Insurance: PAKISTAN REINSURANCE COMPANY LIMITED - Analysis of Financial Statements C Year 2003 - H 2001 2009
Formerly called the Pakistan Insurance Corporation, PRCL is the only professional reinsurance organisation operating in Pakistan. The principal business of the company is provision of insurance and reinsurance services in all classes except life.
The organisation became a company in 2001. Measures taken to convert into a commercial concern include increase in paid-up capital requirements from Rs 0.54 billion to Rs 3 billion and increase in authorized capital from Rs 4 billion to Rs 25 billion. This is to strengthen equity so that the company can expand both at home and abroad. From 1st January 2005, compulsory cessation has been removed. Now, PRCL can select which organisation it can provide reinsurance to and is not bound to provide for poor performing companies.
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COMPANY SNAPSHOT
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Name of company Pakistan Reinsurance Company Limited
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Nature of Business Insurance
Ticker PAKRI
Net Premium CY '07 Rs 1,693,082,718
Net Premium CY '08 Rs 1,895,574,584
Share price (avg.) Rs 32.77/ share
Market Capitalization 9,831,000,000
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RECENT PERFORMANCE H1'09
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H1 08 H1 09 %
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Gross Premium 1,480,000,000 2,036,000,00 37.57%
Net Premiums Revenue 977,870,300 1,009,515,13 3.24%
Net Claims 501,393,408 430,845,350 -14.07%
Expenses 95,056,826 146,580,612 54.20%
Net commission 236,486,037 263,695,077 11.51%
Underwriting Result 144,934,029 168,394,097 16.19%
Investment income 217,773,018 255,779,402 17.45%
Rental income 22,406,505 26,801,877 19.62%
Exchange loss/ gain 32,514,422 21,859,072 -32.77%
Other income 4,616,833 5,286,001 14.49%
General & admin expenses -20,102,919 -16,491,082 -17.97%
Provision for welfare fund -7,960,754 - -
Impairment in value of investments - - 1,127,973,579
Profit before tax 394,181,134 -666,344,212 -269.05%
Tax 103,187,808 -7,930,132 -107.69%
Profit after tax 290,993,326 -674,274,344 -331.71%
EPS 0.97 -2.25 -331.96%
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RECENT PERFORMANCE H1'09
The operating performance of the company has deteriorated further in the second quarter. The gross premium for the period stood at Rs 2,036 million (H1'08: Rs 1,480 million) - representing an increase of 37.57%. The net premium revenue amounts to Rs, 1,010 million (H1'08: Rs 978 million). Net claims have declined by 14.07%, however, expenses and net commission have increased by 54.20% and 11.51% respectively. The underwriting result for the period is subsequently Rs 168 million - representing a 16.19% increase from the same period last year (SPLY).
The composition of net premium reveals that treaty make-up the major portion (63%) of the pie. Fire and engineering are the other two popular policies. The composition of underwriting result shows that engineering insurance has mainly contributed to the profits (24%) by incurring less claims (claims ratio is 11%) and expenses (expense ratio is 2%). Treaty has the highest claims ratio at 56% and the highest expense ratio at 21%, explaining the 22% loss from this policy. The company has a low risk retention ratio. It has transferred most of its risk to another reinsurance company, in a phenomenon known as retrocession (when a re-insurance company gets reinsured further). The table lists the claims, expense, combined and risk retention ratios of all policies.
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Policy Claims Expense Combined Risk
Ratio Ratio Ratio Retention
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Fire 36% 2% 37% 46%
Marine cargo 7% 20% 28% 70%
Marine hull 0% 4% 4% 100%
Accident -3% 11% 8% 100%
Aviation 6% 5% 12% -1116%
Engineering 11% 2% 13% 18%
Treaty 56% 21% 77% 70%
Total 43% 15% 57% 29%
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Investment income has shown an increase by 17.45% compared to SPLY. This is an improvement from first quarter when investment income showed a decline of 25.07%. The increase came from Held to maturity securities as the investment in HTM has increased from Rs 910 million in H1'07 to Rs 2,168 million in H1'08. The rental income has increased by 19.62% from the SPLY. The exchange loss of 32.77% occurred as against a massive 845.44% increase in SPLY.
