TPL Direct Insurance takes the next step

In Pakistan's industry insurance, small players are aiming big. In the ongoing rounds of mergers and acquisitions taking place in the insurance sector, TPL Trakker has recently entered into a sale purchase agreement (SPA) with Greenoaks Global Holdings Ltd (formerly Roosewood Insurance Group).
According to the SPA, a stake of 33 percent or 15 million shares of TPL Direct Insurances issued and paid-up capital will be offered at a rate of Rs30 per share to Greenoaks. To yesterdays market close of Rs25 per share, the offer price suggests a decent premium of 20 percent, while in terms of book value it implies a whopping premium of nearly three times, thus making it an attractive deal for the company.
In terms of insurance penetration, Pakistan is poorly-rated among its regional peers where absence of technical expertise is considered as a major dilemma in our industry. Getting hold of appropriate expertise can be a crucial step in taking the insurance sector to the next level. And therefore foreign strength coming to Pakistan is a compelling initiative in that direction.
Greenoaks, being an insurance venture based in Switzerland, leverages its insurance expertise with a long-term investment strategy. Having hands-on experience, the venture assists insurance companies to become local market leaders. Hence, for TPL Trakker, value addition is the primary motive behind this stake sale.
Recall that last month Rosewood Group had expressed its intentions to acquire a 74.9 percent stake in TPL Direct Insurance. This also leaves a possibility for Greenoaks to acquire the remaining stake through general public.
Barring its small size, TPL Direct Insurance is viewed as one of the profitable companies in the non-life insurance sector of Pakistan. Double digit growth in net premiums coupled with rising profitability has been the key feature of this company.
The only sore point on an otherwise clean profit and loss account is TPLs poor investment ratio (June 2014: 4 percent). Skimpy investment income is the outcome of firms excessively prudent investment approach. Here, enhancing the equity portfolio to say 20-30 percent in equities while parking the rest in government securities and mutual funds can become a silver lining for company's profitability in coming periods.
If the deal comes through, not only it will lift the standards of the target company, but will also boost the competition especially among smaller players.

===========================================================================

TPL Direct Insurance - Key Indicators

===========================================================================

                                                 2008   2009   2010   2011   2012   2013   1HCY14

===========================================================================

Underwriting margin               5%     13%     5%     16%     14%    16%       16%

Net profit margin                     1%       1%    -5%       7%        7%     7%        10%

Claims ratio                2           9%      29%    43%    38%     41%    43%       47%

Expenses ratio                     59%      45%    42%    41%     39%    35%       37%

Comined ratio                       88%      74%    85%    78%     80%    78%       84%

Investment generation ratio  1%    N/A     1%     2%     1%     1%       4%

===========================================================================

Source: BR Research calculation based on company accounts