December 22, 2016

AICL PA

Adamjee Insurance Company Limited

INSURANCE
Pakistan

Reinitiating with a Buy and a TP of Rs92

Coverage

BUY

Re-Initiation

32% return on offer, Buy!

We reinitiate coverage on Adamjee Insurance Company (AICL) with a Buy
rating and a Dec-2017 Target Price of Rs92, offering a 26% capital upside from
stocks last close. We value the company on Sum of The Parts (SoTP), where
core operations of the company are valued at Rs32, Adamjee Life Assurance
Company Ltd (subsidiary) at Rs15 (stake adjusted) and investment portfolio at
Rs46 (after incorporating a 30% discount). AICL trades at ~47% discount to its
peers listed at the local bourse. AICLs undemanding 2016E P/E of 6.89x and
P/BV of 1.43x (vis--vis peer average 2016E P/E of 12.87x and P/BV of 2.01x)
warrants a re-rating for the stock, in our view. We believe AICL merits higher
multiples given (1) recent growth and improvement in core operations, (2)
impressive investment portfolio and (3) massive potential for growth going
forward via Life Insurance and Islamic Insurance (Takaful). The company has
reported higher than peers asset growth of 22% in 2016 TD (vs. industry
growth of 19%). AICL also operates at a higher ROE of 22% vis--vis peer
average of 16%. There is substantial potential for the Pakistans insurance
industry to grow given Pakistans insurance density (i.e. premium per capita)
of ~US$9 vis--vis Indias US$55 and globals US$662. The sectors
penetration remains at ~0.7%, one of the lowest in the region.

Recommendation:
Current Price:

Rs73.16

December 2017 TP:

Rs92

Amreen Soorani
amreen.soorani@js.com
+ 9221 111-574-111
Ext: 3099
KATS Code: AICL
Bloomberg Code: AICL PA
Reuters Code: ADIN.KA
Market Price: Rs73.16
December 2017 Target Price: Rs92

Life Insurance can provide Supernormal Growth

Valuation Methodology: SoTP

We value the Life Insurance arm, Adamjee Life Assurance Company Ltd (ALAC), a
74% owned subsidiary under relative valuation (see table) at Rs20. We believe the
segment has immense growth potential on the back of current low penetration
coupled with improving income per capita and expanding urbanization in Pakistan.
Average annual growth rate of Life Insurance has been ~27%, where insurance
penetration for Pakistan stands at a low of 0.48% with Rs664 per capita density.
Moreover, ALACs growth has remained impressive with 3-year CAGR of 65%
(2012-2015). There are a total of 35 insurance companies operating in Pakistan, out
of which seven are Life Insurance companies. The insurance business is changing
with new distribution channels such as Bancassurance, Websales & Telesales have
emerged, along with expansion of distribution channels where this would also be
applied to the life insurance business in Pakistan.

Market Cap: Rs26bn, US$244mn

Mkt. cap/statutory fund m ultiple (x)

Buy

1-yr Avg. Daily Volume:

0.8mn shares, Rs44mn, US$0.4mn
1-yr High / Low: Rs74.34 / 47.19
Estimated free float: 245mn shares (70%)

Sum of The Parts - Target Price (Rs)

Core operations

32

Portfolio Value*

46

JLCL

0.52

Adamjee Life (74.28% holding)

15

EFL

0.23

Total TP

92

IGIL

0.29

Source: JS Research, *30% discount

Average

0.36

ALAC Statutory funds (Rs mn)

19,187

Value/share (Rs)

20

Source: JS Research

Impressive portfolio in up-trending market

AICL boasts an impressive investment portfolio, which at market value stands at
Rs22bn or Rs63/share. Majority of its investment are in blue chips, with a major
Completed on Dec 22, 2016
All prices are as of Dec 21, 2016
www.JamaPunji.com

Research is available on Bloomberg, Thomson Reuters, CapitalIQ & www.jsgcl.com.pk

Please refer to the important Disclosures and Disclaimer on the last page

Research Entity Notification Number: REP-084

Adamjee Insurance Company Limited | December 22, 2016

chunk invested in MCB Bank (41%). We value the bank at Rs254, warranting further
appreciation in AICLs portfolio value. Other major investments are in United Bank
(6%) and DG Khan Cement (6%). The portfolio holds an attractive dividend yield of
~7%, contributing ~Rs2.60/share (after tax) to our future earnings per annum.
Gauging from past practices, we also expect consistent capital gains to the tune of
Rs2.50/share (after tax) every year.
AICL: Investm ent Portfolio
Weight

