Know the financial performance of leading non-life insurance company of Nepal - Shikhar Insurance Company Limited

Introduction:

Shikhar Insurance Company Limited is the 13^th private sector general insurer in Nepal established in March 2004. SICL is an established Company promoted by a young team of reputed Industrial and business houses involved in various fields.

Past and Current Scenario of Non-Life Insurance industry in Nepal

Non-life Insurance companies have come very far with a long track record of operation in the country. Over the period of years with Earthquake, landslide, floods, etc., people are being aware in terms of ensuring their properties against the possible damages. With 20 Non-Life insurance in the country till the date, it is certain that people are able to insure their properties. As of FY2075, the Non-Life insurance company has a penetration of 25% in the market which contributed about 2.5% of the GDP.  

On the other hand, the economic distress caused by the global Pandemic Covid-19 might have an impact on this sector. However, in times like this Non-life insurance has collected around Rs 25.87 Arba in total premium as of Ashad end, 2077 which reflects trust among the general public towards Insurance companies. Considering the risk coverage and tariff for non-life insurance, profitability might not be affected by them is lower.

 Financial Highlights:

(*Unaudited Figure) *Recently SICL has issued 30% right which yet be adjusted in the latest quarterly report.

As per the unaudited 3^rd quarterly report published by the company in 2077, the company has collected Gross Premium Written (GPW) of Rs. 2.60 Arba. This shows the growth of 27.21% annually. The company has improved its market share from 14% to 18.8% in 2020 as per the Q3 report published by the company.

The company has retained a fair amount of premium which stood around 40-50% in the last 5 years. With higher premium ceded to the Reinsurance company, it has earned a fair amount of Reinsurance commission. However, the company’s claim ratio has increased to 71% in Q4, 2076, and 58% in Q3, 2077. The company despite having a higher claim paying ratio, the growth of the premium collection has supported the claims-paying.

Comparing the concentration of its product segment in total premium, the Motor segment has a higher concentration which stood around 80% in the last 5 years followed by fire insurance which contributed around 9-10%.

Considering the Net Profit, it has been growing at an annual growth rate of 36.53% for the last 5 years. The Net Profit for Q3,2076/2077 stood at Rs. 36.05 crores. In recent years the company has been expanding its branches at a higher pace which has supported the profitability of the company.

Despite the outbreak of the global pandemic Covid-19, the company’s Net Profit was not affected as anticipated. In fact, the company’s Net Profit grew by 55.14% compared to the previous quarter of the same year i.e. Q2, 2076/2077.

Key Ratios

(*Unaudited Figure)

The claim ratio demonstrates how much it is paying in relation to how much it is earning in Net Premium. Since the claims could be quite higher in Non-Life insurance business in comparison to the Life insurance business, SICL’s claim ratio may seem higher but the growth in the Premium collection seems to even out the claims.

The higher claim ratio is contributed by its highest concentrated segment i.e. Motor about 79% in FY2074/2075 from total net claims. However, the growth in the premium collection has supported the claims-paying ability.

The earnings per share of the company have been fairly consistent. The company in FY 2019 had a higher expansion of the business. Due to the addition of new branches in different parts of the country, the company is able to show higher growth in premium which has supported the profitability of the company. Since the company is expanding its services to remote areas, expanding its horizon might help boost its profitability in the near future.

On the solvency front, the company has maintained a good solvency margin which stood at 5.09x in FY2073/2074 where the regulatory minimum requirement of the margin is 1.50x. However, in FY2075 solvency margin decreased to 1.75x which is due to additional reserves and higher provisions provided for IBNR as per NFRS directed by Insurance Board.

Due to the higher solvency margin maintained by the company, it is able to meet all the financial obligations of the company. Though the last 2 years' solvency margin is unavailable in the quarterly report.

Combined Ratio concentrates only on underwriting operations. The average combined ratio for the company has stood around 59% which seems quite acceptable. This shows that the company is generating enough premiums than it is paying out in claims and other expenses of the company. The ratio, however, seems to have been in an increasing order but it shows the efficiency of management in terms of claims-paying ability and managing the daily operations.

The company shows an adequate amount of return on the shareholder's equity. With an average of 20% return on shareholders’ equity, the company shows its efficiency in the utilization of the investor's fund. Despite the increase in the net worth of the company, it has maintained the return for shareholders.

With the increase in competition in the industry itself and limited investment opportunity, the company's return on investment has been slightly affected. Since the company’s investment portfolio is highly concentrated on the fixed deposit in BFI’s, about 70% as of 2019, the lower interest rate environment might affect the return on investment. However, with the investment in another sector, it may show a good sign in returns.

Dividend History

(SICL is yet to declare a dividend for FY 2075/2076)

(* We apologize for mistake made by including FY 2074/75 on the previous post)

Risks:

• With the interest rate lowered by the Central Bank (NRB), being Net Depositor SICL’s profitability in its investment might be affected.
• Due to the increasing Non-Life Insurance Company in Nepal, the industry is facing an unhealthy competition.
• Since, Non-Life insurance sector itself possesses the risk of higher claims, SICL’s profitability might be in pressure if there is a higher claim ratio than premium collection.
• Non-life insurance is highly prone to regulatory changes mainly concerning tariff and risk coverage.
• Limited investment opportunity in the country.

Conclusion

The financials of the Shikhar Insurance Company Limited (SICL) seem fairly stable. However, the economic impact of the Covid-19 pandemic has posed a different scenario for the company in the near future.

The non-life insurance sector hasn’t penetrated the market to its full potential, likely due to unawareness of the general people. Thus, it all comes down to the management team’s ability to secure the position in the untapped market.