Recently, Himalayan General Insurance (HGI), a non-life insurance company of Nepal, has proposed to issue 1:2.2 (220%) Right shares to its shareholders. Generally, Right Shares are issued to increase the capital base of the company. The company needs further capital mainly for 3 reasons, firstly for business expansion, secondly for covering business risk (to cover up loss) and some time to follow regulatory body to increase the paid up capital.
Let’s analyze why Himalayan General Insurance need to increase capital base?
Business Expansion
No doubt after the massive earthquake hit Nepal last year, insurance business of overall insurance industry has increased considerably. During the last fiscal year, the overall insurance business grew by an average 30%. This indicates that insurance business is growing in a good pace. Even government has brought many policies favorable for insurance sector. Adding up more we can see awareness among general public as insurance sector is growing day by day which has resulted more business for insurance companies and will continue to be same in the coming future. We can assume bright future for insurance companies ahead.
We all know insurance business is very risky one due to the risk they take of policy holders. So all the insurance companies are in huge pressure to increase its capital base to deal with the increasing business they are getting. So HGI might have called Right share to increase its business activities in future. But question arises why any company needs to increase 220% in paid up capital in such short span?
To match up the 30% growth in insurance business, Why HGI need 220% increment in paid up capital?
It is hard to believe that HGI has called Right share just to match its business expansion need.
To meet Regulatory Authority Requirement
As for now the minimum capital requirement for non life insurance companies is Rs 25 crore as per the requirement set by Insurance Act. HGI’s current paid up capital is Rs 32.10 crore as per the fourth quarter of the last fiscal year 2072/73. There are rumors about the possible increment of minimum capital requirement of insurance companies from long time but still such directives from Beema Samiti or from Ministry of Finance (MoF) has not been implemented yet. Then what actually forces HGI to increase its paid up capital by massive 220%?
To Cover Business Risk
To understand the business risk, let’s first analyze the major indicators which are presented by HGI in its unaudited fourth quarter report of the last fiscal year 2072/73.
| As per 4th Quarter 2072/73 |
Rs. In '000' |
| Paid Up Capital |
321,000.00 |
| Reserve and Surplus |
127,412.00 |
| Insurance Fund |
257,394.00 |
| Total |
705,806.00 |
The total paid up capital of HGI remains at Rs 32.10 crore and it has Rs 12.74 crore and Rs 25.73 crore in reserve & surplus and insurance fund respectively. So in total the Insurance Company has Rs 70.58 crore from which the insurance company can take business risk arises due to claim from policy holders.
| As per 4th Quarter 2072/73 |
Rs. In '000' |
| Gross Premium |
1,057,751.00 |
| Net Premium |
237,902.00 |
The gross premium collection of HGI from policy holders during the last fiscal year is at Rs 1.05 arba. Out of which HGI has taken risk of only Rs 23.79 crore which means Rs 81.98 crore worth business risk is given to Re-insurance companies. This shows HGI is taking 22% (approx) risk of the overall business they are creating.
| As per 4th Quarter 2072/73 |
Rs. In '000' |
| Unpaid Claims |
5,505,204.00 |
| No. of Unpaid Claims |
1,266.00 |
| Provision for Unpaid Claims |
130,653.00 |
Till date the unpaid claims of HGI stand at Rs 5.50 arba as per the fourth quarter unaudited report of the fiscal year 2072/73. There are still 1,266 claims which are unpaid. For this company which has provisioned just Rs 13.06 crore. So we can figure out there is huge amount of unpaid claims that HGI need to pay in the near future. We need to know that HGI itself is not fully liable to pay this huge claim of Rs 5.50 arba since they have transferred major risk to Re-insurance companies.
Then how much HGI need to pay?
As per the financial statement HGI is taking around 22% (approx) risk which means they are forwarding remaining risk to Re-insurance companies. Assuming this data, HGI is still liable to pay Rs 1.21 arba as a claim payment. This is a huge amount for HGI, since they have minimal amount in reserve and insurance fund as per their latest financial report.
Therefore, analyzing the different aspects we shall come to conclusion that HGI’s recent move to issue 1:2.2 ratio (220%) Right Shares is more to cover its business risk rather than to expand its business activities.
