Insurance:- EFU GENERAL INSURANCE LIMITED - Analysis of Financial Statements Financial Year 2004-Financial Year 2007

The recent political instability followed by the assassination of former Prime Minister, Mohtarma Benazir Bhutto, elections and its preceding violence have led to an increase in premiums charged by the insurance companies, which shall positively reflect on the profit and loss statements of the companies in the coming period.
It is expected that the auto insurance will be the significant beneficiary in this regard. 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, most prominently being the positioning, marketing and distribution related issues.
Further, the 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. Then the cultural and religious factors also play an important part.
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.
General insurance has also been boosted because of increased leasing activities. 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.
COMPANY OVERVIEW:
EFU General Insurance Limited was incorporated as a public limited company on September 2, 1932 in the city of 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 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, 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-fourth 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".
SEGMENTS AT A GLANCE (FY07):
During FY07 motor, fire and marine insurance contributed 71%, 7% and 17% respectively towards the total net premium. EFU enjoys the competitive advantage of having a balanced and diversified set of insurance policies. Thus, 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 growth in the net premium in marine business of EFU is attributable to the overall growth in the exports and imports of Pakistan in the current period. Fire and property damage insurance is also on the rise in consequent of a surge in the construction of shopping centers, residential properties etc and therefore has provided ongoing opportunities for insurers. Furthermore, the building of residential properties for a growing middle class and their subsequent insurance is being encouraged by an increase in loan facilities from banks.
Fire and property: The written premium of this department increased by 26% to Rs 2,896 million in FY07, as compared to Rs 2,308 million in 2006. The company faced some major fire losses, which were exacerbated by claims arising from the disturbances on December 27, 2007 which adversely affected the overall underwriting results. The underwriting loss was Rs 413 million compared to profit of Rs 90 million last year.
Marine, aviation and transport: The written premium of this department increased to Rs 1,257 million in FY07, as compared to Rs 1,186 million in 2006. Claims as a percentage of net premium revenue reduced to 32% as against 47% in 2006. The underwriting profit for the year was Rs 429 million compared to Rs 148 million in 2006.
Motor: The written premium of this department was Rs 4,110 million, in FY07 as compared to Rs 4,532 million in 2006. Claims ratio was 90% as against 84% in 2006 mainly due to losses caused by damages to vehicles from riots on December 27, 2007 and the increase in the incidence of thefts of vehicles during the year. The underwriting loss for the year was Rs 253 million compared to profit of Rs 83 million last year.
Others: The written premium of this department increased by 70% to Rs 452 million in FY07, compared to Rs 266 million in 2006. Claims ratio was 43% as against 37% in 2006. The underwriting profit was Rs 23 million compared to Rs 38 million in 2006.
FINANCIAL ANALYSIS (FY04-FY07):
Over the years, EFU has posted a tremendous growth in its net premiums and gross premiums. In 2007, the company's written premium reached Rs 8.96 billion in 2007 as compared to Rs 8.46 billion in 2006, which represents a growth of 6% over the previous year. The net premium revenue in 2007 rose to Rs 6.1 billion compared to Rs 5.4 billion in 2006, increasing by 13%. The increase in premium was achieved despite fierce competition in the insurance market on account of capacity added by new entrants, and aggressive marketing tactics adopted by some of the prominent players in the industry.
As a result of high net claims, the total underwriting loss of the company in 2007 was Rs 177 million as against profit of Rs 365 million in the previous year. Fortunately, this loss was more than offset by investment income as a result of which the company made a net profit of Rs 14,536 million in 2007 as compared to Rs 762 million in 2006.
The robust growth in gross and net premiums coupled with an underwriting loss resulted in a plummet in two ratios in FY07. 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 claim ratio was 83% as against 76% in the previous year, mainly on account of some large losses in fire and property departments as well as the motor department. The incidents of rioting, arson and damages to motor vehicles in the wake of tragic assassination of Mohtarma Benazir Bhutto has resulted in one of the highest losses in the history of insurance industry in the country. EFUG too has suffered losses on this account and is a contributing factor to the higher claim ratio.
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 best policy for EFU is Marine insurance policy as the claim rates are on the lower side while the high risk attached enables the company to fetch higher premiums. In the motor insurance, the higher premiums have been offset by proportion of claims coming from the policyholders.
Despite an upsurge in the total claims, most noticeably the motor claims, EFU has been able to perform well as far as management of expenses is concerned. The expense ratio hand was slightly lower in FY07 despite a nominal increase in expenses. It has shown a negative trend over the period under consideration. This decline is on the account of higher premiums growth than expense growth.
