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 between the insurance 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.
The gross premiums and net premiums of the insurance industry have shown an increasing trend, thanks to the better marketing environment. Also, the percentage of gross premium to GDP also showed an increasing trend over the period under review. This trend is indicating the growth of insurance penetration in the economy.
NON-LIFE INSURANCE INDUSTRY: There is a monopolistic competition within the non-life insurance sector in Pakistan as there are around 52 non-life insurance companies. The promulgation of insurance ordinance in 2000 and subsequent regulatory changes strengthened the regulatory and supervisory infrastructure for NLI companies.
For instance, enhancement in paid-up capital requirement improved the equity structure and reduced the number of non-profitable companies. The non-life insurance sector's profitability has jumped by 17 percent in the 1st half of 2006 over the same period last year.
The demand for auto, marine, and fire insurance augmented owing to availability of consumer financing at low interest rates, unprecedented rise in trade volumes and uncertainty due to terrorist attacks in many regions, surge in industrial activity and high growth construction business respectively.
COMPANY OVERVIEW: Established in 1953, NJI has secured a place among the "Big Three" Pakistani insurance companies in terms of gross direct premium and financial base. Following the Adamjee and EFU, the company has a total share of 6% non-life insurance sector.
NJI is listed on Karachi and Lahore stock exchanges. Major shareholders include Aga Khan Fund for Economics Development and Hashoo Group. In 2003, NJI became the first Pakistani insurance company to acquire a foreign company when it took over the Pakistan operations of Commercial General Union.
Together with AKFED, NJI also acquired majority control of CU Life Assurance Company of Pakistan Ltd. NJI maintains its diversity through underwriting all classes of general insurance including fire, marine, motor, engineering, health and general accidents.
It not only offers wide risk coverage, but also provides related risk management services delivered by highly qualified and experienced risk managers. From auto financing to personal loans, mortgages to plastic cards, and trade finance to capital investment finance, NJI has the customized solutions to secure entire operations.
Offering a broad spectrum of services available, NJI's client-base comprises prominent national and multinational corporations operating in pharmaceutical, chemical, textile, cement, services (hospital and hotels), oil and energy, manufacturing, FMCG, engineering, banking and financial sectors.
As pioneers in Group Health Insurance, it continues to develop new, flexible and customized plans to suit the diverse need of its many blue chip Pakistani and multinational clients. NJI has an extensive and dynamic branch network in all the major cities and towns of Pakistan that guarantees prompt service at customer's doorstep.
The company prides itself in long-standing reinsurance arrangements and relationship with internationally renowned reinsurers such as Swiss Re, Munich Re, Lloyds, Hannover Re and Mitsui Sumitomo Re. The company is also supported by internationally acclaimed reinsurance brokers including AON Group, Willis, Marsh and UIB.
RECENT RESULTS, 1Q 2008: Despite the economic slow down, the company's net premium increased by more than 14% in 1Q'08. The premium written is lower owing to a 95% decrease in the liability class of business. All other classes have grown satisfactorily. Except fire, all other lines of business have posted satisfactory profits.
The insurance industry has seen unprecedented fires in the first quarter of 2008, so much so that major fire losses in this quarter alone add up to 50% more than major fire losses in the whole of 2006 or 2007. NJI has been impacted by this extraordinary spate of fires and the loss in this line of business has resulted in an overall underwriting loss of Rs 70 million.
The investment income has decreased to Rs 73 million (2007: Rs 122m) as no capital gains were realized from sale of shares. Return on bank deposits has also declined to Rs 26 million from Rs 32 million in 2007 owing to a reduction in bank rates. Rental income has increased to Rs 21 million from Rs 12 million.
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2008 2007
31st March 31st March
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(Rupees in million)
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Premium written 922 1,110
Net premium revenue 490 430
Underwriting result (70) 24
Investment income 73 122
Profit before tax 7 149
Profit after tax 10 126
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The demand for insurance is a function of rising GDP and booming manufacturing and service sector of Pakistan. Over the years, NJI has posted a tremendous growth in its net premiums and gross premiums. A substantial contribution in the growth was primarily by the motor insurance policy followed by marine aviation and transport insurance policy.
