1

Financial Performance of Neco Life Insurance Company

CHAPTER ONE
INTRODUCTION

1.1Background of the study

The adaptation of liberalized economic policies has accelerated the growth of insurance
companies in Nepal. In the recent years, the Nepalese insurance market has grown in the
great number. With the rise on purchase power of the people and increased knowledge,
the insurance business has taken upward course. The volume of premium has been
increasing significantly. Similarly, the agent for life insurance has also increased as
compared to the past years

Insurance is the system of combining loss exposure, with the cost of losses being shared
by all participants. It is a form of risk management primarily used to hedge
against the risk of a contingent, uncertain loss. In simple word, insurance is a means to
minimize future uncertainties and loses. It serves as a medium to be secure from threats.
Insurance provides a canopy under which the consequences of such threats are
compensated and hence eases life. It is the equitable transfer of the risk of loss, from one
entity to another, in exchange for a premium, and can be thought of as a guaranteed and
known to small loss to prevent large and possibly devastating loss.

Insurance companies insure a wide variety of uncertain of our life and society that can be
classified as life and general insurance. Life insurance deals with insurance related to
physical and mental accident of individual or group of individuals whereas the general
insurance considers all insurance except life insurance.

Presently, most of the industries and business houses have been closed down, and those
who have been operating are not been able to perform their daily activities and earn as
they have expected due to existence of risks. In the present context profitability return is
one of the important and challenging goals. So this has compelled the industries to hedge
against the risk of the business.

The increasing trend of foreign employment in Nepal has led to increased life insurance
policy holders’ number. Most of these people go aboard to work not
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knowing the condition and environment of work. Therefore, people buy different
insurance policies to hedge against the threats that they may face in foreign land.

Performance in business influences not just how much a company's market value rises, but it
also helps the industry expand overall, which raises the general prosperity of the economy.
Since insurers serve as both intermediaries for risk transfer and aid in the allocation of capital
in a manner that promotes economic activity, assessing the variables that impact insurer
performance has gained importance in the literature on corporate finance. However, it has not
received much attention, particularly in emerging economies (Ahmed et al., 2011).

Financial performance of insurance firms is essential to their existence as well as their future
expansion and development. Furthermore, regulators, potential investors, workers, brokers,
stockholders, and insurers are all directly impacted by the financial performance of insurance
firms (Kung et al., 2006). In this context, a company's profitability, scale, and continuity of
operations serve as its primary performance indicators. Internal, insurance industry, and
macroeconomic variables are the three categories of elements that impact an insurance
company's performance (Pjanic et al., 2018).

Similar to the business’s performance, profit is a crucial requirement for boosting a

company's ability to compete on the international stage. Furthermore, a profit draws in
investors and raises the degree of solvency, which boosts customer confidence. When
policymakers are making decisions about whether to take over the risks and investment
activities of an insurance firm, one crucial tool they utilize is financial analysis. Because the
insurance sector is one of the components of the financial system that promotes economic
growth and stability, the financial performance of insurance businesses is also significant in
the macroeconomic setting (Burca & Batrinca, 2014).

Financial performance measures an organization's earnings, profits, and value appreciations

as evidenced by the rise in the company's share price. In the insurance business, turnover,
returns on investment, net premiums received, underwriting

activity performance, and return on equity are often used metrics to assess performance.
These measures can be classified as either profit performance metrics or investment
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performance measurements. The monetary worth of a profit is only one facet of its
performance. It's the difference between what is collected and what is spent, to put it simply.
Revenue and expenditure are two components that are influenced by industry features,
macroeconomic variables, and firm-specific characteristics. There are two ways that
investment performance might manifest. The first is the return on non-cash assets used in the
business, and the second is the return on the investment activities of the excess cash at
different levels realized from operations (Lee, 2022).

The immune and repair system of the economy includes the vital role that financial
institutions, such as insurance companies, continue to play in financing and insuring
economic activity and in contributing to the stability of the financial system in particular and
the stability of the economy of the concerned country in general. Consequently, empirical
research is needed to identify the key variables influencing insurance businesses' financial
performance. This will enable pertinent issues to be brought to the attention of the relevant
agencies. Therefore, the effectiveness of the institutions' operations has become crucial, and
studies conducted by various scholars concentrate on the variables that affect performance,
particularly the sector's financial performance (Yuvaraj & Abate, 2013).

