Star Health and Allied Insurance Co Ltd (STARHEALTH) Q2 FY23 Earnings Concall Transcript

Star Health and Allied Insurance Co Ltd (NSE:STARHEALTH) Q2 FY23 Earnings Concall dated Nov. 10, 2022 

Corporate participants:

Mr. Anand Roy — Maaging Director

Dr. S. Prakash — Managing Director

Analysts:

Pratik Patil — Adfactors PR — Analyst

Swarnabha Mukherjee — B&K Securities — Analyst

Prayesh Jain — Motilal Oswal — Analyst

Jayant Kharote — Credit Suisse — Analyst

Avinash — Emkay Global — Analyst

Shreya Shivani — CLSA — Analyst

Sahej Mittal — HDFC Securities — Analyst

Sanketh Godha — Spark Capital — Analyst

Ansuman Deb — ICICI Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Star Health and Allied Insurance Companies Limited’s Q2 and H1 FY ’23 Earnings Conference Call. [Operator Instructions].

I now hand the conference over to Mr. Pratik Patil from Adfactors PR Investor Relations Team. Thank you, and over to you, Mr. Patil.

Pratik Patil — Adfactors PR — Analyst

Thank you, Inba. Good evening, everyone. From the senior management, we have with us Dr. S. Prakash, Managing Director; Mr. Anand Roy, Managing Director; Mr. Nilesh Kambli, Chief Financial Officer; and Mr. Aneesh Srivastava, Chief Investment Officer.

Before we begin the conference call, I would like to mention that some of the statements made during the course of today’s call may be forward looking in nature including those related to the future financial and operating performances, benefits and synergies of the Company’s strategies, future opportunities and growth of the market of the Company’s services. Further, I would like to mention that some of the statements made in today’s conference may involve risks and uncertainties.

Thank you, and over to you, Mr. Roy.

Mr. Anand Roy — Managing Director

Thank you, Pratik, and good evening, everyone, and thank you for joining the Star Health’s earnings call. I will take you through a brief overview of the industry trends and developments that we have witnessed in the last few months as well as walk you through the Company’s performance in terms of premium and distribution. My colleague, Dr. Prakash will cover the financial performance and aspects related to claims including the steps that are underway to manage them. In quarter two 2022, the health insurance industry including CA [Phonetic] has grown by 15.1%, driven by 18% growth in the group health and 17% growth in the retail health segment.

Now, we will talk about the growth and market share of Star Health Insurance. For H1 2023, our retail health growth is 21% versus industry’s retail health growth of 14%. That is, we have grown 1.5 times the industry growth rate as you are aware with our very large base. In quarter two 2023, our retail health segment has grown by 21.7% versus the industry’s retail health growth of 17%. We have grown impressively at 1.3 times the market growth rate. Overall, our GWP grew by 11% in the quarter two of financial year ’23 over the same period of last year to INR3,189 crores. In quarter two of FY ’23, Start Health registered 34% market share in the retail health segment, which is 3 times the second largest player in the industry. We continued to grow higher than the market growth rate and increase our retail health market share. For H1 ’23, our retail market share is 33%, an increase of 200 basis points over the previous year’s same period. As far as accretion share is concerned, Star Health has registered 46% retail health acquisition market share in H1 ’23. Our agency business continued to contribute around 82% of the overall business. Our agency strength has increased to 586,000 agents with an addition of approximately 36,000 agents in H1 of 2023. We are on course to add about 80,000 to 100,000 agents in the current financial year. With improving agency productivity, we are confident of maintaining our market-leading position. For H1 ’23, the corporate agent segment that is banks and other tie-ups continues to remain strong, and our premium in this segment from this channel has grown by 44%.

Some of the highlights in quarter two of FY ’23 for us were as follows: Regarding premium and distribution, our contribution from specialized products has increased to 16.5% in H1 ’23, and we continue our journey of premiumization of our product portfolio. The acquisition of specialized products is 31% in the first half of the year FY ’23. The average sum insured of new policies has increased by 14% on a year-to-year basis to INR8.7 lakhs per policy. We have introduced one new product that is Star Extra Protect, which is an add-on cover available to our existing customers. This product is available for policyholders covered under Family Health Optima Insurance Plan and Medi Classic Insurance Policy having sum assured of INR10 lakhs and above. This will enhance our product portfolio yield on an aggregate basis. We expect to tie up shortly with a South based small finance bank, and we will announce that once the tie-up happens officially.

We continue to expand our distribution reach. Happy to announce that we have opened five new branches in Jammu and Kashmir. We are able to achieve good premiums in the Northeast regions of the country, which started about two years ago, and we continue to explore untapped areas and improve the health insurance penetration in India.