Other income rose by 14.49% while general/administrative expenses have declined by 17.49%. The provision of worker welfare fund was not collected. Also the company recorded massive impairment in investments amounting to Rs 1,128 million (Rs 562 million in 1Q09) - exhibiting a 100.54% increase on a QoQ basis. This is the major contributor to loss before and after tax. Restructuring at the stock exchange will curb the losses. The gross premium has posted positive results. The company needs to manage funds more prudently.
SECTOR OVERVIEW The top five, (T5) companies in the non-life insurance sector of Pakistan make 75% of the gross premium written in the sector. The combined profitability of T5 group has shrunk from a profit of Rs 22.3bn in CY07 to a loss of Rs 4.3bn in CY08. The two-fold reasons for decline were: a) impairment losses on equity portfolios ie negative investment income and b) a high base effect in CY07 when one time capital gains resulted in growth of overall earnings. However the sector has seen massive growth as reflected in underwriting profits that have risen from negative Rs 0.02bn in CY07 to positive Rs 1.1bn in CY08. This was due to a 500 bps increase in risk retention ratio, 16% YoY growth in net premium and sharp containment of claims ratio. Claims ratio stood at 68% in CY08.
FIRE AND PROPERTY The segment achieved robust growth. Underwriting profits grew from negative Rs 19 million in CY07 to a positive Rs 233 million in CY08 due to a sharp decline in claims ratio to 68% in CY08 as against 111% in CY07. Claims in CY07 were unusually high due to monsoon rains in third quarter of CY07 and unstable law and order situation. In CY08 we see a structural change in the risk management policies as less risk was passed onto the reinsurers.
MOTOR The underwriting profit touched the figure of Rs 293 million in CY08 vis-a-vis negative Rs 266 million in CY07. This was because in CY07 the base effect on claims was high. The claims ratio has dropped from 86% to 725 for the segment. The expense ratio was 17% while the combined ratio was 90% (96% SPLY).
MARINE AND TRANSPORT This was the most profitable segment in CY07 (profitability went up by 67%). However, in CY08, the segment has amassed a 45% YoY decline in profitability due to rise in claims, which are up by 48%. The claims ratio stands a 45% in CY08 while it was 32% in CY07. The expense ratio remained stable at 18%. The combined ratio was 63% as against 50% in SPLY.
MISCELLANEOUS Gross premiums did not improve, but net premium booked a growth by 15%, due to higher risk retention of 54%, as against 46% in CY07. The claims increased by 19% in CY08, which restricted top line growth. The claims ratio increased by 2ppts to 75%. The expense ratio was 20% and hence combined ratio stood at 95% in CY08, showing a 100 bps increase.
BOTTOM LINE PERFORMANCE Net earnings of T5 plunged from net profit after tax of Rs 22.3 billion to net loss after tax of Rs 4.3 billion in CY08 mainly due to investment income owing to unfavourable capital market conditions, which included the price floor and subsequent fall in market capitalization.
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GROSS PREMIUM VS NET PREMIUM
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(Rupees in Millions) 2007 2008
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Gross Premium 4,750 4,555
Reinsurance ceded (2,929) (2704)
Net Retention 1,821 1,851
Premium Reserve (128) 45
Net Premium 1,693 1,896
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The gross premium stands at Rs 4,550 billion at the end of CY08 - drop of 4.10% vis-a-vis last year. (CY07: Rs 4,750 billion), which is due to lower facultative business in fire and engineering while other areas performed reasonably. The CAGR (CY03: CY08) of the gross premium has declined by 0.51%. The net premium revenue has increased by 11.96% and the CAGR (CY03: CY08) has been 4.60%. The net premium has shown a y-o-y increase because net retention has improved and premium reserves were favourable.
