Non-life insurance sector profits surges

One-off gains by industry giants act as a catalyst.

KARACHI:

Profits of non-life insurance companies jumped more than four times to Rs2 billion in the first half of 2011 mainly on the back of growth in underwriting business and better other income.

The main reason for the huge jump in total other income was booking of higher provisions and write-offs on ‘available for sale’ investments by EFU General Insurance and Pakistan Reinsurance in the previous year, according to a JS Global Capital note.

Other income – comprising investment income, rental income, etc – rose by a massive 289% to Rs2.1 billion on a yearly basis. However, if these one-off costs are excluded, the sector’s profitability is up 33% in the period under review, adds the note. JS Global Capital analysed a sample of 21 non-life insurance companies from a total of 23 listed companies.

Decline in claim ratio and expense ratio led to an increase in underwriting profits during the first half of the year. Claim ratio decreased to 58% from last year’s 60% while expense ratio declined to 20% from 21%. Consequently, the sector’s underwriting results rose by 38% year-on-year to Rs1.6 billion.

Other income boost

An up-tick in dividend income and lower provisions for impairment in value of ‘available for sale’ investments caused the mammoth growth, says the note.

This inflated figure is due to an impairment charge of Rs725 million booked by EFU Insurance in the first half of 2010 and higher write-offs of Rs517 million in the value of ‘available for sale’ investments by Pakistan Re-insurance in the same period last year. After removal of these costs, total other income is up by 28%. Moreover, higher inflationary pressures caused general and administrative expenses to rise by 23%.

Outlook

Although the quantum of flood this year is not that big as only southern parts of the country have been affected compared to last year, the insurance sector still remains vulnerable, says the note. Apart from the underwriting results, equity market conditions still remain depressed providing little room for growth in investment income, adds the note.

Published in The Express Tribune, October 7^th, 2011.