Download FINANCIAL ANALYSIS OF PNB MET LIFE and more Study Guides, Projects, Research Financial Accounting in PDF only on Docsity!
I
EXECUTIVE SUMMARY
This report provides an analysis and evaluation of the current and prospective profitability, liquidity and financial stability of PNB Met Life. Methods of analysis includes Ratio analysis, cash flow statement. Results of data analyzed show that all ratios are above industry averages. In particular, comparative performance is satisfactory in the areas of profit margins, liquidity, credit control.
The report finds the prospects of the company in its current position are positive. The major areas of weakness require further investigation and remedial action by management. Recommendations discussed include: The company wants to keep an eye on the current assets flow. To utilize its working capital efficiently that is the excess current assets should be adjusted according to current scenario. The company should focus on the debt and long term funds which are utilized in the company
CHAPTER – 1
INTRODUCTION
a firm. Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business. The analyst first identifies the information relevant to the decision under consideration from the total information contained in the financial statements. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents and performance reports.
The analysis of financial statements is an important aid to financial analysis. They provide information on how the firm has performed in the past and what is its current financial position. Financial analysis is the process of identifying the financial strengths and weakness of the firm from the available accounting data and financial statements. The analysis is done by establishing relationship between the different items of financial statements.
The focus of financial analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance.
Financial Statements of Insurance Companies insurance companies includes:
Revenue Account (Form A-RA) : Previously Revenue Account is to be prepared according to Form ‘D’ of the First Schedule to the Insurance Act, 1938. But at present, as per the provisions of IRDA Act, 2002, the Revenue Account of Life Insurance companies are to be prepared as per the requirement of Schedule ‘A’ of the said regulations. This account is prepared for the purpose of ascertaining incomes and expenditures for a particular period as per accrual basis of accounting.
Items Appearing in Revenue Account: (a) Premium ( Schedule 1): It is needless to say that premium paid by policyholders is the major sources of income of Life Insurance companies. It includes: (i) Premiums; (ii) Re-insurance ceded; (iii) Re-insurance accepted. Schedule I contains the details of premium so received. (b) Income from Investment: These include: (i) Interest Dividends; Rent; (ii) Profit on sale/redemption of investments; (iii) Loss on sale/redemption of investments; (iv) Transfer/Gain on revaluations, etc.
These are also the sources of Insurance companies. Accrual Basis of accounting should be followed. (c) Commission ( Schedule 2): Commission is paid on premium paid by the policyholders on first year, or on renewal or on single premium. The life insurance companies pay premium to their agents. (d) Operating Expenses (Schedule 3): Operating expenses include office and administration, selling and distributions expenses and comes under the head Schedule 3. These expenses include: Rents, Rates and Taxes, Training Expenses, Depreciation, Repairs, Auditor Fees etc. It must be remembered that expenses excluding percentage of net premiums or Rs. 5, 00,000, whichever is higher, should separately be mentioned. (e) Benefits paid (Net) (Schedule 4): It includes:
It must be remembered that Shareholders’ Fund and Policyholders Fund are to be shown separately, i.e. Schedules 8 contains the investment of Shareholders’ Fund. On the contrary, Schedule 8A contains the Policyholders’ Fund. Loans ( Schedule 9 ): Proper classifications of loan should be made first, i.e. as per security-wise, performance-wise, borrower- wise etc. Fixed Assets (Schedule 10 ): Detailed descriptions of all the, fixed assets must be made. They include: All tangible assets (viz. Plant and Machinery, Land and Building, etc.) and intangible assets (viz. patent, etc.). Current Assets = Cash at Bank (Schedule 11 ): Cash and Bank (balances should be shown separately) Advances and Other Assets ( Schedule 12): These also include various kinds of advances made by the insurance company. Current Liabilities (Schedule-13): Current liabilities are those which need payment within one year, i.e. liabilities which are repayable within a short period of time, e.g., Creditors, Provisions for Tax, etc. Provisions ( Schedule 14): All kinds of provisions. Miscellaneous Expenditure ( Schedule15): These include – Discount on Issue of Shares or Debentures, Preliminary Expenses.
Essentially, the analysis requires the calculation (usually as a percentage) of both the total existing business still in force at the end of the latest financial accounting period (the balance date) and the experience for that period, usually one year. The calculated values are used directly to indicate the degree to which the life insurer
satisfies the various requirements of both life insurance legislation and the regulations on solvency, capital, and liquidity, as well as the progress made in operational matters such as new business, claims, expenses, and profitability. The ratios are calculated for each licensed life insurer and life reinsurer, and the results are then closely compared with the specified statutory criteria and other supervisory indicators.. Any trend in the ratio values over those years may also be useful for understanding the insurer’s future prospects and may indicate particular matters of concern that warrant further investigation. Comparing the assessments in successive years makes it possible to detect adverse changes in the insurer’s financial condition at an early stage, enabling the insurer to take remedial action with or without formal intervention by the supervisory authority.. Comparing the progress and performance of an insurer’s life business with those of the market is of interest. The supervisor may require further information to assess the insurer’s likely future because the information available is sufficient only to provide a preliminary view and further investigation is needed to confirm that view. Analyzing the calculated ratios across the licensed insurers in the jurisdiction will, subject to a few caveats, enable the supervisory authority to assess the general soundness of the industry as a whole. Relevant ratios The financial statements are best analyzed separately for each business class. These can be divided into three categories: Earnings Liquidity Ratios Solvency These are given in detail below: A. Earnings ratios Profitable operations are necessary for insurance companies to operate as a going concern. Measurement of earnings focuses on an insurers’ ability to efficiently translate its strategies and competitive strengths into growth opportunities and sustainable profit margins
B. Liquidity ratios Good liquidity helps an insurance company to meet policyholder’s obligations promptly. An insurer’s liquidity depends upon the degree to which it can satisfy its financial obligations by holding cash and
assets, redemption of debentures, preference shares and other long-term debt for cash. In short, a cash flow statement shows the cash receipts and disbursements during a certain period.