1.2 Profile Neco Insurance Limited

1. Company Information

Neco Insurance Ltd. is a limited liability company registered under the Companies Act,
2021 BS. It was established on 1 stPoush, 2051(16th December, 1994). It has been
operating general insurance business in Nepal since 17thJestha, 2053 (30th May, 1996) as
per the license granted by Insurance Board of Nepal. The registered office of the
company is at Gyaneshwor, Kathmandu and it is operating its business through various
service outlets nationwide. Neco Insurance enjoys a reputation of expertise, stability and
strength. Our competitive edge, extensive range of products, wide network, claim
servicing capabilities and the ability to provide all possible general insurance solutions
under one roof makes us the most preferred partner for our valued customers. Neco
Insurance has been known in the market as being innovative and having a well-
established relationship with the various reinsurance markets of the world. We are proud
to be the local insurance partner of AIG (American International Group).
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2. Strategic Objectives

The main objectives of the company are:

 To “MAKE A VISIBLE DIFFERENCE” in insurance market by providing best

general insurance services nation-wide
 To be the first and final choice of customers of every business segment of the country
 To ensure that all stakeholders achieve a long-term, competitive and stable return

3. Capital Structure

The paid-up capital of the company is NPR 1,521,633,738 as of 15th July, 2021 and has
declared a bonus share of Rs. 228,245,060 increasing the effective paid-up capital to Rs.
1,749,878,798. In terms of capital, Neco Insurance Ltd is one of the leading insurance
company of general insurance sector. The shareholding patterns of the company are 51%
of promoters and the remaining 49% of the public. The major promoters of the company
are:

 Mahato Group
 Rastriya Banijya Bank Ltd.(RBB)
 Citizen Investment Trust
 Agriculture Development Bank Limited
 Vinayak Group
 Fund Management Company Ltd

4. Support Team

To support the operational activities, prudence in claim and technical risk analysis, we
have outsourced the support team comprising of qualified Chartered Accountants,
Doctors and Engineers which also supports management.

5. Branch Network

With the strategic vision of aggressive growth in business and providing better and
quality service to a client, Neco has established an efficient and effective expansion of
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footprint all over Nepal. Company has altogether 81 networks all over Nepal with 30
branches, 47 sub-branches, 3 TP-Counter and 1contact office.

6. Recent Market and Regulatory Development Impact on Company

There are altogether 19 non-life insurance companies, 19 life insurance companies and 2
re-insurance companies running in the country. The overall, life as well as general,
insurance business in Nepal is at growing phase. As Insurance Sector has contribution on
national GDP is 3.67 %. On around 22.74% average annual growth rate has been
accounted over the past 5 years in non-life insurance sector.

1.3Statement of Problem

In the context of Nepal, the insurance sector is tariff guided i.e. all the coverage and
premium for risk coverage is same across all companies and guided by the Insurance
Board of Nepal. However, there has been significant fluctuation in the performance of
life insurance companies in Nepal, with some companies in brisk of failure and other
looking forward for merger and acquisition so as to make them more immune against
failure. Hence the analysis of factors that affect the financial performance of the
insurance companies can be of major importance in current context.

The present study will intend to explore the following basic question:

1. Whether insurance companies are improving the overall performance or not?

2. What is the status of the various financial parameters ( total assets, ROA, ROE,
Return on investment, Return of Insurance Fund, Net Income to Total premium
collection, liquidity ratio and leverage ratio) of the sample life insurance
companies? Are they adequately capitalized to indemnify the claims at all time?

1.2 Objectives of the study

The main objective of the study is to identify and analysis the factors determining the
financial performance of the Neco Insurance limited. Based on the above general
objective, this research will have the following specific objectives:
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1. To analyze the financial parameters (net profit, total assets, ROA, ROE, Return
on investment, Return of Insurance Fund, Net Income to Total premium
collection, liquidity ratio and leverage ratio) of selected life insurance companies.
2. To examine financial position of the Neco insurance ltd.

