment returns, which in turn could have a material effect on its investment income, financial condition, results of operations and prospects. While falling interest rates could result in an increase in the mark-to-market value of its debt portfolio, they also subject it to reinvestment risk which could result in the fall in portfolio yields. Accordingly, declining interest rates could have a material adverse effect on its investment income, financial condition, results of operations, cash flows and prospects and significantly reduce its profitability. On the other hand, an increase in interest rates could also negatively affect its profitability. Even though an increase in interest rates could result in an increase in investment returns on its newly added fixed income assets, it could also result in a reduction in the value of its existing fixed income assets reducing the mark-to-market value of such instruments.
Outlook
Incorporated in 2006, Star Health and Allied Insurance Company is one of the largest private health insurers in India with a market share of 15.8% in Fiscal 2021. It offers a range of flexible and comprehensive coverage options primarily for retail health, group health, personal accident and overseas travel. Its products target a variety of customer segments, including individuals, families, students, senior citizens, as well as persons with preexisting medical conditions across the broader middle market customer segment. Its products include family floater products, in which the sum insured covers the entire family on the payment of a single annual premium; individual products, which are tailored to the needs of the individual; and specialized products, which focus on customers with pre-existing conditions after taking into account the associated risks. On the concern side, the company depends on the accuracy and completeness of information provided by or on behalf of its customers and counterparties for pricing and underwriting its insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of its products and disrupt its business. Besides, it is exposed to credit risks in relation to its investments. The value of its debt portfolio could be affected by changes in the credit rating of the issuer of the securities as well as by changes in credit spreads in the bond markets.
The issue has been offered in a price band of Rs 870-900 per equity share. The aggregate size of the offer is around Rs 7084.33 crore to Rs 7328.62 crore based on lower and upper price band respectively. On performance front, the company’s total income increased by 35.78% to Rs 7405.32 crore for Fiscal 2021 from Rs 5453.78 crore for Fiscal 2020. The company has reported a net loss of Rs 825.58 crore in Fiscal 2021 from a profit of Rs 268 crore in Fiscal 2020. The company intends to leverage its market leading position scale in the retail health insurance segment to expand its customer base in parallel with India's favourable demographics, while growing profitability and increasing its operating leverage. It also intends to grow and diversify its distribution network to expand customer reach in order to generate new business and drive up-selling of its products to its large customer base, consistent with its profitability objectives. It plans to achieve this by expanding agency, while entering into alternate channels for distribution.
