The insurance sector in Pakistan is expected to become more attractive to investors due to its correlation with economic growth. Analysis of 9-month 2015 performance for five major insurance companies shows a 54% rise in profits, with underwriting contributing more to total income. Improving economic conditions and security are lowering claims ratios. As the economy grows further in coming years, the insurance sector may see sustained growth in premiums and profitability, making it a potential opportunity for portfolio diversification.

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Foundation Research
Equities
19 November 2015
Insurance sector performance
9MCY15 9MCY14 YoY
Net premium revenue 18,571 16,480 13%
Net claims 9,873 9,502 4%
Expenses 5,779 5,305 9%
Underwriting Results 2,919 1,673 74%
Investment income 5,743 4,084 41%
Other income 336 369 -9%
Profit after tax 6,998 4,553 54%
Source: Annual accounts, Foundation Research, November 2015
Performance of UW business(Rs mn)
9MCY15 9MCY14 YoY
IGI 177 124 43%
EFUG 1,006 988 2%
AICL 717 66 986%
JGICL 367 99 271%
PAKRI 652 396 65%
Source: Annual accounts, Foundation Research, November 2015
Analyst
Khurram M. Arif khurram.arif@fs.com.pk
92 21 35612290-94 Ext 335
Non-life Insurance
High correlation to GDP; sector to
become investors’ favorite
Event
 The insurance sector, particularly general segment, is expected to
come on investors’ radar given its higher correlation with economic
turnaround and improved law &order situation, in our view. The initial
evidence based on 9MCY15 performance suggests the same with
sector’s profitability improving by a significant 54% YoY. More
importantly, underwriting segment’s contribution to total income stood at
32% versus 27% in the same period last year and loss ratio (a key
determinant of sector’s probability) eased to 53% against 58% in the
same period last year. Our sample includes 5 non-life insurance
companies that constitute ~80% of the sector’s market cap.
 Though this sector will be formally included in our coverage, at present
we highlight the opportunity provide by this sector (CY15YTD
underperformance of 8.8%) to investors keen on diversifying away from
main board.
Impact
 Early signs of turnaround emerging in the Underwriting business:
Our analysis reveals a surge in written premiums as overall economic
condition improves in Pakistan. Net premium of our sample rose by an
impressive 13% YoY which compares favorably with 10-years CAGR of
9%. Simultaneously, the economic recovery and improved law & order
situation have also reflected positively on the loss ratio which is a vital
gauge for sector’s profitability. The loss ratio dropped to 53% in 9MCY15
(54% in Sep-15) versus 58% in the same period last year, and is the
lowest in the last 10-years.
 With foreseeable improvement in the economy (GDP growth moving
from 4.5% in FY15 to 5.5-6.0% in the next 3-years), we are increasingly
confident about the sustainability of emerging trends in net premiums
and loss ratio witnessed in 9MCY15.
 Our conviction stems from (1) improved law and order environment of
the country post Karachi operation and Zarb-e-Azab, (2) increasing
disposable income on account of lower inflation, (3) higher automobile
sales (car plus LCVs ↑ 56% YoY), (4) 13% YoY increase in credit off-
take (as of Aug-15), and (5) increased use of trackers (TPL tracker’s
revenue increased by 12.6% YoY in 1QFY16).
 Better appreciation for the portfolio value to flow in: With higher
contribution of underwriting business (32% in 9MCY15 versus 27% in
9MCY14 and 17% average in the last 10-years), we expect price/NAV
discount to narrow going forward particularly for stocks like
IGIIL/EFUG/AICL which are currently trading at a discount of
34%/12%/7%, respectively. Based on Dec-14 portfolio readings, we
estimate the portfolio value of the aforementioned to be Rs387/161/62
per share.
PAKISTAN

2. Non-life Insurance Sector November 19, 2015
Foundation Securities (Pvt) Limited
5
10
15
20
25
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
9MCY15
0
2
4
6
8
10
-10.0
0.0
10.0
20.0
30.0
40.0
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
9MCY15
Net premium (LHS)
GDP Growth (RHS)
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
9MCY15
Underwriting profit (LHS)
Loss Ratio (RHS, %)
(80.0)
(60.0)
(40.0)
(20.0)
-
20.0
40.0
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
9MCY15
Outlook
 We see that the changed fortunes will bring back investors’ interest in the insurance sector that underperformed the
broader index in CY15YTD (-3.1% return versus 5.7% of KSE100 index). Though we will formally bring the sector
in our formal coverage, our initial study suggests liking for AICL, EFUG and IGIIL.
Fig 3: Lowering Loss/Ratio better UW business (Rs bn)
Source: Company report, Foundation Research, November 2015
Fig 4: Contribution of UW to Total income on the rise (%)
Source: Company report, Foundation Research, November 2015
Fig 1: Growth of Net Premium (Rs bn)
Source: Company report, Foundation Research, November 2015
Fig 2: High correlation of Net premium to GDP (%)
Source: Company reports, MoF, Foundation Research, Nov 2015

3. Non-life Insurance Sector November 19, 2015
Foundation Securities (Pvt) Limited
Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors
which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially
affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in
interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative
instruments, to manage certain of these exposures.
Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation
Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.
Recommendations definitions
If
Expected return >+10% Outperform.
Expected return from -10% to +10% Neutral.
Expected return <-10% Underperform.
Important disclosures: