Insurance Company: ADAMJEE INSURANCE COMPANY LIMITED - Analysis of Financial Statements Financial Year 2004- Financial Year 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 due to 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 the competition among the 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, ie 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. 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 is broadly involved in underwriting the following classes of businesses:
It offers three products in the retail insurance category namely, fire, motor, and bancassurance. For corporate customers, it has engineering, fire, health, livestock, marine, specialized cover and miscellaneous insurance coverage options.
AICL has a diversified client portfolio encompassing the 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 the cases of kidnapping 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. These entire 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%.
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 to the insurers. Furthermore, the construction of residential properties for a growing middle-class and their subsequent insurance is being encouraged by an increase in the loan facilities from banks.
Portfolio analysis (CY08-09)
Fire and property
The fire portfolio includes engineering and terrorism business. With a gross premium of Rs 3.553 billion (2008: 3.381 billion), this class showed a growth of 5% since the last year. It contributed 35% towards the total gross premium. The underwriting profit amounted to Rs 243 million (2008: Rs 185 million) which increased by 31%. The underwriting profitability ratio is 21% and the combined ratio has improved to 79% as against 88% in 2008. This is mainly due to decrease in claims by 32%.
Marine, aviation and transport
The slowdown in the economy, especially the imports and exports, affected this class of business, which showed a decrease in the gross premium by 25%. This class contributed 11% towards the total gross premium (2008: 15%). The underwriting results of Rs 223 million depicted remarkable increase of 38% over last year.
The underwriting profitability is 23% and combined ratio under this portfolio is 77% as against 87% in 2008. This improvement is mainly attributable to net claims and net commission which decreased by 32% and 29% respectively.
Motor
Motor business constitutes largest portfolio being 36% of total gross premium (2008: 38%) and 51% of total net premium (2008: 50%) of the company. In 2009, the economy faced the liquidity crunch and banks compelled to restrict their lending. As a result, the automobile sector badly affected in the first half of 2009. The decrease in prices by automobile manufacturers from July 2009 improved the situation.
These circumstances had impacted the company and gross premium decreased by 3%. The combined ratio, however, has improved to 94% as against 98% in 2008, due to which underwriting profits amounting to Rs 191.5 million, recorded an increase of 123% over the last year.
Miscellaneous
Miscellaneous business constitutes health, crop and livestock, travel insurance and other businesses. The gross premium amounted to Rs 1.898 billion showing an increase of 32%. This class contributed 18% towards both total gross premium and the total net premium.
Industry results for 2009
The insurance industry grew at a rate of 6% in the CY09, the same rate observed in the last 2 years. However the industry has a lot of room to grow, taking in account the fact that the industry only represents 0.8 percent penetration rate ie insurance premium represent only 0.8 percent, which is the lowest among the comparable countries. The reason for a somewhat low performance can be associated with the emergence of macroeconomic instability since late 2007, turmoil in global financial markets and dislocation of the domestic equity market along with the deteriorating security situation, posed substantial challenges to the sector in 2008.
According to 2009 data, there are 31 general (non-life) insurance companies operating in the market. Approximately 60 percent of the market share is with the top three players, that are:
-- EFU General Insurance Ltd.
-- Adamjee Insurance Ltd
-- IGI Insurance Ltd
For the purpose of analyzing this sector we have selected three top insurance companies in terms of total assets, namely Security General Insurance, New Jubilee Insurance and Premier Insurance.
These six companies out of 31 in total represent 79% of total industry assets, which signals a very high degree of concentration of resources.
Operating performance
The operating performance in terms of under writing profits to net premium, IGI Insurance and Security General show very high ratios of 41% and 29%, compared to other companies that range between 10% to 1%. However a closer look reveals both IGI and Security General actually performed very badly in terms of net premium earnings of just Rs 614 million and Rs 286 million, respectively compared to net premiums as high as Rs 5.5 billion and Rs 6.8 billion of EFU and Adamjee respectively.
Another look into the operating performance of the companies reveals that although EFU performed very well in terms net premium earned, however it was not very lucky in avoiding the claims on its insurance which were as high as 70% of net premium this year. On the other hand Adamjee and New Jubilee were both efficient in terms of ratio of net claims to net premium of 65% and 62% respectively that resulted in savings. The other three did not earn enough net premiums this year and thus net claims were not much either.
Adamjee Insurance displayed great efficiency in terms its management expenses as well keeping it at a very efficient rate of 29% of net premium earned. Other players also kept it controlled between 24% and 69%.
In terms of commission to net premium, there is not much to compare as all the companies have kept it aligned at 7% to 11%.
Profitability ratios
In terms of profit after tax to net premium, IGI securities had the highest ratio of 43%, while Adamjee and New jubilee were next in line with a ratio of 36% and 29% respectively. Although the ratio is a good indicator of performance a closer look is necessary to get a better picture of performance. IGI this year relied heavily on its investment income, which represented 70% of its net premium, thus despite having poor underwriting results, the ratio was still healthy. However IGI's performance in terms of investment income to investment assets wasn't highly admirable with a ratio of only 4%, thus signifying IGI's performance this year both in terms of net premium earned and investment income was dismal.
As can be seen from the graph the best performer of all is clearly Adamjee as all its ratios seem to be balanced, because of which it has the best investment income to investment assets ratio of 23%. EFU, although possessing the same strength as Adamjee in terms of assets, did not live up to expectations, performing low on all accounts. However performance of New Jubilee insurance must applauded with a healthy investment income and net premium.
A much better measure of performance in these circumstances shall be return on assets that shows a much truer picture. Adamjee is best performer with 11% return on assets, and New Jubilee is the second best with 10% while the ratios of all other players are disappointing.
Market value
Adamjee's superiority in the market is evident by the studying the EPS and the share market price, with EPS of Rs 21.71 and share price of Rs 127.5. EFU although stronger that Adamjee in terms of total assets still lags behind in both EPS and share price as its efficiency keeps on declining and so do the future expectations of earnings. Nonetheless performance of NJI must be commended as it only represents 6% of the market but still its share price is comparable to big players such as EFU who represent 24% of the market. Thus going forward there is a huge potential for growth for Adamjee and especially NJI.
Recent performance Adamjee's performance in CY09 was nothing short of spectacular given the context of the industry and struggling economy. The profit after tax, which represented 36% of the net premium, grew by an amazing 124% in CY09. The reason for such fabulous growth in profits was in summary attributed to a rise in investment income and also tremendous efficiency shown in keeping down the expenses.

