Insurance companies from now onwards cannot distribute more than 20 per cent of the profit as cash dividend.
The Insurance Board (IB), the insurance sector regulator, put a cap on cash dividend distribution this week to encourage insurers to issue bonus shares to shareholders so as to strengthen the capital base of companies.
Many investors are lately drawn towards insurance stocks as they promise better dividends, both cash and bonus. For instance, Nepal Life Insurance Company extended bonus shares equivalent to 70 per cent of the paid-up capital and cash dividend of Rs 28.5 per share last fiscal year.
“To prevent extension of large volume of cash dividend to shareholders, we have directed life and non-life insurance companies not to extend more than 20 per cent of the distributable profit as cash dividend,” a senior IB official told The Himalayan Times. Distributable profit is profit accumulated by companies over the years that could be distributed in the form of dividend anytime.
“We believe this decision will help companies to raise their paid-up capital,” the official said.
This decision, however, is not likely to affect prices of insurance stocks, as only a handful of insurers are extending handsome cash dividend, Stockbroker Anjan Poudel said.
“Besides, many investors prefer bonus shares to cash dividend because they tend to yield higher returns when share prices go up,” Poudel informed. “And since insurance companies are expecting further hike in minimum paid-up capital, more bonus shares are likely to be floated on the market, which will only generate more interest towards insurance stocks.”
The insurance sector regulator had earlier instructed life and non-life insurance companies to raise minimum paid-up capital to Rs 500 million and Rs 250 million, respectively, within mid-July, 2013.
More than a year has passed since the expiry of the deadline, but six insurance companies still have not been able to meet the capital requirement. The six companies are: Rastriya Beema Sansthan, Everest Insurance, NB Insurance, United Insurance, Premier Insurance and Neco Insurance.
These companies have already been barred from extending dividend to shareholders. “This week, we also decided not to give priority to their applications for branch expansion and balance sheet approval,” the IB official said.
The insurance sector regulator has been pushing companies to raise their paid-up capital on grounds that the measure would enable them to absorb bigger shocks in case huge compensation has to be extended to clients. Also, a bigger capital base allows insurers to retain
bigger portion of risks, which would lower their dependence on reinsurance companies abroad.
In this regard, IB is mulling over further raising the minimum capital requirement for life and non-life insurers to Rs one billion and Rs 500 million, respectively.
“To further enhance the risk-absorbing capacity of insurers, we have also asked insurance companies to deposit 10 per cent of net profit in the catastrophic fund,” the IB official said.
Although all insurance companies have to create catastrophic fund, many have failed to park money in it as there is no mandatory provision in this regard. “We hope the latest decision would strengthen the financial position of companies,” the official said.
Latest decisions
> Cash dividend capped at up to 20pc of distributable profit
> Companies must park 10pc of net profit in catastrophic fund
> Applications on branch expansion and balance sheet approval filed by companies that have failed to meet minimum regulatory capital requirement to get less priority
source:the himalayan times,26 sept 2014
LINK
The Insurance Board (IB), the insurance sector regulator, put a cap on cash dividend distribution this week to encourage insurers to issue bonus shares to shareholders so as to strengthen the capital base of companies.
Many investors are lately drawn towards insurance stocks as they promise better dividends, both cash and bonus. For instance, Nepal Life Insurance Company extended bonus shares equivalent to 70 per cent of the paid-up capital and cash dividend of Rs 28.5 per share last fiscal year.
“To prevent extension of large volume of cash dividend to shareholders, we have directed life and non-life insurance companies not to extend more than 20 per cent of the distributable profit as cash dividend,” a senior IB official told The Himalayan Times. Distributable profit is profit accumulated by companies over the years that could be distributed in the form of dividend anytime.
“We believe this decision will help companies to raise their paid-up capital,” the official said.
This decision, however, is not likely to affect prices of insurance stocks, as only a handful of insurers are extending handsome cash dividend, Stockbroker Anjan Poudel said.
“Besides, many investors prefer bonus shares to cash dividend because they tend to yield higher returns when share prices go up,” Poudel informed. “And since insurance companies are expecting further hike in minimum paid-up capital, more bonus shares are likely to be floated on the market, which will only generate more interest towards insurance stocks.”
The insurance sector regulator had earlier instructed life and non-life insurance companies to raise minimum paid-up capital to Rs 500 million and Rs 250 million, respectively, within mid-July, 2013.
More than a year has passed since the expiry of the deadline, but six insurance companies still have not been able to meet the capital requirement. The six companies are: Rastriya Beema Sansthan, Everest Insurance, NB Insurance, United Insurance, Premier Insurance and Neco Insurance.
These companies have already been barred from extending dividend to shareholders. “This week, we also decided not to give priority to their applications for branch expansion and balance sheet approval,” the IB official said.
The insurance sector regulator has been pushing companies to raise their paid-up capital on grounds that the measure would enable them to absorb bigger shocks in case huge compensation has to be extended to clients. Also, a bigger capital base allows insurers to retain
bigger portion of risks, which would lower their dependence on reinsurance companies abroad.
In this regard, IB is mulling over further raising the minimum capital requirement for life and non-life insurers to Rs one billion and Rs 500 million, respectively.
“To further enhance the risk-absorbing capacity of insurers, we have also asked insurance companies to deposit 10 per cent of net profit in the catastrophic fund,” the IB official said.
Although all insurance companies have to create catastrophic fund, many have failed to park money in it as there is no mandatory provision in this regard. “We hope the latest decision would strengthen the financial position of companies,” the official said.
Latest decisions
> Cash dividend capped at up to 20pc of distributable profit
> Companies must park 10pc of net profit in catastrophic fund
> Applications on branch expansion and balance sheet approval filed by companies that have failed to meet minimum regulatory capital requirement to get less priority
source:the himalayan times,26 sept 2014
LINK
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