Aviva NDB Insurance enjoys return to profits, sharp rise in GWP

Aviva NDB Insurance has returned to profitability as well as a sharp rise in Gross Written Premium (GWP). However with investment returns coming under threat due to poor equity market performance, John Keells Stock Brokers (JKSB) has lowered earnings forecast to Rs. 565 million from Rs. 774 million for FY11E, representing a yoy decline of 6%. This assessment is contained in JKSB’s earnings update on Aviva NDB. Here are excerpts.

CTCE posted Rs. 34 million in PAT for 2QFY11 as against a loss of Rs. 47 million in the comparative quarter with growth stemming from a sharp increase in GWP predominantly from the Life insurance segment despite a steep fall in investment income and increases in its cost structure. PAT for 1HFY11 which comprises only earnings from the General insurance segment reached Rs. 182 million, representing a yoy growth of over 200%.

Group GWP recorded a growth of 43% during the quarter propelled by a 63% growth in Life insurance GWP to Rs. 2.3 billion while the General insurance segment saw only a 2% growth yoy to Rs. 722 million. All segments operating under General insurance saw yoy as well as qoq declines except for Motor insurance which grew 47% over the comparative quarter in 2010 and 10% over the adjacent quarter in 2011 on the back of higher motor vehicle registrations. In the Life insurance segment, unit linked policies continues to exhibit exponential growth of over 140% yoy to reach Rs. 1.3 billion in GWP.

However, over the adjacent quarter, growth was limited to a 16%.

Despite strong GWP growth, revenue (which includes GWP and investment income) growth was muted due to a steep reduction in investment income with the equity market taking a sizeable dip during the quarter.

Investment income amounted to just Rs. 386 million in 2QFY11 from Rs. 1.3 billion in the comparative quarter.

CTCE had better control over its net claims and benefits which declined marginally during the quarter.

Operational expenses rose during the quarter due to higher administration, establishment and selling expenses. Selling expenses continued to increase post brand migration in 1HFY10 with Rs. 428 million being incurred in 1HFY11 compared to Rs. 397 million and Rs. 188 million in 1HFY10 and 1HFY09 respectively.

During the quarter, Rs. 1.1 billion was written off to the Life insurance fund which grew to Rs. 24.4 billion by the end of 2QFY11.

Earnings Outlook

Life insurance segment is likely to maintain current growth rates in the medium term although unit linked policies may see nominal growth of around 10 – 15% given lower return on investments. On the general insurance segment, motor insurance will continue to drive the segment. The need to split insurance companies within the next 4 years may exert pressure on the insurance providers to avoid price competition in order to safeguard underwriting profits.

With investment returns coming under threat due to poor equity market performance, we lower our earnings forecast for CTCE to Rs. 565 million from Rs. 774 million for FY11E, representing a yoy decline of 6%.

This translates to an EPS of Rs. 18.84. At a price of Rs. 295, the counter is trading at a P/E multiple of 16 times – a premium to the sector as well as the market.