Bank: - Insurance: EFU GENERAL INSURANCE LIMITED - Analysis of Financial Statements Financial Year 2004-H1'08
EFU General Insurance Limited (EFU) was incorporated as a public limited company on September 2, 1932 in Calcutta, India. The company is engaged in general insurance business comprising of fire and property, marine, motor, aviation, engineering, miscellaneous, bonds and risk management through a network of 57 branches (including KEPZ Branch) in Pakistan and one branch in Jeddah, Saudi Arabia.
Its shares are quoted on Karachi and Lahore stock exchanges. Associated companies such as EFU Life Assurance Limited, JS Bank Limited and Trustees of EFU Staff Provident and Gratuity Funds held nearly 8% shares. CEO, Directors, their spouse and minor children held nearly 19% voting interest while Ebrahim Alibhai Foundation holds over 12% shares. A foreign investor has 6.27% voting interest while the Administrator of Abandoned Properties held 5.43% shares. The rest of the shares held by the joint stock companies, including banks and DFIs.
After Adamjee, EFUG, has the 2nd highest share of 24% in non-life insurance sector. Client base comprises of many leading business houses and multinational companies. The independent reviews by professionals of international repute enable the company to keep abreast of international changes in the industry as well as ensure that management adopts the best international practices. Moreover, EFU maintains very close and long-term (over 50 years) relationship with its main reinsurer, 'Munich Re', one of the largest reinsurance companies in the world.
EFU gave the emerging insurance industry the leadership, the manpower and the drive needed to grow in a situation where at one time, three-fourths of insurance was held by foreign companies. JCR-VIS has improved the company's Financial Strength Rating to "AA" (Double A) and outlook to "Stable"
NON-LIFE INSURANCE SECTOR
The non-life insurance sector's market capitalisation was up 133% during FY07, propelled by the aggressive realization of capital gains ahead of anticipated capital gains tax exemption ending December 31, 2007. However, with claims emanating due to unstable law and order situation coupled with above average property damage due to unexpectedly higher monsoon rains reflective in FY07 annual and 1QFY08 results, investor sentiments subsequently turned sour.
On the core insurance business side, combined profitability of the top 5 insurance companies went from a positive PkR1.3bn to a negative PkR0.02bn in FY07. Similarly during 1QCY08, core profitability for the T5 group declined by 97% YoY. As a result, the sector lost 15% YTD CY08 versus the benchmark KSE-100 Index.
RECENT RESULTS (H1'08)
The company declared profit after tax of Rs 325m with earnings per share of Rs 2.83 in HY08 over Rs 688m with earnings per share of Rs 5.98 in the corresponding period of HY07. A significant decline of 52.7% has been posted by the company due to flat growth in net premium revenue coupled with significant growth in administrative expenses.
The gross premiums for H1'08 stood at Rs 5,305 million as against Rs 4,210 million in the corresponding period of last year, representing a growth of Rs 1,095 million (26%). The overall claim ratio on net premium revenue was 71% as against 73% in the corresponding period of last year. However, the expense ratio was on a higher side standing at 16% in H1'08 vis-a-vis 12% in H1'07, raising the overall combined ratio by 1% (from 85% to 86%) in H1'08, as against the same period last year (SPLY).
Net premium revenue of the company grew flatly by just 2.9% to Rs 3.0b in HY'08 as compared to Rs 3.0b in HY'07 whereas the expenses grew significantly by 35.3% and nullified the meager growth in the premium revenue. Due to the said increase in the net expenses the underwriting results of the company declined by 21.2% to Rs 215m in HY08 over Rs 273m in HY07.
The breakup of policies further reveal motor insurance being the prime contributor (69%) to the net premium followed by marine (16%), fire, property and damage insurance policies (11%), in H108. The steep decline in indices of stock exchanges resulted erosion of the market value of investments in shares and securities, including the investments in associate to Rs 18,949 million (on 30 June 2008) as compared to Rs 20,603 million (on 31 December 2007).
Moreover, due to the recent turmoil in the stock market, the investment income of the company was also affected badly registering a 61.0% decline in HY'08 standing at the level of Rs 254m over Rs 651m in HY'07, forming only 8% of net premiums in H1'08, as against 22% in SPLY. The prospects for investment income in the later half of the year does not appear to be bright, considering the current bearish sentiment in the market. The other income remained flat and the rental registered a meager increase of 10% comparative period last year. This could not translate into the bottom-line due to a 20% surge in G&A expenses.
