Bank Pakistan's insurance sector is reaping the benefits of a growing economy coupled with the insurance sector reforms, rising trade activities, improving per capita income and competition among the insurance companies, which are driving the current growth in this sector.
Higher interest rates and tax exemption on the capital gains, supported the investment income of the companies which provided further impetus to the insurance bottom line. However, the insurance industry of Pakistan forms a meagre part of the GDP compared to other nations of the world. With penetration of merely 0.5%, the industry is still in its nascent stage in consequent of lower demand.
In terms of asset holdings, the insurance sector is still dominated by public sector entities and lacks dynamism. The ownership structure of the insurance industry is in sharp contrast to the private sector-led nature of the rest of the financial sector.
The insurance industry, comprising of 53 companies, is largely owned and operated by government-based entities. However, the private sector entities in both life and non-life insurance sector have dominated this business with an 86.7 percent share of total premiums of the industry. Despite fewer companies in the life insurance, it accounts for 67 percent of total insurance assets. Concentration of business among the top 10 companies, though still high, reduced by 9.0 percent in 2006, from 91.6 percent of gross premiums in 2005 to 82.6 percent in 2006.
LIFE INSURANCE SECTOR:
For the last couple of years, surge in the economic activity coupled with a favourable 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 87 percent in CY01 to around 75 percent at the end of CY05 in the 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, 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 of three companies namely 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 the 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 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 which awarded the ISO 9001:2000 certification. Presently, EFU Life continues to be the largest private sector life insurance company in Pakistan.
The company has a market share of over 50% of the private sector life premium income. It has a comprehensive range of products, which had been developed after the extensive research of financial services in western countries such as the United Kingdom. These products are designed to meet the varying needs of the company's clients and offer the best in financial services. 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.
FINANCIAL ANALYSIS:
With a focus on exceeding client expectations and through use of innovative technology, EFU Life continued to stay ahead of its competition by providing unmatched products and services to its clients. Due to steps taken during the year, there was an increase in the size and productivity of the sales force. The company intends to continue its focus on increasing the size of its sales force and open more branches to further increase its market penetration. For Group Benefits business, EFU Life's strategy of targeting traditional "employer-employee" groups and diversifying into "bank-customers" groups has resulted in an upward growth trajectory. EFU Life as part of its strategy makes extensive use of technology to gain competitive advantage and provide better value to all its stakeholders.
In 2006, EFU became the first life insurance company in Pakistan to launch a toll-free call centre. This call centre uses state-of-the-art technology to provide clients ready access to their policies' information and EFU Life's client servicing staff. A mobile phone application software was developed in-house and launched in 2006 for the sales force which enables them access to vital business information through their mobile phones by means of an automated short messaging service and GPRS facilities.
Focusing on the needs of its clients, EFU Life continued to design and launch new products during the year. One of the major product launches during 2006 was a flexible unit-linked whole of life product branded "Prosperity for Life", which is targeted towards meeting the evolving financial needs of a family, be it financial protection on premature death, children's education or marriage, retirement income, or saving for any other future financial objective.
RECENT RESULTS:
The company's total premium income increased by 38%, from Rs 2.348 billion in the first nine months of 2006 to Rs 3.238 billion in the corresponding period of 2007. Individual life premium business has continued its upward growth trajectory owing to increase in the size and better productivity of our sales force, and significant contribution from the bancassurance distribution channel. New individual life regular premium income stood at Rs 778 million at the end of the third quarter of the year compared to Rs 499 million for the same period last year, an increase of 56%. Renewal premium income also showed a consistent growth, up by 32% for the same period, mainly due to the sound persistency of the company's operations.
Group Benefits business stood at Rs 884 million as on 30 September 2007 compared to Rs 668 million at the end of first nine months of 2006, an increase of 32%. The company posted a before tax profit of Rs 397 million as at the end of the third quarter this year compared to Rs 265 million in the corresponding period last year, an increase of 49.8%. To cater to the financial planning needs of expatriate Pakistanis, EFU life has partnered with a significant insurance player in the UAE market. This arrangement will not only help the Company to reach out to the non-resident Pakistani population, but will also result in an influx of foreign exchange into the country.
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. As shown in the graph, the upper movement in the premiums persisted in 3Q'07 as well. 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 upwards trend in the gross and net premiums can be attributed to the sharp rise in demand for insurance owing to surge in population and consequently increasing proportion of ageing population.
As 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 FY06. The trend continued in 3Q'07 as well mainly because of the reasons mentioned before.
Return from government securities from 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 and during 3Q'07. Besides high returns in the stock market, this change was primarily driven by 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 Savings 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 FY06 owing to depreciation in the market value of the shares. Thus, investment income to net premiums ratio also declined in FY06 and the trend continued during 3Q'07 as well.
Skewed distribution of investment assets towards the government securities depicts 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 FY05 but increased in the subsequent years. 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.
FUTURE OUTLOOK: 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 the EFU Life will be benefited greatly from this incentive.
Dedicated sales force combined with developments made in the bancassurance distribution channel has enabled EFU Life to garner greater volumes of business, which will be reflected positively in the annual results of FY07. The company focuses to deliver better values to its customers by designing competitive products, providing excellent service, using innovative technology and controlling costs to its clients. All these measures have borne fruit and 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 3Q'07
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Rupees in Thousand
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Gross Premium 1883699 2500098 3338078 3240816
Net Premium Revenue 1719822 2257827 3042316 3102099
Total Claims Incurred 631818 748823 951440 428120
Underwriting Expenses 466248 673230 920399 1143439
Underwriting Result 907027 1267935 1698785 1530540
Investment Income 301222 861892 465565 119568
Profit Before Tax 214830 296214 337769 397181
Profit After Tax 140830 195867 235969 292181
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Balance Sheet FY'04 FY'05 FY'06 3Q'07
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Rupees in Millions
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Paid up capital 165000 210000 300000 500000
Equity 365162 536279 730248 962429
Investments (Book Value) 3689747 5156704 6573206 9314837
Cash & Bank balances 382418 455453 683275 829018
Total Assets 4259061 5968374 7700228 10743505
Total Liabilities 401556 514536 653144 765810
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Operating Performance (%) FY'04 FY'05 FY'06 3Q'07
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Underwriting Profit / Net Premium 52.74 56.16 55.84 49.34
Underwriting Profit / Gross Premium 48.15 50.72 50.89 47.23
Loss Ratio 36.74 33.17 31.27 13.80
Expense Ratio 27.11 29.82 30.25 36.86
Combined ratio 63.85 62.98 61.53 50.66
Return on Assets 3.31 3.28 3.06 2.72
Reinsurance Expense/Net Premiums 9.53 10.73 9.72 4.47
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DEBT MANAGEMENT FY'04 FY'05 FY'06 3Q'07
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Debt/Assets Ratio 9.43 8.62 8.48 7.13
Debt/Equity 1.10 0.96 0.89 0.80
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Capital Adequacy FY'04 FY'05 FY'06 3Q'07
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Paid-up Capital / Total Equity 0.45 0.39 0.41 0.52
Equity/Total Assets 0.09 0.09 0.09 0.09
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Profitability Ratios FY'04 FY'05 FY'06 3Q'07
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Investment income/Net premiums 17.51 38.17 15.30 3.85
Investment income/Investment assets 8.16 16.71 7.08 1.28
Profit After tax/Net Premium 8.19 8.68 7.76 9.42
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Market Value Ratios FY'04 FY'05 FY'06 3Q'07
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Earnings Per Share 6.71 6.53 7.87 5.84
Dividends per share 0.91 1.17 1.40 1.20
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