EFU profits slide as slowdown in economy takes its toll

Tracking the trend in overall economy, the general insurance business in Pakistan is also on a decline. Net premiums of the second biggest general insurance firm by revenue, EFU General Insurance, fell 13 percent year-on-year to Rs 1.38 billion in the second quarter ending June.
The slowdown in economy seems to have strained EFU more, relative to its peer Adamjee Insurance, resulting in a 10 percent decline in net premium revenue during the period - indicating negative growth in business activities of the countrys private sector. However, for EFU, an improved claim ratio (from 71% in 1HCY08 to 65% in 1HCY09) partially offset the impact of lower revenues.
This biggest blow to EFUs bottom-line profits, however, came from sliding investment income which decreased by 69 percent during the first six months - eroding the impact of improved claim ratio. The conditions were even worse in the second quarter where the decline in claim ratio was relatively lower, leading to a dismal bottom-line performance.
Nonetheless, the management did a good job by curtailing administrative expenditure, down 7 percent year-on-year in Apr-Jun period, in an effort to arrest the fall in profits. The companys stock - which has underperformed the index since January 2009 - took a battering after the recently announced results, falling 5 percent to Rs 93.60 by Tuesdays close.
With the companys investment income - about 50 to 70 percent contributor in operating income - likely to normalise in the medium term, the companys earnings are likely to stabilise going forward. And while the claims are seen oscillating like a pendulum, the major worry for EFUs management, rather the whole insurance industry, is to take net premiums back on the same track as of nominal GDP growth.

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EFU GENERAL INSURANCE

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RS (INN)               2Q CY 09   2Q CY 08   % CHG   1H CY 09   1H CY 08   % CHG

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Net premium revenue       1,375      1,569   -12 %      2,799      3,091   -10 %

Net claims                  946      1,120   -15 %      1,822      2,183   -17 %

Net commission              120        139   -13 %        215        222    -3 %

Underwriting results         30         57   -48 %        209        215    -3 %

Investment income            32        (32)    N/A         79        254   -69 %

General & Admin expense     119        128    -7 %        225        223     1 %

Profit before tax           (14)       (20)  -28 %        203        365   -44 %

Profit after tax            (20)        70     N/A        140        325   -57 %

EFS (Rs)                  (0.18)      0.61     N/A       1.22       2.83   -57 %

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