As discussed in the previous quarterly earnings, we have exited large group health insurance policies as demonstrated by the 54% reduction in group health premium during quarter two of 2023. We continue to monitor this segment closely, and we will make inroads wherever this premium is adequate. As reiterated previously, we remain positive on the SME, the small and medium enterprises, and non-employer-employee groups. The employer-employee segment group policies are largely sold to retail customers of the bank of tie-ups, which we have. And if we include these policies also, our overall retail growth is 22% in quarter two of 2023.

We have recently onboarded Mukesh Sharma, a senior tech resource, as our CDTO, Chief Digital Transformation Officer. We continue to simplify our customers’ journey by focusing on digital initiatives. Some of the outcomes of the digital initiatives were, our app downloads have reached 1.7 million downloads. 83% of our active agents are now using our digital solutions to provide services to the customers. Digital sourcing defined as premium collected directly from our website as well as third-party aggregators and online brokers has grown 28% year-on-year and now accounts for 11% of our overall GWP for H1 ’23. This is a very significant milestone as we have crossed the 10% digital business share for the first time. Idea calling bot [Phonetic] for renewal policy retention has been introduced in quarter two of 2023.

Now, I request my colleague, Dr. S. Prakash, to talk about the claims and financial initiatives.

Dr. S. Prakash — Managing Director

Thanks, Anand. Let me brief on the claims initiatives, and we are working on a four-pronged approach to effectively manage our claims services. Number one, prudent claims settlement based on rich medical wisdom and insurance expertise. Number two, a well-negotiated volume-based pricing arrangement with our network hospitals, and this can give us the operating leverage in terms of lowering average claim size. Number three, technology-enabled fraud detection and mitigation tools. Number four, risk-based pricing through micro segmentation of portfolio. 81% of the amount settled in cashless claims during this H1 are through cashless. Cashless turnaround during weekdays comes to around 90% for us. In cashless, we have introduced auto-adjudication of claims and this shares [Phonetic] drastically in improving turnaround time and thereby customer satisfaction. 8% of hospitals have been onboarded under this initiative. The number of claims under auto-adjudication has risen to 33,000 in Q2 FY ’23, a growth of 95% versus Q1 of FY ’23. We have stepped up our tele consultation with 7.75 lakh consultations till date. And we are also actively promoting our wellness initiatives and programs. We continue to improve on the claims related milestones. Within overall cashless claims, the share of hospitals with pricing arrangements, that is those agreed network hospitals, the cashless claims are 66% versus 64% in FY ’22. Based on our market intelligence, we find our average claim size continues to remain one of the lowest in the country. In the last three quarters, we are seeing a consistent reduction quarter-on-quarter in the average claim size.

As you will be aware, cost control is one of the critical factors to address in retail claims business. Our antifraud digital initiatives as became operational this year, and this has started to produce savings in claims outgo. It has resulted in 0.5% reduction in claims ratio in Q2 of FY ’23. We expect more than a 1% reduction in claims ratio in the subsequent quarters. We are planning to take price size [Phonetic] in quarter three, in this quarter in our flagship product, Family Health Optima, to combat the structural rise in medical inflation post COVID. We have taken a price increase in one more of our products, Medi Class Individual, which has started showing results in the form of lowering loss ratios.

Let me take you through the financial performance. Our combined ratio in the first half of this financial year has improved to 97.9% versus 119.2% in the same period last year. Improvement in combined ratio is achieved through claims and expense ratio management. The combined ratio in Q2 FY ’23 was 97.9% versus 117.3% in Q2 FY ’22. The claims ratio in H1 FY ’23 has improved to 67.3% versus 88.2 in H1 FY ’22. H1 FY ’23 claims ratio has 0.7% impact on COVID claims. The claims ratio in quarter two FY ’23 was 68.2% versus 85.6% in quarter two FY ’22. This year, with staggered monsoons, the impact of epidemics like dengue, malaria, virus fever was high in Q2 of FY ’23, compared to historical averages. We have seen a 9% decrease in reported claims in October ’22 versus the average of reported claims in Q2 this year. While usually, quarter three is prone for epidemic related claims, so far in these 40 days of Q3, we are not seeing any major impact. For the month of October, the loss ratio is approximately 63.5%. And the YTD loss ratio as on October end is approximately 66.5%. So, we are very positive and confident to achieve the loss ratio as per the guidance given for the financial year. Expense ratio has also improved in H1 to 30.7% on account of efficient cost management evidenced by a fall in expense ratio in quarter two FY ’23 to 29.7% from what was 31.6% in quarter two FY ’22. There is a 1.9% improvement. So, H1 FY ’23 recorded a profit before tax of INR409 crores and profit after tax of INR306 crores. Adjusted profit after tax excluding non-business ESOP cost is INR390 crores in H1 FY ’23. For the quarter two FY ’23, the profit before tax is INR121 crores and profit after tax is INR93 crores. Our investment assets have grown to INR11,653 crores in H1 2023 versus INR8,604 crores in H1 2022. Claims based solvency as on 30th September 2022 is 1.95 times compared to the regulatory requirement of 1.50 times. This solvency is achieved through only mandatory 4% reinsurance arrangement that we have. We have repaid a target of [Phonetic] INR200 crores before 30th September ’22 and another INR50 crores in October ’22. In spite of payment of this update [Phonetic], the solvency continues to be well above the required level.

