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GENERAL INSURANCE

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RATING (JANUARY 2014) IGI INSURANCE LIMITED (IGI)

New Previous Insurer Financial Strength

AA AA

RATING HISTORY

Dec Nov Dec Nov Feb Dec2008 2009 2010 2011 2013 2013

AA+

AA

A+

A

FINANCIAL DATA PKR (mln)

Sep-13* Dec-12 Dec-11

Equity 10,531 10,305 11,288

GPW 1,655 1,847 1,747 Adjusted U/W (loss)/ Profits

(61) 116 101

Pre-tax (loss)/Profit 519 (414) 57

Combined Ratio (%) 107.8 87.6 88.1

Operating Raio (%) 34.0 144.1 93.4

Liquidity Ratio** (x) 54.3 46.0 24.8

*Unaudited ** Liquidity Ratio: Investments at Market Value less borrowings/Provision for outstanding claims ANALYSTS Anam Pirzada +92 42 3586 9504 anam.pirzada@pacra.com

Amara S. Gondal +92 42 3586 9504 amara.gondal@pacra.com

RATING RATIONALE AND KEY DRIVERS The rating draws comfort from the investments-holding company structure of IGI. This, while generating non-

core revenue stream, provides strong risk absorption capacity to the company, engendering high level of resilience and flexibility against varied risks. A notable improvement has been made in the IT infrastructure augmenting MIS platform. This also helped the company to bring efficiency, notably in claims management. After demonstrating stable performance in previous years, has been a drop in the underwriting results in the ongoing year, mainly due to one-off claims in fire and marine segments and losses in the health segment. The company intends to mend this by harnessing client selection process and optimizing sectoral mix. Alliance with Packages Group lends support to the ratings. The rating remains dependent on the management's ability to strengthen its market position in a competitive

landscape. Ongoing acquisition of a life insurance company is expected to benefit IGI in strengthening footings in the insurance industry. Nevertheless, any material dilution in the risk absorption capacity would impact the rating. ASSESSMENT IGI maintains a diversified GPW portfolio at end-Sep13 comprising fire segment (35%), motor (26%),

marine (15%), health (13%) and misc. (11%). IGI has been capitalizing on group strength, in the form of captive business (40%) providing stability to the topline. This translates into relatively high top ten client concentration (40%) than peers. IGI has a market share of 4% at end-Sep13. The company has been growing modestly leveling with the

industry growth of 8% (CY12: 6%). The growth has been fueled by all segments majorly in fire (14%). However, the claims ratio is depicting a hike mainly due to three reasons; increased losses in the marine segment in the 2Q13 (153%) on the back of one major claim, flood losses in the fire segment and due to emerging health segment having higher loss ratios. The company’s operating expense ratio spiked to 41% in CY12 (CY11: 34%) due to increased provision of bad debts (3% of NPR) as against 5% reversal income in CY11. Moreover, the company has also been incurring legal costs for its prospective subsidiary – ALICO (9M13: 7%, CY12: 4%, CY11: 3%). Baring this, the operating expense ratio normalizes to 38% in 9M13. The increased level of claims dragged the company’s underwriting performance into loss. The investment book posted sizeable gains mainly emanating from strategic holdings. Although, stable stream of dividend income improved (60% YoY), major difference was the turnaround of profits from its associate – Packages Limited. Resultantly, benefiting IGI, bringing its bottomline into profits (PKR 519mln) as against loss of PKR 470mln in 9M12. Going forward, IGI intends to maintain its prudent growth stance, while achieving underwriting

profitability. The company focuses to consolidate recently launched health segment, discontinuing relations with loss making accounts. Meanwhile IGI envisages tapping growth potential in different sectors like engineering and power. IGI recently finalized the deal to acquire ~82% stake in the American Life Insurance Company (ALICO), through which the management foresees growth by providing complete insurance solution to its customers. The arrangement requires payment by IGI in two tranches; whereby after the payment of first tranche (Jan14) the shareholding with IGI shall be ~70% while the remaining would be acquired after 3 years. ALICO US would be providing technical assistance during the period, which would benefit IGI in augmenting expertise in health segment. The synergies available will be utilized in expanding customer base of IGI. After completing the acquisition formalities, ALICO would be re-branded as IGI Life, thereby bringing the subsidiary under IGI’s umbrella. IGI’s equity is entirely deployed in investment book (end-Sep13: PKR 11,358mln). The investment book

pre-dominantly comprises strategic investments (94%) in associates. Of the remaining, majority is invested in TDRs, government securities and a small portion in investment properties. IGI IBL’s subsidiary – IGI funds, was divested during the year (merged with Alfalah GHP funds) while the bank itself may be divested in the course of time. Following ALICO acquisition strategic book would further increase by PKR 700mln. IGI has built up long-term relations with a panel of reputed international reinsurers (Swiss Re, Hannover Re,

Mitsui Sumitomo Re, Scor Re) predominantly rated in ‘AA’ and ‘A’ categories. IGI's reinsurance arrangements mainly comprise Surplus treaties; the company has Excess of Loss treaty arrangements to cover the catastrophic risks and the motor insurance. During the year the company faced reduced commission income which reflects reinsurers’ view against the high cession of losses (9M13: 47%, CY12: 30%). IGI has a robust financial profile – a factor of paramount equity base established by the company over time

through investment gains. Although liquidity position marginally improved to 0.9x of policyholder liabilities; a major proportion is allocated to dedicated avenues. Excluding this the liquidity ratio drops to 0.4x, which is lowest amongst peers. However, huge strategic portfolio provides an added cushion and gives fiscal space for borrowing. Going forward, the financing of ALICO acquisition would increase leveraging. PROFILE IGI Insurance Limited, listed on Karachi and Lahore stock exchanges, is largely owned by Packages Group

- country's prominent business group with diversified interests in packaging, dairy, chemicals, and the financial sector. IGI Insurance is the holding company of the Packages Group's (PG) interest in the financial sector. The company has an experienced eight-member board of directors with Syed Babar Ali holding the

Chairman's position. The overall governance structure and transparency of PG in general, and IGI in particular, meets high standards in the industry. Mr. Jalees Ahmed Siddiqi, the CEO since January 2009, an engineering graduate, possesses vast national and international experience and is assisted by a team of qualified professionals.