The insurance industry of Pakistan forms a meagre 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 in consequent of lower demand.
The concept of insurance in Pakistan is not acceptable on account of many reasons such as:
-- Poor positioning and marketing of insurance policies.
-- Distribution related issues: Inability of sales reps to contact people who might be interested in buying insurance.
-- Cultural and religious factor: The widespread perception that insurance is non-Islamic and against Shariah.
-- 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 the Pakistani scenario.
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. 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 59 insurance companies out of which 52 companies offer general or non-life insurance, 5 offer life insurance services, one is takaful and one a reinsurance company. The non-life insurance industry (NLI) also includes six companies that provide health insurance coverage as well.
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.
COMPANY OVERVIEW
EFU General Insurance Limited (EFU) was incorporated as a public limited company on September 2, 1932 in Calcutta (now Kolkata). The company is engaged in general insurance business comprising of fire and property, marine, motor, aviation, engineering, miscellaneous, bonds and risk management through a network of 57 branches (including KEPZ Branch) in Pakistan and one branch in Jeddah, Saudi Arabia.
EFU's shares are quoted on Karachi and Lahore stock exchanges. Associated companies such as EFU Life Assurance Limited, JS Bank Limited and Trustees of EFU Staff Provident and Gratuity Funds held nearly 8% shares. CEO, Directors, their spouse and minor children held nearly 19% voting interest while Ebrahim Alibhai Foundation holds over 12% shares. A foreign investor has 6.27% voting interest while the Administrator of Abandoned Properties held 5.43% shares. The rest of the shares were with by joint stock companies including banks and DFIs.
After Adamjee Insurance, EFUG, has the 2nd highest share of 24% in non-life insurance sector. Client-base comprises of many leading business houses and multinational companies. The independent reviews by professionals of international repute enable the company to keep abreast of international changes in the industry as well as ensure that management adopts the best international practices. Moreover, EFU maintains very close and long-term (over 50 years) relationship with its main reinsurer, 'Munich Re', one of the largest reinsurance companies in the world.
EFU gave the emerging insurance industry the leadership, the manpower and the drive needed to grow in a situation where at one time, three-fourths of insurance was held by foreign companies. JCR-VIS has improved the company's Financial Strength Rating to "AA" (Double A) and outlook to "Stable".
RECENT RESULTS 1H10
The written premium for the six months period was Rs 5 100 million as against Rs 5 792 million in the corresponding period last year. The net premium was slightly higher at Rs 2846 million as compared to Rs 2789 in the same period last year. The overall claim ratio on Net Premium Revenue was higher at 68% as against 65% in the corresponding period of last year. The total underwriting profit for the six months period was Rs 22 million as compared to Rs 209 million in corresponding period of 2009. The Investment loss for the six months period was Rs 614 million compared to profit of Rs 79 million in the corresponding period last year. The loss is due to provision for impairment of Rs 725 million due to decline in value of equity investments. Rental income, other income and dividend from associate were also lower as compared to previous year's levels. The after tax loss for the six months was Rs 708 million compared to profit of Rs 140 million in the corresponding period of last year.
In the after math of the floods, the company faces a high rise in claims, which will erode its profitability. However, high cost projects are likely to be re-insured, reducing the potential downside risk for the company.
The written premium was Rs 9.6 billion in 2009 as compared to Rs 9.7 billion in 2008. The net premium revenue was Rs 5.57 billion as against Rs 6.14 billion in 2008. The decline in net premium was due to reduction in premiums from vehicle leasing insurance business. The total underwriting profit of EFU for 2009 was Rs 67 million as against profit of Rs 371 million in the previous year of 2008. The reduction in underwriting profit was due to losses in the fire and property business. However, overall claims ratio stayed constant at 71%.
EFU faced some major fire losses as well as losses from rains in Karachi in July, which adversely affected the overall underwriting results. The underwriting loss in the fire and property department was Rs 380 million compared to Rs 27 million last year.
The written premiums in Marine, Aviation and Transport Department fell to Rs 1376 million in 2009 as compared to Rs 1498 million in 2008 due to reduced imports in the country. Claims as a percentage of net premium revenue was 49% in 2009 as against 39% in 2008. The underwriting profit fell to Rs 134 million in 2009 as compared to Rs 232 million in 2008.
