Launched in 1942, Habib Insurance falls under the umbrella of Habib Group. From a paid-up capital of Rs2.5 million at the time of its onset, the company now enjoys a strong paid-up capital of nearly Rs619 million. This gradual increase in the paid-up capital has been achieved with the issue of bonus shares. At this level, the company does not only meet the required adequacy level as laid down by SECP (the regulator), but it is also exceeds the regulatory requirement by over two times.
Backed by an adequate capital adequacy level, the company also enjoys reinsurance arrangement with leading reinsurers including Hannover Re, Scor Re, Korean Re, Trust Re, Best Re and Pakistan Reinsurance Co Ltd
Industry structure - big players are the rulers!
Despite having nearly 40 non-life insurers (including takaful operators) existing in the industry, the non-life sector is highly dominated by top three players, namely EFU General, Adamjee Insurance and Jubilee General Insurance, who retain approximately 58 percent market share, according to the latest statistics published by Insurance Association of Pakistan. The market share of remaining smaller players is sparse and hovers in the range of 0-4 percent on an individual basis.
Talking about Habib Insurance specifically, it is ranked among the mid-sized insurance firms with premium contribution of nearly 2 percent to the industry, as per IAP statistics.
Reviewing the five-year financial performance:
By now, it is no secret that the company has been struggling with subdued growth in premiums for the past three years. Although, premiums have been growing but the pace has slowed down significantly and now hovers in single-digit territory. Perhaps, this is attributable to increasing competition among insurers and the industry dominance by large players. This has made it harder for smaller players to strengthen their prominence and footing in the industry.
However, the good feature is that the company is managing its claims well as depicted by its sliding claims ratio since 2011. Subsequent touching a high of 55 percent in 2011, the claims ratio has dropped to its lowest level of 48 percent in 2014 since then. It seems like the company is focusing more on cleaning its books than to build its premiums. This may well be a sensible approach. It's because keeping a qualified portfolio is more important than to adopt an aggressive lending drive aimed at expanding premiums as the later runs the risk of intensifying claims expenses at a much faster pace, which in turn hurts profitability.
Despite muted growth in top line, profitability has kept on growing. In this regard, 2014 marked the highest profitability level of Rs260 million ever since 2008. Bulk of the contribution to bottom line comes from its investment portfolio in the form of dividends and capital gains. In 2014, income from dividends and capital gains formed over 90 percent of the total investment income of the firm.
Strong income from the equities is the inevitable outcome of its investment portfolio's inclination towards equities. However, in 2014, the company slashed the share of equities in its portfolio to 63 percent from 80 percent in the preceding year. Clearly, this has been done in the wake of monetary easing that is helping investors to churn healthy revaluation gains on their government securities. The firm achieved this by raising its holding in PIBs and money market funds to 36 percent in 2014 from 18 percent in the preceding year. Indeed, it was a smart move as it also helps in reducing the volatility arising from capital gains and dividends. Mind you, this doesn't mean that the volatility has been removed completely; it has between equities and fixed income now.
With improving income flows just been reduced by slashing the exposure in equities! Nonetheless, the portfolio position seems well-balanced from its investment portfolio, its investment income ratio surged to 56 percent - the highest level spotted since 2008.
Market performance:
Company's alteration in the portfolio mix and book cleaning efforts also incited investors on local bourse as its stock price has rallied by 11 percent since January 2014 to Rs17.05 based on yesterday's close. However, the stock is still underperforming the broader market which has given a return of 20 percent during the same period.
Way forward for Habib Insurance:
In our last brief recording on Habib Insurance published on July 23, 2014 in this column, it was suggested that the company should build up its holding in government securities as increasing PIB yields at that time presented a lucrative opportunity to lock-in higher yields ahead of the downfall. The company rightly followed the recommendation and in the case of interest rates shedding further, additional revaluation gains will provide some support to the investment income.
Now, while continuing its book-cleaning exercises, the next step for the firm should be to boost its premiums. This can be done by expanding the distribution channels so as to increase visibility and outreach in the industry. Joining hands with banks and telecommunication companies can be one of the many ways in this regard. Nonetheless, innovation and advancement at the technological front remains critical. And Habib Insurance has the capital base available to capitalize on that front!
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Habib Insurance - Financial Highlights
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Rs (mn) CY12 CY13 CY14
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Net premium revenue 436 439 459
Net claims -230 -215 -221
Expenses -137 -151 -175
Underwriting result 64 74 87
Net investment income 204 240 257
General and administrative expenses -67 -54 -59
Profit before tax 210 271 293
Profit after tax 195 245 260
Net claims ratio 53% 49% 48%
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Source: Company accounts
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