HNB Assurance forecasts to post Rs. 296 m profit in 2011

HNB Assurance Plc has been forecast to achieve a Rs. 296 million profit in the current 2011 financial year by John Keells Stock Brokers (JKSBC).This forecast is following the release of strong 4Q 2010 and overall 2010 earnings by HNB Assurance. Here are excerpts from JKSB earnings update on HNB Assurance Plc.

HNB Assurance Plc (HASU) rebounded strongly during 4QFY10 with a 24% increase in earnings to Rs. 181 million to end the year with a PAT of Rs. 242 million in line with our forecast of Rs. 248 million. Pending finalisation of its Life fund valuation, the company has recognised a provisional profit of Rs. 156 million compared to Rs. 130 million in FY09. Motor insurance was the largest contributor to the General insurance GWP which grew 36% over the comparative quarter in 2009. New motor vehicle registrations which rose 77% during 4QFY10 and 76% in FY10 resulted in a sharp increase in motor insurance business at HASU. GWP from the segment recorded an increase of 54% yoy during the quarter while over the adjacent quarter, an 8% growth was achieved. In addition, the Miscellaneous insurance segment too witnessed a twofold growth on the back of an increase in medical insurance policies from few large corporate accounts. GWP from the Life insurance segment grew 59% over the comparative quarter with growth being fuelled by a significant improvement on its basic endowment policies. MRP, which are tied to housing loans, too have witnessed growth consequent to the sharp reduction in interest rates. The company was less reliant on its Single Premium policies in FY10 compared to FY09. Cumulative GWP from the segment exceeded Rs. 1 billion since the commencement of its life product sales in 2002, growing at a CAGR of over 50%.

Adverse weather conditions that prevailed during the quarter coupled with motor and medical claims resulted in a 25% increase in claims to the amount of Rs. 177 million. Investment income for the quarter rose 26% during the quarter to Rs. 152 million thanks to capital gains recorded from its equity investments and interest received from attractive debenture issues. During the quarter, Rs. 60 million was transferred to the Life fund which stood at Rs. 2,385 million, a yoy growth of 29%.

Outlook

The General insurance segment will be driven by increased demand for new motor vehicles. Although HASU has been selective in terms of policies underwritten, we expect the segment to bring in higher GWP in the medium term. Increase in per capita GDP and an increase in purchasing power is likely to increase demand for basic endowment policies while the company may also have one off issues of Single premium policies to boost GWP growth. HASU is also looking at introducing a couple of new and innovative Life insurance products during 1HFY11. Investment income is expected to grow with its increased exposure to the equity markets while interest earned from attractive debenture issues will also be a significant contributor.

We expect HASU’s bancassurance model to be a significant revenue generator for both the Life and General insurance segments in the medium term. Given the above, we expect HASU to post Rs. 296 million for FY11E, representing an EPS of Rs. 7.78. At a price of Rs. 81.10, the counter is trading at a P/E of 10 times FY11E earnings – a discount of around 12% to the sector.