INSURANCE INDUSTRY FAILS TO MAKE ANY VISIBLE IMPACT ON CAPITAL MARKET

By HARIS ZAMIR
May 15 - May 21, 2006

Non-life insurance sector has shown tremendous growth in their income and balance sheet over the last few years on account of increased economic activities, booming equity markets and structural reforms. Combined earnings of the non-life insurance companies (based on all listed companies and state owned unlisted National Insurance Company)have reached Rs 5.7 billion in 2005 from Rs 1.2 billion in 2001 -a CAGR of 47 percent during 2002-2005.

In last Budget in June 2005, the government announced capital gain tax exemption on sale of shares to listed insurance companies till June 30,2007, a much awaited demand of insurance sector. Therefore, in the year 2005 the insurance companies booked heavy capital gains on their investments in the stock market. As a result, investment income of non-life insurance companies increased by 84 percent to Rs 4.7 billion in 2005. This tax exemption has provided an opportunity to insurance companies to realize capital gain so as to strengthen their equity base that will go a long way in supporting the overall growth of the insurance business.

As one can observe from the table the gross premium posted a 4-year CAGR of 20 percent with net premium rising 19 percent annually. Claim ratio which was 64 percent in 2001 has been reduced to 56 percent in 2005. Similarly, expense ratio (insurance expense divided by net premium) that was 25 percent in 2001 reached 18 percent in 2005. Moreover, combined ratio of the sample companies came down to 74 percent in 2005 as against 88 percent in 2001.

KEY FINANCIAL STATISTICS OF NON-LIFE (LISTED &NIC)

(Rs mn)

2001

2002

2003

2004

2005

CAGR

Gross Premium

12,076

14,083

17,916

20,394

24,982

20%

Net Premium

7,244

7,994

8,800

11,350

14,431

19%

Net Claims

4,612

4,532

4,791

6,152

8,065

15%

Investment Income

1,901

2,090

2,467

2,655

4,848

26%

Underwriting Profit

370

1,497

1,549

2,159

2,982

68%

Net Income

1,216

1,838

2,477

2,931

5,729

47%

Muhammad Imran, research analyst at Jahangir Siddiqui Capital Markets said that the purpose of insurance is to mitigate risk. Insurance business is quite volatile in nature and in case of any significant unfavorable event, the underwriting business can incurred losses as well. For example in the year 2004 and 2005 natural catastrophes like Tsunami and Hurricane Katrina caused heavy claims ratio both to insurers and reinsures.

That is the reason that investments have an important role in insurance business. Besides improving bottom line of insurance companies, this investment income strengthened the equity base of insurance companies. The strong equity can, if needed, led to a lesser need of re-insurance arrangement and provide room for further growth. In both cases, the bottom-line of insurance companies from their underwriting business improves.

"We have made an analysis of world 's 3 largest non-life insurance companies to evaluate the ratio of investment and investment income. On an average, these three insurance companies 55-60%assets comprises of investments on which they earn revenue other than their core business. In case of Pakistan, investments comprises close to 50 percent of total assets of non-life insurance companies. Similarly, if we see the ratio of investment income to total income for Pakistan non-life companies, investment income makes approximately on an average 55-65%of total income. This is slightly better than 75-85%in case of key international non-life insurers.

In Pakistan, non life insurers have four main business classes i.e. motor, marine, fire and miscellaneous (includes treaty, others and health insurance as well).Given below is an analysis of these segments.

MOTOR: Depended on automobiles sales: This is the most growing arena of the non-life insurance. The representation of motor insurance in net premium of listed companies has increased to 53 percent in 2005 from 47 percent in 2001.The rising auto sale (35%CAGR in last 4-years)is the main reason behind this. Almost all banks are offering car financing schemes &for that insurance of vehicle is a perquisite.Net premium of auto business has increased by 32 percent annually during last 3-years and has reached Rs 6.4 billion at the end of 2005 from Rs 2.8 billion in the years 2002. Pakistan's total automobile market is expected to grow at 5-year CAGR of 17 percent to reach 375,000 units in FY10 from that of 169,000 in FY05. This ensures growth in this segment of general insurance.

MARINE: Function of country 's trade activities, the growth of marine insurance is directly linked with the trade volume in the country as it is related with the transportation of goods via sea. Marine insurance share on the basis of 2005 net premium was 20%.Marine insurance has grown by 22 percent annually during last 3 years. We expect growth in this segment to continue owing to rising trade activities in country. Trade volume in the country (exports and imports collectively)rose by 34 percent in the calendar year 2005 to reach US$41bn.We expect an average growth of 18%in this segment for next 5-years inline with the growth of trade activities.

FIRE: Linked with industrial activities, listed companies fire business net premium has reached Rs 2.2 billion in 2005 with a share of 18 percent in the overall net premium. During last 3-years,net premium of the fire business soared at a CAGR of 29%.Fire insurance business is mainly linked with the construction and infrastructure projects. The announcement of mega infrastructure projects like dams and rising construction activities will directly benefit this segment.

Moreover, the growth in industrialization also bodes well for fire &property business.

MISCELLANEOUS: Miscellaneous segment includes insurance of cash in transit, cash in vault, burglary etc. This segment is growing at a slower pace as compared to other sub components of industry. Its share has been reduced to 9%in 2005 from 14%in 2001.