Star Health Insurance: Quarter 3 FY 2023-24 Results Analysis

Topline Growth:16.5%

Bottomline Growth: 38.1%

Brilliant results in an industry where most insurers are making underwriting losses. Will the stock market reward the shareholders due to these excellent results?

Is understanding the financials of an insurance company as simple as looking at topline and bottom-line growth?

Incurred claims increased by 22% while earned premiums increased by only 15%. This is a huge negative factor. In such a case, how did the profit grow so substantially?

The answer lies in Quota Share Reinsurance of 50% for long-term business, which forms presently 6% of the portfolio. How does Quota Share reinsurance help improve the financial results of a long-term business?

In long-term insurance, premiums can be accounted for only after earning the same and the remaining premium must be treated as an unexpired premium reserve. Whereas expenses like commission are front-loaded. Hence, financial results will be bad in the initial years and will improve in the long term.

However, when a Quota Share reinsurance is bought, Reinsurance pays an RI commission which also is front-loaded. Hence, Net commission improves. This is the reason there is a 13% drop in commission paid even when business grew by 16%. This improves both profitability as well as Solvency. However, what is happening is future profit is compromised to improve present profitability.

Another reason for improved profitability is the sale of assets leading to capital gains. Hence, the 40% increase in investment income.

We leave it to the investors to judge whether the results were good, average, or bad.

Note: Blog written on 31st January 2024. How the stock market reacted on 1st February has to be seen.