If managers at Adamjee Insurance are rejoicing in the stellar profits declared by the company in 2009, they shouldn .
While the firms bottom-line more than doubled last year, the boost mainly came from 126 percent growth in investment income as it capitalized on 60 percent jump in equity prices at the Karachi Stock Exchange during 2009.
In the meanwhile, core earnings continued to mirror the effects of a slowing economy, as net premium revenue dropped about 9 percent.
The health of an insurance firms core business is best judged by the premiums. In the current year, premiums suffered - tracking the reduced purchasing power in the economy, owing to which broad based cuts in insurance were witnessed in all areas of the companys product portfolio.
In recent years, the growth of non-life insurance industry can be attributed partly to the increase in the availability of auto financing. However, with car financing becoming increasingly difficult for consumers and less promotions and fresh induction amongst corporate executives, Adamjees premiums from motor vehicles decreased by 7 percent during the period.
Overall, underwriting income was up on the back of a slowdown in claims. But this was largely expected as the claims had skyrocketed during 2008 in the aftermath of the assassination of Benazir Bhutto. Claims were down 14 percent compared to the last year and underwriting up 85 percent in CY09.
Generating a profit in excess of 100 percent primarily off investments may not be such a bad idea for the directors of Adamjee. However, the company should focus on its core competencies as the key driver of growth, to remain sustainable in the long term.Going forward, the companys managers must come up with new products such as terrorism insurance, a loan protection scheme and health insurance in view of the problems faced in the country. That is, if they don plan to continue relying on investment income and want to focus on developing their core business.
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ADAMJEE INSURANCE
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Rs (mn) 2009 2008 % Change
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Net Premium Revenue 6807 7488 -9%
Net Claims (4453) (5173) -14%
Underwriting Results 679 367 85%
Investment Income 2479 1098 126%
Profit after tax 2434 1099 121%
EPS (Rs) 21.65 9.77 122%
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Source: KSE notice