Cash Flows are inflows and outflows of cash and cash equivalents. The statement of cash flow shows three main categories of cash inflows and cash outflows, namely : operating, investing and financing activities. (a) Operating activities are the principal revenue generating activities of the enterprise. (b) Investing activities include the acquisition and disposal of longterm assets and other investments not included in cash equivalents. (c) Financing activities are activities that result in change in the size and composition of the owner’s capital (including Preference share capital in the case of a company) and borrowings of the enterprise.
The Company has established a governance framework and a control environment, commensurate with the size, scale and complexity of its operations. The corporate governance framework of the Company is based on an effective independent Board, separation of Board’s supervisory role from the executive management and constitution of Board Committees, generally comprising a majority of independent/non-executive directors and chaired by independent directors to oversee critical areas. The Board committees are supported by executive committees to oversee at an operational level. All employees are bound by the Code of business conduct and ethics approved by the Board of Directors. The Company has a reporting and review framework comprising quarterly reporting and review of audited financials and investment returns to regulators and shareholders. The financials prepared are audited by joint statutory auditors, and are reviewed by Audit Committee on a quarterly basis. They are also submitted to IRDAI. The Company has in place adequate internal financial controls across all major processes with respect to financial statements.
1.1 NEED FOR THE STUDY
The Financial Statements are mirror which reflects the financial position and strengths or weakness of the concern. The insurance Company has been witnessed intense competition from domestic and international companies. Every business needs to view the financial performance analysis.
The study on effectiveness of operational and financial performance of PNB Met Life is conducted to measure the overall performance of company. The financial analysis strengthens the firms to make their best use, and to be able to spot out financial weakness of the firm to state suitable corrective actions.
This study aims at analyzing the overall financial performance of the company by using various financial tools like Comparative Analysis, common size statement analysis, Ratio Analysis, and Cash Flow Analysis.
1.3 SCOPE OF THE STUDY
The study is based on the accounting information of the PNB Met Life. The study covers the period of 2013-2018 for analyzing the financial statement such as income statements and balance sheet.
The scope of the study involves the various factors that affect the financial efficiency of the company. To increase the profit and sales growth of the company. This study finds out the operational efficiency of the organization and allocation of resources to improve the efficiency of the organization.
The data of the past five years are taken into account for the study. The performance is compared within those periods. This study finds out the areas where PNB Met Life can improve to increase the efficiency of its assets and funds employee.
1.4 INDUSTRY PROFILE
Insurance companies may be classified into two groups:
- Life insurance companies, which sell life insurance, annuities and pensions products.
- Non-life or property /casulty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
- Standard lines
- Excess lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature – coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
Insurance companies are generally classified as either mutual or proprietary companies. Mutual companies are owned by the policyholders, while shareholders (who may or may not own policies) own proprietary insurance companies.
Demutulization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century. However, not all states permit mutual holding companies.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
- Heavy and increasing premium costs in almost every line of coverage
- Difficulties in insuring certain types of fortuitous risk
- Differential coverage standards in various parts of the world
- Rating structures which reflect market trends rather than individual loss experience
- Insufficient credit for deductibles or loss control efforts
There are also companies known as "insurance consultants". Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A
number of independent rating agencies provide information and rate the financial viability of insurance companies.
Private sector companies should be allowed to promote insurance companies
Foreign promoters should also be allowed
Government to vest its regulatory powers on an independent regulatory body answerable to Parliament
Birth of IRDAI
Insurance Regulatory and Development Authority (IRDA) set up as autonomous body under the IRDA Act, 1999
IRDAI’s Mission: To protect the interests of policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.
IRDAI’s Activities
Frames regulations for insurance industry in terms of Section 114A of the Insurance Act 1938
From the year 2000 has registered new insurance companies in accordance with regulations
Monitors insurance sector activities for healthy development of the industry and protection of policyholders’ interests
The functions of the IRDAI are defined in Section 14 of the IRDAI Act, 1999, and include:
Issuing, renewing, modifying, withdrawing, suspending or cancelling registrations Protecting policyholder interests Specifying qualifications, the code of conduct and training for intermediaries and agents Specifying the code of conduct for surveyors and loss assessors Promoting efficiency Promoting and regulating professional organisations connected with the insurance and re-insurance industry Levying fees and other charges Inspecting and investigating insurers, intermediaries and other relevant organisations Regulating rates, advantages, terms and conditions which may be offered by insurers not covered by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938)
Objectives of IRDA:
To promote the interest and rights of policy holders. To promote and ensure the growth of Insurance Industry. To ensure speedy settlement of genuine claims and to prevent frauds and malpractices To bring transparency and orderly conduct of in financial markets dealing with insurance.