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 loss/claims ratio. It now hovers around 103% and indicates that the company needs to further improve its underwriting results through appropriate risk identification and premium charges.
The reinsurance expense to net premiums ratio has declined considerably on the account of higher net premiums. The ROA of EFUG which had previously declined slightly from 8% to 7% in 2006 on the account of higher growth in assets base than in PAT, shot up in FY07 on the account of 18 times higher PAT than the previous year.
Total assets of EFU also registered an increase by 158% to Rs 27,389 million on December 31, 2007. The increases are seen in investments, premium due but unpaid, re-insurance recoveries against outstanding claims and prepayments. Net increase in assets has been largely financed through retention of profits, increase in provision for outstanding claims. These trends are totally 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 increased sharply as a result of higher income coming from investment portfolio.
Higher returns from capital gains have offset the higher claims and expenses in favour of the company. Thus, EFU has overall posted a very healthy trend in its profitability measures. The company's income from investment, rentals and other income for the year under review was Rs 15,012 million as compared to Rs 813 million last year manifesting an increase of 95% and due to this the company was able to offset the underwriting loss.
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 the country 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. 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.
With the stock exchange posting a bullish trend over the years, EFU has been able to reap benefits through high capital gains and dividend income. Consequently, investment income per unit of investment asset has increased considerably.
Investment income despite, showing a rising trend in FY05 plummeted as a percent of net premiums as its growth was offset by a much higher growth in net premiums thus causing their ratio to decline in 2005. However, it recovered again in FY06, due to 54% increase in investments as against 40% increase in net premiums. Furthermore, it shot up in FY07 due to higher returns from capital gains.
The book value of investments has increased to Rs 18,595 million compared to Rs 3,675 million which is mainly due to realization of capital gains on equity investments. The market value of investments also increased by Rs 13,507 million from Rs 7,096 million as at December 31, 2006 to Rs 20,603 million as at December 31, 2007.
EFU's debt ratios have been erratic as evident from the debt management graph. Major contributors towards plummeting D/A and D/E ratios in FY07 (despite a nominal increase in debts), have been increasing assets base (158% increase in FY07) and equity base (8% increase in FY07), which caused the overall debts of the company to decline as a portion.
The capital adequacy indicators deal with the regulatory aspect with emphasis on paid-up capital and total equity. Due to retention of profits, shareholders equity on December 31, 2007 was 8% higher compared to December 31, 2006. ROE for FY07 shot up due to higher PAT. ROE is highly satisfactory compared to industry.
EFU enjoys high capital adequacy ratios owing to increase in paid-up capital requirement, retained earnings from increased profit levels and increased reserves. Shareholders Equity on December 31, 2006 as percentage of Total Assets was 59% (2005: 18%).
The decline in paid-up capital/equity ratio of FY07 is due to high base effect because of the reasons discussed above. Thus, EFU has fulfilled the capital requirements as laid down in the regulatory framework. With its aggressive plans, EFU is well positioned to reap the benefits of the rising insurance market so as to augment its market share.
Besides, the company's equity base and balance sheet footing is also getting stronger. This in turn is assisting it to reap benefits in the stock market. Rising EPS and DPS also indicate its healthy performance which it passes to its investors. The average market prices show a rising trend showing investor's confidence in EFUG.
FUTURE OUTLOOK: Prospects for 2008 will depend on the new economic policies of the new government, which would have its reflection on insurance industry and EFUG as well. The company plans to lay emphasis on strengthening the underwriting discipline with a view to improving the quality further thereby making all classes profitable.
In the budget 2007-08, the requirement of compulsory re-insurance with Pakistan Reinsurance Company Ltd (PAKRI) has been omitted from the insurance ordinance. Accordingly, non-life insurance companies are free to reinsure from PAKRI or any other foreign company.
Furthermore, tax exemption on capital gain on the sale of Modaraba certificates or listed shares have now been extended up to June 2008 in budget FY08. This augurs well for the insurance sector and will continue to encourage insurance companies to realize capital gains on their equity investments in FY08. This will enable the companies to enhance their equity base, going a long way in supporting the overall growth of insurance business in the country.
According to the international press, Pakistan is on the front line of the fight against international terrorism because of its proximity to Afghanistan and other alleged sanctuaries of al Qaeda and other dissident groups. Outbreaks of violence in Pakistan itself are fairly common. Some of these have prompted significant insurance losses. Thus, increasingly high instability in the country may pose high risks to EFU in terms of higher claim rates.
EFU needs to work hard on its claims ratios and further improve its underwriting results by appropriate risk identification and premium charges. The company intends to further capitalize on the new opportunities expected to arise from the development of infrastructural projects and maintain its growth momentum in future years.

