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Jefferies Financial Group Inc (Photo: Bloomberg)
Pvt Insurance players in focus: On Monday, August 26, 2024, shares of insurance companies Go Digit and Star Health continued their upward trend following coverage initiation by New York-based international brokerage Jefferies on August 23.
In the past two trading sessions, Go Digit’s stock increased up to 3 per cent. Including today’s gain, it reached an intraday high of Rs 370 on Monday. Meanwhile, Star Health saw its share price climb 1 per cent since the coverage initiation. It hit an intraday peak of Rs 614.95 today.
Why did these stocks extend their rally?
Analysts at Jefferies are placing their bets on major private insurers like PB Fintech, ICICI Lombard and Go Digit, anticipating that these companies will benefit from a prolonged upcycle in the motor insurance sector.
This upcycle, analysts believe, is driven by the premiumisation of the auto mix and a decrease in competitive pressure. Accordingly, Jefferies analysts have initiated coverage on Go Digit and Star Health. They also noted that ICICI Lombard is the biggest beneficiary on motors with low exposure to retail health and remains their top pick along with PB Fintech.
“ICICI Lombard is the biggest beneficiary of motors with low exposure to retail health & remains our top pick along with PB Fintech. We initiate on Go Digit (Buy) & Star Health (Hold),” Jayant Kharote and Prakhar Sharma, equity analysts at Jefferies said in a note.
What analysts said about these companies?
For Star Health, the report highlights its dominance in the retail health sector (approximately 33 per cent market share) and its extensive agency network. However, the company faces ongoing industry challenges that may keep profitability under pressure.
Jefferies analysts project an elevated combined ratio of 97-98 per cent for FY25-27E, with Return on Equities (RoEs) expected to remain within the 11-13 per cent range. Thus, Star Health is rated as a ‘Hold’ with a target price of Rs 550, based on an implied price-to-earnings (P/E) ratio of 28x for September 2026. Upside risks, analysts noted, include a potential increase in retail volumes or reduced competition.
In contrast, Go Digit has shown superior underwriting performance in the motor segment due to its flexibility in adapting to various asset cohorts and profit pools, analysts said. This agility has resulted in a strong gross direct premium income (GDPI) growth rate of 41 per cent compound annual growth rate (CAGR) over FY21-24. As growth moderates to 21 per cent CAGR over FY24-27E, product diversification and improved operating leverage, analysts believe, are expected to enhance the combined ratio to 103 per cent (from 109 per cent).
The projected earnings per share (EPS) CAGR of approximately 73 per cent and RoE expansion to about 16 per cent suggest sustained momentum beyond FY27E. Consequently, analysts have rated Go Digit as a ‘Buy’ with a target price of Rs 420, reflecting an implied P/E ratio of 48x for September 2026. On the flipside, Jefferies also points out that the health insurance sector, which makes up ~35 per cent of Go Digit’s portfolio, could face challenges due to rising claim frequencies and high competition.
Similarly, ICICI Lombard is expected to benefit considerably from the current motor upcycle due to improved growth from stronger passenger vehicle renewals and a two-wheeler rebound. Better market share and profitability from reduced competitive intensity, coupled with a new channel strategy for risk selection, strengthen its position.
Despite a potential uptick in motor claims, ICICI Lombard’s conservative reserving strategy maintains a healthy claims outlook, with a projected combined ratio improving by ~370 basis points to ~100 per cent by FY27E.
Thus, analysts at Jefferies have raised EPS estimates by 6-16 per cent and set a new target price of Rs 2,600, reflecting an implied P/E ratio of 40x for September 2026. The transition to International Financial Reporting Standards (IFRS) accounting standards, they said, could further boost reported earnings and reduce the implied P/E ratio by 20-25 per cent.
That apart, analysts highlighted that PB Fintech is seen as a more favourable option for retail health insurance in the current environment. Even as the cycle turns, broad price increases could drive stronger growth for PB Fintech. The launch of its claims management business is expected to enhance customer retention and renewal rates, analysts highlighted.
Other factors contributing to this outlook:
Motor segment upcycle
The motor insurance sector is anticipated to experience a multi-year upcycle with an estimated 14 per cent CAGR from FY24-27E. This growth, analysts said, will be supported by renewals, which constitute 60-70 per cent of the premium mix, benefiting from the shift towards premium, high-value auto segments.
Two-wheeler sales are rebounding, and certain commercial vehicle segments are improving. Regulatory guidelines and increasing claims from aggressive players are moderating competitive intensity. Potential boosts could come from increased new passenger vehicle sales or higher motor third-party (TP) pricing. The success of Bima Sugam could further enhance product profitability.
Retail health sector challenges
Growth in retail health insurance has slowed to under 5 per cent from approximately 18 per cent post-COVID. Pricing-driven growth is leading to policy ‘porting’ and adverse risk selection for large players.
Elevated claim frequencies, particularly as the post-COVID client cohort reaches its peak claim period, analysts believe, are expected to persist. While industry-wide price hikes could address rising claims and improve renewals, the current downturn may be extended. The introduction of composite licences could further heighten competitive pressures, analysts added.
First Published: Aug 26 2024 | 9:51 AM IST
