Non-life insurance sector shows 16pc decline in profit in CY11

RECORDER REPORT

KARACHI: The non-life insurance sector containing 21 insurance companies has shown accumulated decline of 16 percent on year-on-year basis in profits during CY11.

"The decline in bottom-line was mainly due to significant increase in admin expense which increased by massive 48 percent during this period", Mazhar A Sabir, an analyst at InvestCap said.

However, a significant growth was witnessed in the core as well as investment income which soared by 64 percent and 22 percent respectively during the year, he added.

On a sample of 21 out of 22 listed non-life insurance companies (we exclude PAKRI also due to its nature of reinsurance business) on the KSE, representing 100 percent of the sector's market capitalization, Pakistan Gen. Insurance Ltd recorded a massive 909 percent on year-on-year basis jump in profits while two companies booked net losses during CY11.

In CY11, the total net premium (gross premium minus reinsurance arrangements) of the non-life insurance companies stood at Rs 22 billion, showing an appreciation 7.5 percent, also the claims ratio improved to reach at 58 percent as compared to 63 percent recorded in last year. The core profit (underwriting results) has also improved by 64 percent, whereas combined ratio (profitability ratio) reached to 12.5 percent as compared to 8.2 percent witnessed in the last year.

Segment wise analysis reveals that the net premium of major segments like 'Fire and property damage' (FIRE) and 'Marine aviation and transport' (MARINE) has improved during the year and registered a growth of 15 percent and 16 percent respectively, while the 'Miscellaneous' (MISC) segment net premium improved by 25 percent. On the other hand, the net premium of motor segment has shown a decline of 1.3 percent during the year.

"In line with our expectation, the claims ratio of these segments also improved during the year, a 21 percent improvement witnessed in the 'FIRE' segment, which reached at 47 percent", he said.

Motor segment's claim ratio improved by four percent while 'MARINE' and Miscellaneous claims ratio declined by 1.1 percent and 8.4 percent to reach at 49 percent and 72 percent respectively during the year.

The investment income (dividend income plus capital gains) which is a major component of profits of non-life insurance sector surged by 22 percent on year-on-year and 12 percent on quarter-on-quarter basis. This growth however, could not tickle down to the bottom line of the sector owing to 48 percent on year-on-year basis increase in admin expense which translates bottom-line decline during the year.

"The main reason for such an abrupt increase in admin expense was the organisational restructuring by majority of insurance companies which we believe is one-off expense of the sector", he said. "We believe that the first quarter of CY12 would be better for insurance sector's profitability due to major investment income from the equity market transactions amid upward movement in stock markets coupled with expectation of better law and order situation of the country", he added.

Adamjee insurance Company Ltd (AICL) recently announced its full year CY11 result in which posted the lowest earning in a decade. The company posted net profit after tax of Rs 132 million, down by 74 percent. Despite 88 percent growth in core profits and nine percent rise in investment income, the company earned loss before taxation of Rs 42 million owing to 147 percent sharp rise in admin expenses. However, due to tax benefits, the company managed to post profit after tax of Rs 132 million (EPS: 1.07). On quarter-on-quarter basis, AICL posted loss of Rs 237 million (LPS Rs 1.91) as against profit of Rs 51 million (EPS Re 0.41).

"After booking lower earnings during CY11, we expect the company to reap the benefits of upward movement of the stock market during the first quarter of CY12 coupled with expectations of stable law and order situation in the country", he said.