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APRIL 2015
The Pakistan Credit Rating Agency Limited
ENTITY RATING REPORT
NEW [APR-15]
PREVIOUS [MAY-14]
REPORT CONTENTS
1. RATING ANALYSES
Insurer Financial Strength (IFS) Rating
A A
2. FINANCIAL INFORMATION
Outlook Positive Stable
3. RATING SCALE
4. REGULATORY AND SUPPLEMENTARY
DISCLOSURE
ADAMJEE LIFE ASSURANCE
COMPANY LIMITED (ALAC)
The Pakistan Credit Rating Agency Limited
GENERAL INSURANCE
ADAMJEE LIFE ASSURANCE COMPANY LIMITED (ALAC)
April 2015 www.pacra.com
1 EFU (78%), Jubilee Life (81%).
RATING ANALYSES
(APRIL 2015)
ADAMJEE LIFE
ASSURANCE COMPANY
LIMITED (ALAC)
Industry: Life insurance sector, during CY14, witnessed significant slowdown in
growth 10% (CY13: 24%). Entire growth is led by the private sector, which grew by
20%, mainly due to Bancassurance. Investment portfolios of life insurers are highly
skewed towards government securities (primarily PIBs). Interest rate cuts brought
revaluation gains augmenting bottom-line. With the advent of takaful window, another
avenue has emerged which may benefit the sector in future.
Premium Mix: ALAC continued to procure predominant business through
bancassurance arrangements with its group bank – MCB – during CY14. The
premium mix remained dominated with unit-linked business (84%), followed by non-
unitized (10%), and conventional business (6%). The proportion of long-term
contracts increased to 61% (CY13: 51%) providing regular stream of premium.
Performance: ALAC has been growing tremendously since its inception and in its
6th
year of operation, it has achieved a market share of ~7% (CY10: 1.5%). During
CY14, ALAC’s GPW (PKR 5,215mln) grew by 17%. Herein, major growth has been
seen in group and individual’s renewable premium, whereas, single premium
witnessed decline. Persistency sustained at 75% second year, though remained lower
than peers1. Loss ratio of unit-linked segment (27%) is better than peers. The
investment income increased 2x; gains from PIBs (realized and unrealized) taking
benefit from declining interest rate environment in the country. This helped in
increasing excess of income over expenditure by 19%. Due to which, the operating
ratio improved to 99% (CY13: 100%); surplus for the very first year after
incorporation. However, capital contribution increased to PKR 70mln (CY13: PKR
34mln) to meet enhanced regulatory solvency requirement.
Business Strategy: Going forward the company envisages enhancing its
bancassurance business. While its group bank (MCB) would continue to remain forte
of banca business, the company is eyeing to expand through other banks and as a first
step, has entered into partnership with Faysal bank during CY14. The adoption of
agency model would bring further growth. In this regard, two branches have been set
up during CY14 while four new branches will be added till CY16. As the company
targets to achieve significant GPW growth in CY15, focus on stabilizing and
diversifying revenue streams while enhancing persistency would remain important.
Moreover, ALAC plans to introduce window Takaful operations.
Systems & Control: ALAC is ready to launch its internally developed Insurance
ERP Software by 3Q15 – a more advanced version.
Investments: The statutory fund investments (~93%) are outsourced and managed by
MCB - Arif Habib Savings & Investments Ltd (rated ‘AM2+’ by PACRA), with a
discretionary portfolio mandate. ALAC’s statutory fund’s investment book is
predominantly deployed in low risk government securities (78%), followed by
equities (14%). During CY14, ALAC astutely increased exposure in equities in
anticipation of positive stock market performance. Moreover, taking note of lowering
interest rates, the company transferred funds from short term T-Bills to longer term
PIBs, resulting in higher gains. Shareholder’s book, representing 78% of equity base,
is also deployed conservatively in government securities (83%), followed by equities
(10%). The investment yield of both statutory funds (16%) and shareholders’ funds
(11%) improved, mainly due to higher gains from PIBs.
Liquidity & Solvency: At end-Dec14, the accumulated capital contribution to
statutory funds rose to PKR 642mln (CY13: PKR 572mln) – providing 2x coverage to
the accumulated deficit (PKR 372mln). The liquidity ratio remained constant at 1.1x,
providing good risk absorption capacity.
Profile: ALAC, starting operations in 2009, is a subsidiary of Adamjee Insurance
(AICL) (74%). The other major shareholder is IVM Intersurer B.V. (26%), a
company of Hollard (a leading Insurance Group of South Africa). AICL is the second
largest non-life insurance company in the country, rated ‘AA’ by PACRA. AICL is a
part of Nishat group - a leading business conglomerate in Pakistan with strong
presence in banking, insurance, textiles, and cement sectors.
Governance & Management: The company’s BoD comprises seven members,
including the CEO – Mr. Fredrik De Beer. Apart from the CEO, four members
represent AICL and two IVM. Mr. De Beer has experience of over three decades in
various sectors including life and general insurance business. He is assisted by a team
of professionals.
RATING RATIONALE
The rating reflects ALAC's
sustained progression in business
volume emanating from its
synergies with the group bank –
MCB. With significant growth in
its topline and improved
investment income, the company
has succeeded in achieving break-
even for the last two years. The
growth in volume is primarily
Bancassurance driven. The
management intends to built sales
force around recently launched
agency model as well to add to its
growth momentum. Although this
would lead to high set-up cost yet
success therein is important for
future positioning of the company.
Meanwhile, comfort is drawn
from ALAC's strong risk
absorption capacity, represented
by sufficient liquidity and overall
quality of its investment portfolio.
