Is the insurance sector overvalued?

A Comparative Analysis of the Insurance Companies

In the last six months, NEPSE Index has reached to 775 points from 542 points, an increase of increased 233 points or 43 percentages. In the same period, Insurance Sub-Index has reached to 2658 points from 1322 points, an increase of increased 1336 points or 101 percentages. This has led some to believe that the insurance sector is overvalued whereas there are others who view it as natural given that most insurance companies have yet to declare the bonus from last year’s profit (bonus shares) as well as the regulatory requirement to raise the paid-up capital of the insurance companies (right shares).

To get to the core of the issue, a comparative analysis of the insurance companies was conducted. The analysis divided insurance companies into two groups – the first group consisting of companies that has already issued or that does not need to issue right shares and the second group consisting of companies that has yet to issue right shares. Then, a third group was included consisting of one or two prominent companies from sub-index commercial bank, development bank, and hydropower for the purpose of comparison of financial indicators.

Fig1:Financial Indicators of various companies

Fig2:Financial Indicators of various companies

Fig3:Various companies growth and dividend figures

The analysis reveals that it is hard to tell if the insurance sector as a whole is overvalued due to huge differences between companies trading within the sector.

Comparatively Overvalued Stocks:

1.    Nepal Life Insurance (trading at a PE ratio of more than 100)

2.    National Life Insurance (trading at a PE ratio of more than 100)

3.    Guras Life Insurance (trading at right adjusted PE ratio of 96)

4.    United Insurance (made loss last year and was unable to hand out dividend)

5.    Asian Life Insurance (sub-par returns and right shares)

Comparatively Undervalued Stocks:

1.    Shikhar Insurance (PE ratio  of 22, 50% right shares in pipeline and about 30-40% expected bonus)

2.    Nepal Insurance (100% right shares in pipeline and about 20-25% expected bonus)

3.    Alliance Insurance (PE ratio  of 19, 55% right shares in pipeline and about 13% expected bonus)

4.    Siddhartha Insurance (Right adjusted PE ratio of 13, about 15-20% expected bonus)

Disclaimer:

1.    Although the ideas was to conduct an analysis on all companies, five companies was excluded – three of them (Rastriya Beema Sansthan, Everest Insurance Co. Ltd., and NB Insurance Company) due to lack of sufficient data and two of them (Premier Insurance Co. Ltd. and Neco Insurance Co.) as their trading has been halted.

2.    For the purpose of simplicity, all the numbers has been rounded to nearest whole digit.

Article by: Mr. Anil Bikram Shah

Email: anilbikramshah@gmail.com