KARACHI, Nov 4: The profitability of non-life insurance companies took a plunge by an average of 61 per cent in the latest nine months (Jan-Sept 2008), which analysts attributed to a sharp decline in investment income and erosion in core underwriting profits.

Taking sample of 16, out of 24 stock market listed non-life companies, which together accounted for 94 per cent of the total gross premium, analyst at JS Global, Farhan Rizvi, calculated combined earnings at Rs4.5 billion. That represented an increase of 10 per cent from profit at Rs4.1 billion earned by the industry in the corresponding period of the previous year.

But all of the increase emanated from one time abnormal capital gains booked by the Adamjee Insurance Company on the sale of 14.1 million MCB shares from its portfolio to Maybank.

Shorn of that one time gain, the industry witnessed profitability dip by 61 per cent.

Investment income amounted to Rs926 million, which showed a steep drop of 75 per cent over the previous similar period. In that respect, the non-insurance companies are seen to be an early casualty of the stock market meltdown, since most companies invest much of the surplus cash in equities. The loss from investment in equities was exacerbated by a 13 per cent drop in overall industry underwriting profit.

Interestingly, the total net premium of the sector continued its steady growth momentum, rising by 17 per cent to Rs14.9 billion in 9M2008 compared to Rs12.8 billion earned in the same period of 2007.

However, the premium rise could not translate into improvement in underwriting profit because of 19 per cent rise in net claims to Rs9.8 billion; a 33 per cent jump in net commission paid amounting to Rs 1.1 billion and 20 per cent increase in underwriting expenses which stood at Rs2.7 billion.

Claim ratio edged up to 66 per cent during the period under review compared to 65 per cent in 9M2007. All of that resulted in a decline in underwriting profits by 13 per cent to Rs1.2 billion in 9M2008. The fate of the non-life insurance companies look clearly linked to economic growth as well as the stabilisation of the equity market.