The consumer finance explosion in the last four or five years has helped the motor insurance industry to thrive while enhancing the demand for cars. Banks that are offering car finance loans have put together special deals with insurers for their customer base.
The growth in the net premium in marine business of NJI is attributable to the overall growth in the exports and imports of Pakistan in the current period. Fire and property damage insurance is also on the rise in consequent of a surge in the construction of shopping centers, residential properties etc and therefore has provided ongoing opportunities for insurers.
Furthermore, the building of residential properties for a growing middle class and their subsequent insurance is being encouraged by an increase in loan facilities from banks.
Increase in demand for insurance as discussed earlier consequently boosted the revenue generated from the premiums in FY06 and FY07. NJI enjoys the competitive advantage of having a balanced and diversified set of insurance policies. Thus, any setback in one revenue source is offset by the other source of premiums.
While the premiums increased on one hand, the claim rate also increased resulting in lower growth in underwriting profits as a percentage of total premiums.
The claim rate sharply increased in FY07 bringing down the underwriting profits to a negative level with the major claims emanating from fire and property damage for the same reason as discussed before.
Further, the claims for motor insurance are also on a higher side as reflected in higher traffic incidents because of irregularities in traffic management, violation of traffic rules and rising theft cases.
The best policy for NJI is marine insurance as the claim rates are on the lower side while the high risk attached with, enables the company to fetch higher premiums. In the motor insurance, the higher premiums have been offset by the high proportion of claims coming from the policyholders.
An upsurge in the total claims, most noticeably the property claims, has taken its toll in that the expense ratios for NJI have worsened in FY07. The high net premium charges in FY07 were unable to mitigate the effect of a rise in the claim rate and other expenses. As a result net loss ratio has posted an increasing trend.
The expense ratio (as measured by total underwriting expenses including commissions, to net premiums) however registered a rising trend till FY06 owing to higher expenses. It then declined in FY07 in consequent of a lower reinsurance expenses probably due to the exemption from the compulsory reinsurance from Pak Reinsurance and better avenues NJI now has for reinsuring its premiums.
The combined ratio is the sum of loss ratio and expense ratio. It is a measure of insurer profitability, which does not consider investment income and takes into account only the income generated by core business of the insurance company. NJI showed posted rising tendency in combined ratio on the account of rising expense ratio. It now hovers around 100% and indicates that the company needs to further cut down on its expenses.
Another comprehensive indicator of profitability is the net income margin as a percentage of total premiums. Income margin too has declined as a result of lower income coming from investment portfolio and high claim rate and other expenses. Lower capital gains worsened the bottom line of the company.
NJI has carried out its major investment in shares of listed companies. The stock portfolio is well diversified encompassing shares of both volatile and non-volatile sectors. Since the stock market of Pakistan is a characteristic of changing political and international scenarios, market risk is pervasively high for the company.
Major portion of the company's investment income comes through non-trading investment, and dividend income through long-term holdings, which depicts the unstable nature of NJI's income. On a more holistic note, NJI has a well-diversified investment portfolio with all three modes of generating income namely dividend income, interest income and income from capital gains.
With the stock exchange posting a bullish trend over the years, NJI has been able to reap benefits through high capital gains and dividend income. Consequently, investment income per unit of investment asset increased tremendously in FY06. Investment income despite, shows a rising trend but its growth in FY06 is offset by a much higher growth in net premiums thus causing their ratios to decline in FY06.
Investment income decreased in 2007 by Rs 35 million in consequent of lower capital gains realized from the sale of shares. Income from bank deposits increased by Rs 31 million and rent by Rs 25 million. Lower capital gains owe much to the unstable economic conditions and fluctuating stock market during the period under review.
NJI's debt burden decreased till 2006 as evident from the debt management graph. With better yields and strong market performance, NJI is now diverting its focus on equity financing rather than debt financing.
However, the debt ratios increased in FY07 as a result of sudden shift in debt burden. The financial strength of the company to service its debt remains strong though. PACRA and JCR-VIS reaffirmed the AA rating of NJI's financial strength. This shows the strong capacity to meet contact obligations.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. NJI enjoys high capital adequacy ratios owing to increase in paid-up capital requirement, retained earnings from increased profit levels and increased accumulated net surplus.
