Insurance: ADAMJEE INSURANCE COMPANY LIMITED Analysis of Financial Statements December 2004-June 2007
The insurance industry of Pakistan forms a meagre part of the GDP as compared to other nations of the world. With penetration of merely 0.5%, the industry is still in its nascent stage in consequent of lower demand. The concept of insurance in Pakistan is not acceptable on account of many reasons; most prominently being the positioning, marketing and distribution related issues.
Furthermore, the demand for insurance depends on real disposable income of the prospective policyholder, the individual's preference about the need for financial security, economic environment, interest rates, inflation and insurance premium rates; factors which are all missing in the Pakistani scenario. Then the cultural and religious factors also play an integral part.
Pakistan's insurance sector is reaping the benefits of a growing economy coupled with the insurance sector reforms, soaring trade activities, improving per capita income and competition among insurance sector companies, which are driving the current growth in the insurance sector. Moreover, higher interest rates and tax exemption on capital gains also supported the investment income of the companies, which provided further impetus to the insurance bottom line.
The gross premiums and net premiums of the insurance industry have shown an increasing trend, thanks to the better marketing environment. Also, the percentage of gross premium to GDP also showed an increasing trend over the period under assessment. This trend is indicative of growth of insurance penetration in the economy.
At present there are 54 insurance companies out of which 49 companies offer non-life insurance and 5 offer life insurance services. The non-life insurance industry also includes six companies that provide health insurance coverage as well.
Non-life insurance: There is a monopolistic competition within the non-life insurance sector in Pakistan as there are around 49 non-life insurance companies. The promulgation of insurance ordinance in 2000 and subsequent regulatory changes strengthened the regulatory and supervisory infrastructure for NLI companies. For instance, enhancement in paid-up capital requirement improved the equity structure and reduced the number of non-profitable companies.
The non-life insurance sector's profitability has jumped by 17 percent in the 1st half of current year over the same period last year. The demand for auto insurance, marine insurance, and fire insurance augmented owing to availability of consumer financing at low interest rates, unprecedented rise in trade volumes and increased uncertainty due to terrorist attacks in many regions, surge in industrial activity and high growth construction business respectively.
The combined profitability of non-life insurance sector totalled at Rs 3.3 billion during the period under review as compared to Rs 2.8 billion in the last year. However, the structure of the NLI sector is still skewed. The top 5 companies have more than 70 percent in the overall assets and net premium of the sector.
Claim ratio of the sector depicted a declining trend while combined ratio of the sector stood at 79 percent versus 80 percent in 2006. Moreover, expense ratio of the sector stood at the level of last year, ie 18 percent. With the enhancement in the insurance products, further growth is expected in this sector.
Company overview: Adamjee Insurance Company Limited (AICL) was incorporated as a public limited company on September 28, 1960. The primary business of the company is to provide General Insurance at retail and corporate levels. AICL is listed on Karachi and Lahore stock exchanges of the country. The company is also registered with the Central Depository Company of Pakistan Limited (CDC). AICL broadly is involved in underwriting the following classes of businesses:
Retail insurance: Fire, motor, bancassurance Corporate insurance: Engineering, fire, health, livestock, marine, specialized cover, miscellaneous.
AICL has a diversified client portfolio encompassing both retail and corporate levels. The company insures most of the banks. Moreover, it insures petrochemical and complex industrial risks of very high value. The company has a major market share of engineering business in Pakistan. It provides insurance protection to most of the private sector telecommunication industries. It also insures most of the textile mills, sugar mills and cement factories of the country along with covering the energy risks in Pakistan. Foreign concerns entering Pakistan to execute construction, erection or infrastructure development projects are insured by AICL. Also, the company is the principal insurer in Pakistan for kidnap and ransom, professional indemnity, product liability and other specialized lines.