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Recent results (H1'08) Q2'08 Q2'07 H1'08 H1'07 % chg
PKR mn
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Net Premium Revenue 1,569 1,486 3,091 3,003 3%
Less: Net Claims 1,120 1,120 2,183 2,201 -1%
Less: Expenses 256 179 481 356 26%
Less: Net Commission 139 93 222 174 22%
Underwriting result 57 94 215 273 -27%
Investment Income (32) 454 254 651 -156%
Rental Income 21 18 41 37 10%
Other Income 14 17 28 28 0%
General and administration expenses (128) (90) (222) (177) 20%
Profit before tax (20) 494 365 811 -122%
Provision for taxation 90 (63) (39) (124) -218%
Profit after tax 70 431 325 688 -112%
Earnings per share (basic & diluted 0.61 3.75 2.83 5.98 -111%
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Segments at a glance (FY07)
During FY07 motor, fire and marine insurance contributed 71%, 7% and 17% respectively towards the total net premium. EFU enjoys the competitive advantage of having a balanced and diversified set of insurance policies. Thus, any setback in one revenue source is offset by the other source of premiums. The consumer finance explosion in the last four or five years has helped the motor insurance industry to thrive while enhancing the demand for cars. Banks that are offering car finance loans have put together special deals with insurers for their customer base.
The growth in the net premium in marine business of EFU is attributable to the overall growth in the exports and imports of Pakistan in the current period. Fire and property damage insurance is also on the rise in consequent of a surge in the construction of shopping centers, residential properties etc and therefore has provided ongoing opportunities for insurers. Furthermore, the building of residential properties for a growing middle class and their subsequent insurance is being encouraged by an increase in loan facilities from banks.
Fire and property: The written premium of this department increased by 26% to Rs 2,896 million in FY07, as compared to Rs 2,308 million in 2006. The Company faced some major fire losses, which were exacerbated by claims arising from the disturbances on December 27, 2007 which adversely affected the overall underwriting results. The underwriting loss was Rs 413 million compared to profit of Rs 90 million last year.
Marine, aviation and transport: The written premium of this department increased to Rs 1,257 million in FY07, as compared to Rs 1,186 million in 2006. Claims as a percentage of net premium revenue reduced to 32% as against 47% in 2006. The underwriting profit for the year was Rs 429 million compared to Rs 148 million in 2006.
Motor: The written premium of this department was Rs 4,110 million, in FY07 as compared to Rs 4,532 million in 2006. Claims ratio was 90% as against 84% in 2006 mainly due to losses caused by damages to vehicles from riots on December 27, 2007 and the increase in the incidence of thefts of vehicles during the year. The underwriting loss for the year was Rs 253 million compared to profit of Rs 83 million last year. Others: The written premium of this department increased by 70% to Rs 452 million in FY07, compared to Rs 266 million in 2006. Claims ratio was 43% as against 37% in 2006. The underwriting profit was Rs 23 million compared to Rs 38 million in 2006.
FINANCIAL ANALYSIS (FY04-FY07)
Over the years, EFU has posted a tremendous growth in its net premiums and gross premiums. In 2007, the company's written premium reached Rs 8.96 billion in 2007 as compared to Rs 8.46 billion in 2006, which represents a growth of 6 % over the previous year. The net premium revenue in 2007 rose to Rs 6.1 billion compared to Rs 5.4 billion in 2006, increasing by 13%. The increase in premium was achieved despite fierce competition in the insurance market on account of capacity added by new entrants and aggressive marketing tactics adopted by some of the prominent players in the industry.
As a result of high net claims, the total underwriting loss of the company in 2007 was Rs 177 million as against profit of Rs 365 million in the previous year. Fortunately, this loss was more than offset by investment income as a result of which the Company made a net profit of Rs 14,536 million in 2007 as compared to Rs 762 million in 2006. The robust growth in gross and net premiums coupled with an underwriting loss resulted in a plummet in two ratios in FY07.
The condition in the insurance industry in Pakistan is characterised by increasing capacity with entry of new companies in the market resulting in a highly competitive environment for procurement of business. On the other hand the frequency and severity of losses are higher due to recurring natural disasters (eg earthquake, floods), inflation in value of insured assets and the deterioration in the law and order situation in the country.
The overall claim ratio was 83% as against 76% in the previous year, mainly on account of some large losses in fire and property departments as well as the motor department. The incidents of rioting, arson and damages to motor vehicles in the wake of assassination of Benazir Bhutto has resulted in one of the highest losses in the history of the insurance industry in the country. EFUG too has suffered losses on this account and is a contributing factor to the higher claim ratio.
The loss ratio in motor department was higher on account of claims from damage to vehicles from incidents of riots and vandalism, irregularities in traffic management, violation of traffic rules and rising theft cases. Moreover higher cost of repairs due to inflation in cost of parts and labour charges was also a major reason. EFU has taken strict measures to improve the quality of business and to curtail the claim ratio by improving controls in the motor claims settlement procedure.