To conclude, ladies and gentlemen, we continue to believe in the profitable growth opportunities available in retail health segment and we are on our desired path of realizing the same. Thank you.

Questions and Answers:

Operator

Sir, maybe [Phonetic] open the lines for questions now?

Dr. S. Prakash — Managing Director

Yes.

Operator

Thank you. [Operator Instructions]. The first question comes from the line of Swarnabha Mukherjee from B&K Securities. Please go ahead.

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah. Good afternoon, sirs, and thank you for the opportunity. So, I have three questions, first on the loss ratio side, so as you mentioned, that Q2 was impacted by significantly related [Phonetic] diseases like dengue, malaria and on the first half, our loss ratio is almost around 68%. Now, this number that you have mentioned for October 63.5%, if I heard it correctly, does this also have a COVID element that you had disclosed in — for first half and then, I believe that we will have to maintain this kind of run rate for the next of the year in order to reach your 63% to 65% guidance. So that — I mean if that is the case then, is there — then does that again include structural element that you were saying that is happening in the post-COVID world in terms of [Technical Issues].

Operator

Yeah, Mr. Swarnabha Mukherjee, are you still there?

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah. I am there.

Operator

Can you repeat the last part of your question? I think the management was unable to hear.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay. Okay, sir. So, did you did you get the question on the loss ratio, sir?

Dr. S. Prakash — Managing Director

Can you just repeat the whole thing again?

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah. Sure. So, sir in terms of loss ratio in the first half, you have — the number was almost around close to 68%. Now, the 63.5% run rate that you have said for October, I guess you’ll have to maintain that kind of run rate to reach your 63% to 65% kind of guidance range that you had given, so how confident are you about that and does this also factor in the structural changes towards the loss ratio, slightly elevated loss ratio in the post-COVID world? So, that was that was the first question. Was I audible, sir?

Dr. S. Prakash — Managing Director

Yeah, we are audible. Can we take this question first then?

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah, sure, sure, sir.

Dr. S. Prakash — Managing Director

So, in the first half, particularly during July/August, the reported claims on infections due to fever and respiratory illness were very high. That’s probably because of the southwest monsoon, and we usually get this impact of monsoon during October and November, but this year we saw the maximum impact of monsoon being July/August. So, based on that, we have a feeling that the worst of the impact due to the pandemic — due to the epidemics of monsoon have already happened in the Q2. So, that’s the reason why we say in Q3 in the 40 days of this Q3, where usually these days are for monsoon-related epidemic diseases, we don’t see so much of the epidemic diseases during these 40 days in this Q3. That’s the reason why I’m having a lot of confidence that we should be able to reach that we have guided towards the end of this year.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay, the thing that I also noticed was that your share of cashless claims through the network hospitals has gone up. Does that in anyway positively impact the loss ratio or how should we look into that because that did not pan out in the numbers? So, just wanted to know.

Dr. S. Prakash — Managing Director

In general, I can say more the cashless, it is more comfortable to the customer and also less prone for fraud and unwarranted claims because we are able to ascertain and get all the details, we know the infrastructure and expertise available in the hospital, we have [Indecipherable] these hospitals, and we know what are the systems and processes, and we have a score of their performance also. So, based on these things, as much as we get more traffic and more outgo on cashless related hospitals, we feel that we are giving no room for unwarranted and un-indicated claims.

Swarnabha Mukherjee — B&K Securities — Analyst

Yeah. In your internal calculation, do you see a difference between the loss ratio from these hospitals where cashless is more vis-a-vis others?

