Insurance: ADAMJEE INSURANCE COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004 - 2001 Q 2009
The insurance industry of Pakistan forms a meagre part of the GDP as compared to other nations of the world. With a very low penetration level, 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. 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 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, i.e. 18 percent. With the enhancement in the insurance products, further growth is expected in this sector.
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. It 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 is broadly involved in underwriting the following classes of businesses:
It offers three products in the retail insurance category namely, fire, motor and bancassurance. While for corporate customers it has engineering, fire, health, livestock, marine, specialised cover and miscellaneous insurance coverage options.
AICL has a diversified client portfolio encompassing both retail 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 against kidnapping for ransom, professional indemnity, product liability and other specialised 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 these factors 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%.
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.
INSURANCE INDUSTRY REVIEW
During the last 4 years, gross premium of general insurance companies in Pakistan grew by approximately 15% annually while the penetration of the sector reached 0.4% (Rs 33 billion) of GDP by the end of 2007. The growth in the gross premium was mainly attributable to the decent economic growth during this era.
According to an independent source, the gross premium of the general insurance in Pakistan is projected to end at Rs 35 billion mark in 2008. While this would be a growth of 6% over 2007, insurance penetration is projected to be lower at 0.33% at the end of 2008 versus that of 0.4% a year earlier. The decline in insurance penetration is attributable to the overall economic slowdown, particularly to the bleak auto sector performance.
Undoubtedly, the motor segment has been regarded as the major growth propeller for the insurance sector in the last 5 years. This was mainly attributable to abundance financing facilities and rise in personal income. The growth of the sector, however, remained stagnant in 2008 on the back of subdued car sales and industrial production. Moreover, slowdown in the trade activities amid global economic crisis also affected the marine insurance.
Another problematic factor for insurance companies is increase in the reinsurance rates by the major reinsurance companies in the world. As reported in many international journals the reinsurance companies have increased their rates due to growing demand of reinsurance and changing risk environment.
RECENT PERFORMANCE 1Q09
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RECENT PERFORMANCE
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1Q '08 1Q '09 %Change
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Earnings Rupees in Thousands
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Gross Premium 2,360,219 2,362,610 0.10%
Net Premium Revenue 1,620,179 1,779,964 10%
Net Claims (1,401,901) -1,138,724 -19%
Underwriting Result (175,190) 199,318 214%
Investment Income 342,118 384,927 13%
Profit Before Tax 102,890 480,478 367%
Profit After Tax 88,425 441,444 399%
Earnings per share 0.86 4.32 402%
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The recent performance shows better results as compared to last year. The 2008 was an extraordinary year and 27th December riots had resulted in huge claims for the company. However, this year the operations have normalised and due to low base effect of previous year, the situation looks positive. Gross premiums saw a negligible increase of 0.10% for the period under consideration. The net premium revenue has increased by 10%. The net claims have declined by 19%. The underwriting result shows a profit of Rs 199 million as against loss of Rs 175 million in the same period last year, representing a change of 214%. This is because the claims ratio has reduced from 86.53% in 1Q08 to 63.97% in 1Q09.
The investment income has increased by 13%. This quarter the increase in due to return received on mutual funds (Rs 61,690) and profit on Pakistan Investment Bonds (Rs 1,109). This source of income was missing last year. Also the return on TFCs was 13% greater this time. The return on fixed income securities and dividend income recorded a decline of 37% and 27% respectively. The profit before tax and profit after tax have registered an increase of 367% and 399% respectively. The earnings per share is now Rs 4.32 per share, exhibiting an increase of 402%.
The composition of underwriting result shows the percentage contribution of different policies offered by AICL. Treaty insurance represents reinsurance of AICL with reinsurance companies and is not a policy offered by AICL. Fire and property damage shows the greatest profit (45%) as it incurs lower claims compared to motor insurance (4%). Marine, aviation, and transport insurance make up the second largest portion of the pie of underwriting result with 39% contribution.
Motor insurance contributes maximum to the net premium revenue (51%) while fire and property damage insurance contributes 18%. The claims of marine, aviation, and transport make up 7% of total claims which is the lowest. This shows that the most popular policy of AICL is motor insurance and it is also the least profitable for the company as it incurs maximum claims (57%) with a claim ratio of 38%.