The declining paid-up capital to equity ratio is due to high denominator effect because of the reasons discussed above. Thus, NJI has fulfilled the capital requirements as laid down in the regulatory framework.
With its aggressive plans, NJI is well positioned to reap the benefits of the rising insurance market so as to augment its market share. Besides, the company's equity base and balance sheet footing is also getting stronger. This in turn is assisting it to reap benefits in the stock market. The decline in EPS and DPS in FY07 can again be attributed to the political turmoil following the assassination of former prime minister, Benazir Bhutto.
FUTURE OUTLOOK: Political uncertainty will continue to clog the economy. This will intensify the price competition between the major players of the insurance industry. NJI however, claims to be well equipped by focusing on high-tech areas.
According to the international press, Pakistan is a frontline state for fighting against international terrorism because of its proximity to Afghanistan and other alleged sanctuaries of al Qaeda and other dissident groups. Outbreaks of violence in Pakistan itself are fairly common. Some of these have prompted significant insurance losses. Thus, increasing instability in the country may pose high risks to NJI in terms of higher claim rates.
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NEW JUBILEE INSURANCE- KEY FINANCIAL DATA
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Earnings FY'04 FY'05 FY'06 FY'07
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In Rupees
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Gross Premium 1,404,000,000 1,737,000,000 2,571,883,000 3,430,000,000
Net Premium Revenue 639,810,000 917,120,000 1,486,429,000 1,818,775,000
Total Claims Incurred 392,700,000 554,260,000 887,587,000 1,413,733,000
Underwriting Expenses 187,580,000 293,250,000 499,166,000 405,432,000
Underwriting Result 67,570,000 69,600,000 99,676,000 -207,033,000
Investment Income 151,860,000 487,250,000 690,178,000 599,208,000
Profit Before Tax 271,980,000 614,410,000 936,793,000 575,041,000
Tax 65,840,000 58,210,000 95,060,000 13,415,000
Profit After Tax 206,140,000 556,200,000 841,733,000 588,456,000
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Balance Sheet FY'04 FY'05 FY'06 FY'07
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In Rupees
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Paid up capital 318,430,000 366,193,000 439,432,000 549,290,000
Equity 747,410,000 1,193,180,000 2,034,251,000 2,411,663,000
Investments (Book Value) 855,830,000 1,071,853,000 1,261,854,000 1,955,892,000
Cash & Bank balances 608,220,000 862,120,000 1,686,561,000 1,680,625,000
Total Assets 2,436,730,000 2,785,390,000 4,376,785,000 5,932,706,000
Total Liabilities 1,689,320,000 1,592,210,000 2,342,534,000 3,521,043,000
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Operating Performance (%) FY'04 FY'05 FY'06 FY'07
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Underwriting Profit / Net Premium 10.56 7.59 6.71 -11.38
Underwriting Profit / Gross Premium 4.81 4.01 3.88 -5.93
Loss Ratio 61.38 60.43 59.71 77.73
Expense Ratio 29.32 31.98 33.58 22.29
Combined ratio 90.70 92.41 93.29 100.02
Return on Assets 8.46 19.97 19.23 9.92
Reinsurance Expense/Net Premiums 119.44 89.40 73.02 91.89
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
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Debt/Assets Ratio 69.33 57.16 53.52 59.35
Debt/Equity 2.26 1.33 1.15 1.46
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Capital Adequacy FY'04 FY'05 FY'06 FY'07
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Paid-up Capital / Total Equity 0.43 0.31 0.22 0.23
Equity/Total Assets 0.31 0.43 0.46 0.41
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Profitability Ratios FY'04 FY'05 FY'06 FY'07
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Investment income/Net premiums 23.74 53.13 46.43 32.95
Investment income/Investment assets 17.74 45.46 54.70 30.64
Profit After tax/Net Premium 32.22 60.65 56.63 32.35
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Market Value Ratios FY'04 FY'05 FY'06 FY'07
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Earnings Per Share 3.19 6.33 9.58 10.71
Dividends per share 1.50 1.50 2.00 -
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