The insurance industry of Pakistan forms a meagre part of the GDP as compared to other nations of the world. With a very low penetration level, the industry is still in its nascent stage in consequent of lower demand. The concept of insurance in Pakistan is not acceptable due to many reasons; most prominently being the positioning, marketing and distribution related issues.
Further, the demand for insurance depends on real disposable income of the prospective policyholder, the individual's preference about the need for financial security, economic environment, interest rates, inflation and insurance premium rates; factors which are all missing in Pakistani scenario. The cultural and religious factors also play an integral part.
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. 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 assessment. This trend is indicative of growth of insurance penetration in the economy. 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.
NON-LIFE INSURANCE
There is a monopolistic competition within the non-life insurance sector in Pakistan as there are around 49 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 current year over the same period last year. The demand for auto insurance, marine insurance, and fire insurance augmented owing to availability of consumer financing at low interest rates, unprecedented rise in trade volumes and increased uncertainty due to terrorist attacks in many regions, surge in industrial activity and high growth construction business respectively.
The structure of the NLI sector is still skewed. The top 5 companies have more than 70 percent in the overall assets and net premium of the sector. Claim ratio of the sector depicted a declining trend while combined ratio of the sector stood at 79 percent versus 80 percent in 2006. Moreover, expense ratio of the sector stood at the level of last year, ie 18 percent.
With the enhancement in the insurance products, further growth is expected in this sector. Adamjee Insurance Company Limited (AICL) was incorporated as a public limited company on September 28, 1960. The primary business of the company is to provide general insurance at retail and corporate levels. AICL is listed on Karachi and Lahore stock exchanges of the country. The company is also registered with the Central Depository Company of Pakistan Limited (CDC). AICL broadly is involved in underwriting the following classes of businesses:
AICL offers three products in the retail insurance category namely, fire, motor, and bancassurance. For corporate customers, it has engineering, fire, health, livestock, marine, specialized cover, and miscellaneous insurance cover options. AICL has a diversified client portfolio encompassing both retail and corporate levels. The company insures most of the banks. Moreover, it insures petrochemical and complex industrial risks of very high value. The company has a major market share of engineering business in Pakistan.
It provides insurance protection to private sector telecommunication industries. It also insures textile mills, sugar mills and cement factories of the country along with covering the energy risks in Pakistan. Foreign concerns entering Pakistan to execute construction, erection or infrastructure development projects are insured by AICL. Also, the company is the principal insurer in Pakistan against the kidnapping and ransom, professional indemnity, product liability and other specialized lines.
Starting with a paid up capital of Rs 2.5 million, AICL has grown phenomenally to the current paid up capital of Rs 1.022 billion which is the highest amongst all the general insurance companies. AICL enjoys a competitive edge in the insurance industry due to its strong asset base, paid up capital, huge reserves, and balanced portfolio mix, steady growth in gross premium and continuous increase in share price at the stock market.
All of these place Adamjee Insurance in the top notch of the non-life insurance sector. Based on the amount of assets and total premium, the company can be safely considered as the market leader in non-life insurance with a total share of 42%. Over the years, AICL has posted a tremendous growth in its net and gross premiums. The demand for insurance is a function of rising GDP and booming manufacturing and service sector of Pakistan. A substantial contribution in the growth was by the motor insurance policy followed by fire 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 Adamjee Insurance Company Limited 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 construction of shopping centres, residential properties etc, and therefore has provided ongoing opportunities for insurers. Furthermore, the construction of the residential properties for a growing middle class and their insurance is being encouraged by an increase in loan facilities from banks.
RECENT PERFORMANCE
The operating performance of AICL has improved. The profit after tax has increased by 99% compared to the same period last year. The profit collected from business inside Pakistan amounted to Rs 2.8 billion ie 93.1% of the total profit before tax while the rest was earned through operations outside Pakistan.
The gross and net premium, have both registered an increase of 17% and 33% respectively. However the underwriting result declined by 61% due to an increase in claims of 52%. The PAT has increased the EPS by an impressive 98% signaling sound operating performance of the company. This is largely because investment income has increased by 99%.