Starting with a paid up capital of Rs 2.5 million, AICL has grown phenomenally to the current paid up capital of Rs 1.022 billion which is the highest amongst all the general insurance companies. AICL enjoys a competitive edge in the insurance industry due its strong asset base, paid up capital, huge reserves, and balanced portfolio mix, steady growth in gross premium and continuous increase in share price at the stock market. All of these attributes place Adamjee Insurance in the top notch of the non-life insurance sector. Based on the amount of assets and total premium, the company can be safely considered as the market leader in non-life insurance with a total share of 42%.
Recent results: The profit after tax of AICL showed an increase of 11% Rs 1.18bn (EPS: Rs 11.56) in 1H07 as compared to Rs 1.06bn (EPS: Rs 10.41) in the same period last year. The net premiums increased by 10.6% during the period under review. This resulted in improvement of underwriting gains by 55.6% to Rs 515m in 1H07 as compared to Rs 331m in the same period last year. This was due to fall in claims and increase in operational efficiency through prudent management of operations. The major contribution to underwriting gains was from motor and fire businesses.
Financial analysis: Over the years, AICL has posted a tremendous growth in its net premiums and gross premiums. The demand for insurance is a function of rising GDP and booming manufacturing and service sector of Pakistan. A substantial contribution in the growth was by the motor insurance policy followed by fire insurance policy. 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 Adamjee Insurance Company Limited 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.
Increase in demand for insurance as discussed earlier consequently boosted the revenue generated from the premiums in FY06. During FY06 fire and motor insurance contributed 37% and 31% towards the total insurance policy portfolio respectively. AICL enjoys the competitive advantage of having a diversified set of insurance policies. Thus, any setback in one revenue source is offset by the other source of premiums.
While the premiums increased on one hand, the claim rate also increased resulting in lower growth in underwriting profits as a percentage of total premiums. The underwriting profits increased at a decreasing rate with the major claims emanating from fire and property damage. The management of AICL is trying to bring down the claim ratio through better risk management and diversification.
Furthermore, the claims for motor insurance are also on a higher side as reflected in higher traffic incidents because of irregularities in traffic management, violation of traffic rules and rising theft cases. AICL 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 Adamjee Insurance 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, AICL has been able to perform well as far as management of expenses is concerned. The high net premium charges against the higher risk have mitigated the effect of higher claims. As a result net loss ratio has posted a declining trend. The expense ratio (as measured by total underwriting expenses including commissions to net premiums) has also registered a declining trend owing to better management and efficiency on part of the company.
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. AICL showed posted declining tendency in combined ratio in FY05. It now hovers around 91% after posting a marked decline in combined ratio in FY06 and indicates that the company is making increased underwriting profit.
Other comprehensive indicator of profitability is the net income margin as a percentage of total premiums. Income margin too has been favorable for the company 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, AICL has overall posted a healthy trend in its profitability measures.
AICL has carried out its major investment in shares of listed companies. The stock portfolio is well diversified encompassing 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. 69% of the company's investment income comes through capital gains and dividend income through long-term holdings, which depicts the unstable nature of AICL's income. On a more holistic note, AICL 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, AICL has been able to reap benefits through high capital gains and dividend income. Consequently, investment income per unit of investment asset has increased tremendously. The dip in the ratio was seen in FY05 and can be attributed to a greater increase in the investment assets most noticeably marketable securities. Investment income as a percentage of net premiums has also shown an increasing trend and substantiates the increasing proportion of returns generated through investment portfolio.
AICL's debt burden has been decreasing as evident from the debt management graph. With better yields and strong market performance, AICL is now diverting its focus on equity financing rather than debt financing. The company intends to expand its operations in Life Insurance and Takaful business and plans to finance these projects by increasing its shareholder base.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. AICL enjoys high capital adequacy ratios owing to increase in paid-up capital requirement, retained earnings from increased profit levels and increased accumulated net surplus. The declining paid-up capital to equity ratio is due to high denominator effect because of the reasons discussed above. Thus, AICL has fulfilled the capital requirements as laid down in the regulatory framework. In fact, it enjoys the highest paid-up capital in the industry and thus enjoys leadership in this regard.
With its aggressive plans, Adamjee Insurance 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 AICL to reap benefits in the stock market. The company's shares are being traded on KSE and LSE at higher P/E multiples and truly reflects investors' confidence in the company.