Value/share

41%

38.12

26.1

Security General Insurance

Listed shares

4%

9.68

2.6

United Bank Limited

Unlisted shares

6%

6.01

4.1

Packages Ltd

Listed shares

4%

0.98

2.3

Fauji Fertilizer Company

Listed shares

4%

8.66

2.6

D.G. Khan Cement Company

Listed shares

6%

6.28

3.8

Pakistan Sovereign Fund

Mutual Fund

4%

16.28

2.5

31%

19

Portfolio

63

Source: Company accounts

General Insurance Industry in Pakistan

(Rsmn)

Earnings to grow as core profits rise

We expect companys Earnings before Tax to grow at a 5-year CAGR of 10%,
where earnings contribution from core operations is expected to increase from 14%
to 45% by 2022F, which we believe is yet to be priced in. We believe Net Claims
would escalate on a relatively lower pace of 9% from improving asset quality
witnessed during 2010-2015. We expect Fire & Property segment to witness a
positive turn around on the back of upcoming projects under the China Pakistan
Economic Corridor (CPEC) and other infrastructure and energy projects. We
incorporate 10% CAGR in the segments Underwriting profit during 2016E-2021F,
where we believe profit margins may rise to 20%, from 15% currently.

30,000

20,000
15,000

2010-2015

2017F-2022F

Net Premium revenue

15%

2%

9%

Net Claims

14%

0%

5%

Underwriting profit

38%

28%

16%

Investment Income

17%

25%

1%

Gen. & Admn expenses

18%

-2%

6%

Profit / Loss before Tax

23%

39%

8%

Profit / Loss after Tax

27%

39%

8%

Jubilee Gen

10,000
5,000

EFU Gen

AICL: 5-year CAGR

2004-2008

IGI Ins.

25,000

Underwriting Profit

Others

Net Premium
Revenue

MCB Bank

No of shares

Adamjee Ins

Others

Source: IAP

Source: Company Accounts, JS Research

as company has seemed to have turned the tide in 2015

AICLs past financial performance has been driven by its investment income and
lower effective tax rate. With 28% market share in the General Insurance industry of
Pakistan, the companys earnings over the last five years (2010-15) have grown at a
5-year CAGR of 39%. However, the companys core profitability started to improve
(mainly led by heavy-weight Motor Segment) in 2015 as the company booked
record Underwriting profit margin of 11% vis--vis an average of 3% during 20102014. AICL also recorded a higher Underwriting profit than its fixed overheads
during 2015, finally bringing AICLs core operations into the green zone for the first
time in nine years. We flag there still remains upside as the company incurs 73%
costs after Underwriting profits versus peer average of 52%. We flag 28% of the
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Adamjee Insurance Company Limited | December 22, 2016

revenues and 23% of the Underwriting profits pertain to operations outside Pakistan
that generate 9% margins versus 12% margins on local operations, where foreign
operations are widely concentrated in the Motor segment (56% of total Motor
segment from foreign operations).
AICL: Underwriting profits surpassing General and Admin Expenses (Rsmn)

1,400
1,200
1,000
800
600
400
200
(200)
(400)
(600)

Underwriting profit

9M2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

General and administration expenses

Source: Company Accounts

with Motor Segment taking the lead

180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
-

100,000
80,000
60,000
40,000

20,000

Fire
Marine

Source: Company accounts

Sep-16

Jul-16

May-16

Mar-16

Jan-16

Nov-15

Sep-15

Jul-15

May-15

Mar-15

Jan-15

Nov-14

Sep-14

Jul-14

May-14

Mar-14

Jan-14

Misc.

2018F

Auto loans (Rs mn)

Accident
& Health

2017F

Local auto sales (units) RHS

120,000

Motor

2016E

140,000

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2015A

Increasing auto loans to spur car insurance

AICL: Segment break-up of Net Premium

2014A

Turnaround in core business is channeled from its Motor segment with 35% YoY
growth in Net Premium during 2015, against a decline of 4% during 2009-2014. The
segments Underwriting profit touched Rs462mn (54% of total underwriting profit)
against Rs216mn during the year 2014. We believe (1) pick up in auto financing
amid monetary easing by the State Bank of Pakistan and (2) strong growth in highend car sales are the major factors that have triggered growth in the segment.
Going forward we forecast the segments Underwriting profit to post a 5-year CAGR
of 28%, on the back of 20% YoY growth in Net Premium.

