ICRA Nepal assigns IPO Grade 3+ indicating average fundamentals to the proposed rights issue of Siddhartha Insurance

ICRA Nepal has assigned “[ICRANP] IPO Grade 3+”, indicating average fundamentals to the proposed rights issue (equity shares) amounting to Rs 22.44 crore of Siddhartha Insurance Limited (SIL).

ICRA Nepal assigns IPO grading on a scale of IPO Grade 1 through IPO Grade 5, with Grade 1 indicating strong fundamentals and Grade 5 indicating poor fundamentals. For the grading categories 2, 3 and 4, the sign of + (plus) appended to the grading symbols indicate their relative positioning within the grading categories concerned. Thus, the grading of 2+, 3+ and 4+ are one notch higher than 2, 3, and 4 respectively.

SIL has proposed 35% rights issue of 2,244,973.5 numbers of equity shares of face value Rs 100 each, to be issued to the existing shareholders at par. The issue is being made in order to comply with revised paid up capital requirement for general insurers, rolled out by the regulator (the Insurance Board of Nepal).

The grading considers SIL’s institutional promoter strength and existence of a shared brand name with Siddhartha Bank Limited (rated BBB+ by ICRA Nepal, which holds 15% stake in SIL). The grading also considers SIL’s good market share (8% of gross premium written (GPW) in FY2017, ranking 2nd among the 17 players in the industry) and adequate franchisee network (53 branches as on mid-Jan 2018). The grading factors in SIL’s adequate reinsurance arrangements, experienced management team and sufficiently tested underwriting norms.

ICRA Nepal also takes note that SIL’s claims paying ability, solvency position and profitability profile has not deteriorated in the aftermath of the April 2015 earthquake owing to sufficient catastrophic reinsurance arrangements. The grading also takes into consideration SIL’s healthy underwriting profitability aided by low claims ratio which has helped SIL maintain sound profitability indicators. Profitability is likely to improve further given the hardening of interest rates across banking industry and its favourable impact on the investment yield of SIL.

The grading is constrained by the company’s moderate track record (operating since April 2006), high dependence on institutional customers (75% of GPW in FY2017), high reliance on agency channels (>80% of GPW through individual and corporate agents in FY2017) and stiff competition from larger players with new licence in the Nepalese general insurance industry.

SIL is one of the large players in the Nepalese general insurance industry in terms of premium earnings, despite being the youngest among the 17 players in the industry. Over past 3 years ending FY2017, SIL’s growth in GPW and Net premium written (NPW) stood at CAGR 23% and 27% respectively, at par with industry average; enabling SIL to maintain its market share.

In terms of portfolio mix for FY2017, motor segment accounted for 47% of GPW, followed by fire segment at 26%, Miscellaneous segment at 13%, marine (cargo) segment at 7%; among others. Although motor remains the key segment for SIL, portfolio diversification of SIL remains aided by fire, miscellaneous and marine segment. This partly aids the resilience of premium earnings of SIL.