ICRA Nepal has assigned [ICRANP] IPO Grade 4+, indicating below average fundamentals to the proposed rights issue of NPR 938.5 million of Gurans Life Insurance Company Limited (GLICL). GLICL has proposed the 100% rights issue of 9,385,200 equity shares each with the face value of NPR 100/-, to be issued to the existing shareholders at par. The proposed issue is being made to comply with the revised capital requirement for life insurers mandated by the Insurance Board of Nepal (the regulator). GLICL’s paid-up capital after proposed rights issue will be ~NPR 1,867 million compared to the revised regulatory minimum requirement of NPR 2,000 million. The company is likely to meet the shortfall through its profit accruals.
Strength and opportunities
- Improving outlook for the life insurers, as reflected in the strong growth in the industry gross premium earnings in the last one to two years and better returns on the investment portfolio of the companies.
- Steady growth in gross premium written (GPW) during the last two years and registered a strong growth in the first-year premium in FY2019.
- Good policy renewal rates (above 85%) and maintained a consistent and high yield on investment portfolio during the last two years. All these augurs well for the incremental growth, its sustainability and returns to the policyholders and equity holders.
- Adequate solvency profile of the company (solvency ratio of ~2 times as of mid-July 2018 against regulatory minimum requirement of 1.5 times), which is expected to be further strengthened after the rights issue.
- Adequate franchise network of the company (78 outlets across the country) and the relatively unpenetrated insurance market, which offers adequate growth potential.
- Good ownership profile and experienced management team of the company.
Weaknesses and threats
- Limited track record (operating since 2008) and small scale of operation of GLICL (smallest among the old nine players in the industry in terms of premium earnings in FY2018 and FY2019).
- One of the smallest life funds (lowest among the old nine players, except Surya Life) in the endowment product dominated industry, which limits the economies of scale available to the company and its return potential vis-à-vis larger players.
- Sharp decline in premium from mandatory foreign employment (FE) term insurance from FY2019, despite being offset by strong growth in the first-year premium on endowment products.
- Relatively low catastrophic loss coverage in the reinsurance arrangements. This remains a concern, especially considering the recent increase in the insured population base and the commensurate increase in the risk for the company.
- Fragmented nature of the industry and increased competition after the licensing of 10 new life insurance companies by the regulator in late FY2017/early FY2018.
Source: ICRA Nepal