Source: SBP, PAMA

9M2016 more of the same

Further improvement has been witnessed during 9M2016 with underwriting profits
clocking in at Rs878mn (EPS Rs8.10) against Rs645mn during 9M2015 (EPS
Rs6.39), the highest compared to any annual underwriting profits made by AICL.
Furthermore, Investment income jumped by 41% YoY as the company continued to
realize gains on its investment portfolio, along with dividend income. Net premium in
the Motor segment escalated by 134% YoY, compensating for drop in Underwriting
profit margins (9M2016 12%, -185bps YoY), as profits in absolute terms witnessed
two-fold increase in the segment. AICLs 3Q2016 bottom improved by 2x YoY
(Rs1.36bn, EPS Rs3.88) as companys underwriting business increased by 25%
YoY. Underwriting profits outgrew administrative expenses, while investment
income clocked in at Rs1,452mn (up 3x YoY). Out of the total investment income,
Page 3

Adamjee Insurance Company Limited | December 22, 2016

Rs356mn was accounted as dividend income and Rs1.10bn were Gain on Sale of
Investments.
9M2016: Result Review
(Rs m n)

9M2016

9M2015 YoY% 3Q2016

3Q2015 YoY%

Net premium revenue

6,879

4,806

43%

2,515

2,046

23%

Net claims

4,204

2,855

47%

1,622

1,250

30%

Expenses

1,204

970

24%

403

395

2%

Net commission

593

337

76%

201

170

18%

Underw riting result

878

645

36%

289

231

25%

Investment income

2,819

2,004

41%

1,452

509

185%

Rental income

52%

-6%

Other income

135

77

75%

24

25

-4%

General and admin expenses

420

357

18%

148

131

13%

Exchange gain / (loss)

-79%

(1)

-325%

Workers' w elfare fund

68

48

12

170%

624

155%

Profit from w indow Takaful op.

PBT
Tax
PAT
EPS - Reported (Rs)

3
3,350

43%

32

NM

2,329

44%

1,588

NM

516

94

449%

229

43

433%

2,834

2,235

27%

1,359

581

134%

8.10

6.39

27%

3.88

1.66

134%

Source: Company accounts

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Adamjee Insurance Company Limited | December 22, 2016

Financial Summary - AICL

Financial Highlights
Incom e Statem ent (Rs m n)

2014A

2015A

2016E

2017F

2018F

Net Premium revenue

6,302

7,748

9,209

10,419

11,562

Net Claims

4,088

4,780

5,581

6,162

6,627

Underw riting profit

369

853

1,234

1,475

1,762

Investment Income

2,061

2,404

4,007

2,687

2,769

Gen. & Admn Expense

485

571

604

639

676

Profit/ Loss before Tax

2,031

2,825

4,647

3,561

3,892

Profit/ Loss after Tax

1,880

2,554

3,718

2,492

2,724

2014A

2015A

2016E

2017F

2018F

Paid up Capital

3,500

3,500

3,500

3,500

3,500

Reserves

1,395

1,437

1,437

1,437

1,437

Retained earnings

9,209

10,710

12,940

14,470

16,145

Balance Sheet (Rs m n)

Total Equity

14,104

15,646

17,877

19,407

21,081

Provision for outstanding claims

5,706

5,773

5,773

5,773

5,773

Provision for unearned premium

5,270

5,929

5,929

5,929

5,929

Other liabilities

3,751

4,907

5,010

5,118

5,231

Total Liabilities

14,727

16,609

16,712

16,820

16,933

Investments

13,482

15,393

15,393

15,393

15,393

Premiums due but unpaid

3,627

4,539

4,630

4,722

4,817

Other Assets

11,721

12,323

14,566

16,111

17,804

Total Assets

28,830

32,255

34,588

36,226

38,014

Ratio Analysis

2014A

2015A

2016E

2017F

2018F

EPS (Rs)

5.37

7.30

10.62

7.12

7.78

DPS (Rs)

2.25

3.00

4.25

2.75

3.00

40.30

44.70

51.08

55.45

60.23

PER (x)

7.46

6.59

6.89

10.27

9.40

P/BV (x)

0.99

1.08

1.43

1.32

1.21

BVPS (Rs)

Dividend Yield
ROE
Underw riting Profit Margin
Investment / Total Assets (x)

6%

6%

6%

4%

4%

13%

16%

21%

13%

13%

6%

11%

13%

14%

15%

0.48

0.45

0.42

0.40

0.47

Source: JS Research, Company Accounts

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Adamjee Insurance Company Limited | December 22, 2016

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