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JKSB Quarterly Highlights_HNB Assurance PLC (HASU)_3QCY16

Note Summary:

HASU reported a significant 149% YoY increase in earnings for 3QCY16, driven primarily by a turnaround in profitability for the GI business (PAT of Rs. 27mn for the quarter vs. a loss of Rs. 165mn in 3QCY15), while its life business continued to show healthy profit growth (+23% YoY). The improved profitability of the GI business stems mainly from a strong improvement in its motor claims ratio (from 88% in 3QCY15 to 72% in 3QCY16), supported by 1) market segmentation of the motor portfolio; 2) a strengthening of the claims processing division; and 3) re-pricing of portfolios in which the severity and frequency of claims were high, following a sharp increase in claims in the private car segment in CY15. Market share loss has led to a drop in market ranking on the GI side, while HASU’s life market positioning remains unchanged despite market share gains.

With 9MCY16 profit at Rs. 106mn, we project full year earnings of Rs. 453mn (+130% YoY), with a healthy life surplus transfer expected in 4QCY16. Looking ahead to CY17, we do not expect flood related claims in 2QCY16 to significantly impact reinsurance premiums on renewal of contracts. HASU’s GI business focus will continue to be on reducing underwriting losses, with a target of aligning the company’s motor claims ratio with the industry average of 65%-66%. On the life side, focus will remain on increasing contribution from higher margin endowment policies and improving policy retention, while a budget proposal to discontinue EPF housing loans could also drive growth in HASU’s MRP (Mortgage Reducing Policy) business - despite the higher interest rate environment - supported by its parent Hatton National Bank PLC. At its current price of Rs. 55.30, HASU trades at a CY16E P/E of 6.1x and a P/BV of 1.2x (based on NAV as at end Sep 2016), at a discount to the insurance sector average P/E.