The best policy for EFU is Marine insurance policy as the claim rates are on the lower side while the high risk attached enables the company to fetch higher premiums. In the motor insurance, the higher premiums have been offset by the high proportion of claims coming from the policyholders. Despite an upsurge in the total claims, most noticeably the motor claims, EFU has been able to perform well as far as management of expenses is concerned. The expense ratio hand was slightly lower in FY07 despite a nominal increase in expenses. It has shown a negative trend over the period under consideration. This decline is on the account of higher premiums growth than expense growth.
The combined ratio is the sum of loss ratio and expense ratio. It is a measure of insurer profitability, which does not consider investment income and takes into account only the income generated by core business of the insurance company. EFU posted rising tendency in combined ratio on the account of rising loss/claims ratio. It now hovers around 103% and indicates that the company needs to further improve its underwriting results through appropriate risk identification and premium charges.
The reinsurance expense to net premiums ratio has declined considerably on the account of higher net premiums. The ROA of EFUG which had previously declined slightly from 8% to 7% in 2006 on the account of higher growth in assets base than in PAT, shot up in FY'07 on the account of 18times higher PAT than the previous year. Total assets of EFU also registered an increase by 158% to Rs 27,389 million on December 31, 2007. The increases are seen in Investments, Premium Due but Unpaid, Re-insurance Recoveries against Outstanding Claims and Prepayments. Net increase in assets has been largely financed through retention of profits, increase in Provision for Outstanding Claims. These trends are totally in line with that of the overall insurance industry.
Another comprehensive indicator of profitability is the net income margin (PAT as a percentage of total premiums). Income margin has increased sharply as a result of higher income coming from investment portfolio. Higher returns from capital gains have offset the higher claims and expenses in favor of the company. Thus, EFU has overall posted a very healthy trend in its profitability measures. The company's income from investment, rentals and other income for the year under review was Rs 15,012 million as compared to Rs 813 million last year manifesting an increase of 95% and due to this the company was able to offset the underwriting loss.
EFU has carried out its major investment in shares of listed companies. The stock portfolio is well diversified, encompassing the shares of both volatile and non-volatile sectors. Since the stock market of Pakistan is a characteristic of changing political and international scenarios, market risk is pervasively high for the company. Major portion of the company's investment income comes through capital gains and dividend income through long-term holdings. On a more holistic note, EFU has a well-diversified investment portfolio with all three modes of generating income namely dividend income, interest income and income from capital gains.
With the stock exchange posting a bullish trend over the years, EFU has been able to reap benefits through high capital gains and dividend income. Consequently, investment income per unit of investment asset has increased considerably.
Investment income despite, showing a rising trend in FY'05 plummeted as a % of net premiums as its growth was offset by a much higher growth in net premiums thus causing their ratio to decline in 2005. However, it recovered again in FY06, due to 54% increase in investments as against 40% increase in net premiums. Furthermore, it shot up in FY07 due to higher returns from capital gains.
The book value of investments has increased to Rs 18,595 million compared to Rs 3,675 million which is mainly due to realization of capital gains on equity investments. The market value of investments also increased by Rs 13,507 million from Rs 7,096 million as at December 31, 2006 to Rs 20,603 million as at December 31, 2007.
EFU's debt ratios have been erratic as evident from the debt management graph. Major contributors towards plummeting D/A and D/E ratios in FY07 (despite a nominal increase in debts), have been increasing assets base (158% increase in FY07) and equity base (8% increase in FY'07), which caused the overall debts of the company to decline as a portion.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. Due to retention of profits, shareholders equity on December 31, 2007 was 8% higher compared to December 31, 2006. ROE for FY07 shot up due to higher PAT. ROE is highly satisfactory compared to industry.
EFU enjoys high capital adequacy ratios owing to increase in paid-up capital requirement, retained earnings from increased profit levels and increased reserves. Shareholders equity on December 31, 2006 as percentage of Total Assets was 59% (2005: 18%). The decline in paid-up capital/equity ratio of FY07 is due to high base effect because of the reasons discussed above. Thus, EFU has fulfilled the capital requirements as laid down in the regulatory framework.
With its aggressive plans, EFU is well positioned to reap the benefits of the rising insurance market so as to augment its market share. Besides, the company's equity base and balance sheet footing is also getting stronger. This in turn is assisting it to reap benefits in the stock market. Rising EPS and DPS also indicate its healthy performance which it passes to its investors. The average market prices show a rising trend showing investor's confidence in EFUG.