The written premium for the Motor Department was Rs 3335 million in 2009 as compared to Rs 3927 million in 2008. The reduction in premium was due to decline in the leasing business of vehicles. Claims as a percentage of net premium revenue was 68% in 2009 as against 75% in 2008. The underwriting profit for 2009 was Rs 187 million as compared to Rs 88 million in 2008.
The written premium in Other Miscellaneous Department increased to Rs 724 million in 2009 as compared to Rs 536 million in 2008. Claims as a percentage of net premium revenue was 51% in 2009 as against 31% in 2008. The underwriting profit was Rs 100 million compared to Rs 101 million in 2008.
FINANCIAL ANALYSIS (FY04-FY06)
The demand for insurance is a function of rising GDP and booming manufacturing and service sector of Pakistan. Over the years, EFU has posted a tremendous growth in its net premiums and gross premium. However, in 2009, gross premium fell from Rs 9698 million in 2008 to Rs 9614 million in 2009. Net premium revenue also fell from Rs 6136 million in 2008 to Rs 9614 million in 2009. This contributed to the sharp decrease in the underwriting profit to net premium ratio, which fell to 1% in 2009 as compared to 6% in 2008. Furthermore, the underwriting profit to gross premium ratio also fell to 1% in 2009 as compared to 4% in 2008.
During FY09, motor insurance contributed 64%, marine, aviation and transport insurance contributed 14%, fire and property damage contributed 17%, other insurance contributed 3% and treaty contributed 2% to the net premiums of EFU for the financial year of 2009.
EFU enjoys the competitive advantage of having a balanced and diversified set of insurance policies and it tries to ensure that any setback in one revenue source is offset by the other source of premiums.
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 condition in the insurance industry in Pakistan is characterised by increasing capacity with entry of new companies in the market resulting in a highly competitive environment for procurement of business. On the other hand the frequency and severity of losses are higher due to recurring natural disasters (eg earthquake, floods), inflation in value of insured assets and the deterioration in the law and order situation in the country. The overall loss ratio (ie claims as a percentage of net premium revenue) decreased from 71% in 2008 to 70% in 2009. The net claims expense was Rs 941 million for the Fire and Property Damage Department, Rs 394 million for the Marine, Aviation and Transport Department, Rs 2416 million for the Motor Department, Rs 79 million for the Miscellaneous Department, and Rs 79 million for Treaty respectively, in 2009.
The loss ratio in Motor Department was higher on account of claims from damage to vehicles from incidents of riots and vandalism, irregularities in traffic management, violation of traffic rules and rising theft cases. Moreover higher cost of repairs due to inflation in cost of parts and labour charges was also a major reason. EFU 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.
The grand total of the net claims expense witnessed a decrease as it was Rs 4369 million in 2008 and it fell to Rs 911 million in 2009.
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. EFU posted rising tendency in combined ratio on the account of rising expense ratio. The expense ration increased from 33% to 35% in 2009. This indicates that the company needs to further improve its underwriting results through appropriate risk identification and premium charges. Furthermore, it needs to work on decreasing its underwriting expenses, which should not increase disproportionately with net premium revenue.
The reinsurance expense to net premiums ratio has increased considerably from 58% in 2008 to 73% in 2009. The ROA of EFU has also increased considerably from -26% in 2008 to 3% in 2009. This is because EFU's profit after tax Rs 732 million by the end of 2009 whereas in 2008, EFU had incurred a loss after tax of Rs 5471 million. Total assets of efu stood at Rs 21938 million on December 31, 2009 as compared to Rs 21229 million on December 31, 2008. These trends are nearly in line with that of the overall insurance industry.
Another comprehensive indicator of profitability is the net income margin (PAT as a percentage of total premiums). Income margin has sharply increased as a result of several factors such as higher income coming from investment portfolio and the fact that EFU recorded a profit after tax for 2009 instead of a loss after tax like it did in 2008. Investment Income as a percentage of investment assets has increased from -45% in 2008 to 5% in 2009. Overall, the company has shown a very healthy performance with regards to their profitability and investment returns.
EFU 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 capital gains and dividend income through long-term holdings, which depicts the unstable nature of EFU's income. On a more holistic note, EFU has a well-diversified investment portfolio with all three modes of generating income namely dividend income, interest income and income from capital gains.