Dr. S. Prakash — Managing Director

See, not all hospitals are the same. [Technical Issues] geographies they are mixed and the level of expertise, so we have different grading of hospitals, and then we monitor the outgo based on the average that we pay in that area. There is an index [Technical Issues] process that we follow, and based on all that, we ascertain [Technical Issues] pay less than what the hospital otherwise charges in that area for a particular procedure.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay. Okay. Okay. And sir, next question on the retail health renewal ratio, so wanted to understand, I mean we had a number of 98% in FY ’21. I understand that in the COVID period, there were corona coverage policies, etc., which resulted in, — which were not renewed, so, last year the numbers were not at that level, but this year, I think, we don’t have such kind of policies in the base, but still the renewal rates are in and around 94%, so how to look into this and is there any persistency, any kind of cohorts, how should we look at this?

Mr. Anand Roy — Managing Director

Yeah, the retail renewal ratio continues to be the best in the industry as far as retail health insurance business is concerned at 94.4%, but there were some policies, which were taken last year due to the fear of COVID, not COVID related policies, but some customers have taken some proper policies, which were not renewed this year. But we are not much concerned about this. We are very confident that we’ll be able to maintain good renewal ratios and it will be improving in every quarter.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay. In terms of renewals, as we progress generally in the renewal cohorts, will our loss ratios kind of increase because age of the customer increases and then there could be probability updates?

Mr. Anand Roy — Managing Director

So, you have to — we look at it on a combined ratio basis as the renewal cohorts age, so on a combined ratio basis, we are able to maintain profitability at all the cohorts as far as our customer basis is concerned and whenever it is required, we do go for a price revision as already Dr. Prakash had mentioned in his presentation.

Swarnabha Mukherjee — B&K Securities — Analyst

Sure, Sure. And one last question from my side. Sir, you mentioned in the opening comments about the SME book continuing to be the focus area, but the number was bit muted in that front for this quarter and even for the last quarter. I think, single-digit de-growth was there, so what is going on there if you could highlight?

Mr. Anand Roy — Managing Director

Yes, the focus in the group segment is on the SME business, but even within the SME business, the Company is very very selective in terms of our pricing strategy and underwriting principles, so even in the SME business, we want to be selective, so there has been a little slow growth, but we are confident of the target that we have taken for the current year and we will achieve that.

Swarnabha Mukherjee — B&K Securities — Analyst

Okay. That’s helpful, sir. Thank you so much and all the best for second half.

Mr. Anand Roy — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions]. We’ll take our next question from the line of Prayesh Jain from Motilal Oswal. Please go ahead.

Prayesh Jain — Motilal Oswal — Analyst

Yeah, Hi. Good evening, everyone. Firstly, could you tell me as to our investment books have grown that yields are higher sequentially for the entire industry, but still we saw our investment income being flattish on a sequential basis, anything — how do we read that?

Dr. S. Prakash — Managing Director

No, no. See, if you compare it with respect to the last financial year, there was a profit that we booked in first half of last financial year, approximately INR110 crores of profit that we had and in full year last we have booked the profit of approximately INR160 crores and the reason was that yields were at the bottom and hence, we decided that perhaps it could be an appropriate strategy to do that. So, it was a tactical move, which we did and because of high base of [Technical Issues] flatter base this year. Otherwise, we are maintaining the yields of the portfolio.

Prayesh Jain — Motilal Oswal — Analyst

My question was more on the sequential quarter basis, Q1 versus Q2?

Dr. S. Prakash — Managing Director

I understand your point. See, what happens is that a large part of the AUM growth actually happens in the second half of the financial year and since AUM remains flat and there is no incremental deployment, which is happening except for what we get in maturities. So, basically yields ultimately remain broadly the same, but we would be in position to take the benefit of rising yields in the second half of the year as we start getting larger flows. And obviously as mentioned here, we have stayed back some INR250 crores of sub-debt as well.

Prayesh Jain — Motilal Oswal — Analyst

Okay. Okay.

Dr. S. Prakash — Managing Director

So, that is how the calculation goes.

Prayesh Jain — Motilal Oswal — Analyst

All right. And what is the quantum of price hike that you are contemplating and is it the only price hike or some other price hikes are also being considered? And when you say you’ll be able to maintain the 63.5% kind of October level loss ratio, do you include the price hike in that when you say it or how do we read this in terms of [Technical Issues].

Dr. S. Prakash — Managing Director

See, we are continuously monitoring product-wise loss ratios and when they cross the threshold, we go for a price revision and at every product level, we want to maintain profitability and that is how the whole management works on that concept. So, any product, when we find that, it causes a threshold going, we study the reason and then we find an alternate solution by repricing the product and also currently, we are selling more and more of high sum-insured policies. Our fresh policy [Phonetic] close to 82% is INR5 lakh and above. So, there is a tremendous increase quarter-on-quarter on the sale of high sum-insured policies in our fresh. These along with the price revisions that we do and the age [Phonetic] where there is a premium hike based on the age and some of our customers enhance the sum insured. This post COVID, we feel a lot of people enhancing the sum insured during renewal. All these things contribute to our premium growth.

