Adamjee Insurance in dire straits

Adamjee Insurance (KSE: AICL) is witnessing its fortunes slip this year. With investment income losing luster and net claims touching the skies, AICLs bottom line dwindled by 44 percent year on year in 1H CY14.
In terms of premiums, AICLs insurance business is growing with its net premiums rising 13 percent year on year in 1H CY14. However, poor quality of insurance portfolio has continued to thwart the fate of AICLs profitability. This time again, burgeoning claims wiped out the gains from rising premiums.
Claims ratio (net claims/net premiums) surged by a whopping 400 basis points, whereas combined ratio, which takes into account claims, commission and expenses, soared to 99 percent (1H CY13: 95 percent). Consequently, underwriting profits slipped by a massive 76 percent.
AICL derives bulk of its premiums from motor segment (45 percent in 1H CY14), where, despite the managements efforts of limiting losses, the segment once again landed in red by posting an underwriting loss of Rs80 million in 1H CY14. Thats after accounting for the segments underwriting profit of Rs4.8 million in 2Q CY14. In addition to motor segment, however, mounting claims in marine, aviation and transport segments also kept a lid on AICLs bottom line.
Meanwhile, AICLs investment managers also contributed to the company's dwindling performance in the half year ended June 2014. Investment income fell by Rs655 million or 39 percent year on year in 1H CY14.
It should be kept in mind that the companys investment portfolio holds some red flags. Taking a clue from 2013 financials, the portfolio is highly skewed towards equities (71 percent holding). This is quite contrary to industry-wide norms where the share of equities is restricted in the range of 20-50 percent.
High dependence on equities makes the company vulnerable to stock market fluctuations. Limiting equity exposure and balancing the investment exposure between equities and fixed income securities will lend a hand in limiting the volatile nature of AICLs profitability in coming times. Though of course, cleaning up the insurance portfolio would also be a good idea.

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Adamjee Insurance

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Rs (mn)                         1HCY13      1HCY14         chg

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Net premium revenue              2,710       3,055         13%

Net claims                      -1,642      -1,981         21%

Expenses                          -765        -847         11%

Net commission                    -176        -196         11%

Underwriting result                127          31        -76%

Investment income                1,673       1,018        -39%

Other income                        67          50        -25%

General & admin expenses          -158        -169          7%

Profit before taxation           1,710         930        -46%

Tax                               -200         -86        -57%

Profit after taxation            1,510         844        -44%

EPS (Rs)                          4.32        2.41

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