Insurance: NEW JUBILEE INSURANCE - Analysis of Financial Statements Financial Year 2004 - Q 2003 2008
New Jubilee Insurance was established in 1953. Since then NJI has evolved as one of the leading companies in the insurance sector. Sustained growth over half a century has secured NJI a place among the "Big Three" Pakistani insurance companies in terms of gross direct premium and financial base. NJI is listed on Karachi and Lahore stock exchanges.
Its major shareholders are Aga Khan Fund for Economics Development and the Hashoo Group. The company has reinsurance arrangements with international renowned reinsurers such as Swiss Re, Munich Re, Lloyds, Hannover Re and Mitsui Sumitomo Re. The company is also supported by internationally acclaimed reinsurance brokers including AON Group, Willis, Marsh and UIB.
In 2003, NJI became the first Pakistani insurance company to acquire a foreign company when it took over the Pakistan operations of Commercial General Union. Together with AKFED, NJI also acquired majority control of CU Life Assurance Company of Pakistan Ltd. At NJI, underwriting of all classes of general insurance including fire, marine, motor, engineering, health and general accidents is undertaken.
It not only offers wide risk coverage, but also provides related risk management services delivered by highly qualified and experienced risk managers. NJI has developed unique and innovative insurance solutions to meet the growing consumer financing trends of economy. From auto financing to personal loans, mortgages to plastic cards, and trade finance to capital investment finance, NJI has the customised solutions to secure the entire operations.
It is the pioneer in the group health insurance. The client base of NJI comprised prominent national and multinational corporations operating in pharmaceutical, chemical, textile, cement, services (hospital and hotels), manufacturing, FMCG, engineering, oil and energy, and banking and financial secto rs.
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RUPEES (IN MILLIONS) 3Q FY07 3Q FY08 %
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Premium written 2940 2881 -2.01%
Net premium revenue 1335 1623 21.57%
Underwriting profit 75 46 -38.67%
Investment income 412 245 -40.53%
Profit before tax 488 290 -40.57%
Profit after tax 415 253 -39.04%
Earnings per share 6.3 3.83 -39.21%
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RECENT PERFORMANCE
In the third quarter of the current fiscal year, the situation has ameliorated but the graph of performance is still down. Due to the economic slowdown, the gross premiums have not picked up and have declined by 2.01% from the corresponding period last year. The net premium revenue has increased by 21.57%. There was an underwriting profit in this quarter of Rs 46 million which is 38.67% less than the corresponding period last year.
However this is better than the companys performance in the first half of the current fiscal year as the underwriting loss was Rs 9 million. This is largely due to a recovery in the fire business. The company made a loss of Rs 72 million in the first half of the current fiscal year but has made a loss of Rs 19 million in the three quarters on a cumulative basis. The worldwide bourses including the Karachi Stock Exchange are not doing well. This has significantly impacted the income from capital gains and dividends.
Huge claims payment has affected the return on bank deposits. Lower investment income and underwriting profit have in turn yielded in a lower profit both before and after tax. The composition of the portfolio for net premium and underwriting result show a different picture altogether. In terms of net premium, the motor component contributes major chunk at 30% (Rs 172.2 million) but in terms of underwriting result the contribution is reduced to 9% (Rs 4.9 million).
This is largely due to thefts and damages of automobiles during strikes and riots in the country. The fire and property segment of NJIs portfolio has yielded maximum underwriting profit at 97% (Rs 52.9 million) for the three quarters in 2008. The miscellaneous items have posted an underwriting loss for the period at -62% (-Rs 34.1 million).
OPERATING PERFORMANCEThe gross premium and net premium revenue have shown a progressive increase over the years. The cumulative annual growth rate for the period FY04 to FY07 has been 144.33% for gross premium and 184.27% for net premium. In FY07, the gross revenue amounted to Rs 3.4 billion and net premium revenues amounted to Rs 1.8 billion with an increase in growth of 33.38% and 22.36% respectively on a y-o-y basis. The growth rates have fallen from last year when they were a healthy 48.06% and 62.08% respectively.
