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.
Moreover, higher interest rates and tax exemption on capital gains also supported the investment income of the companies, which provided further impetus to the insurance bottom-line. However, the insurance industry of Pakistan forms a meager part of the GDP as compared to other nations of the world. With penetration of merely 0.5%, the industry is still in its nascent stage.
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.
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Assets Structure of the Insurance Industry
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Share in percent
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CY01 CY02 CY03 CY04 CY05
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Life 73.7 73.7 71.4 71.0 70.6
State owned 71.6 71.2 67.7 66.8 65.5
Private 2.0 2.5 3.7 4.2 5.1
Domestic 1.1 1.5 2.4 2.6 3.1
Foreign 0.9 1.0 1.3 1.6 2.0
Non Life 23.4 23.1 24.5 25.2 26.6
State owned 9.9 9.4 9.3 8.6 8.4
Private 13.5 13.7 15.2 16.6 18.2
Domestic 12.7 12.8 14.2 15.9 17.4
Foreign 0.8 0.9 1.0 0.6 0.8
Reinsurance 2.9 3.2 4.1 3.8 2.8
State owned 2.9 3.2 4.1 3.8 2.8
Total Assets
(billion Rs) 113.4 129.8 151.4 174.6 201.7
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Source: Annual audited reports of insurance companies.
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Life Insurance Sector: During the last couple of years, a surge in the overall economic activity coupled with a favorable interest rate environment and strengthening of the regulatory framework have helped the life insurance sector to grow. Specifically, during CY01-05, the gross premium of the LI sector recorded a CAGR of around 22.2 percent.
This robust growth was broad-based as both individual as well as group insurance businesses saw double-digit CAGR of 21.9 percent and 22.8 percent, respectively, during CY01-05. Exceptional performance of individual life gross premium was spurred by growth in both new as well as renewal businesses. Moreover, investment-linked products witnessed an encouragingly sharp growth in CY01-05.
The market structure of the LI sector witnessed transformations during CY01-05. The share of the public-owned State Life Insurance Company (SLIC) has declined from almost 87 percent in CY01 to around 75 percent at the end of CY05 in the overall LI sector gross premium. While the increased paid-up capital requirement forced the private insurance companies to launch and aggressively market new-innovated insurance products, increasing demand due to GDP growth provided them the enabling environment. As a result, the market share of private insurance companies, both local and foreign, almost doubled during the CY01-CY05 period. Bancassurance, a relatively new concept in Pakistan, also received considerable promotion and can be an opportunity for the life-insurance companies.
Overview of EFU Group: EFU is the only insurance group in Pakistan to provide a full range of insurance services. This includes life, health and general insurance. The group comprises three companies - EFU General Insurance Limited, EFU life Assurance Limited and Allianz EFU Health Insurance Limited. EFU's strength lies in its close and long-term (over 50 years) relationship with its main re-insurer, Munich Re of Germany, one of the largest reinsurance companies in the world. Another unique feature of EFU is a voluntary review mechanism by the companies to keep under review their operations by professionals of international repute. This independent review enables the company to keep abreast of international changes in the industry and ensures that the managements adopt the best international practices.
Company overview: EFU Life Assurance Ltd was incorporated in November 1992 as the first private sector life insurance company after GoP reopened the life insurance business to private sector organizations. In early 1993, EFU Life commenced writing group life insurance business and by March 1994 the company began writing its individual life business. A team of professionals with extensive life insurance experience in the United Kingdom manages EFU Life, enabling the company to establish a professional culture unique amongst life insurance business in Pakistan. EFU Life has a growing branch network of 80 branches throughout the country (8 new branches were added in 2006) with 1,600 personnel in its sales force and around 150 personnel at its main offices in Karachi and Lahore. The company employs 5 full time actuaries and also has an active involvement of one of the leading actuarial firms in the country. EFU Life is the first life insurance company in Pakistan to be awarded the ISO 9001:2000 certification. Today, EFU Life continues to be the largest private sector life insurance company in Pakistan.
The company enjoys a market share of over 50% of the private sector life premium income.
EFU LIFE IS THE PIONEER IN INTRODUCING THE FOLLOWING PRODUCTS AND FEATURES IN PAKISTAN:
-- Unit-linked products
-- Critical illness products
-- Education planning product
-- Inflation protection benefit
-- Tax qualified pension plans
-- Extended critical illness product (covering 379 medical conditions)
Group insurance coverage options: Death, group accidental death benefit, group accidental disability benefit, fortnightly income benefit, group natural disability benefit, group terminal illness benefit, group critical illness cover, group loan insurance, group provident fund insurance.
Bancassurance: Mortgage insurance, credit card insurance, personal loans/revolving finance insurance, individual insurance.
EFU Life has maintained its growth trajectory by posting a 34% increase in the net premiums in FY06. This includes both individual life insurance and group life insurance. However, individual life insurance constitutes the major operating business for the company. Group benefits business showed an excellent growth of 52% with gross premium income of Rs 708 million in 2005. Both group credit life business (sold to bank customers' groups) and traditional employer-employee groups contributed to this growth. This upward trend in the gross and net premiums can be attributed to sharp rise in demand for insurance owing to a surge in population and consequently an increasing proportion of ageing population.
While the demand for insurance rose, claim rate also increased as a result. Operating performance of EFU has been so far praiseworthy. The underwriting profit increased over the years but on a decreasing rate. As a result, underwriting profit to net premium ratio declined slightly in FY'06.
