Incorporated in September 1960, Adamjee Insurance is the biggest player in the non-life insurance sector, which, coupled with life insurance, has a meagre 0.7 percent representation in the GDP. However, the company offers the widest range of products which cover fire and property, engineering, health, marine, motor etc. On a Gross Premium Written (GPW) basis, AICL enjoys a market share of 28 percent (end-September 2010).
Over the past few years, the total assets of the company have grown at an annual compounded growth rate of 10 percent. Both the gross and net premiums have grown by about five percent in the last four years. Being the industry leader, AICL benefits from a competitive position arising from a diverse portfolio mix, liquidity and absorbing insurance-related risks. The affiliation with one of the largest banks in Pakistan is a cherry on top, providing AICL with a vast network for bancassurance.
Slower growth in 2010 Although the company's financial position and income statement strengthened during the year under review, the year-on-year growth figures remained under pressure. Return on total assets decreased by 9.4 percent, while profit after tax to gross premium contracted by 19 percent after growing by 12 percent from FY09. The PAT to net premiums concluded an even paltry figure of a drop by 28 percent.
Despite the blues of 2010, this year is expected to produce better results for AICL. The first quarter report ended March 31, 2011 presented an improved image of the company's performance in terms of profit after tax to net premiums and return on total assets.
FY10 remained bearish for the AICL scrip giving a negative return of 36 percent from the start of the year to the end compared to FY09, where the stock gained in value by 24 percent.
Fire and Property, the star contributor For the year ended December 2010, fire and property insurance had the highest share of premiums, about 37 premiums backed by motor insurance factoring 32 percent. Despite being the major constituent, net premiums for fire and property showed a slight drop from FY09 while net claims rose by nine percent mainly due to the havoc wreaked by the floods and the worsening law and order situation in the country.
Net premium green again Gross premiums grew by a healthy 12 percent on a year-on-year basis, a gain of 19 percent from the previous year. However, the net premiums followed with a slow but a steady pace and grew at a CAGR of 5.6 percent from FY07 onwards, showing a year-on-year growth of one percent as compared to a 9 percent slump in the previous financial year (FY09). Net premium retention kept falling since FY08 onwards and was 60 percent for the current fiscal year. Amongst all the products offered by AICL, motor insurance contributed the most to the net premium revenue.
Claims ratio volatile The net claims of AICL grew at a CAGR of 5.4 percent from FY07, falling slightly short of the growth in net premiums for the same period. On a year-on-year basis, the net claims grew by nine percent in the recent year after falling by 14 percent in FY09, while quarterly comparison revealed that net claims grew by 15 percent from Mar-10 to Mar-11.
The net claims ratio remained erratic for the last four years averaging 69 percent. The claims ratio for the recent year end stood at 70 percent having risen by five percent from the previous year. This shows a decline in the underwriting profit to which fire and property insurance chipped in the most this year. The underwriting results increased by 85 percent in FY09, but took a nose dive in FY10 by a staggering 59 percent. However, the first quarter results show a pick up from the negative trend.
Investment income The investment exposure of AICL dropped from 47 percent in FY09 to 40 percent in FY10, whereas it stood at 35 percent for the first quarter-ended Mar-11. A clear majority of 59 percent of the investment is made in equities, of which 66 percent is invested in group companies (mainly in a single associated company, MCB Bank Limited) hence, not so liquid.
This also makes AICL's equity investment portfolio suffer from concentration risk. FY07 onwards, the investments at market value have eroded by 1.3 percent on a CAGR basis due to repressed performance of the stock market.
Liquidity The highly liquid assets of AICL taken as cash and bank balances and short-term investments in marketable securities, net of provision for impairment, showed an increase of 2.7 percent in FY10 on a year-on-year basis. Liquid assets to net claims also dropped from 1.12 times to 1.09 times. Determination of the amount and maturity of net claims is the toughest job for insurance companies. Liquid assets to net claims reveal a true claims payment position of the company.
Way forward Being the largest player in the general insurance sector, AICL has the leeway to insure sensitive projects like Petrochemicals, Energy etc. This should improve the net premiums for the company.
Innovative bankassurance and travel insurance products kept providing a cushion to a subdued performance from some other products within the portfolio. Moreover, since AICL provides insurance cover to key industries like cement, sugar and textile, the deteriorating cash flow position of these sectors might jeopardise the stream of premium payments by these industries posing a risk to the profitability of AICL.
With the onslaught of terrorist activities in the country, AICL introduced separate clauses within various products to provide a cover against it. Despite quantification of terrorist attacks being an intricate science, market leaders like AICL should bring in terrorism insurance as a classified product.
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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