OPERATING PERFORMANCE (FY08)
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POLICIES CLAIMS RATIO
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Marine, Aviation and Transport 4.62%
Fire and property damage 8.01%
Treaty 0.59%
Motor 38.19%
Miscellaneous 12.56%
Total 63.97%
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The gross premium has increased by 8.81% while the net premiums have increased by 35.38% on a y-o-y basis. The total claims incurred have increased by 32.13% on a y-o-y basis. The underwriting result showed a significant increase of 208.4%. The profit after tax has reduced by 73.84% on a y-o-y basis. This is largely due to a decline in investment income by 75.52%. This was due to turbulence at the Karachi Stock Exchange that was at 5,865 points on 31st December 2008 as against 14,075 points on 31st December 2007. The portfolio of AICL comprises the following:
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2008 2007
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Fire 33% 39%
Marine 15% 14%
Motor 38% 33%
Misc. 14% 14%
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The table shows growth in the insurance components volume wise. The figure shows the contribution of the portfolio components in the total gross premium. Both diagrams illustrate a visible increase in the proportion of premiums collected on account of motor policy, which has increased by 5%. A 6% decline in fire policy was observed.
FIRE AND PROPERTY
The gross premiums from this component were Rs 3.4bn in 2008 as against Rs 3.5bn in 2007. The ratio of net claims to net premium revenue is 64% in 2008 as against 93% in 2007. The company earned underwriting profit of Rs 185 million in 2008 as against an underwriting loss of Rs 171 million last year.
MARINE, AVIATION AND TRANSPORT
This segment contributes 15% to the gross premium. The company has underwritten gross premiums worth Rs 1.5 billion in 2008 as against Rs 1.4 billion in 2007. This represents a growth of 8%. The portfolio showed a decline of 53% in underwriting profit which amounted to Rs 161 million in 2008 as compared to Rs 342 million in 2007. Net claim to net premium ratio is 51% as against 32% last year. The underwriting profitability ratio with respect to net premium is 13% against 33% last year. This is mainly because of extraordinary losses incurred this year.
MOTOR
This segment contributes 38% of the total gross premium. The company has underwritten gross premium of Rs 3.9 billion showing a growth of 27% on a y-o-y basis. Net claim to net premium ratio is 73% for current year as well as 2007. The company made an underwriting profit of Rs 86 million as against an underwriting loss of Rs 13 million in 2007. The management has become wary in this segment and has become cautious in the motor claims settlement procedure. This will help lower the claim ratio.
MISCELLANEOUS
The gross premium showed growth of 11%. The gross premium increased from Rs 1.3 billion in 2007 to Rs 1.4 billion in 2008. Net claim to net premium ratio became 82% in 2008 from 81% in 2007. There is an underwriting loss of Rs 65 million in this portfolio against Rs 22 million gain in 2007. This is on account of health in this part of portfolio.
The underwriting profit as a percentage of net premium has increased from 2.15 in 2007 to 4.90 in 2008. This is because the underwriting result increased by 208% while net premium revenue grew by only 35%. The expense ratio has declined from 19.07 in 2007 to 16.17 in 2008. This is because the underwriting expenses grew at a slower rate compared to net premium revenue. The underwriting expenses grew by 14% while net premium revenue showed a growth of 35%. The loss ratio has declined from 70.77 to 69.07 on a y-o-y basis. This is because the total claims incurred grew slower relative to the net premiums. The total net claims incurred posted a growth of 32% which is lower than the growth in net premium revenue of 35%. The combined ratio consequently showed a similar trend. The combined ratio declined from 89% in 2007 to 85% in 2008. This shows that the expenses of the company have gone down. The reinsurance expense to net premium ratio has bounced in 2008. It has increased from 22% in 2007 to 37% in 2008.
The investment income has declined by 76% on a y-o-y basis. This was mainly on account of the poor performance of the Karachi Stock Exchange. The crises at the stock exchange took a toll and culminated into the imposition of a floor at the stock exchange. This had brought trading to a standstill and the investments got devalued. This factor has resulted in a major decline in all investment return related ratios.
The investment income to net premiums has fallen from 81% in 2007 to 15% in 2008. The investment income to investment assets has declined from 55% in 2007 to 14% in 2008. Hence compared to gross premium (growth of 8.81%) the performance of investment income was unsatisfactory. The share of underwriting result in total profit (31% from 3%) has increased than the share of investment income (69% from 97%).
The debt management of the company has improved. The proportion of debt compared to assets and equity has come down. Debt to assets ratio has increased from 59% in 2007 to 54% in 2008. Debt to equity ratio has declined from 145% in 2007 to 120% in 2008. The total equity has grown by10% on a y-o-y basis. The total assets have declined slightly by 1% on a y-o-y basis. However, the major dip was seen in the total liabilities/debt, which was by 9%.
This shows that the company is under leveraged and has expanded its equity base over the years. On the upside, this shows that the company will incur lower interest expense obligations. This will strengthen the company's liquidity position. Moreover, the company now has greater room to raise capital through debt in the future with exceeding the optimal gearing ratio as the capital structure has been modified by rise in equity.
The capital adequacy ratios show an optimistic outlook. The paid up capital to total equity ratio shows a declining trend. The ratio reduced from 0.13 in 2007 to 0.12 in 2008. This shows that the rise in total equity is not due to issuing of additional shares but as a result of reinvested profits from underwriting results and investment income. Paid-up capital to total assets have declined due to an increase in assets.