1.3 Significance of the study

Profitability is regarded as the lifeblood for any enterprises because it is needed for growth and
expansion. Similarly, the good performance of any industry in general and any firm in particular
plays the role of increasing market value of that specific firm coupled with role o leading towards the
growth of the whole industry which ultimately leads to the overall success of the economy. Financial
institutions are considered the backbone economy for any country. Measuring the financial
performance of financial institutions including insurance companies has gained great importance as
these companies provide mechanism to transfer funds from surplus unit to deficit unit. In addition to
facilitating transfer of fund, insurance companies also provides mechanism for transfer of risk. So it
is necessary to constantly analyze the financial performance of insurance companies. It helps to
analyze the financial condition of the country. Similarly the study of financial performance also
provides information to stakeholders to analyze the investment opportunities.

1.4 Literature survey

Insurance is the system of combining loss exposure, with the cost of losses being shared
by all participants. It is a form of risk management primarily used to hedge
against the risk of a contingent, uncertain loss. In simple word, insurance is a means to
minimize future uncertainties and loses. It serves as a medium to be secure from threats.
Insurance provides a canopy under which the consequences of such threats are
compensated and hence eases life. It is the equitable transfer of the risk of loss, from one
entity to another, in exchange for a premium, and can be thought of as a guaranteed and
known to small loss to prevent large and possibly devastating loss.

Insurance companies insure a wide variety of uncertain of our life and society that can be
classified as life and general insurance. Life insurance deals with insurance related
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to physical and mental accident of individual or group of individuals whereas the general
insurance considers all insurance except life insurance.

Life insurance (or life assurance, especially in the Commonwealth of Nations), is a

contract between an insurance policy holder and an insurer or assurer, where the insurer
promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a
premium, upon the death of an insured person (often the policy holder). Depending on
the contract, other events such as terminal illness or critical illness can also trigger
payment. The policy holder typically pays a premium, either regularly or as one lump
sum.

In Nepal, the concept of insurance can be traced down to the Guthi system which is joint
family culture that has been prevalent from ancient times in Nepal. This system has
provided security and assistance to individuals and families in times of need. It is a kind
of trust where lands and money are allocated from different sources for religious and
charitable purposes. With the development of trade commerce and industry, the necessity
of insurance also grew. The traditional Guthi system became obsolete and in 1947, Nepal
Insurance and Transport Company were established to meet the growing necessity of
insurance. Later, Nepal government established Rastriya Beema Sansthan P. Ltd
(converted to Corporation in 1969). After the implementation of Insurance Act, 1992,
many insurance companies has been established in the country.

Company performance is the function of the ability of the company to gain and manage
the resources in several different ways to develop competitive advantage. It is the
measurement for what had been achieved by company which shows good condition for
certain period of time. The purpose of measuring the achievement is to obtain useful
information related to flow of fund, the use of fund, effectiveness and efficiency.
“Financial Performance analysis is a study or relationship among the various financial
factor in business a disclosed by a single set of statement and a study of the trend of these
fact as shown in a series of statements. By establishing a strategic relationship between
the item of a balance sheet and income statements and other operative data, the financial
analysis unveils the meaning and signification of such items.”(B.N. Ahuja, 1998: 23)
Profitability is one of the important function of financial management and a crucial
indicator of financial position of an organization. It plays an important while analyzing
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the financial performance of company. In the opinion of R.R. Gilchrist, (Argent, 1968)
“the profit is the ultimate measure of effectiveness. A profitable company is likely to
offer not only the security of employment but also promotion prospects jobs
opportunities and the intense personnel motivation that comes from being associated
with success.” (Argent, 1968:68)

“Profit is the barometer of the success of business. It is indeed, a magic eye that mirrors
all aspects of entire business organization including the quality output.”(Argent,
1968:68)

So it is essential to measure the profitability of a company to analyze its performance.