==================================================
RECENT PERFORMANCE
==================================================
Earnings 3Q '07 3Q '08 % Change
--------------------------------------------------
Rupees in Millions
--------------------------------------------------
Gross Premium 6,756 7,873 17%
Net Premium Revenue 4,100 5,463 33%
Net Claims 2,556 3,883 52%
Underwriting Result 418 164 -61%
Investment Income 1,467 2,925 99%
Profit Before Tax 1,679 2,954 76%
Profit After Tax 1,543 3,063 99%
Earnings per share 15.10 29.96 98%
==================================================
The analysis shows that the major recipient of premium revenues, expenses and claims is the motor insurance followed by fire and property damage and marine, aviation and transport. Motor insurance contributes 49.68% of the net premium revenue, 54.43% of the net claims incurred and 46.37% of the expenses incurred.
The treaty component of insurance makes up a negligible proportion of the revenue and expenses. The underwriting profits have resulted from marine, aviation and transport, fire and property damage and treaty components while the rest have resulted in loss for the third quarter of FY08.
The composition of the premiums reveals that the greatest amount of underwriting profit was collected from fire and property damage component of insurance policies. This amounted to Rs 175 million, thus making up a significant 38% of the total underwriting profit earned. The net claims of this insurance policy were Rs 644 million. The underwriting profit due to marine, aviation and transport makes the second largest chunk of 29%. The net claims of this policy amounted to Rs 478 million.
The miscellaneous component of insurance policy resulted in the largest net loss. The motor component resulted in a net loss of 12%. This is because the net claims incurred with respect to motor insurance of Rs 2.1 billion were the largest. This together with expenses and commission offset the largest premium of Rs 2.7 billion collected from motor component among other policies and resulted in a net loss.
The provision for doubtful balances for premiums due has increased from Rs 3.2 billion to Rs 3.5billion while provision for doubtful balances for amounts due from insurers and reinsurers has increased from Rs 256 million to Rs 632 million.
INVESTMENT INCOME
The return from available for sale AFS securities contributed entirely to the investment income while there was no return from the held to maturity securities. In available for sale securities the return on both fixed income and TFCs declined by 42.1% and 8.3% respectively. On the other hand, the dividend income increased by 6.64% and gain on sale for AFS securities increased by 192.35%. This resulted in increase in net investment income by 99.44%.
Increase in demand for insurance as discussed earlier consequently boosted the revenue generating from the premiums rose in FY06. During FY06, fire and motor insurance contributed 37% and 31% towards the total insurance policy portfolio respectively. AICL enjoys the competitive advantage of having a diversified set of insurance policies. Thus, any set back in one revenue source is offset by the other source of premiums.
While the premiums increased on the one hand, the claim rate also increased resulting in lower growth in underwriting profits as a percentage of total premiums. The underwriting profits increased at a decreasing rate with the major claims emanating from fire and property damage. The management of AICL is trying to bring down the claim ratio through better risk management and diversification.
Furthermore, 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. AICL has taken strict measures to improve the quality of business and to curtail the claim ratio by improving controls in the motor claims settlement procedure.
A thorough study of the financial statements reveals that the best policy for Adamjee Insurance is marine insurance policy as the claim rates are on the lower side while the high risk attached enables the company to fetch higher premiums. In the motor insurance, the higher premiums have offset the high proportion of claims coming from the policyholders.
The underwriting profits and the net premiums registered an increase of 55.6% and 10.6% respectively in June'07 as compared to that in June'06. Being a relatively old company, AICL enjoys a large network of clients, who trust on its services. This also justifies the increasingly higher growth margins of the company.
Despite an upsurge in the total claims, most noticeably the motor claims, AICL has been able to perform well as far as management of expenses is concerned. The high net premiums charges against the higher risk have mitigated the effect of higher claims. As a result net loss ratio has posted a declining trend. The expense ratio as measure by total underwriting expenses including commissions to net premiums has also registered a declining trend continuing in FY07 as well, owing to better management and efficiency on part of the company.
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. AICL showed declining tendency in combined ratio in FY05. It now hovers around 91% after posting a marked decline in combined ratio in FY06 and indicates that the company is making underwriting profit.
Before that it was paying out more money in claims that it was receiving from premiums. Other comprehensive indicator of profitability is the net income margin as a percentage of total premiums. Income margin too has been favourable for the company as a result of higher income coming from investment portfolio. Higher returns from capital gains have offset the higher claims and expenses in favour of the company.
Thus, AICL overall posted a healthy trend in its profitability measures. AICL has carried out its major investment in shares of listed companies. The stock portfolio is well-diversified encompassing the 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. 69% of the company's investment income comes through capital gains and dividend income through long-term holdings, which depicts the unstable nature of AICL's income.
