Rakesh Jhunjhunwala-Backed Star Health Has Filed IPO Papers: Will It Be A Good Stock To Bet On?

Chennai-based Star Health & Allied Insurance has filed its Draft Red Herring Prospectus (DHRP) with the market regulator Securities and Exchange Board of India (SEBI) ahead of initial public offering (IPO).It is the first and largest stand-alone health insurer to file for an IPO.

The IPO comprises a fresh issue of equity worth ₹2,000 crore and an offer for sale of up to 6.01 crore shares by promoters and existing shareholders, according to the draft prospectus.

Founded in 2006 by V Jagannathan, it provides health insurance, overseas medi-claim and personal accident policies. As of October 2020, the firm, a market leader in the standalone health insurance segment, commands a 52 per cent market share.

In August 2018, WestBridge AIF (using its special purpose vehicle(SPV) - Safecrop Holdings Pvt. Ltd.), Rakesh Jhunjhunwala and Madison Capital, signed agreements with the existing shareholders of Star Health & Allied Insurance Company Ltd to buy a 90 per cent stake in the firm. Back then, the existing shareholders of Star Health included included the original promoter firm - Star Health Investments Pvt. Ltd. and investments funds of ICICI Ventures, Tata Capital and Apis Partners.

Star is the third firm owned by Jhunjhunwla to opt for a listing after Nazara and Barbeque Nation. Shares of both Nazara and Barbeque Nation were lapped up by investors and listed at a premium. Jhunjhunwala owns 13 per cent of the company with his wife Rekha owning another 3 per cent.

Despite the increase in Gross Written Premium due to COVID, the company has also been impacted negatively by the pandemic. The Net Incurred Claims Ratio has increased to 87 per cent due to exceptionally higher claims due to Covid and a withdrawal from an insurance treaty. To put this in context, the company had a net claims incurred ratio of around 65 per cent in the past. The combined ratio for the company was 114 per cent for FY21, implying an underwriting loss. The issue clearly highlights the Achilles heel of the Insurance business – reliance on past data does not account for black swan events.

However, the company has several operational advantages. It operates in the retail health business, which has the lowest claims rates according to the DRHP. It also has almost five times the number of insurance agents compared to its nearest competitor, Religare. Having a strong insurance agent network is crucial, as most people require assistance in selecting the correct policy for themselves. Its hospital network covers 10,870 hospitals all over India. Such a strong distribution network along with a laser sharp focus on health insurance has helped it become the top player in the sector, despite competing with deep-pocketed players.

Family Floater policies account for more than 60% of its premium income, while the remaining consists of individual floater policies and specialised policies. However, gradually, the share of family floater policies is reducing as individual policies gain a higher share of the policy pool.

Under the draft, Star Health has reserved 75% of the IPO size for qualified institutional buyers (QIBs), while 15% of the portion is reserved for non-institutional investors and the remaining 10% is kept for retail individual investors. It will be an Offer for Sale combined with an issue of Fresh Shares.

The money raised by issuing fresh shares will be used to augment the capital base of the company and increase its solvency ratio. With the Offer for Sale, Westbridge, Apis and other investors will be selling a part of their stakes.