Kathmandu: Until last year, Nepal’s insurance companies strongly favoured bonus shares when distributing profits. This year, however, the focus has clearly shifted toward cash dividends. Companies that once preferred issuing bonus shares from their distributable profits are now prioritizing direct cash payouts to shareholders.
Two years ago, in fiscal year 2019/20, ten out of eleven life insurance companies that declared dividends issued bonus shares, while five of the seven non-life insurers that announced dividends followed the same route. In that year, both life and non-life insurers overwhelmingly preferred bonus shares over cash dividends.
The same pattern largely continued in the following fiscal year, 2020/21. Of the eleven life insurers that declared dividends, eight issued bonus shares, while seven of the eleven non-life insurers that announced dividends also opted for bonus shares. As in the previous year, insurers from both segments leaned more toward capitalizing profits through bonus shares rather than paying out cash.
That approach has now changed. From profits earned in fiscal year 2021/22, only four of the eleven life insurance companies that have so far declared dividends are issuing bonus shares. Similarly, among seven non-life insurers that have announced dividends from last year’s profits, only two are distributing bonus shares.
From profits of fiscal year 2020/21, life insurers had distributed bonus shares of up to nearly 27 percent, while cash dividends were limited to about 21 percent. This year, life insurers have decided to distribute cash dividends of up to 21 percent, while bonus shares have been capped at around 5 percent.
In the non-life segment, companies had issued bonus shares of up to 18 percent from profits of fiscal year 2020/21, whereas this year, apart from Siddhartha Premier Insurance’s decision to distribute a 30 percent cash dividend, bonus shares across the sector remain minimal.
Overall, while bonus shares dominated dividend declarations until last year, insurance companies are now clearly giving greater priority to cash dividends.
The shift from bonus shares to cash dividends is closely linked to regulatory changes. Previously, the Nepal Insurance Authority had set the minimum paid-up capital requirement at Rs 1 billion for non-life insurers and Rs 2 billion for life insurers. On 24 March 2022, the regulator issued new directives raising the minimum paid-up capital to Rs 5 billion for life insurers and Rs 2.5 billion for non-life insurers, an increase of 150 percent, to be met within one year.
Faced with this sharp rise in capital requirements, insurance companies pursued various strategies, including mergers, initial public offerings, and rights issues. When these measures proved insufficient, many companies turned to capitalizing their profits by issuing bonus shares, effectively converting retained earnings into paid-up capital.
Bonus shares allow companies to reward shareholders without paying out cash, increasing the number of shares held while keeping funds within the company. This helps preserve cash for loan repayments, business expansion, new investments, and meeting regulatory capital thresholds. As a result, until recently, insurers prioritized bonus shares as a practical way to meet the regulator’s higher capital requirements.
Now that most life insurance companies have reached the mandated paid-up capital levels, they have begun to focus more on cash dividends. This explains why insurers that once emphasized bonus shares are now concentrating on cash payouts.
Although bonus shares can support long-term growth if capital expansion is matched by business growth and rising profits, excessive reliance on bonus shares without proportional business expansion can burden companies with high capital and reduce their ability to sustain dividends in the future
Both cash dividends and bonus shares are tools companies use to reward shareholders, and each has its own advantages. When a company pays cash dividends, shareholders receive immediate income from profits, which can support personal finances and meet short-term needs. Cash dividends are especially attractive to investors seeking regular income. They also do not increase the number of shares in the market, helping maintain price stability.
Bonus shares, on the other hand, distribute profits in the form of additional shares rather than cash. This helps companies conserve cash and strengthen capital for expansion and long-term investment. While bonus shares increase a shareholder’s total holdings, they also raise the total number of shares in circulation, which leads to price adjustments and a lower per-share market value in the short term.
Although bonus shares can support long-term growth if capital expansion is matched by business growth and rising profits, excessive reliance on bonus shares without proportional business expansion can burden companies with high capital and reduce their ability to sustain dividends in the future. For this reason, a balanced combination of cash dividends and bonus shares is generally considered healthier.
So far, eleven life insurance companies have declared dividends for fiscal year 2021/22, while three of the fourteen operating life insurers have yet to announce dividends. Most of the companies that have declared dividends are offering cash payouts. Nepal Life Insurance and Life Insurance Corporation have announced the highest dividends, at around 21 percent. Life Insurance Corporation has proposed a 21.05 percent cash dividend, including tax, from its distributable profits.
Citizen Life Insurance has announced a 20 percent cash dividend, a notable shift from the previous year when it distributed a total dividend of over 28 percent largely through bonus shares. Nepal Life Insurance has decided to distribute a total dividend of 21.05 percent, comprising 5 percent bonus shares and 16.05 percent cash dividend. Sun Nepal Life has announced a total dividend of 20.26 percent, including about 15.26 percent cash and 5 percent bonus shares.
SuryaJyoti Life Insurance has declared a 13 percent cash dividend, while Reliable Nepal has announced 12 percent. Prabhu Mahalaxmi Life Insurance has declared a total dividend of 8.42 percent, split between 4 percent bonus shares and about 4.42 percent cash. IME Life, Sanima Reliance, National Life, and Himalayan Everest have announced cash dividends of 10.53 percent, 10.17 percent, 8.5 percent, and 8 percent respectively.
Among non-life insurers, Siddhartha Premier Insurance has declared the highest cash dividend so far, at 25 percent. From last year’s profits, NLG Insurance has announced a combination of 4 percent bonus shares and about 3.37 percent cash dividend, while Shikhar Insurance has decided on 6 percent bonus shares and a small cash dividend. Other non-life insurers have focused mainly on cash payouts, with Sagarmatha Lumbini Insurance announcing 15 percent, Nepal Insurance 6.34 percent, Himalayan Everest 8 percent, and IGI Prudential 5 percent cash dividends.
All dividends declared by insurance companies will be distributed to shareholders only after approval from the Nepal Insurance Authority and endorsement by the companies’ upcoming annual general meetings.
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