ICRA Nepal assigns IPO Grade 4 to proposed 50% rights issue of Gurans Life Insurance

ICRA Nepal has assigned “[ICRANP] IPO Grade 4” indicating below average fundamentals to the proposed rights issue amounting Rs 29.7 crore of Gurans Life Insurance Company Limited (GLICL). 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. GLICL has proposed 50% rights issue of 29.70 lakh number of equity shares each with 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 rolled out by the Insurance Board of Nepal (the regulator). The grading factors in the strong ownership profile of the company (as evidenced by >60% stake by individuals and institutions associated with Dugar family). The grading also factors in an improvement in the premium growth of GLICL in recent years (CAGR 30% over past 5 years partly aided by the launching of foreign employment (FE) term business in FY2015. The grading also considers an adequate franchise network of the company (64 outlets across the country). The re-insurance contracts including the catastrophic coverage are adequate as per ICRA, and factored in the grading. However, the grading remains constrained by low policy renewal rates of GLICL over the years which has accentuated in recent years (45% in FY2017 vs. 58% in FY2016 and 71% in FY2015). This remains a concern to the earnings stability and scale growth of the company. The grading is also constrained by the slim margin over regulatory requirements of the solvency profile (solvency ratio of 1.60 times vis-à-vis regulatory minimum of 1.50 times), small scale of operations of the company vis-à-vis peers (ranked 9th in terms of gross premium earnings in FY2017 among the 9 players in the industry); which stems from a limited operating track record (operating since 2008). Although the premium growth remains above industry average in past 5 years, it is aided by recently introduced FE term product. The grading also remains constrained by a relatively small life fund Rs 3.3 arba as on mid-Oct 2017) which limits the quantum of incremental returns to profit-sharing policyholders as well as shareholders of the company. The grading is also constrained by a challenging operating environment for life insurers after the recent licensing (in early FY2017) of 10 new life insurance companies (LICs) by the regulator. Despite an increase in FE business since FY2015, its proportion in the overall GLICL’s portfolio remains low (13% of gross premium in FY2017). GLICL’s premium mix is dominated by endowment policies (and its variants) which accounted for 87% of gross premium during FY2017 (95% in FY2016). Apart from FE business, the company does not have any notable term business. Backed by the FE business taken up in recent years, proportion of new business has improved marginally. Nonetheless, renewal premium accounts for major source of premium earnings for GLICL (58% in FY2017, past 5 years average of 60%). Net investment income of GLICL for FY2017 stood at Rs 25.6 crore corresponding to average yield on investment of 8%. The investment portfolio remains compliant with the regulatory guidelines, with 92% of portfolio, (comprising investments in Government securities, fixed deposits receipt (FDR) (with Commercial banks and Development Banks) and debentures of commercial banks) as on mid July 2017 compared to 95% in mid-July-2016. Since mid FY2017, banking interest rates have begun to harden, following a period of rising liquidity and softer rates (during FY2014-FY2016). Since, >90% of the total investment of GLICL is concentrated in domestic financial institution’s FDRs, the hardening of interest rates augurs well for the incremental earning profile of the company. GLICL has a reinsurance agreement for traditional life policies with SCOR Global Life Re, Singapore since inception. GLICL changed its reinsurer for FE business and catastrophic loss cover to Nepal Reinsurance Company from FY2017 (previously done with SCOR).