JKSB retains Rs. 248 m FY 2010 net profit forecast for HNB Assurance

John Keells Stock Brokers is retaining its forecast of a full year net profit of Rs. 248 million for HNB Assurance following the release of the latter’s third quarter results.

This assessment is contained in JKSB’s earnings update done by its research team member Jeewanthi Malagala on HNB Assurance (HASU). Here are excerpts.

Despite steady performance in the 1st 2 quarters of FY10, HNB Assurance Plc (HASU) witnessed a 22% decline in earnings to Rs. 17 million on the back of an increase in insurance claims despite growth in GWP. However, earnings for the cumulative period (which includes only General insurance profits) have risen 10% yoy to Rs. 61 million.

The reduction in import tariffs and favourable macroeconomic environment paved way for an 18% increase in General GWP to reach Rs. 357 million with Motor insurance, being the largest contributor to the segment recording a 13% growth over the previous quarter. GWP from the Non life segment grew 13% for the cumulative period.

On the Life insurance segment, GWP declined 10% during the quarter. This was primarily due to the inclusion of GWP Single premium policies that were issued in 3QFY09 amounting to Rs. 142 million that had a one-off boost to Life GWP. However, during 3QFY10, the company issued another Single Premium policy which raised around Rs. 42 million. Excluding this, the segment witnessed over 30% yoy growth fuelled by its basic endowment policy sales.

Investment income during 3QFY10 grew 3% yoy to Rs. 125 million. The steep decline in interest rates has adversely impacted its investment income but this has been offset to a great extent by capital gains recorded from its equity investments.

The quarter experienced a 17% increase in insurance claims while for the cumulative period this amounted to 27%. The 3QFY10 also saw the transfer of Rs. 195 million, a yoy decline of 13% to the Life Insurance fund which grew to Rs. 2,325 million by the end of 3QFY10.

Outlook

The reduction of import tariffs has resulted in a considerable growth in Motor insurance GWP, which according to the company, is far more profitable than other insurance products given that high quality policies are underwritten.

On the Life insurance segment, HASU’s currently enjoying significant growth from its basic endowment policies while also having one off issues of Single Premium policies to further boost GWP growth. Interest on its MRPs has also improved consequent to the decline interest rates which has increased the demand for housing loans.

The income from investments is likely to remain flat for FY10 due to the unavailability of high interest bearings investments. However, the company is steadily increasing its exposure to the equity markets while also subscribing to remunerative debenture issues.

We retain our forecast of Rs. 248 million in earnings to equity for FY10E which includes profits from the Life Insurance segment, representing an EPS of Rs. 6.60. For FY11E, we expect HASU to post Rs. 333 million in PAT. At a price of Rs. 77.50, the counter is trading at a P/E of 11.7x and 8.7x FY10E and FY11E earnings respectively.