Shikhar Insurance Company Limited: [ICRANP-IR] A(assigned)11 February 2020 Facility/Instrument Rated Amount (NPR Million)Rating Action(February 2020)Issuer Rating NA [ICRANP-IR] A(assigned)Rating action ICRA Nepal has assigned the issuer rating of [ICRANP-IR] A (pronounced ICRA NP Issuer Rating A) to Shikhar Insurance Company Limited (SICL). Issuers with this rating are considered to have adequate degree of safety regarding timely servicing of financial obligations. Such issuers carry low credit risk. The rating is only an opinion on the general creditworthiness of the rated entity and not specific to any particular debt instrument. The sign of + (plus) or –(minus) appended to the rating symbols indicate their relative position within the rating categories concerned. Thus, the rating of A is one notch higher than A-.
The assigned rating factors in SICL’s adequate track record in the industry (operating since 2004) and strong market positioning. The rating also takes into consideration SICL’s strong branch network,which,coupled with an adequate solvency profile and an experienced management team augur well for future business growth. Low penetration of the insurance sector in Nepal also offers growth potential to the players like SICL. The rating also takes into consideration, the company’s adequate reinsurance arrangements, including catastrophic provisions and good profile of the lead reinsurer, which provides comfort to its claims-paying ability and its ability to maintain solvency in the event of catastrophic events like the April 2015 earthquake.The rating also factors in the economies of scale available to the company given SICL’s position as the largest player in the industry in terms of GPW in the last two to three years. This,coupled with the improving investment yield on a sizeable investment portfolio,has helped SICL maintain a healthy and progressive profitability profile,even with a moderation in underwriting performance.
However, the rating remains constrained by SICL’s moderation in premium growth and its decline in underwriting profitability over the last two years, notwithstanding a marginal improvement during Q1 FY 2020. Moderation in SICL’s underwriting performance stems from the steady rise in the claim’s ratio of its largest segment i.e. Motor. SICL’s combined ratio has witnessed a steady deterioration between FY2016 and FY 2019 (from 57% to 80%)because of the interim rise in the claim’s ratio(from 47% to 74%). Nonetheless, on account of some corrective measures, the claims ratio has moderated to 68% during Q1 FY 2020 resulting in an improved combined ratio of 64%for the period. The management expense ratio has remained high in the recent period(34% in FY 2019 and 42% in Q1 FY 2020)because of the increase in branch network and rise in associated costs,which coincided with the slowdown in premium growth thereby suppressing the underwriting profitability ratio. The slowdown is likely to continue as the liquidity crunch in the banking sector is affecting the creation of fresh insurable assets. At the same time, the industry remains fragmented, thus increasing the competitive intensity for players. Th frequent changes in the operating environment (mainly because of the regulatory changes) also pose a challenge for the players, remaining a rating concern.
- Adequate track record, strong market positioningand seasoned management team
- Adequate reinsurance arrangements
- Adequate solvency and liquidity
- Good profitability profile
- Slowdown in premium growth and increasing net claims ratio
- Low penetration of insurance sector, fragmented industry and intense competition
- Changes in the operating environment because of new regulations
- High sectoral concentration in motor segment
Established in March 2004, Shikhar Insurance Company Limited (SICL) is the 13th private sector general insurer in Nepal. SICL is a large sized company with ~14% of the market share in terms of the general insurance industry’s gross premium written in FY 2019. As of mid-October 2019, SICL has been in operation with 96 branches spread across the nation for procuring business and extending after-sales services.
The paid-up capital and the net worth of the company as of mid-October 2019 was ~NPR 1,057 million and NPR 2,766 million respectively. SICL has a 60:40 promoter-public shareholding ratio. Major shareholders as on mid-July 2019 include Mr. Gaurav Agarwal (12.89%), Buddha Air Pvt. Ltd. (8.03%), Mr. Bikas J.B. Rana (7.32%), Mr. Ang Tshering Sherpa (6.88%), Mr. Shashikant Agrawal (5.69%) and Mr. Kailash Prasad Sirohiya (4.05%),among others.
SICL reported a profit after tax of NPR ~430 million during FY2019 (NPR 399 million in FY2018) over an asset base of NPR 4,669 million as of mid-July 2019 (NPR 4,257 million in mid-July 2018). During Q1 FY2020, SICL reported a profit after tax of ~NPR 92 million.
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