Liberty Micro Life's issuer rating unchanged, but concentrated business and declining returns remain key challenges
ICRA Nepal has maintained Liberty Micro Life Insurance's issuer rating at BB-. The company's business is heavily concentrated in term insurance, and investment returns and profits have declined sharply, raising questions about long-term sustainability.
Kathmandu. Rating agency ICRA Nepal has maintained the 'issuer rating' of micro life insurance company Liberty Micro Life Insurance Limited at [ICRANP-IR] BB-. According to ICRA Nepal's recently published credit rating report, this rating indicates that the company falls under the moderate risk category in terms of meeting its financial obligations on time.
Despite positive factors such as a network of 23 branches and a solvency ratio of 1.99 times, which is above the minimum regulatory threshold, questions have been raised about the company's long-term sustainability and profitability due to the nature of its business, a significant decline in investment returns, and governance-related challenges.
In fiscal year 2082/83, Liberty Micro Life collected total insurance premiums of Rs. 52.30 million. An analysis of the composition of total premiums shows that the company's portfolio is heavily concentrated in only a few specific areas.
- Approximately 68 percent of total collected premiums comes from term insurance.
- Within this, the share of business obtained through the foreign employment insurance pool is only about 30 percent, equivalent to Rs. 15.60 million.
- About 37 percent of total premiums was obtained through micro-loan borrowers and institutional microfinance, cooperatives, and bank financial institution borrowers.
- Rs. 15.70 million of total premiums comes from single premiums.
The reliance on short-term term insurance for 68 percent of total premiums, and within that, 30 percent on foreign employment insurance that enjoys government protection, shows that the company's own net market expansion capacity is weak.
Moreover, from fiscal year 2087/88, the Insurance Authority will fully implement the risk-based capital (RBC) system. Since the claim ratio has already reached 20 percent and claim risk is higher in term insurance, there are doubts about how strong the company's solvency base will remain after the RBC system is implemented.
About 13 percent of the company's total investment of Rs. 87.40 million is in the stock market. On this investment, the company has suffered a loss of about 15 percent as of mid-July 2083. Concentrating large investments in a single company's shares at a 5.6 percent loss and in a single mutual fund at a 17 percent loss clearly reveals a weak pre-provisioning investment strategy.
In FY 2082/83, the company's net profit declined by 97 percent to just Rs. 460,000. As a result, shareholder returns fell from 3.1 percent to 0.1 percent. The company is preparing to issue an initial public offering (IPO) for the general public.
Bonus returns that life insurance companies provide to policyholders mainly depend on interest rates from their long-term investments, debentures, and fixed deposits. Liberty's investment return has fallen from 10.4 percent to 5.6 percent. The net claim payment ratio has already reached 20 percent of total net premiums.