Shikhar Insurance proposes issue of 30% right shares; ICRA Nepal assigns average grade to the issue

ICRA Nepal has assigned [ICRANP] IPO Grade 3+, indicating average fundamentals to the proposed rights issue amounting to ~NPR 317 million of Shikhar Insurance Company Limited (SICL). SICL has proposed a 30% rights issue of 3,171,932 numbers of equity shares of the face value NPR 100 each, to be issued to the existing shareholders at par. The proposed rights issue is being made to support the management’s growth plan and strengthen the solvency profile of the company.

The grading factors in SICL’s adequate track record in the industry (operating since 2004) and strong market positioning. The grading 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 grading 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 grading 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 grading remains constrained by SICL’s moderation in premium growth and its decline in underwriting profitability over the last two years. 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 FY2019 (from 57% to 80%) because of the interim rise in the claim’s ratio (from 47% to 74%). The management expense ratio has also witnessed an increase in FY2018 and FY2019 because of the increase in branch network and rise, which coincided with the slowdown in premium growth. 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. At the same time, frequent changes in the operating environment (mainly because of the regulatory changes) also pose a challenge for the players, remaining a grading concern.

Source: ICRA Ratings Nepal