Prayesh Jain — Motilal Oswal — Analyst

I just have one more question. If you look at your claims, what would be your claims filed verses claims delivered or claims settled? What would be that ratio and how would have that trended in the past year or so?

Dr. S. Prakash — Managing Director

The claims filed, we call them the claims reported, we see that close to 83% of the claims reported were the claims that were incurred by us. And this consistently continues over the last seven months of this year. We don’t see any volatility in that.

Prayesh Jain — Motilal Oswal — Analyst

My question is coming from whether this 83% that you are saying, is it in line with what the industry is doing? Is it better than the industry? Or are we at the lower end? Is there a trend that I know other players are able to get more market share out of this?

Dr. S. Prakash — Managing Director

We don’t have public disclosure on these infra details, but overall, the number of claims reported will depend on the type of portfolio the companies handle and business model.

Operator

Sorry to interrupt, Mr. Prayesh Jain, may be request you to return to the queue. There are several participants waiting for their turn. We will take our next question that is from the line of Jayant Kharote from Credit Suisse. Please go ahead.

Jayant Kharote — Credit Suisse — Analyst

Yeah. Thank you for the opportunity and congrats on good set on the growth, sir. I have a couple of questions. Firstly on the reserving, if you could break the URR into retail and corporate and also sort of give some color on — bit of higher deserving this quarter, then I’ll take the next question.

Mr. Anand Roy — Managing Director

Yeah. So, in terms of groups because we are de-growing, we have been de-grown to almost 50%, the earned premium is higher than the net written premium, so the reserve release is higher compared to the creation that happened, whereas in the retail, last year also we had grown by 22%, we continued to grow at 21%. So, the reserve creation and the reserve release continue to match. So, when we talk about the net written premium being lower than the net earned premium, it is largely because of the group health business where we have degrowth.

Jayant Kharote — Credit Suisse — Analyst

Okay. Sir, on the retail side, if you could break down the growth into volume versus value, that would be helpful.

Mr. Anand Roy — Managing Director

8% to 10% of our growth is value based and again the same 10% to 12% is volume-based growth, the split of 21% that we have.

Jayant Kharote — Credit Suisse — Analyst

Now in the second half, sir, some of the impact of the price hikes would be already coming into the base, so do we expect typically for us is the second half more heavy on the volumes than the first?

Mr. Anand Roy — Managing Director

Yeah, yeah definitely. So, Q4 being a tax exemption period, that is where the majority of the volume come in and it should be good. I mean first off because the base was higher, we see a slight base effect coming into play for first half, but second half we believe should be good.

Jayant Kharote — Credit Suisse — Analyst

Yeah. Sir, two last questions. First is on the median age you had disclosed last time around, the median age moving lower with the Young Star product penetration increasing, so if you could talk a little bit about how the penetration of Young Star product is currently at, I think it was only 11% or 12% last quarter, and then how has the median age moved Q-o-Q?

Mr. Anand Roy — Managing Director

The median age continues to be 41 years as we speak. The Young Star product is doing well. It is one of our fastest selling products. So, the median age hasn’t changed much.

Jayant Kharote — Credit Suisse — Analyst

Sir, does the Young Star grow faster than the overall retail growth meaning the share in the mix, is it moving up or stable?

Mr. Anand Roy — Managing Director

Of course, because it is also coming from a relatively lower base, so the growth is faster and it is also very attractive to the younger age profile of the customers, so definitely it is growing at a faster pace as compared to the overall retail growth of organization.

Jayant Kharote — Credit Suisse — Analyst

Okay, sir. Thank you very much.

Mr. Anand Roy — Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Avinash from Emkay Global. Please go ahead.

Avinash — Emkay Global — Analyst

Yeah. Good afternoon. Again delving a bit on claims and combined, so like general factors that had helped it improving versus last year post COVID [Phonetic], then you have [Technical Issues] portfolio more towards the retail. You have done kind of upselling and selling more of the specialist product, all these factors and of course has — could have helped you, but again [Technical Issues], but these factors are kind of forming a part and parcel of the business, I know, sometimes in dengue, malaria or other type chicken guinea, diarrhea, whatever it is, now the question here is that, at this juncture, because, I mean, almost we are eight months off [Technical Issues] sort of a comfort level, if not the lower, the upper end like 65% kind of a claims ratio and 95% kind of a combined ratio for FY ’23. I am asking in particular ’23, because the many of their steps in terms of price hike and other things you will take [Technical Issues] FY ’24, but FY ’23, we are like almost eight months into it. So, the first question would be — I mean if that’s okay, how much comfort do you have around 65% claims and 95% combined ratio for FY ’23 and then following on that, what sort of growth [Technical Issues] is done, I mean, group retail for FY ’24, what kind of growth sort of [Technical Issues]. Thank you.

