ICICI Lombard vs Star Health: Which is a better long-term investment?

The Indian health insurance industry is poised for remarkable growth in the coming years. A large proportion of India’s population is devoid of any health insurance and since the pandemic, more and more people are opting for health insurance making the industry's outlook and growth potential in the country extremely robust.

Not a lot of non-life insurers are listed on the bourses in India. Among the 2 major health insurance stocks- ICICI Lombard General Insurance Company and Star Health and Allied Insurance Company, let's find out which is a better long-term investment opportunity for investors.

Stock price trend

While ICICI Lombard has shed around 20 percent in the last 1 year, Star Health is down over 25 percent in this period.

Meanwhile, just in 2023 YTD, Star Health has lost 6.5 percent as against over a 12 percent fall in ICICI Lombard.

ICICI Lombard has given negative returns in all 3 months of 2023 so far - down 2.4 percent each in March and Feb and 8.6 in January.

On the other hand, Star Health has been in the red in 2 of the 3 months of the current calendar year. It has declined around 6 percent in March so far after a 12.5 percent jump in February. Meanwhile, in Jan, it tanked by 11.6 percent.

ICICI Lombard has fallen 24 percent from its 52-week high of ₹1,410.55, hit in April 2022. It had recently hit its 52-week low of ₹1,049, on March 16, 2023.

Whereas, Star Health has shed 32 percent from its 52-week high of ₹780, hit in September last year. It also hit its 52-week low ₹451 earlier this year on January 30, 2023.

About the firms

Established in 2001, ICICI Lombard General Insurance Company is a joint venture between ICICI Bank- India’s second-largest bank and Fairfax Financial Holdings Limited- a financial services company based in Toronto. It is the largest private-sector general insurance company in India. It is engaged in general insurance, reinsurance, insurance claims management and investment management. The company has a Gross Written Premium (GWP) of ₹143.20 billion (FY2021). The firm offers policy insurance and renewal through its intermediaries and website. It markets assurance products including Car Insurance, Health Insurance, International Travel Insurance, Overseas Student Travel Insurance, Two Wheeler Insurance, Home Insurance and Weather insurance. ICICI Lombard has 273 branches and 840 virtual offices spread across the nation.

Star Health and Allied Insurance Co Ltd is an Indian multinational health insurance company headquartered in Chennai. The company provides services in health, personal accident and overseas travel insurance, directly as well as through various channels like agents, brokers and online. Star Health is also prominently into bancassurance having long-standing relationships with various banks. Currently, Star Health has 12800+ employees and 640+ branch offices all over India. It launched its ₹7,249 crore initial public offering (IPO) in December 2021. After the issue was undersubscribed, it reduced the IPO size to ₹6,400 crore.

Earnings

In the December quarter of FY23, ICICI Lombard General Insurance Company posted an 11 percent rise in net profit to ₹353 crore versus ₹318 crore in the year-ago period. The insurer collected a gross direct premium of ₹5,493 crore in the quarter under review, up 17 percent YoY. It reported a 9 percent increase in underwriting losses in the given period to ₹293.46 crore.

Star Health, on the other hand, posted a net profit of ₹210.47 crore for the period ended December 31, 2022, as against a loss of ₹578.37 crore for the same period last year. Its total income rose 14 percent to ₹2,982.93 crore during the quarter under review as compared to ₹2618.42 crore in the year-ago period.

Which is a better investment?

According to Vinit Bolinjkar, Head of Research, Ventura Securities, Star health seems to be a better pick than ICICI Lombard.

“Star Health is India’s largest standalone health insurer (SAHI) with a market share of 13 percent as of 9MFY23 (33 percent in retail health insurance). It has built a strong virtuous cycle through its market leadership position in agency networks, retail health, and by having one of the largest hospital networks. Star Health trades at 4.3x FY25 P/B,” he explained.