It reduced from 0.09 in 2006 to 0.05 in 2007 and increased to 0.06 in 2008. This was due to decrease in assets in 2008 by a slight 1%. The equity to total assets has increased over the years. It increased from 0.41 in 2007 to 0.46 in 2008. This is due to greater increase in equity than in assets. The equity has grown by 509% in the period 2004-08 while the total assets have grown by 132% in the same period.
The EPS (earnings per share) of the firm was an impressive Rs 41.09 per share. This has declined to Rs 10.75 per share in 2008. This is largely due to a decline in profit after tax on account of lower investment income this year.
The profit after tax has reduced from Rs 4.2 billion to Rs 1.10 billion - a decline of 74%. The dividend of the firm has reduced consequently. It has declined from Rs 3.3/share to Rs 3.0 per share. The P/E ratio has declined overall but has shown a slight increase this year from 8.72 in 2007 to 9.47 in 2008. This is due to decline in EPS. The market prices have also declined from Rs 358/share to Rs 102/share.
However the decline in EPS was greater that resulted in an overall increase in P/E ratio. On face value P/E ratio indicates good performance of the firm in the future. However, close scrutiny reveals that both earnings and share price has gone down. This could be attributed to extraordinary stock exchange crisis witnessed in the last year. Once this situation improves, the company's performance will improve.
FUTURE OUTLOOK
The enhancement of FED from 5%-10% will have a negative impact on the company's profitability. Moreover, exemption from the tax on unrealised gain from the non-life insurance companies as announced in the budget 2008-2009 will have a positive effect on the bottom-line of AICL. 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 is currently focusing on increasing its underwriting base and improving operations to strengthen the business. The company believes in investing in employees and technology to ensure excellence. Hence it will continue to have an optimistic trend despite global and domestic recession.
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ADAMJEE INSURANCE-KEY FINANCIAL DATA
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FY'04 FY'05 FY'06 FY'07 FY '08
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Earnings Rupees in Millions
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Gross Premium 5266 6682 7912 9379 10205
Net Premium Revenue 3678 3997 5280 5532 7489
Total claims incurred 2683 2472 3355 3915 5173
Underwriting Result 74 306 482 119 367
Investment Income 494 1147 1515 4486 1098
Profit Before Tax 411 1278 1685 4285 1176
Profit After Tax 327 1163 1577 4201 1099
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FY'04 FY'05 FY'06 FY'07 FY '08
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Balance Sheet Rupees in Millions
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Paid up capital 826 826 1022 1022 1022
Equity 1387 2426 3788 7652 8444
Investments 2469 3040 4503 8132 7577
Cash & Bank balances 755 1428 883 954 1724
Total Assets 8005 9182 11139 18766 18545
Total Liabilities 6618 6756 7351 11114 10100
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Operating Performance (%) FY'04 FY'05 FY'06 FY'07 FY'08
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Underwriting Profit / Net Premium 2.02 7.66 9.13 2.15 4.90
Underwriting Profit / Gross Premium 1.41 4.58 6.09 1.27 3.60
Loss Ratio 72.93 62.84 63.54 70.77 69.07
Expense Ratio 32.46 30.52 27.34 19.07 16.12
Combined ratio 105.39 93.36 90.88 89.84 85.19
Return on Assets 4.09 12.67 14.15 22.39 5.93
Reinsurance Expense/Net Premiums 43.16 67.18 49.84 22.18 37.05
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Debt Management FY'04 FY'05 FY'06 FY'07 FY'08
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Debt/Assets Ratio 82.67 73.58 65.99 59.22 54.46
Debt/Equity 477.14 278.48 194.06 145.24 119.61
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Capital Adequacy FY'04 FY'05 FY'06 FY'07 FY'08
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Paid-up Capital / Total Equity 0.6 0.36 0.27 0.13 0.12
Paid-up Capital / Total Assets 0.1 0.09 0.09 0.05 0.06
Equity/Total Assets 0.17 0.25 0.34 0.41 0.46
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Profitability Ratios FY'04 FY'05 FY'06 FY'07 FY'08
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Investment income/Net premiums 13.42 28.7 28.7 81.09 14.66
Investment income/Investment assets 15.99 11.55 19 55.16 14.49
Profit After tax/Net Premium 8.9 29.1 29.86 75.94 14.67
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Market Value Ratios FY'04 FY'05 FY'06 FY'07 FY'08
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Earnings Per Share 3.96 11 15 41.09 10.75
Share price 65.6 137 150.5 358.4 101.8
Dividends per share - 1.5 4.0 3.3 3.0
P/E Ratio 16.57 12.04 9.76 8.72 9.47
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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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