Mr. Anand Roy — Managing Director

So, loss ratio, as spoken by Dr. Prakash during the script reading, we continued to maintain the guidance of 62% to 65% and I have spoken that some of the Q3 impact has already come in Q2 in terms of the epidemics that have come in. Q4 last year if you see excluding the COVID loss ratio, it was 64% with the higher weightage of group and Q4 traditionally has been much much better than the first nine months or quarter two, quarter three. So, we’re pretty confident of the full-year guidance that we have given in terms of the loss ratio of 63% to 65%. In terms of growth again, H1 was around 12%. [Speech Overlap]. Avinash, you were talking about the next year growth or the second half growth?

Avinash — Emkay Global — Analyst

No. No. Next year, because this I am sort of understanding you will be shuffling between group to retail. I am saying that okay, now, say, FY ’23, you achieved the portfolio where want to be the mix, now what kind of growth would you expect in next year because now your portfolio balancing is done because this year of course your growth is really being hurt by portfolio balancing, etc., right? So, I am saying that next year going, you will be taking certain price hikes, your portfolio based impact is there [Technical Issues] retail, and what kind of growth do you see for FY ’24?

Mr. Anand Roy — Managing Director

Yeah, so with the group base effect going out and with price increases and with a large base, we believe we should be in a position to grow at 20% to 22% going forward.

Avinash — Emkay Global — Analyst

Okay. And just — so if you are kind of still confident of 63% to 65% claims ratio, that means kind of a 95-odd percent combined ratio is also on target. I mean, now 30% ballpark expense ratio is correct?

Mr. Anand Roy — Managing Director

Yeah, yeah. So, I mean for quarter two, the expense ratio is slightly below 30%, but yes. I mean we continue with the guidance of 93% to 95% combined ratio, 63% to 65% loss ratio.

Avinash — Emkay Global — Analyst

Okay. In terms of in terms of just quickly on solvency, I mean solvency will continue to improve because you have [Technical Issues] do you see again further scope to reduce your sub-debt or like what kind of capital because I mean most likely, you are going to end up the year in around 210 odd percent [Phonetic] solvency, so will you continue with the sub-debt or you will sort of exercise [Technical Issues].

Mr. Anand Roy — Managing Director

Yeah, so the solvency continues to be stronger, but it is still on claim basis at 1.95 times [Phonetic] on premium, the solvency will improve to 2.08 times. In terms of sub-debt, the sub-debt that is issued is for seven years with a call option of the five years, so this sub-debt, which we issued in 2017, came up for call option now, which will retire. The INR470 crores that we have raised last year in September, it will come up for call option after five years so and conditions, we will be not in a position to exercise the call option or call for this sub-debt before the due date. So, we’ll continue with the sub-debt, and it is sufficient, it is at 8.75% interest rate.

Operator

Mr. Avinash, could you please return to the queue so that we can ask other participants [Speech Overlap]. Thank you.

Avinash — Emkay Global — Analyst

Yeah. Sure. Sure.

Operator

Thank you. We’ll take our next question from the line of Shreya Shivani from CLSA. Please go ahead.

Shreya Shivani — CLSA — Analyst

Thank you. Sir, two questions. First is on the commission rate, so I can see that the — If I see for second quarter, the commission per net written premium is slightly lower at around 13%, it used to be at 13.7% or 14% previously, so has any change happened over there. Also the second question is on the reinsurance, your reinsurance is also reduced to under 5% now. I know that the mandatory level has been reduced to 4%, so any comments you’d like to highlight, any change in reinsurance agreement now that it’s a different focus and mandatory limit? So, those are my two questions.

Dr. S. Prakash — Managing Director

Yeah. So, commission, structurally there is no change, but the business composition also impacts the commission ratio, so as Anand sir spoke, that the direct portion has now grown to 11% of the overall business. So, on a portfolio basis, it has an impact on the commission and the composition of new ways [Phonetic], last year it was a high-growth period in retail, whether — overall output is 19.5% [Phonetic] on agency business, so this year, the growth is around 20%. So changing business mix portfolio, it has impacted the commission ratio. In terms of RI, the mandatory RI is reduced to 4% now, what we have is the personal accident and critical illness benefit products where there — we have specific reinsurance arrangements. We had spoken on the last call that this portfolio is also growing for us, so on a portfolio basis, it is in that range of around 5%, even though the obligatory is at 4%.

