60% Right Share issue of NLG Insurance Company receives average ratings from ICRA Nepal; total of 38.42 Lakh units of shares to be issued

ICRA Nepal has assigned [ICRANP] IPO Grade 3, indicating average fundamentals to the proposed rights issue amounting to NPR 384.20 million of NLG Insurance Company Limited (NLG). NLG has proposed a 60% rights issue of 3,842,000 numbers of equity shares of face value NPR 100 each, to be issued to the existing shareholders at par. The proposed rights issue is being made to comply with the revised minimum paid up capital requirement for general insurers as prescribed by the Insurance Board of Nepal.

The grading factors in NLG’s long track record in the industry and institutional ownership (with 50% stake from National Life Insurance Company Limited) and also takes into consideration NLG’s sufficiently tested underwriting norms, good underwriting performance and adequate profitability indicators. The grading also remains supported by NLG’s recent expansion in branch network which, coupled with an experienced management team, augurs well for its incremental business growth. The grading also takes into consideration, NLG’s adequate reinsurance arrangements, including catastrophic provisions and strong profile of the lead reinsurer, which provides comfort to NLG’s claims-paying ability and its quality of maintaining solvency in the event of catastrophic events like the April 2015 earthquake. The grading action also factors in the improved investment outlook for NLG, given the hardening of the interest rate across the banking sector deposits, wherein a major portion of its investment portfolio is concentrated.

However, the grading remains constrained by NLG’s declining market share and its high concentration in the motor segment. NLG’s premium growth rate has lagged behind the industry average for the last two to three years, affecting its scale of operations vis-à-vis the industry peers. This remains a concern, especially in the recent regime of declining premium tariffs and increasing liability cover for the major segments like fire and motor. Incremental growth and the return prospect of NLG are likely to be determined by its ability to grow the customer base and diversify its revenue stream across different segments. While recent growth in its branch network is expected to support the endeavour, NLG’s ability to achieve the targeted growth and diversification in the highly fragmented and competitive domestic general insurance industry, remains to be seen. With sizeable equity injection proposed shortly and expectations of increased operating expense commensurate with the recent branch expansion, the return indicators are expected to remain muted over the medium term; which has also been factored into the grading assigned.

Source: ICRA Nepal