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

EFU GENERAL INSURANCE-KEY FINANCIAL DATA

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

Earnings                                      FY'04          FY'05          FY'06          FY'07

------------------------------------------------------------------------------------------------

                                                          In Rupees

------------------------------------------------------------------------------------------------

Gross Premium                         5,043,000,000  6,644,000,000  8,459,386,000  8,961,000,000

Net Premium Revenue                   2,536,000,000  3,861,990,000  5,417,952,000  6,110,504,000

Total Claims Incurred                 1,529,560,000  2,694,350,000  4,131,705,000  5,092,241,000

Underwriting Expenses                   586,240,000    855,380,000  1,098,166,000  1,195,195,000

Underwriting Result                     420,290,000    312,270,000    364,937,000   -176,932,000

Investment Income                       101,730,000    372,970,000    696,466,000 14,812,295,000

Profit Before Tax                       474,160,000    645,720,000    857,753,000 14,457,295,000

Profit After Tax                        322,440,000    506,270,000    762,158,000 14,536,309,000

------------------------------------------------------------------------------------------------

Balance Sheet                                 FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

                                                          In Rupees

------------------------------------------------------------------------------------------------

Paid up capital                         210,000,000    300,000,000    500,000,000  1,000,000,000

Equity                                  675,610,000  1,118,890,000  1,790,860,000 16,177,169,000

Investments (Book Value)                155,896,000  2,387,155,000  3,675,085,000 18,595,362,000

Cash & Bank balances                    865,990,000  1,192,910,000  1,135,916,000  1,162,876,000

Total Assets                          4,783,590,000  6,334,640,000 10,627,996,000 27,389,975,000

Total Liabilities                     4,107,980,000  5,215,763,000  8,837,136,000 11,212,806,000

------------------------------------------------------------------------------------------------

Operating Performance (%)                     FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

Underwriting Profit / Net Premium             16.57           8.09           6.74          -2.90

Underwriting Profit / Gross Premium            8.33           4.70           4.31          -1.97

Loss Ratio                                    60.31          69.77          76.26          83.34

Expense Ratio                                 23.12          22.15          20.27          19.56

Combined ratio                                83.43          91.91          96.53         102.90

Return on Assets                               6.74           7.99           7.17          53.07

Return on Equity                               0.48           0.45           0.43           0.90

Reinsurance Expense/Net Premiums              98.86          72.04          56.14          46.65

------------------------------------------------------------------------------------------------

DEBT MANAGEMENT                               FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

Debt/Assets Ratio                             85.88          82.34          83.15          40.94

Debt/Equity                                    6.08           4.66           4.93           0.69

------------------------------------------------------------------------------------------------

Capital Adequacy                              FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

Paid-up Capital / Total Equity                 0.31           0.27           0.28           0.06

Equity/Total Assets                            0.14           0.18           0.17           0.59

------------------------------------------------------------------------------------------------

Profitability Ratios                          FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

Investment income/Net premiums                 4.01           9.66          12.85         242.41

Investment income/Investment assets           65.26          15.62          18.95          79.66

Profit After tax/Net Premium                  12.71          13.11          14.07         237.89

------------------------------------------------------------------------------------------------

Market Value Ratios                           FY'04          FY'05          FY'06          FY'06

------------------------------------------------------------------------------------------------

Market Prices (average)                       91.90         138.50         212.00         364.00

Price Earnings Ratio                          13.70          21.21          26.94           2.50

Dividends per share                            3.00           3.00           3.00           6.00

Earnings Per Share                             6.71           6.53           7.87         145.36

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

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2008