Shreya Shivani — CLSA — Analyst

Including the personal accident, the normal — your health policy where your mandatory has reduced to 4%, the terms of agreement with the reinsurers remains the same?

Mr. Anand Roy — Managing Director

Yeah, yeah. So this is reason [Technical Issues] and it’s standard terms across the industry.

Shreya Shivani — CLSA — Analyst

Okay. Got it. Thank you. Those are my questions.

Operator

Thank you. Our next question is from the line of Sahej Mittal of HDFC Securities. Please go ahead.

Sahej Mittal — HDFC Securities — Analyst

Hi, good evening, everyone. So, three questions from my side, so, firstly, what percentage of your existing customers are opting for an upsell or higher sum-assured on the existing policy, if you could quantify that and give some color around — what are the type of these customers, what kind of higher sum-assured they are going for, say for example, [Technical Issues] policy with the sum-assured of, say, INR10 lakhs, now they are opting for INR20 lakhs or are any signs wherein customers are actually going for a reduced sum-assured? That is first. Second is around other expenses other than related to the insurance business. So, I mean that has already reached close to about INR150 crores in the first half. So, are we done with the expenses related to ESOP [Technical Issues] or are we expecting any further expenses in this line item? Those are the first two questions.

Mr. Anand Roy — Managing Director

Yeah. As far as the upsell of renewal customers are concerned, we have a dedicated team, which is focusing on renewal retention and we tried ourselves that we have amongst the best renewal retention in the entire industry and consistently so for the last 15 years. So, upselling is a strategy that we follow, but the Company also has a strategy to upsell only to customers where we see profitability once we upsell. Obviously that is an internal strategy that we adopt. So, we have a plan and we continue to do that, but we are not disclosing this number in the open forum, maybe we can take it offline and we can discuss this with you. As far as the ESOP cost is concerned, I think we have two more months that is October and November, cost will be absorbed and after that, I think the entire 100% of the cost gets absorbed.

Sahej Mittal — HDFC Securities — Analyst

Sorry, sir. If you can just re-clarify on the ESOP plan?

Mr. Anand Roy — Managing Director

ESOP, 10 months are over as on 30th September, two more months remain before this whole cost will be absorbed, so for October and November, there has been additional impact of INR36 crores, which will come through and that will close the matter in terms of the ESOP cost. It started on [Technical Issues].

Sahej Mittal — HDFC Securities — Analyst

Sir, and one thing is on the restating which is done by Star Health, when you are reporting the monthly numbers, so I mean, after restating the base numbers, your growth optically looks better, right, but being a market-share market leader, this sort of raised doubts for us, so if you could give us a convincing explanation for the restatement in the base, I mean, what was that relating to?

Mr. Anand Roy — Managing Director

Yeah, so there is no restatement in the base, if you look at the financial quarter end numbers and what we are reporting is it is always in line. It is only that since inception, we are following [Technical Issues] the transaction date, because we follow [Technical Issues] cover. The money comes in before the policy start, so during month ends, you know the first base premium used to come on 29th and 30th, which is to get booked in the system and reported because we did a reporting from the system, which method we have changed last year, December. So, that is also a one-year impact, which will get over, I think, in December. Risk commencement date basis is what reporting we have started, which was always there when we reported financials. So, it’s only a monthly phenomenon. Quarter-end numbers are always in line with what we report in the financials.

Sahej Mittal — HDFC Securities — Analyst

Right. I was just taking a look at the balance sheet and there has been a de-growth in the provisions, so ideally if there are businesses growing, then the provisions for a general insurance company should grow because of higher unexpired risks. I’m not sure if I’m reading this correctly. Correct me if I am not.

Mr. Anand Roy — Managing Director

So, the unexpired risk follows a pattern. If you see compared to Q1, the Q2 unexpired risk has grown. We always say that this is a retail business, which happens more in quarter four. So compared to — quarter four is the maximum quarter whether the reserve gets created in terms of the URR, unexpired risk result, which keeps on relieving, so [Technical Issues] pattern will always be line with the premium, which happens during the year.

Sahej Mittal — HDFC Securities — Analyst

Sure. Thanks. I’ll join back the queue.

Operator

Thank you. Our next question is from the line of Sanketh Godha from Spark Capital. Please go ahead.

Sanketh Godha — Spark Capital — Analyst

Yeah, and thank you for the opportunity. Sir, if I take the renewal rate of 94% and try to calculate the breakup into [Technical Issues] renewal, it seems that new business has declined for us in first half of FY ’23. Is that assessment right, sir? I just wanted to understand that despite taking price hike and everything, the new business is de-growing in the current year and is it the high base, which is leading to [Technical Issues]?