Hamdan Ahmed Ali-Shami (2008) argued that there are different ways to measure
profitability such as return on assets (ROA), return on equity (ROE) and return on
invested (ROIC). ROA is an indicator of how profitable a company is relative to its total
assets. It gives us an idea as to how efficient management is in using its assets to
generate earnings whereas ROE measures a company’s profitability which reveals how
much profit a company generates with the money shareholders’ have invested. ROIC is a
measure used to assess a company’s efficiency in allocating the capital under its control
in profitable measure. This measure gives a sense of how well a company is in using its
money to generate returns. Comparing a company’s ROIC with its weighted average cost
of capital (WACC) reveals whether invested capital is used efficiently or not.”

Similarly, Khan and Jain have defined “the ratio analysis is defined as the systematic use
of ratio to interpret the financial performance so that the strength and weakness of firm as
well as its historical performance and current financial condition can be determined.”
(Khan and Jain, 1990:19)

However, William H. Greene and Dam Segal (2004) argued that the performance of
insurance companies in financial terms is normally expressed in net premium earned,
profitability from underwriting activities, annual turnover, return on investment, return
of equity. These measures could be classified as profit performance measures and
investment performance measure. However, most researchers in the field of
insurance and their profitability stated that the key indicator of firm’s profitability is
ROA defined as the after tax profit divided by total assets.
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There are various factors that affect the financial performance of a company. A study by
Liargovas & Skandalis (2008) tried to empirically implement a comprehensive analytical
framework of financial performance in the case of Greek industrial firms during the
period of 1997-2004. The paper examined the impact of key determinants of firm’s
financial performance. The study distinguishes between financial and non- financial
drivers of firm performance. The study results showed that leverage, export activity,
location, size, and the index for management competence significantly affect firm
performance of Greece. The results indicated that profitable firms large, young exporting
firms a competitive management team, which have an optimal debt-equity ratio and use
their liquidity to finance their investments.

Studies conducted in different countries found that for non-life insurance companies size
of capital is one of the important factors that affect ROA, Hifza Malik (2011) examined
the relationship between volume capital and return on assets for Pakistan insurance
industry and found positive and statistically significant relationship between insurance
capital and profitability. Similarly, Hamadan Ahamed Ali Al-Shami (2008) found in his
investigation that there exists a positive relation between volume of capital and
profitability of insurance companies. However size of capital may affect various
performance indicators such as return on equity.

Almanjali, Alamro and Al soub (2012) investigated the factors that affect the financial
performance of the Jordanian insurance companies. The study showed that the variables
like liquidity, leverage, size, management competence index have a positive statistical
effect on the financial performance of Jordanian insurance companies. The researchers
recommended that a high consideration of increasing the company assets will lead to
good financial performance and there is a significant need to have highly qualified
employees in the top managerial staff.

Review of thesis:
Some related theses to this study are illustrated below:

Dhakal (2007) had conducted research entitles “Financial Performance of Nepalese

Insurance Companies”. The study aimed to evaluate the profitability of Nepal Life
Insurance Company Ltd, and Life Insurance Corporation Nepal Ltd. in life insurance and
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Himalayan General Insurance Co. Ltd. and Neco Insurance Co. Ltd. in non- life
insurance companies and suggest the recommendation based on it.
The major objectives of the study are given below:

 To evaluate the profitability of the companies.

 To analyze the relation of various factors like assets, Interest income,
Managerial expenses and Life Insurance Fund on profitability.
 To analyze the financial position of sample insurance companies

The major findings of the study are given below:

 The return on assets ratio of life insurance companies are more scattered than
that of non-life insurance companies.
 Comparatively, the return on equity ratio of life insurance companies are more
scattered than that of non-life insurance companies.
 The higher CV shows the greater variability in the average return on
investment ratios of life insurance companies than that of non-life insurance
companies.
 Comparatively, the return of insurance fund ratios of life insurance are more
scattered than that of non-life insurance companies.
 The interest incomes to total income ratios of non-life insurance companies
are more homogenous than that of non-life insurance companies.
 Comparatively, the interest income to total assets ratios of life insurance are
more dispersed than that of the non-life insurance companies
 Comparatively, the investment to total assets ratios of life insurance are more
dispersed than that of non-life insurance companies
 Comparatively, the interest earned to total investment ratios of non-life insurance
companies are more dispersed than that of the life insurance companies.

