Adamjee Insurance Company Limited

Adamjee Insurance Company Limited (KSE: AICL) is the second largest player in Pakistan's non-life insurance sector and one of the six insurers that make the KSE-100 list. In terms of premium revenue and profits, only EFU General surpasses AICL. The top three players in the non-life space - EFU General, Adamjee and Jubilee General accounted for 57 percent of the (non-life) sector's total gross premiums in 1H15.

AICL, which accounts for 18 percent of non-life premiums (1H15), was incorporated as a public limited company in 1960. The firm has presence in Pakistan as well as UAE. Its key operating segments include Fire and Property damage, Marine, Aviation and Transport, Motor, and Accident and Health - the latter two being its favourites. Pakistan hasn't been an ideal market for insurers, scarred by alarmingly low insurance penetration rates. The non-life sector in particular has a close link to the economic growth, which hasn't been particularly eye-catching lately. However, the emergence of new distribution channels in the past couple of years has helped to add steam to the sector.

Recent Performance

In the past two years, Adamjee's financial performance began to show promise after stagnation of premiums in CY10 and CY11 and a sizeable decline in CY12. In the recently concluded CY15, Adamjee reported a stellar 23 percent increase in net premium revenue to Rs 7.7 billion. In comparison, the overall non-life sector has lately been growing at an average annual pace of around seven percent.

The general insurer produced commendable results in both Pakistan and UAE in 2015. The growth of business in the home (and larger) market, however, was outpaced by that in the Middle Eastern country. With premiums rallying 46 percent and a loss turning into profits in the latter in UAE operations, offshore success was a major part of Adamjee's upbeat performance last year. In Pakistan, the company's premiums rose 16 percent to Rs 5.5 billion and profits climbed 33 percent to Rs 2.7 billion.

Adamjee's top grossing segment continues to be motor insurance. In the previous year, it accounted for nearly half of the premiums but a lower share in claims. Accident and health insurance came in at second in terms of premiums, but after deducting claims, commission and expenses, it resulted in an underwriting loss for the firm.

Over the past few years, claims have declined as a percentage of premiums at Adamjee. From CY12 to CY15, the ratio has come down from 73 percent to 62 percent. In 2015, growth in claims was significantly short of that in premiums, resulting in a big jump in underwriting results - a measure of core business performance.

In the forgettable CY12, the firm reported an underwriting loss of Rs 412 million. From the lows though, consistent improvement each year took Adamjee to an underwriting profit of Rs 854 million in the recently concluded year. 54 percent of the underwriting income is attributable to the motor insurance segment.

Then there is the income from investment, which is a more volatile component of the income statement as it depends on the performance of securities in the firm's portfolio. In 2015, investment income soared by 17 percent to Rs 2.4 billion, despite sluggish equity market. However, it still declined as a percentage of net premiums year-on-year from 33 percent to 31 percent.

Profitability has also been volatile, but has trended upwards over the past few years. Following a slight dip in CY14, the bottom line expanded 36 percent in CY15 to Rs 2.6 billion. A 131 percent gain in underwriting income helped the margins climb up rapidly last year.

Courtesy of sub-par operational performance, Adamjee's balance sheet shrank in CY11. However, it has been all green since then. The firm's investment portfolio (at book value) is worth Rs 15.4 billion out of total assets of Rs 32.3 billion. Cash and bank deposits haven't deviated much over the years and stood at Rs 2.9 billion.

Stock Performance and Outlook

An impressive rebound by Adamjee from its 2011-12 woes has led the stock to outperform the market in each of the past three years with gains of 63 percent, 34 percent and five percent, respectively. In CY16 to date, the stock is in red, and it currently trades at around Rs 54 apiece.
The insurance sector in general has had a good run lately and is backed to continue on its upward trajectory. The development of new distribution channels has aided the cause of insurers and will continue to do so. Window Takaful operations are still new to insurers' arsenal and will prove to be accretive over the next few years. Also, economic development and massive projects like CPEC further expands the earning potential for non-life insurers in the country.