KEY RATING DRIVERS
The positive outlook takes note of
management’s ability to execute its
business plan in line with its growth
objectives, while translating into
underwriting profitability. The self
subsistence of statutory funds
without relying on capital
contribution, while ensuring
underwriting profitability, would
benefit the rating. Moreover,
prudent management of risk in wake
of increasing business volumes
would remain important.
The Pakistan Credit Rating Agency Limited
Adamjee Life Assurance Company
PKR mln
BALANCE SHEET 31-Dec-14 31-Dec-13 31-Dec-12
Investments
Liquid Investments 8,682 5,478 2,355
Other Investments 3 - -
8,685 5,478 2,355
Insurance Related Assets 360 34 41
Other Assets 144 123 91
TOTAL ASSETS 9,189 5,634 2,487
Equity 364 419 241
Accumulated Retained Surplus (372) (539) (475)
Accumulated Capital Contribution 642 572 538
Policyholder Liabilities 7,986 4,827 1,955
Balance of Statutory Funds 8,256 4,860 2,018
Other Liabilities 569 355 229
TOTAL EQUITY & LIABILITIES 9,189 5,634 2,487
INCOME STATEMENT 31-Dec-14 31-Dec-13 31-Dec-12
Net Premium
Gross premium Written (GPW) 5,215 4,475 2,297
Retinsurance Expense (239) (162) (107)
Net Premium Revenue (NPR) 4,976 4,313 2,190
Net Claims (1,243) (608) (155)
Net Operational Expenses (1,456) (1,213) (823)
Excess of Income over claims and expenditure 3,326 2,809 1,367
Surplus/(deficit) Retained in Statutory Fund/Profit before tax in Shareholder's Fund 72 (64) (108)
RATIO ANALYSIS 31-Dec-14 31-Dec-13 31-Dec-12
Underwriting Results
Loss Ratio 25% 14% 7%
Combined Ratio 98% 93% 113%
Performance
Operating Ratio 99% 101% 105%
Investment Yield 15% 9% 11%
Liquididity & Solvency
Liquidity Ratio – times 1.1 1.1 1.2
Adamjee Life Assurance Company
April 2015
Life Insurance
Financials [Summary]
www.pacra.com
The Pakistan Credit Rating Agency Limited
STANDARD RATING SCALE & DEFINITIONS
LONG TERM RATINGS SHORT TERM RATINGS AAA Highest credit quality. Lowest expectation of credit risk.
Indicate exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
A1+: The highest capacity for timely repayment.
A1:. A strong capacity for timely repayment.
A2: A satisfactory capacity for timely repayment. This may be susceptible to adverse changes in business, economic, or financial conditions.
A3: An adequate capacity for timely repayment. Such capacity is susceptible to adverse changes in business, economic, or financial conditions.
B: The capacity for timely repayment is more susceptible to adverse changes in business, economic, or financial conditions.
C: An inadequate capacity to ensure timely repayment.
AA+
AA
AA-
Very high credit quality. Very low expectation of credit risk. Indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A+
A
A-
High credit quality. Low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be vulnerable to changes in circumstances or in economic conditions.
BBB+
BBB
BBB-
Good credit quality. Currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity.
BB+
BB
BB-
Speculative. Possibility of credit risk developing. There is a possibility of credit risk developing, particularly as a result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met.
B+
B
B-
Highly speculative. Significant credit risk. A limited margin of safety remains against credit risk. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC
CC
C
High default risk. Substantial credit risk “CCC” Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. “CC” Rating indicates that default of some kind appears probable. “C” Ratings signal imminent default.
D Obligations are currently in default.
Rating Watch Alerts to the possibility of a rating change subsequent to, or in anticipation of, a) some material identifiable event and/or b) deviation from expected trend. But it does not mean that a rating change is inevitable. Rating Watch may carry designation – Positive (rating may be raised, negative (lowered), or developing (direction is unclear). A watch should be resolved with in foreseeable future, but may continue if underlying circumstances are not settled.
Outlook (Stable, Positive, Negative, Developing) Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’.
Suspension It is not possible to update an opinion due to lack of requisite information. Opinion should be resumed in foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn.
Disclaimer: PACRA's ratings are an assessment of the credit standing of entities/issues in Pakistan. They do not take into account the potential transfer / convertibility risk that may exist for foreign currency creditors. PACRA's opinion is not a recommendation to purchase, sell or hold a security, in as much as it does not comment on the security’s market price or suitability for a particular investor.
Withdrawn A rating is withdrawn on a) termination of rating mandate, b) cessation of underlying entity, c) the debt instrument is redeemed, d) the rating remains suspended for six months, or e) the entity/issuer defaults.
Credit rating reflects forward-looking opinion on credit worthiness of underlying entity or instrument; more specifically it covers relative ability to honor financial obligations. The primary factor being captured on the rating scale is relative likelihood of default.
Name of Issuer ADAMJEE LIFE ASSURANCE COMPANY LIMITED (ALAC)
Sector Insurance - Life
Type of Relationship Solicited
Purpose of the Rating Independent Risk Assessment
Rating History
17-Apr-15 A Positive Maintain
12-May-14 A Stable Maintain
3-May-13 A Stable Maintain
11-Nov-11 A Stable Maintain
11-Jan-11 A Stable Maintain
Related Criteria and Research
Rating Methodology Insurer Financial Strength Rating Methodology
Sector Research Insurance | Life - Viewpoint | Apr-13
Rating Analysts Rabia Ahmed Amara S. Gondal
rabia.ahmed@pacra.com amara.gondal@pacra.com
(92-42-35869504) (92-42-35869504)
Rating Team Statement
Disclaimer
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Probability of Default (PD)
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this assignment does not have any beneficial interest, direct or indirect in the rated entity/instrument.
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Long Term Outlook Action
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