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Financial Results                 2009         2008

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Total Assets                    21,612       19,004

Equity                          10,781        8,559

Gross Premium Underwritten      10,321       10,205

Underwriting Results               679          367

Investment Income                2,479        1,098

Profit After Tax                 2,434        1,099

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The distribution of revenue in the calendar year 2009 changed from the last year, as contribution of investment income as revenue source increased from 13% to 27%.
Net premium revenue represented a lesser percentage (72%) of total revenue compared to last year when 85% of the total revenue was net premium.
However it must be noted that the sharp increase in investment income over shadowed the fall in premium earned that was 9% lower than the last year. The reason for higher investment income this year can be attributed to the increased investment in one-year treasury bills and also to the fall in provision made for impairment in value of investment.
Nevertheless the decrease in net premium cannot be ignored as it represents the greatest chunk of revenue Admajee. However the slow growth in the overall industry and present economic turmoil has been a primary reason for why Adamjee's net premiums decreased.
Furthermore, as a positive sign, the net claims decreased by 14% due to a much better situation of the country in terms of law and order compared to the last year. This resulted in an 85% improvement in underwriting results this year.
Investment income
The return from available for sale AFS securities contributed entirely to the investment income while there was no return from the held to maturity securities. In available for sale securities the return on both fixed income and TFCs declined by 42.1% and 8.3% respectively. On the other hand the dividend income increased by 6.64% and gain on sale for AFS securities increased by 192.35%. This resulted in increase in net investment income by 99.44%.
Increase in demand for insurance as discussed earlier consequently boosted the revenue generating from the premiums, rose 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 set back in one revenue source is offset by the other source of premiums.
While the premiums increased on the 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.
A thorough study of the financial statements reveals that 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 offset the high proportion of claims coming from the policyholders.
The underwriting profits and the net premiums registered an increase of 55.6% and 10.6% respectively in June 07 as compared to that in June 06. Being a relatively old company, AICL enjoys a large network of clients who trust the service of AICL. This also justifies the increasingly higher growth margins of the company.
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 measure by total underwriting expenses including commissions to net premiums has also registered a declining trend continuing in FY07 as well, 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 underwriting profit. Before that it was paying out more money in claims that it was receiving from premiums.
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.
Now that the tax has been exempted from the capital gains, AICL will be the major beneficiary. 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. However, The increased instability in the country will have a magnified effect on the investment income of AICL since it greatly relies on the returns from investment in KSE, which is undergoing a bearish trend these days.
Investment income per unit of investment asset has increased tremendously over the years. 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.
Adamjee Insurance has decreased its reliance on debt, which is evident from the debt management graph. This augurs well for the company, as the financial risk has been mitigated considerably. With better yields and strong market performance, AICL is now diverting its focus on equity financing. But with the shaky investors' confidence seen these days owing to instability and political turmoil, AICL might have to shift towards debt financing adding to the financial risk for the company as people (both local and foreign investors) are reluctant to invest.
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.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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