Thapa (2016) had conducted a research on “Financial performance of General Insurance

Companies in Nepal”. This study aimed to identify and compare factors determining the
financial performance of Nepalese general insurance companies. This study concluded
that the net income of the company has positive relation with the
paid up capital, total assets, total premium collection, ROA, ROE whereas net income
has inverse relation with the liquidity of insurance companies.

The following are the main objectives of the study:

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 To analyze the financial parameters (Paid up Capital, Total Assets, ROA, ROE,
Liquidity, Tangibility of Assets) of sample non-life insurance companies that
affects the insurance companies’ profitability and growth.
 To examine the premium collection pattern of sample insurance companies
and analyze their effect on profitability.
 To analyze the relationship of profitability with the premium collection from all
the portfolios (Fire, Marine, Motor, Engr. & CAR, Aviation, Agricultural &
Livestock and Miscellaneous) through evaluation of Net Profit to Total
Premium Collection Ratio.
 To examine the effect of re-insurance premium paid to re-insurer on
profitability of non-life insurance companies.
 To identify the major components that contributes to the Net income of insurance
companies.

The major findings of this study are:

Findings on general Analysis of important financial parameters

 The average paid up capital of Sagarmatha and Shikhar are almost equal with
Shikar slightly higher.Sagarmatha has the highest inet inome followed by
Shikhar, Lumbini and Premier. Paid up capital has positive relationship with the
Net Income/Profitability.
 There is positive relationship of total assets with net income, i.e. Net Income
increase with total assets.
 The average total premium collection of Shikhar is highest followed by
Sagarmatha, Lumbini and Premier. Although the pattern of net Income does not
match with the total premium collection, there is positive relationship of
total premium collection with net income.
 The average ROA of Sagarmatha is highest followed by Shikhar, Lumbini and
Premier. The ROA values are of similar pattern of net income values i.e. higher
the ROA value higher the net income and vice versa. Therefore, there is positive
and close relationship of ROA with net income.

Major findings on Premium Collection Structure Analysis

 Sagarmatha Insurance has the highest proportion of average Motor premium

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collection followed by Fire, Miscellaneous, Marine, Engr. & CAR, Aviation, and
Agricultural & Livestock. The average Net Profit to Total Premium collection of
Sagarmatha Insurance is highest. Therefore, this order of premium collection can
be the best composition of portfolios among the sample companies.
 Similarly, Marine premium collection proportion of Sagarmatha is highest among
the sample companies. Premier has second highest followed by Shikhar and
Lumbini. This is the same pattern of Net Profit to Total Premium collection
among the sample companies. Therefore, it can be concluded that
this portfolio is one of the most lucrative one.
 Motor premium collection of Lumbini General Insurance is highest followed by
Sagarmatha, Shikhar and Premier. This is the portfolio with highest premium
collection proportion of all sample insurance companies. But, the Net Profit to
Total Premium collection of Lumbini is lowest among the sample companies.
Therefore, Motor premium collection does not seem to be much
lucrative one.
 Engr. & CAR premium collection proportion of Premier Insurance is highest
followed by Sagarmatha, Lumbini and Shikhar. Since, the Net Profit to Total
Premium Collection of both Premium and Sagarmatha are high among the sample
companies, it indicates that the Engr. & CAR premium has better
impact on profitability of insurance companies.
 Shikhar Insurance has been maintaining a good proportion of Aviation premium
collection during the study period. Others have started this business only on the
last year of the study period, except for Lumbini General Insurance which has no
any Aviation premium collection during the study period. Also, most of the
premium collected under this portfolio is paid as re-insurance premium; it has
little impact on profitability of insurance

companies.
 Agricultural and Livestock Insurance premium collection started from the last of
study period due to compulsory enforcement from the Regulatory Body; Beema
Samiti and backed by the government. The volume is small and it has
little to do with the profitability of Insurance Companies at present.
 Miscellaneous premium collection of Premier is highest followed by Shikhar,
Sagarmatha and Lumbini. Net Profit to Total Premium Collection of Premier and
Shikhar are average. Therefore, miscellaneous premium collection does not seem
to have much impact on higher profitability of the insurance companies.
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1.5 Research Methodology