Budgetary measures and outlook: In the budget 2007-08, the requirement of compulsory re-insurance with Pakistan Reinsurance Company Ltd (PAKRI) has been omitted from the insurance ordinance. Accordingly, non-life insurance companies are free to reinsure from PAKRI or any other foreign company.
Furthermore, tax exemption on capital gain on the sale of Modaraba certificates or listed shares have now been extended up to June 2008 in budget FY08. This augurs well for the insurance sector and will continue to encourage insurance companies to realize capital gains on their equity investments in FY08. This will enable the companies to enhance their equity base, going a long way in supporting the overall growth of insurance business in the country.
Government has also exempted 5% excise duty on health insurance of non-life insurance companies in budget FY08. Nevertheless, the affect will not be substantial since health insurance forms a very small part of the total insurance premiums. Adamjee would be the major beneficiary of this exemption as its share in miscellaneous segment as a percentage of its total gross premium is the highest in the industry by contributing 25% to the total miscellaneous premium.
A new insurance policy is expected in the next few months. This policy will include lots of positive reforms and an incentive package for the insurance sector, in order to boost its penetration level in Pakistan. The penetration level is currently just 0.4% of GDP for non-life insurance, far below than 2.53% in India.
According to the international press, Pakistan is on the front line of the fight against international terrorism because of its proximity to Afghanistan and other alleged sanctuaries of al Qaeda and other dissident groups. Outbreaks of violence in Pakistan itself are fairly common. Some of these have prompted significant insurance losses. Thus, increasingly high instability in the country may pose high risks to AICL in terms of higher claim rates.
The company intends to diversify its product range and wants to incorporate Takaful insurance in its product line. It also plans to enter in the life insurance business. Being the largest company in terms of paid-up-capital, Adamjee would be a strong player in this segment.
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ADAMJEE INSURANCE-KEY FINANCIAL DATA
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Earnings FY'04 FY'05 FY'06
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Rupees in Millions
Gross Premium 5266 6682 7912
Net Premium Revenue 3678 3997 5280
Underwriting Result 74 306 482
Investment Income 494 1147 1515
Profit Before Tax 411 1278 1685
Profit After Tax 327 1163 1577
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Balance Sheet FY'04 FY'05 FY'06
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Rupees in Millions
Paid up capital 826 826 1022
Equity 1387 2426 3788
Investments (Book Value) 2469 3040 4503
Investments (Market value) 5282 6599 8062
Cash & Bank balances 755 1428 883
Total Assets 8005 9182 11139
Total Liabilities 6618 6756 7351
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Operating Performance (%) FY'04 FY'05 FY'06
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Underwriting Profit / 2.02 7.66 9.13
Net Premium
Underwriting Profit / 9.37 17.17 19.15
Gross Premium
Loss Ratio 72.93 62.84 63.54
Expense Ratio 32.46 30.52 27.34
Combined ratio 105.39 93.35 90.87
Return on Assets 4.09 12.67 14.15
Reinsurance Expense/ 43.16 67.18 49.84
Net Premiums
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DEBT MANAGEMENT FY'04 FY'05 FY'06
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Debt/Assets Ratio 82.67 74.93 65.99
Debt/Equity 4.77 2.99 1.94
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Capital Adequacy FY'04 FY'05 FY'06
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Paid-up Capital / Total Equity 0.60 0.36 0.27
Paid-up Capital / Total Assets 0.10 0.09 0.09
Equity/Total Assets 0.17 0.25 0.34
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Profitability Ratios FY'04 FY'05 FY'06
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Investment income/Net premiums 13.42 28.70 28.70
Investment income 15.99 11.55 19.00
/Investment assets
Profit After tax/Net Premium 8.90 29.10 29.86
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Market Value Ratios FY'04 FY'05 FY'06
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Earnings Per Share 3.96 11.00 15.00
Dividends per share - 1.50 4.03
P/E Ratio 16.57 12.04 9.76
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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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