JKSB forecasts Janashakthi Insurance to post Rs. 784 m earnings in FY11

As per the industry statistics provided by the regulator IBSL, Janashakthi Insurance is ranked as the third largest General insurer in the country with an approximate market share of 12% by the end of FY10. In the Life insurance segment, JINS ranked fifth in the industry with a market share of 5.4%.

Over the years, JINS has been predominantly an aggressive Non-Life insurance provider, contributing to as much as 75% of GWP.

However, in recent years, the company has shown interest in expanding its Life insurance portfolio with the change in the macroeconomic environment in the country.

The company has seen steady growth in recent years posting the highest ever profit of Rs. 770 million in FY10 thanks to prudent and efficient management of its investment portfolio.

Stemming from its performance in FY10, JINS recorded a PAT of Rs. 280 million for 1HFY11, growing 93% y-o-y thanks to a 23% increase in GWP.

Non-Life GWP accounted for over 70% of total GWP which grew 23% y-o-y with Motor Insurance (MI) being the largest contributor to the segment accounting for 71% of Non – Life GWP. The MI segment grew over 17% in 1HFY11 on the back of reduced vehicle duties which led to an influx of vehicles.

However, the company remained less aggressive in its new policy acquisitions under motor in order to ensure that the quality of the portfolio is maintained. Additionally, the company began pruning down on its medical portfolio in order to improve the bottom line.

Better claims control saw the company enjoying an approximate 6% reduction in net insurance claims and benefits to Rs. 1.47 billion in 1HFY11 mainly due to a reduction in flood related claims. JINS, similar to most other insurance providers saw a marginal decline in investment income to Rs. 429 million.

Despite lower returns on the equity market, the company booked in approximately Rs. 100 million in realised capital gains during the 1HFY11. By the end of FY10, of the funds under management in the Non-Life segment, approximately 57% has been invested in government securities (compared to around 70%-80% by other insurance providers) while a further 15% and a 16% has been invested in the equity and corporate debt market respectively.

JINS has expanded its Life insurance portfolio which accounted for only 22% in FY05 as against 27% in FY10. The Life insurance segment saw a 23% growth in GWP to Rs. 870 million with first year and renewal premiums growing by 52% and 7.5% yoy respectively. By the end of FY10, approximately 83% of funds under the segment were allocated to government securities. During 1HFY11, Rs. 385 million was transferred to the Life fund which stood at Rs. 4.2 billion.

Earnings for the 1HFY11 do not include any earnings from the Life insurance segment which will be made available only at year end post valuation of the Life fund.

Outlook

On the General insurance segment, motor insurance is likely to maintain current growth levels for the next couple of years given the current tariff structure. Price competition that was prevalent in the segment is likely to reduce in the medium term given the need to split Life and General insurance businesses in four years, thus resulting in policies of better quality being underwritten.

Other segments such as fire are likely to see only marginal growth as large infrastructure projects will be underwritten by the state owned insurance providers while companies such as JINS will have to rely heavily on private sector investments.

Investment income on the General insurance segment will remain more challenging as returns from the equity markets moderate. On Life insurance, the segment exhibits heavy potential with low penetration ratio compared to other regional peers.

With a growing ageing population in the country and only a smaller percentage of the public having access to pension schemes, the need for retirement products is increasing. Complemented by a growth in per capita income, we expect the basic endowment policies to see growth in the medium term. JINS is expected to focus heavily on developing its health related life insurance category.

Given the above, we expect JINS to post Rs. 784 million in earnings for FY11E, which translates to an EPS of Rs. 2.16. At a price of Rs. 16.30, the counter is trading at a P/E multiple of 7.5 times – a discount of 35% to the sector.