On a more holistic note, AICL has a well-diversified investment portfolio with all three modes of generating income namely dividend income, interest income and income from capital gains. Now that the tax has been exempted from the capital gains, AICL will be the major beneficiary. With the stock exchange posting a bullish trend over the years, AICL has been able to reap benefits through high capital gains and dividend income.
However, the increased instability in the country will have a magnified effect on the investment income of AICL since it greatly relies on the returns from investment in KSE, which is undergoing a bearish trend these days. Investment income per unit of investment asset has increased tremendously over the years.
The dip in the ratio was seen in FY05 and can be attributed to a greater increase in the investment assets most noticeably marketable securities. Investment income as a percentage of net premiums has also shown an increasing trend and substantiates the increasing proportion of returns generated through investment portfolio.
Adamjee Insurance has decreased its reliance on debt evident from the debt management graph. This augurs well for the company, as the financial risk has been mitigated considerably. With better yields and strong market performance, AICL is now diverting its focus on equity financing.
But with the shaky investors' confidence seen these days owing to instability and political turmoil, AICL might have to shift towards debt financing adding to the financial risk for the company as people (both local and foreign investors) are reluctant to invest.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. AICL 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, the AICL has fulfilled the capital requirements as laid down in the regulatory framework. In fact, it enjoys the highest paid-up capital in the industry and thus enjoys leadership in this regard. With its aggressive plans, Adamjee Insurance 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 AICL to reap benefits in the stock market. The company's shares are being traded on KSE and LSE at higher P/E multiples and truly reflects investors' confidence in the company.
FUTURE OUTLOOK
The enhancement of FED from 5%-10% will have a negative impact on the company's profitability. Moreover, tax exemption on unrealized gain from the non-life insurance companies as announced in the budget 2008-09 will have a positive effect on the bottom-line of AICL.
According to the international press, Pakistan is a frontline state on fight against 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, increasingly high instability in the country may pose high risks to AICL in terms of higher claim rates.
====================================================================
ADAMJEE INSURANCE-KEY FINANCIAL DATA
====================================================================
Earnings FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Rupees in Millions
--------------------------------------------------------------------
Gross Premium 5266 6682 7912 9379
Net Premium Revenue 3678 3997 5280 5532
Underwriting Result 74 306 482 119
Investment Income 494 1147 1515 4486
Profit Before Tax 411 1278 1685 4285
Profit After Tax 327 1163 1577 4201
--------------------------------------------------------------------
Balance Sheet FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Rupees in Millions
--------------------------------------------------------------------
Paid up capital 826 826 1022 1022
Equity 1387 2426 3788 7652
Investments 2469 3040 4503 8132
Cash & Bank balances 755 1428 883 954
Total Assets 8005 9182 11139 18766
Total Liabilities 6618 6756 7351 11114
--------------------------------------------------------------------
Operating Performance (%) FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Underwriting Profit / Net Premium 2.02 7.66 9.13 2.15
Underwriting Profit / Gross Premium 9.37 17.17 19.15 1.27
Loss Ratio 72.93 62.84 63.54 26.68
Expense Ratio 32.46 30.52 27.34 13.20
Combined ratio 105.39 93.35 90.87 39.88
Return on Assets 4.09 12.67 14.15 22.39
Reinsurance Expense/Net Premiums 43.16 67.18 49.84 22.18
--------------------------------------------------------------------
DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Debt/Assets Ratio 82.67 74.93 65.99 5.94
Debt/Equity 4.77 2.99 1.94 0.15
--------------------------------------------------------------------
Capital Adequacy FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Paid-up Capital / Total Equity 0.60 0.36 0.27 0.13
Paid-up Capital / Total Assets 0.10 0.09 0.09 0.05
Equity/Total Assets 0.17 0.25 0.34 0.41
--------------------------------------------------------------------
Profitability Ratios FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Investment income/Net premiums 13.42 28.70 28.70 81.09
Investment income/Investment assets 15.99 11.55 19.00 55.16
Profit After tax/Net Premium 8.90 29.10 29.86 75.94
--------------------------------------------------------------------
Market Value Ratios FY'04 FY'05 FY'06 FY'07
--------------------------------------------------------------------
Earnings Per Share 3.96 11.00 15.00 41.09
Dividends per share - 1.50 4.03 3.30
P/E Ratio 16.57 12.04 9.76 8.72
====================================================================