The in-depth analysis of operating performance shows that the underwriting profit as a percentage of both net premium and gross premium has declined. The underwriting profit/net premium has declined from 6.71 in FY06 to -11.38 in FY07 while the underwriting profit/gross premium has declined from 3.88 in FY06 to -6.04 in FY07. In FY07 there was an underwriting loss of Rs 207 million. This was a decline of 307.71%. This is the reason why the ratios mentioned above have registered such a steep decline. All the classes of business contributed to growth. The composition is as follows:
Due to the assassination of Benazir Bhutto on 27th December 2007, NJI being one of the largest insurers in the country bore the brunt of extraordinary losses. Initially, it was predicted that the underwriting profit for FY07 would be 13% higher than FY06, ie, Rs 113 million. However marine yielded profits of Rs 106 million, liability and health insurance posted profits of Rs 18 million and Rs 23 million respectively. These minimised the losses from other components of the portfolio that totalled Rs 351 million.
INVESTMENT RETURNSThe investment income including capital gain, rental income and return on bank deposits amounted to Rs 780 million in FY07 as against Rs 815 million in FY06 (a decline of Rs 35 million). This is due to lower capital gain on sale of shares of Rs 499 million in FY07 as against Rs 595 million in FY06.
However the rental income and return on bank deposits increased by Rs 25 million and Rs 31 million respectively. Due to decline in investment, the related ratios have dropped as well. The investment income/net premium has dropped from 46.43% to 32.95% while investment income/investment assets has dropped from 54.70% to 30.64% on a y-o-y basis.
DEBT MANAGEMENTThe debt management ratios show a U-shaped trend. The debt burden of the company reduced but has increased in FY07. The debt to assets ratio has increased from 53.52% in FY06 to 59.35% in FY07. The debt to equity ratio has increased from 1.15 in FY06 to 1.46 in FY07. The total liabilities have increased by 50.31% on a y-o-y basis.
EXPENSE ANALYSISThe profit after tax has reduced from Rs 841 million to Rs 588 million on a y-o-y basis - a decline of 30.09%. This is largely due to a massive decline in the underwriting profit, which in turn was due to turn-up of insurance claims in the wake of 27th December tragedy. The reinsurance expense/net premium has increased from 73.02% to 88.61% on a y-o-y basis. This is due to an increase in reinsurance expense of 48.47% which is higher than increase in the net premium revenue which grew by 22.36% on a y-o-y basis.
The CAGR of reinsurance expense stands at 110.89% as against CAGR of net premium revenue, which stood at 184.27%. The loss ratio (net claims incurred/net premium revenue) has increased from 59.71% to 77.73% on a y-o-y basis. The expense ratio (underwriting expenses/net premium revenue) has decreased from 33.58% to 22.29% on a y-o-y basis. The combined ratio (expense ratio + loss ratio) has increased from 93.29% to 100.02%. This shows that profit after tax was solely due to the investment income earned as the net premium revenues were wiped out through insurance claims and underwriting expenses.
CAPITAL ADEQUACYThe paid-up capital to total equity has declined over the years from 0.43 in FY04 to 0.23 in FY07. This is because the CAGR of paid up capital is 72.5% while that of equity is 222.67%. In FY07, the ratio has shown a slight increase from 0.22 to 0.23 on a y-o-y basis.
The equity to total assets has increased from 0.31 in FY04 to 0.41 in FY07. The equity has grown at a greater rate than total assets. The CAGR of equity is 222.67% while that of total assets is 143.47%. In FY07 the ratio has seen a slight decline from 0.46 in FY06 to 0.41 in FY07 as assets grew by 35.55% and equity grew by 18.55% on a y-o-y basis.
INVESTOR EXPECTATIONSThe share price of the NJI has declined over the year. In July 07 the share price was Rs 238 but has reduced to Rs 108.75 in September 08. This is largely due to poor performance of the bourses in Pakistan in view of the weak political and economic situation of the country.