Meanwhile, Bolinjkar also pointed out that the green shoots of ICICI Lombard’s strategy in the motor (in the CV space) and health space are visible and favorable base will benefit the company going ahead, although competitive pressure in the motor OD space continues to be a challenge. The company’s investments in distribution and digital areas could keep the combined operating ratio (COR) elevated in the medium term. ICICI Lombard trades at 4.2x FY25 P/B, noted Bolinjkar.

Meanwhile, Nirav Karkera, Head of Research at Fisdom, believes both Star Health and ICICI Lombard are well-positioned to capture the remarkable growth opportunity in the health insurance industry.

"Star Health Insurance's strong agency network, market leadership in retail health, and vast hospital network have created a virtuous cycle that drives its growth in the long term. On the other hand, ICICI Lombard is leveraging its competitive advantage in commercial segments, increasing its focus on retail health, and improving its loss ratio, positioning it for profitable growth in the future. While Star Health Insurance has delivered impressive financial results, ICICI Lombard has recently struggled with profitability due to rising costs, underwriting loss, and lower claims ratios. Nevertheless, ICICI Lombard's shares offer a good buying opportunity for investors due to their material underperformance in the past year. As the company continues to leverage its strengths and manage costs effectively, it can regain its lost market share in the motor own damage segment and maintain its growth trajectory in other segments," Karkera explained.

He also noted that both companies are expected to play a vital role in shaping the industry's future as India's middle class continues to grow and demand for quality healthcare coverage increases. With their unique strengths and strategies, they have demonstrated their ability to navigate the challenges of the health insurance industry and capitalize on growth opportunities, making them attractive investment options for investors looking to tap into India's burgeoning health insurance market, he said.

Meanwhile, domestic brokerage Emkay also has ‘buy’ calls on both these stocks. For ICICI Lombard, it has a target price of ₹1,490, indicating an upside of almost 40 percent while for Star Health, it has a target price of ₹670, indicating an upside of 27 percent.

Emkay noted that being one of the largest private sector general insurers and one of the oldest as well, ICICI Lombard with its sustained investments in technology is well placed to leverage upon its vast historical dataset. The key focus of all the technology initiatives and partnerships is to enhance customer experience by making their insurance journey simpler and minimizing fraud.

This enhanced customer experience will lead to winning new customers, better customer retention, cross-selling of additional products, and operating efficiencies, all of which would lead to profitable growth, it added. It also pointed out that on the financials front, these technological investments and competitive dynamics of the industry in terms of pricing and distributors’ payouts mean the company will aim to achieve a 102 percent combined ratio by FY25, slightly higher than the pre-pandemic combined ratio of 100 percent.

For Star Health, the brokerage noted that the firm has developed formidable expertise in product design, pricing, underwriting, distribution, and claims processing, given its 15 years of approach towards the health insurance business, particularly retail health. This expertise across the health insurance business functions gives management the confidence to continue its profitable growth journey over many years, despite a fast-changing regulatory environment and heightened competition. Further, Star’s shares have materially underperformed the market, owing to a combination of expensive valuation and earnings volatility, and currently trade on FY25E P/E of 23x, which looks appealing with growth and profitability expected to accelerate going ahead, it added.

Outlook

The insurance industry has witnessed broad-based growth during most of FY23, with health, motor, and fire leading the way, followed by other segments, said Karkera of Fisdom. Year-on-year growth in overall motor gross direct premium income (GDPI) has been primarily driven by a significant increase in motor own damage (OD) GDPI, while growth in motor third-party (TP) GDPI has remained relatively healthy, he noted, adding that the growth in group health insurance has continued to drive overall health GDPI growth in the current fiscal year.

"Going ahead, India's non-life insurance industry is poised for fast-paced growth due to a favourable regulatory and demographic environment. Rising awareness, per capita income, and willingness to purchase non-life insurance policies provide a clear path for market expansion. To meet this growing demand, the industry will need to innovate their product offerings and customer value proposition. The focus of innovation is expected to be on providing flexibility, specific coverage, and affordability," he forecasted.