Mr. Anand Roy — Managing Director

So, Sanketh, for the first half of the year, we have seen a flattish growth in new business and as rightly put by you, it is because of the high base of the last financial year, where the delta variant had a huge impact and led to a very enormous growth in the health insurance business last year. But as we speak, when we are looking at the trends for the last three months, we are seeing very high positive growths, and we believe that by end of the year, we will end this year with a very very good performance in new business also.

Sanketh Godha — Spark Capital — Analyst

Sir, is it safe to [Technical Issues] floating growth, if possible for the full year in new business not affecting the [Technical Issues] part.

Mr. Anand Roy — Managing Director

Sorry. Can you repeat? I think your voice is not clear.

Sanketh Godha — Spark Capital — Analyst

Sir, I was asking that given the trend has improved from — because four quarter is seasonally strong, is it safe to assume that by end of the year, the new business growth would be in mid-teens or low-teens compared to the flat trend, what we see for the half?

Mr. Anand Roy — Managing Director

Yeah, you can safely assume that it will be in the mid-teens, if not higher.

Sanketh Godha — Spark Capital — Analyst

Got it sir. And sir, the second question which I have is that given the contribution of the specialized products have increased to us, I just wanted to understand how the loss ratio of specialized products look versus the regular product or the Company average? How different they are? How substantially lower they are? And just wanted to understand the trend that the specialized products, which are currently around 16.5% [Technical Issues] what is the likely number you want to target to have a cushioning effect due to the entire loss issue.

Dr. S. Prakash — Managing Director

Yeah, Sanketh. The specialized products are really doing well. There is a lot of acceptance from the market and our outgoing [Indecipherable] also relatively less compared our other retail products. So, we are comfortable and we continue to accelerate our sales in the specialty product and we expect a 10% cushion on the specialty products compared to other products.

Sanketh Godha — Spark Capital — Analyst

Sir if I understood it rightly, given that we have a loss ratio of 67.3%, is it safe to assume that the specialized products have somewhere mid-50s as a loss ratio?

Mr. Anand Roy — Managing Director

What we are seeing — that GWP is growing, the [Technical Issues] will happen over a period of time. You cannot put it in proportion to the GWP [Technical Issues].

Sanketh Godha — Spark Capital — Analyst

Okay. Okay, sir. And the last one, the quantum of price hike you have taken in Optima and the Medi Classic, I just wanted to understand what is the quantum of price hike it will be and what proportion these two products will contribute to the entire retail health portfolio of ours?

Mr. Anand Roy — Managing Director

So, we have taken a price hike already in Medi Classic insurance, which is individual plan, which constitutes around 7% to 8% of our GWP. We have taken a 24% price hike in that particular product only a couple of months ago, so the price hike will still take some time to play out. We are evaluating a price hike in our Family Health Optima, which is our flagship product, which constitutes close to 50% of our business, and we will get back to you with details once we have some clarity on that.

Sanketh Godha — Spark Capital — Analyst

Okay. Perfect, sir. Thank you. That’s it from my side.

Mr. Anand Roy — Managing Director

Thank you.

Dr. S. Prakash — Managing Director

Thank you.

Operator

Thank you. Our next question is from the line of Ansuman Deb from ICICI Securities. Please go ahead.

Ansuman Deb — ICICI Securities — Analyst

Yeah. Good evening and thanks for the opportunity. So, the first question is regarding the expense ratio as it has gone down quarter-on-quarter and so, is there arbitrage that we are likely to see versus our peers considering the scale that we have right now in a little bit more controlling in the expense ratio? That is number one question. And the second question is that despite a higher retail mix and the price hike and also targeting some of the newer lower age people, our loss ratios have increased because of the timing of monsoon as you said. So, does your 63% to 65% guidance factors the effect of this price hikes coming in [Technical Issues] kind of mid. Yeah, these are the two questions.

Mr. Anand Roy — Managing Director

So, in terms of expense ratio, our investment in technology, efficient processes continue to yield us figures and this is one of the best-in class expense ratio when we compare to peers doing retail business and we believe we should be in a position to take these benefits as we keep on moving forward. Your second question on the impact of loss ratio due to price increase, what will happen is Medi Classic was taken in July ’22 with a 24% increase that will definitely have an impact on the year end loss ratio. When we talk about the other product, which will be [Technical Issues] hopefully in December, it will first start with the new products for three months and then it will start for the renewal product. So, the large benefit of it will come only in the next financial year. This financial year, it will be hardly anything when we take this in December.

[Ends abruptly]