The floor on equities created more inefficiency in the market. The investor expectations show a rising trend with respect to earnings per share which, has increased from Rs 3.91/share in FY04 to Rs 10.71/share in FY07. However the dividends have declined for the current fiscal year from Rs 2.00 in FY06 to Rs 1.5 in FY07.
BUDGETARY IMPACTLike other non-life insurance companies, the measures introduced in the Federal Budget FY09 will have a neutral impact on NJI. 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 NJI. Looking for positives, the decision to exclude income shown as unrealised gains from taxable income in the case of non-life insurance companies should bode favorably for NJI since unrealised 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 NJI and it will be a major beneficiary from this measure.
FUTURE OUTLOOKOn 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 the emerging markets. Notwithstanding the sizable claims realised by the insurance sector, claims will normalise and curbing of economic derailment coupled with a stable law and 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. Amidst the political uncertainty and the difficult economic situation prevailing in the country, the company plans to lay emphasis on strengthening the underwriting discipline with a view to improving the quality further thereby making all classes profitable.
NJI 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 capitalise on the new opportunities expected to arise from the development of infrastructural projects and maintain its growth momentum in coming years.
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NEW JUBILEE INSURANCE- KEY FINANCIAL DATA
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Earnings FY04 FY05 FY06 FY07
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In Rupees
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Gross Premium 1,404,000 1,737,000 2,571,883 3,430,376
Net Premium Revenue 639,810 917,120 1,486,429 1,818,775
Total Claims Incurred 392,700 554,260 887,587 1,413,733
Underwriting Expenses 187,580 293,250 499,166 405,432
Underwriting Result 67,570 69,600 99,676 -207,033
Investment Income 151,860 487,250 690,178 599,208
Profit Before Tax 271,980 614,410 936,793 575,041
Tax 65,840 58,210 9,506 13,415
Profit After Tax 206,140 556,200 841,733 588,456
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Balance Sheet FY04 FY05 FY06 FY07
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In Rupees
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Paid up capital 318,430 366,193 439,432 549,290
Equity 747,410 1,193,180 2,034,251 2,411,663
Investments (Book Value) 855,830 1,071,853 1,261,854 1,955,892
Cash & Bank balances 608,220 862,120 1,686,561 1,680,625
Total Assets 2,436,730 2,785,390 4,376,785 5,932,706
Total Liabilities 1,689,320 1,592,210 2,342,534 3,521,043
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Operating Performance (%) FY04 FY05 FY06 FY07
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Underwriting Profit / Net Premium 10.56 7.59 6.71 -11.38
Underwriting Profit / Gross Premium 4.81 4.01 3.88 -6.04
Loss Ratio 61.38 60.43 59.71 77.73
Expense Ratio 29.32 31.98 33.58 22.29
Combined ratio 90.70 92.41 93.29 100.02
Return on Assets 8.46 19.97 19.23 9.92
Reinsurance Expense/Net Premiums 119.44 89.40 73.02 88.61
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DEBT MANAGEMENT FY04 FY05 FY06 FY07
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Debt/Assets Ratio/ % 69.33 57.16 53.52 59.35
Debt/Equity 2.26 1.33 1.15 1.46
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Capital Adequacy FY04 FY05 FY06 FY07
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Paid-up Capital / Total Equity 0.43 0.31 0.22 0.23
Equity/Total Assets 0.31 0.43 0.46 0.41
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Profitability Ratios/ % FY04 FY05 FY06 FY07
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Investment income/Net premiums 23.74 53.13 46.43 32.95
Investment income/Investment assets 17.74 45.46 54.70 30.64
Profit After tax/Net Premium 32.22 60.65 56.63 32.35
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Market Value Ratios FY04 FY05 FY06 FY07
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Earnings Per Share 3.19 6.33 9.58 10.71
Dividends per share 1.50 1.50 2.00 1.50
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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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