BUDGETARY IMPACT
Like other non-life insurance companies, the measures introduced in the Federal Budget FY09 will have a neutral impact on EFUG. The decision to subject re-insurance premium to 5% withholding tax would not have any impact given the fact it can pass through this cost in the form of high premiums. Although the 5% FED on crop insurance has been exempted, the low volumes of such products will have an immaterial impact on its core profitability. However, the decision to raise FED rate from 5% to 10% on insurance services will increase the cost of insurance business and hence bode negatively for the insurance sector including EFUG.
Looking for positives, the decision to exclude income shown as unrealized gains from taxable income in the case of non-life insurance companies should bode favorably for EFUG since unrealized gains contribute heavily to its bottom line.
With the government having granted exemption on CGT for a period of two years (until June 30, 2010) without any change in the withholding tax and CVT regime, it will likely bode well for the sector as insurance companies bank a great deal on investment to augment their underwriting profits and increase capital for coverage against any unexpected catastrophes, while growing the potential of increasing risk retention. It is worth mentioning that investment income constitutes a major portion of the profitability of EFUG and it will be a major beneficiary from this measure.
FUTURE OUTLOOK
On the core insurance business front, the insurance sector of Pakistan is relatively under-served as insurance penetration is currently at 0.5% versus 1.3% in emerging markets. Notwithstanding the sizable claims realized by the insurance sector, claims will normalize and curbing of economic derailment coupled with a stable law & order outlook should provide impetus to the mainstay Fire and Marine insurance businesses. However, keen competition, particularly with pricing, alongside the decline in growth of consumer vehicle loans is likely to dampen growth of the motor insurance segment. The company plans to lay emphasis on strengthening the underwriting discipline with a view to improving the quality further thereby making all classes profitable.
EFU needs to work hard on its claims ratios and further improve its underwriting results by appropriate risk identification and premium charges. The company intends to further capitalize on the new opportunities expected to arise from the development of infrastructural projects and maintain its growth momentum in future years.
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EFU GENERAL INSURANCE-KEY FINANCIAL DATA
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Earnings FY'04 FY'05 FY'06 FY'07
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In Rupees
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Gross Premium 5,043,000,000 6,644,000,000 8,459,386,000 8,961,000,000
Net Premium Revenue 2,536,000,000 3,861,990,000 5,417,952,000 6,110,504,000
Total Claims Incurred 1,529,560,000 2,694,350,000 4,131,705,000 5,092,241,000
Underwriting Expenses 586,240,000 855,380,000 1,098,166,000 1,195,195,000
Underwriting Result 420,290,000 312,270,000 364,937,000 -176,932,000
Investment Income 101,730,000 372,970,000 696,466,000 14,812,295,000
Profit Before Tax 474,160,000 645,720,000 857,753,000 14,457,295,000
Profit After Tax 322,440,000 506,270,000 762,158,000 14,536,309,000
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Balance Sheet FY'04 FY'05 FY'06 FY'07
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In Rupees
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Paid up capital 210,000,000 300,000,000 500,000,000 1,000,000,000
Equity 675,610,000 1,118,890,000 1,790,860,000 16,177,169,000
Investments (Book Value) 155,896,000 2,387,155,000 3,675,085,000 18,595,362,000
Cash & Bank balances 865,990,000 1,192,910,000 1,135,916,000 1,162,876,000
Total Assets 4,783,590,000 6,334,640,000 10,627,996,000 27,389,975,000
Total Liabilities 4,107,980,000 5,215,763,000 8,837,136,000 11,212,806,000
Operating Performance (%)
Underwriting Profit / Net Premium 16.57 8.09 6.74 -2.90
Underwriting Profit / Gross Premium 8.33 4.70 4.31 -1.97
Loss Ratio 60.31 69.77 76.26 83.34
Expense Ratio 23.12 22.15 20.27 19.56
Combined ratio 83.43 91.91 96.53 102.90
Return on Assets 6.74 7.99 7.17 53.07
Return on Equity 0.48 0.45 0.43 0.90
Reinsurance Expense/Net Premiums 98.86 72.04 56.14 46.65
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DEBT MANAGEMENT
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Debt/Assets Ratio 85.88 82.34 83.15 40.94
Debt/Equity 6.08 4.66 4.93 0.69
Capital Adequacy
Paid-up Capital / Total Equity 0.31 0.27 0.28 0.06
Equity/Total Assets 0.14 0.18 0.17 0.59
Profitability Ratios
Investment income/Net premiums 4.01 9.66 12.85 242.41
Investment income/Investment assets 65.26 15.62 18.95 79.66
Profit After tax/Net Premium 12.71 13.11 14.07 237.89
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Market Value Ratios
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Market Prices (average) 91.90 138.50 212.00 364.00
Price Earnings Ratio 13.70 21.21 26.94 2.50
Dividends per share 3.00 3.00 3.00 6.00
Earnings Per Share 6.71 6.53 7.87 145.36
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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