Return from government securities forms a major part of the company's investment income. Investment in financial instruments dominates the asset composition of EFU Life as well apart from being the significant portion of all life insurance companies. Dividend income and capital gains also form an earning source for the company. While government securities continue to have a disproportionately larger share, the exposure to stock market (as percent of overall investment portfolio) surged at the end of FY'06.
Besides high returns in the stock market, this change was primarily driven by a sharply declining yield and scarcity of long-term government securities and their declining return. While corporate companies, including insurance companies, were banned to invest in National Saving Schemes (NSS) since March 2000, supply of other long-term securities, such as TFCs, has also declined from 2003 onwards. These developments, in turn, forced life insurance companies to invest relatively more in stock markets. Net investment income declined in FY'06 owing to depreciation in the market value of the shares. Thus, investment income to net premiums ratio also declined in FY'06.
Skewed distribution of investment assets towards the government securities depicts a lower risk for the company. Therefore, the stream of income for EFU life is fixed income while the increasing share of the stocks and shares will add to the volatility in the income stream.
Aggressive marketing and distribution strategies have affected the expenses of the company and thus the expense ratio. Hence, the expense ratio has declined over the years. Loss ratio as measured by total claims to net premiums has declined as a result of higher than proportionate increase in the net premiums. The combined ratio thus declined and signifies profitable business on part of the company. Combined ratio takes into account only the income generated by core business.
EFU Life is self-sufficient in its capital requirement. Equity to assets ratio has been consistently one over the years under discussion. This signifies sufficient capital for one unit of assets. Paid up capital-equity ratio declined in FY'06 but increased in FY'06. The former was due to a more than proportionate increase in equity owing to higher general reserves and accumulated surplus, while the latter increase in the ratio was followed by an increase in the paid up capital by almost 43%.
Reliance on debt for financing has decreased marginally over the years under discussion. The company is efficient in managing its debt while the lower debt burden poses lower interest rate risk to the company.
BUDGETARY MEASURES AND OUTLOOK: In the budget '08, the requirement of compulsory re-insurance with Pakistan Reinsurance Company Ltd (PAKRI) has been omitted from the insurance ordinance. Accordingly, non-life insurance companies are free to reinsure from PAKRI or any other foreign company. Furthermore, tax exemption on capital gains on the sale of Modarabah certificates or listed shares have now been extended up to June 2008 in Budget FY08. This augurs well for the insurance sector and will continue to encourage insurance companies to realize capital gains on their equity investments in FY08. This will enable the companies to enhance their equity base, going a long way in supporting the overall growth of insurance business in the country.
Duty on Life and health insurance policies has been waived mainly with a view to promote the life and health insurance business in Pakistan. Thus, EFU Life will benefit greatly from this incentive. A new insurance policy is expected in the next few months. This policy will include positive reforms and an incentive package for the insurance sector, in order to boost its penetration level in Pakistan.
Dedicated sales force combined with developments made in the bancassurance distribution channel will enable EFU Life to garner greater volumes of business in the forthcoming years. It also strives to deliver better value to customers by designing competitive products, providing clients excellent service, using innovative technology and controlling costs. All these measures have borne fruit as indicated in the growth of premiums and sound business persistency.
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EFU LIFE INSURANCE-KEY FINANCIAL DATA
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Earnings FY'04 FY'05 FY'06
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Rupees in Thousand
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Gross Premium 1883699 2500098 3338078
Net Premium Revenue 1719822 2257827 3042316
Total Claims Incurred 631818 748823 951440
Underwriting Expenses 466248 673230 920399
Underwriting Result 907027 1267935 1698785
Investment Income 301222 861892 465565
Profit Before Tax 214830 296214 337769
Profit After Tax 140830 195867 235969
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Balance Sheet FY'04 FY'05 FY'06
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Rupees in Millions
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Paid up capital 165000 210000 300000
Equity 365162 536279 730248
Investments (Book Value) 3689747 5156704 6573206
Cash & Bank balances 382418 455453 683275
Total Assets 4259061 5968374 7700228
Total Liabilities 401556 514536 653144
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Operating Performance (%) FY'04 FY'05 FY'06
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Underwriting Profit /
Net Premium 52.74 56.16 55.84
Underwriting Profit /
Gross Premium 48.15 50.72 50.89
Loss Ratio 36.74 33.17 31.27
Expense Ratio 27.11 29.82 30.25
Combined ratio 63.85 62.98 61.53
Return on Assets 3.31 3.28 3.06
Reinsurance Expense/
Net Premiums 9.53 10.73 9.72
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DEBT MANAGEMENT FY'04 FY'05 FY'06
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Debt/Assets Ratio 9.43 8.62 8.48
Debt/Equity 1.10 0.96 0.89
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Capital Adequacy FY'04 FY'05 FY'06
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Paid-up Capital / Total Equity 0.45 0.39 0.41
Equity/Total Assets 0.09 0.09 0.09
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Profitability Ratios FY'04 FY'05 FY'06
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Investment income/Net premiums 17.51 38.17 15.30
Investment income/
Investment assets 8.16 16.71 7.08
Profit After tax/Net Premium 8.19 8.68 7.76
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Market Value Ratios FY'04 FY'05 FY'06
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Earnings Per Share 6.71 6.53 7.87
Dividends per share 0.91 1.17 1.40
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