1.5.1 Research plan and design

Research design means an overall framework for the activities to be taken during the
course of a study. It draws road map for doing research. It is an integrated system that
guides the researchers in formulating, implementing and controlling the study so as to
obtain answers to research questions. This research is descriptive and analytical in
nature. Descriptive research is used to compare and to assess the options, behaviors of
the firms and describe the situation and events occurring during the study period where
analytical research is used to find out the result employing financial and statistical tools.

1.5.2 Population and sample of the study

Population refers to the industries of the same-nature of its service & product. In this
study, all the life insurance companies of Nepal is the population. There are 14 life
insurance companies in Nepal which is the population in this study.

Sample means the representative parts of population which is studied to draw

conclusions about the population under study. There is Neco insurance limited. Which is
selected as sample.

1.5.3 Nature and source of data

The data used in this study are secondary in nature. The secondary data is collected from
various annual reports published by the insurance companies in Nepal.

1.5.4 Analytical tools

The different analytical tools used in this study are financial ratios and statistical tools.
These tools are used to analyze the financial performance of the sample insurance
companies.

1.5.4.1 Financial ratios:

a. Liquidity Ratios

Liquidity ratios are used to judge the firm's ability to moot short-term obligation. These
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ratios give insights into the present cash solvency of the firms and its ability to remain
solvent in the event of adversities. Usually, the current ratio is used to evaluate insurance
companies’ liquidity. It is calculated by dividing the current assets by the current
liabilities, which is expressed as follows

current assets
current ratio=current liabilities

b. Leverage Ratio

Leverage or capital structure ratios are used to judge the long-term financial position of
the firm. It evaluates the financial risk of long-term creditors greater the proportion of the
owner's capital structure, lesser will be the financial risk borne by supplier of credit
funds. In this case of insurance company, the ratio of current liabilities to total assets is
taken for calculation of leverage.

current liabilities
Leverage ratio= total assets
c. Net profit to total premium collection ratio: It

is calculated as follows:

Net net profit

profit ¿ total premium collection ratio=
total premiun collected

d. Return on Assets:

It measures the efficiency of bank in utilization of the overall assets. High ratio indicates
the success of management in overall operation. Lower ratio means insufficient operation
of the bank.

net income
ROA= total assests

e. Return on Equity:

The ratio is tested to see the profitability of the owner's investment "reflects the extent to
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which the objective of business is accomplished". The ratio is of great interest to present
as well as prospective shareholders and of great significance to management, which has
the responsibility of maximizing the owner's welfare, so higher ratio is desirable.

net income
ROE= total equity

f. Return on investment:

It measures the performance of the investment and it indicates the whole investment
portfolio performance. This ratio is obtained by dividing the net profit by investment,

net income
ROI =total investment

g. Return on insurance fund:

It measures the percentage of net profit on insurance fund employed to the firm. It is
calculated as:

net
ROI =income
total insurance fund

1.5.4.2 Statistical tools:

a. Arithmetic Mean

The arithmetic mean of a set of data is found by taking the sum of the data, and then
dividing the sum by the total number of values in the set. A mean is commonly known as
an average. Arithmetic Mean (AM) is given by

X = ∑X

n
Where,
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X = Arithmetic Mean
∑X = Sum of all the values of the variable X n
= Number of observations

b. Coefficient of Variation (C.V):

Coefficient of variation represents the ratio of the standard deviation to the mean and it is
useful statistic for comparing the degree of variation from one data to another data.

Standard Deviation
C. V. = Average mean

c. Standard Deviation (S.D):

Standard deviation measures the variation or dispersion of data from average mean or
expected value. It is calculated as follows:

√
1
S.D (σ) = ∑ ( X− X ) 2
N
Where,
N = Number of observations
X = Expected return of the historical data
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