ICRA Nepal assigns ICRA grade 4+ indicating below average fundamentals to the proposed 160% right issue of Prime Life Insurance Company Limited

ICRA Nepal has assigned “[ICRANP] IPO Grade 4+” indicating below average fundamentals to the proposed rights issue amounting Rs. 97.63 crore of Prime Life Insurance Company Limited (PLIC). ICRA Nepal assigns IPO1 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. PLIC has proposed 160% rights issue of 97.63 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 insurers2 rolled out by the Insurance Board of Nepal (the regulator). The grading factors in a strong policy renewal rate, and the recent improvement in new business premium which was backed by a strong growth in first year premium (FYP) (CAGR 47% between FY2014-FY2017). The rapid growth in FYP in recent years augurs well for incremental business growth. The grading also factors PLIC’s strength in terms of franchise network (111 outlets across the country), institutional promoters (15% stake by Laxmi Bank Limited) and an experienced management team. The grading also factors an adequate reinsurance contracts including a catastrophic coverage provision. The grading incorporates the adequate solvency profile of the company (solvency ratio of 2.08 times in FY20163 vis-à-vis regulatory minimum of 1.50 times). The grading remains constrained by a small scale of operations of the company (PLIC ranks 7th among the 9 players in terms of assets base). It stems from a limited operating track record (operating since 2008) and a slowdown in growth during FY2013 and FY2014. Business slowdown in those years was due to negative publicity generated after the regulator (Insurance Board) initiated action against PLIC amid allegations of excessive management expenditure. Sizeable portion (28% of gross premium in FY2017) of PLIC’s business comprised of single premium foreign employment (FE) term business. Long term sustainability of growth and profitability of FE segment is to be tested, especially in view of a decline in migrant Nepalese workers and an increase in risk cover. The grading also remains constrained by a small life fund (~NPR 5.2 billion 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 the challenging operating environment for life insurers after the recent licensing (in early FY2017) of 10 new life insurance companies (LICs) by the regulator. PLIC is one of the major player in FE business in the industry, accounting for ~1/3rd of industry FE business. However, the product mix of PLIC is still dominated by endowment policies (and its variants). During FY2017, 75% of the premium earnings was from endowment products (77% in FY2016) while remainder was accounted by FE business. Apart from FE product, the company does not have any notable term business. FE segment has shown signs of stagnation across the industry, given the decline in number of migrant workers going abroad. At the same time, FE segment is likely to witness increased competition after the licensing of new LICs. Therefore, incremental growth is likely to come from traditional business. Healthy growth in FYP and strong policy renewal rate, therefore, remains a comfort for the company’s growth going forward. However, PLIC’s ability to maintain its market positioning in the face of increased competition in the industry remains to be seen. Benefit payment (net claims/net premium) ratio of PLIC has remained high, but fairly steady, ranging from 15-17% during past 3-4 years. Death claims accounted for the largest share in the benefit payment (58% during past 3 years, more than90% was from FE segment). There hasn’t been any spike in death claims in recent years, despite PLIC having sizeable FE business. At the same time, proportion of policy surrender also remains low. Although the claims ratio could rise in future given the increased FE risk cover and increased competition (which could increase the policy surrender rate), nonetheless, the past track record of stable claims ratio remains a credit positive. Due to the benefit ratio remaining on higher side, claims paying ability ratio (amount available for claims/ net claims paid) remains relatively low at ~6 times in FY2017 (~5 times in FY2016). As of mid-Oct 2017, it is in operation with 5 regional offices, 28 branches and 82 sub-branches and 5,300 active agents spread across the nation for procuring new business and extending after sales services. PLIC has 70:30 promoter-public shareholdings as on mid-Oct-2017. The company has majority shareholding from individuals and institutions associated with Khetan Group, including 15% stake by Laxmi Bank Limited (class A commercial bank, rated BBB by ICRA Nepal). PLIC reported a profit after tax of Rs. 22.1 crore during FY 2016-17 over total assets base of Rs. 71.53 lakh on mid-Jul-2017 as compared to profit after tax of Rs. 20.8 crore during FY 2015-16 over total assets base of Rs. 5.6.05 lakh as of mid-Jul-2016. During Q1FY2017-18, PLIC has reported net profit of Rs. 6.3 crore over asset base of Rs. 75.79 lakh on mid-Oct 2017. In terms of technology platform, PLIC has implemented locally developed “CLAS” software in its corporate office and all its branches.