Kathmandu: Credit rating agency, ICRA Nepal has upgraded the issuer rating of Himalayan Reinsurance Limited (HRL) to [ICRANP-IR] A from [ICRANP-IR] A-.
According to ICRA Nepal, the rating indicates adequate degree of safety regarding timely servicing of financial obligations. Such issuers carry low credit risk.
The rating upgrade factors in HRL’s growth in scale in a short-time span, aided by the consolidated reinsurance industry in domestic market and supportive regulatory provisions. The regulatory provisions have ensured HRL, a share in domestic industry premium (and risk), which coupled with adequate underwriting performance of Nepalese insurance industry, is likely to remain a long-term positive for HRL. The rating also positively factors in the improved liquidity and capitalization level of HRL, following the recent equity raising through IPOs. Resulting high liquidity offsets some of the concerns arising from relatively aggressive/optimized retrocession arrangement and limited track record.
The press release issued by ICRA Nepal reads, ”Although HRL’s business at present is largely driven by domestic business, its growing acceptability in foreign markets, including a cross-border reinsurance licence from the Insurance Regulatory and Development Authority of India (IRDAI), also remains a positive.”
HRL has maintained adequate solvency profile (solvency ratio of ~2.06 times for FY2023). Its investment profile largely comprise of double digit interest earning deposit with A level commercial banks. HRL has backing of corporate promoters including government undertaking (PSU) banks (Nepal Bank Ltd. and Rastriya Banijya Bank Ltd collectively holding ~10% stake) and established private sector business houses.
Challenge’s Ahead:
The rating continues to remain constrained by HRL’s limited track record of operations. Given the short operational track record, the adequacy of HRL’s retrocession coverage vis-à-vis the company’s current level of operations and risks insured by it, remains untested. Although the risk is mitigated to some extent by improved liquidity and capitalization post-IPO, its incremental underwriting performance will remain a key monitorable/sensitivity.
HRL’s high geographical concentration as most of its business (~95% of 9MFY2024 gross premium) is concentrated in Nepal. It exposes high geographical concentration risk. The recent softening of interest rates across the banking industry also remains a concern. As HRL’s business profile remains underpinned by favourable regulations, incremental regulatory developments will also remain a key monitorable/sensitivity.
ICRA Nepal has mentioned, HRL’s ability to maintain its underwriting performance as the business gets seasoned will remain a key monitorable. Its ability to maintain a comfortable solvency and liquidity profile on an ongoing basis will also remain a monitorable.
