10 Factors to look for while analysing the financials of General Insurance Company

How can you financially analyse the insurance company?
1.     I will look at the GWP-Gross Written Premium figure of a company. Most of the people look at the growth in absolute terms (PY it was 19000 crore and CY it is 22000 crore) but I would prefer to look in the relative terms (PY it is 1287 crore and CY it is 2310 crore) so in the second case growth in GWP is more than 79% and half of that is not even achieved by first company. SO here I have mentioned the financials of New India assurance company with highest market share (15%) in general insurance as compare to Universal Sompo general insurance company with market share of 1.53% (Current year GWP of 2310 crore). We can compare to GWP of a company with the industry GWP too (which is 18% for GI industry).

2.       Now this does not mean that my profitability will increase because it might be the case that company insured a large number of highly risky clients and due to poor underwriting, company hit with the large losses. Let’s look at the loss ratio of the company which is nothing but Incurred Claims/Earned Premium. So Universal Sompo, the company with 79% growth in premium has decreased its loss ratio from 70% to 56%. This is a good sign as it indicates that company underwriting skills are good to insured clients with expected risk or lower risk.

3.       Now this does not mean that company is good, now I have to look at how expenses and commissions play its role, maybe they take up a large chunk of company revenue. So, for this I will look at the Combined Ratio = sum of total incurred claims, total expenses and total commission paid divided by total earned premiums. So Universal Sompo General Insurance (USGI) lt. has reduced its Combined ratio for the first time into two-digit figure to 73% (Previously it was 105%). So, it indicates that company has good cost management skills which leads to growth and profitability.

4.       It might be the case that different products have different growth so let’s try to look at the various sections of an insurance company say crop insurance, motor insurance, personal accident insurance. So, if I talk about Universal Sompo General Insurance then its growth is 126% in crop insurance by providing the same in states of Uttar Pradesh and Karnataka and 186% in Personal accident insurance. We can compare these results with the industry results. And if we look closely than more than 50% of the revenue in terms of GWP comes from crop insurance.

5.       Now it might be the case that company is highly leveraged than we should look at the Debt Equity ratio of a company and the company that is highly leveraged might not be able to meet financial obligations when a large catastrophic event occurs.
Reinsurance allows a company to pass off some of the risk exposure to other insurers (usually a good thing), but be careful. Too much dependence on reinsurance means that the company is not keeping a fair portion of responsibility for each premium dollar.

6.       Credit ratings plays an important role in assessing the creditworthiness of a company. In terms of insurance company, it also tells us about the claims paying ability. For ex: BAGIC has been awarded with iAAA rating. The 'iAAA' rating is the highest for claims paying ability for an insurance company in the industry. The ratings indicate the company's fundamentally strong position in the market and that its prospect of meeting policyholder obligations is the best.

7.       Then we will try to look at various tie-ups that company has in the form of Bancassurance. So if I talk about USGI company then it motor insurance its channels are agency, bancassur-
ance, Maruti Suzuki, Honda, Web aggregators and so on. Out of which Maruti Suzuki performed the best as out of the 647crore premium received through motor insurance, 290 crores has been achieved with the help of Maruti Suzuki.

8.       Now let’s see whether company is meeting the regulators requirement or not. We will look at the solvency ratio of the company. In India, for general insurers the required solvency ratio is 150%. So USGI has 230% which is above the required ratio that indicates that company has enough assets to pay off its liabilities.

9.       Now what about the shareholders? From shareholders point of view I would look at the return on equity in case of public limited company and in case of private limited company we can look at the Net Earnings ratio(Net profit after tax / Net Premium)  or Return on Net Worth ( Net Profit after tax / New worth) which is 22% and 40% respectively for USGI.

10.   Profitability. As with any company, profitability is a key determinant for deciding whether to invest. For an insurance company, there are two components of profits that we must consider: premium/underwriting income and investment income.
Underwriting income is just that: any revenue derived from issuing insurance policies. By averaging the premium's growth rates of several past years, you can determine the growth trends. Growing premium income is a "catch" for insurance companies. Ideally, you want the growth rate to exceed the industry average, but you want to be sure that this higher growth does not come at the expense of accepting higher-risk clients. Conversely, a company whose premium income is growing at a slower rate might be too picky, looking for only the highest quality insurance opportunities. The one thing to remember is that higher premium collections do not equate to higher profits. Lower numbers of claims (via low risk clients) contribute more to the bottom line.
The second area of profitability that you need to include in your analysis is investment income. As we mentioned earlier, a greater proportion of an insurer's income comes from investments. To evaluate this area, take a look at the company's asset allocation strategy (usually mentioned in the notes of the financial statements). You aren't likely to find any secrets in this area. A majority of the assets should be invested in low-risk bonds, equities or money market securities. Some insurers invest a substantial portion of their assets in real estate. If this is so, take a look at what type of property it is and where it is located. A building in New York City is much more liquid than one in Syria.

A.      iAAA: The 'iAAA' rating is the highest for claims paying ability for an insurance company in the industry. The ratings indicate the company's fundamentally strong position in the market and that its prospect of meeting policyholder obligations is the best.
B.      Bancassurance: Bancassurance is a relationship between a bank and an insurance company that is aimed at offering insurance products or insurance benefits to the bank's customers. In this partnership, bank staff and tellers become the point of sale and point of contact for the customer.
C.      Gross Written Premium: When a non-life insurance company closes a contract to provide insurance against loss, the revenues (premiums) expected to be received over the life of the contract are called gross premiums written.
D.      Net Premium: Insurance companies often purchase reinsurance to protect themselves against the risk of a loss above a certain threshold; the cost of reinsurance (reinsurance premiums) is deducted from gross premiums written along with Unexpired Risk Reserve to arrive at net premiums written. Net premiums written is the sum of all types of insurance premiums which a company may collect throughout the whole duration of existing insurance policies minus the costs like agent's commissions or payments made for reinsurance.
E.       Unexpired Risk Reserve: If the estimated cost of claims and expenses resulting from claims exceeds the unearned premium reserve, then an unexpired risk reserve should be created equal to this excess. This is essentially a provision for an expected loss.
F.       Unearned Premium Reserve: It is a reserve to assure the return of unearned premium if policy lapses. It is the account in which insurer deposits unearned premium.
G.      Earned Premium: The portion of Written premium which is considered earned by the insurer, based on ratio of the time elapsed on the policy to its effective life.
H.      Redundancy and Deficiency: Increase in reserves means deficiencies. Release of reserves means redundancy. Deficiencies is being described as strengthening reserves.
I.         Incurred Claims: Case Outstanding for claims + Paid claims = Incurred Claims also known as Reported claims.


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