EFU's debt ratios have been erratic as evident from the debt management graph. However 2009 is one year which stands out as EFU has successfully managed to hold their D/A and their D/E ratio constant in this year. The D/A ratio stood at 52% in 2008 and by the end of 2009, it was held constant at the same percentage. The D/E ratio stood at Re 1 by the end of 2008 and by the end of 2009, it was held constant at Re 1.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. Paid up Capital to Total Equity Ratio and the Equity to Total Assets ratio both remained constant in 2009 as compared to 2008. ROE for the year under review increased slightly and this can be attributed to the fact that EFU recorded a profit after tax in 2009 as compared to a loss after tax in 2008. Furthermore, equity increased from Rs 10105 million in 2008 to Rs 10464 million in 2009.
EFU enjoys high capital adequacy ratios owing to increase in paid-up capital requirement, retained earnings from increased profit levels and increased accumulated net surplus. Shareholders Equity on as percentage of Total Assets reflects EFU's financial strength. EFU has fulfilled the capital requirements as laid down in the regulatory framework.
Earnings per share of EFU have increased from -Rs 48 in 2008 to Rs 6 in 2009. The average market prices, which had been showing a rising trend till 2007, have shown a decreasing trend in 2008 and 2009. The average market price of December 2009 was Rs 98. The Dividends per share have increased from Rs 3.25 in 2008 to Rs 4 in 2009. Price earnings ratio has also increased from -Rs 3 to Rs 15.
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EFU GENERAL INSURANCE-KEY FINANCIAL DATA
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Earnings FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
In Rupees
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Gross Premium 5,043,000,000 6,644,000,000 8,459,386,000 8,961,395,000 9,698,670,000 9,614,014,000
Net Premium Revenue 2,536,000,000 3,861,990,000 5,417,952,000 6,110,504,000 6,136,944,000 5,570,211,000
Total Claims Incurred 1,529,560,000 2,694,350,000 4,131,705,000 5,092,241,000 4,369,507,000 3,911,444,000
Underwriting Expenses 586,240,000 855,380,000 1,098,166,000 1,663,806,000 2,002,165,000 1,968,351,000
Underwriting Result 420,290,000 312,270,000 188,081,000 -176,932,000 371,433,000 66,536,000
Investment Income 101,730,000 372,970,000 696,466,000 14,812,295,000 -5,299,619,000 673,524,000
Profit Before Tax 474,160,000 645,720,000 857,753,000 14,457,295,000 -5,442,922,000 801,443,000
Profit After Tax 322,440,000 506,270,000 762,158,000 14,536,309,000 -5,471,226,000 732,299,000
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Balance Sheet FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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In Rupees
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Paid up capital 210,000,000 300,000,000 500,000,000 1,000,000,000 1,150,000,000 1,150,000,000
Equity 675,610,000 1,118,890,000 1,790,860,000 15,177,169,000 10,105,943,000 10,464,942,000
Investments (Book Value) 155,896,000 2,387,155,000 3,675,085,000 18,595,362,000 11,831,998,000 12,643,728,000
Cash & Bank balances 865,990,000 1,192,910,000 1,135,916,000 1,162,876,000 1,303,684,000 1,349,606,000
Total Assets 4,783,590,000 6,334,640,000 10,627,996,000 27,389,975,000 21,229,692,000 21,938,950,000
Total Liabilities 4,107,980,000 5,215,763,000 8,837,136,000 11,212,806,000 11,123,749,000 11,474,458,000
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Operating Performance (%) FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Underwriting Profit / Net Premium 17 8 3 -3 6 1
Underwriting Profit / Gross Premium 8 5 2 -2 4 1
Loss Ratio 60 70 76 83 71 70
Expense Ratio 23 22 20 27 33 35
Combined ratio 83 92 97 111 104 106
Return on Assets 7 8 7 53 -26 3
Return on Equity 0 0 0 1 -1 0
Reinsurance Expense/Net Premiums 99 72 56 47 58 73
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Debt/Assets Ratio 86 82 83 41 52 52
Debt/Equity 6 5 5 1 1 1
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Capital Adequacy FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Paid-up Capital / Total Equity 0 0 0 0 0 0
Equity/Total Assets 0 0 0 1 0 0
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Profitability Ratios FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Investment income/Net premiums 4 10 13 242 -86 12
Investment income/Investment assets 65 16 19 80 -45 5
Profit After tax/Net Premium 13 13 14 238 -89 13
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Market Value Ratios FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Market Prices (average) 92 139 212 420 133 98
Price Earnings Ratio 14 21 27 3 -3 15
Dividends per share 3 3 3 6 3 4
Earnings Per Share 7 7 8 145 -48 6
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