Proposed 20% right issue of Lumbini General Insurance receives average ratings from ICRA; 17.60 Lakh units to be issued at par

ICRA Nepal has assigned [ICRANP] IPO Grade 3, indicating average fundamentals to the proposed rights issue amounting to NPR 176 million of Lumbini General Insurance Company Limited (LGIL). LGIL has proposed a 20% rights issue of 1,760,000 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 LGIL’s adequate track record in the industry and also takes into consideration LGIL’s sufficiently tested underwriting norms, good underwriting performance and adequate profitability indicators. The grading also remains supported by LGIL’s recent expansion of its branch network, which coupled with an experienced management team, augurs well for its incremental business growth. The grading further takes into consideration LGIL’s adequate reinsurance arrangements, including catastrophic provisions, which provides comfort to its claims-paying ability and its quality of maintaining solvency in the event of catastrophic events like the April 2015 earthquake. ICRA Nepal notes the improved investment outlook for the company, 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 limited portfolio diversification and LGIL’s high concentration in the motor segment. This remains a concern, especially in the recent regime of increasing liability cover for the motor segment. The fire segment, along which LGIL has registered improved growth in recent years, could also come under pressure following the reduction in premium tariffs imposed by the regulator from H2 FY2018. Incremental growth and the return prospect of LGIL 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 endeavor, LGIL’s ability to achieve the targeted growth and diversification in the highly fragmented and increasingly competitive domestic general insurance industry, remains to be seen. With sizeable equity injection proposed shortly and muted growth outlook, the return indicators are expected to remain suppressed over the medium term; which has also been factored into the assigned grading.

Source: ICRA Ratings Nepal