OPERATING PERFORMANCE
The underwriting profit/net premium has decreased from 12.28 in CY07 to 10.87 in CY08 due to a decline in underwriting result by 0.87% and increase in net premium revenue by 11.96%. Treaty makes up the largest portion of underwriting profit - 40%. The underwriting profit/gross premium has increased from 4.38 in CY07 to 4.53 in CY08, primarily due to a decline in gross premium by 4.10% on a y-o-y basis. The claims ratio declined from 55% to 51% on a y-o-y basis, which will positively impact underwriting result.
INVESTMENT RETURNS
Investment income/net premium has decreased from 217.91 in CY07 to 44.65 in CY08 while investment income/investment assets have declined from 57.54 in CY07 to 15.50 in CY08 due to a decline in investment income by 77.06% on a y-o-y basis. The major decline was seen in available-for-sale investments - 99.95%. The decline in return on Government Securities, income on treasury bills and dividend income were by 23.84%, 10.10% and 12.49% respectively. Return on other fixed income securities and deposits increased substantially by 439.34% but could not contribute to increase in investment income. Also the decline in amortization (49.65%) on PIBs and expenses (46.42%) could not have a favorable impact on the investment income. The investment assets show a decrease of 13.89% principally due to sale of all treasury bills and decline in PIBs.
EXPENSE ANALYSIS
Loss ratio has decreased from 55.01 in CY07 to 50.79 in CY08 while the expense ratio has increased from 9.09 in CY07 to 13.19 in CY08. The combined ratio has hence decreased from 64.10 in CY07 to 63.98 in CY08. The reinsurance expense/net premium has declined from 180.55 in CY07 to 140.30 in CY08. PAT/Net Premium has decreased from 78.43 in CY07 to 19.46 in CY08 as PAT has declined by 41.62% and net premium has increased by 11.96% on a y-o-y basis.
MARKET VALUE RATIOS
The EPS has drastically declined from Rs 12.42/share in CY07 to Rs 2.95/share in CY08. This is due to decline in profitability (PBT declined by 76.21%; PAT declined by 41.62%). Dividends were not given out in CY07 while in CY'08 the cash dividend was Rs 2.50/share. The average price per share as on 12th June 2008 was Rs 39/share after staying above Rs 150/share in May 2008. However the share price has recovered and shows that investor confidence is returning due to improved macroeconomic performance. The reforms show that the company's performance will further strengthen in years to come.
FUTURE OUTLOOK
PRCL is compelled to accept 35% of reinsurance business from the general insurance companies operating in Pakistan to avoid premium outflows out of the country. PRCL is also collaborating with international entities through ECO (Economic Cooperation Organisation) and FAIR (Federation of Afro-Asian Insurer and Re-insurer) to avoid outflow of foreign exchange and improve the performance of insurance sector in Pakistan. The company has launched a reinsurance management system on 1st April 2009 that will improve its monitoring capabilities but will not contribute to operational efficiency.
A number of reforms were implemented as a consequence of the Insurance Policy 2007 that aimed reforms at a similar pace as the banking sector. The insurance sector was given tax incentives in the Federal Budget 2008-09:
* Taxable income to be determined after deduction of insurance premium
* Capital element of annuity receipts to be exempted from tax
This new policy also aimed at covering four new areas: crop insurance, insurance against terrorism, insurance against earthquake and micro-insurance. These areas are still largely untapped and provide new opportunities for PRCL. Government has also provided an exemption of 5% excise duty on non-life insurance companies in budget policy of 2008. With the upcoming sector of Islamic insurance called Takaful, PRCL may decide to further diversify its offerings of products as well as its customer base by pursuing Takaful as a separate class of insurance. This is another step that would enable the company to further strengthen its position in the competitive arena.
Moreover, the recently introduced crop insurance could be tapped as a potential avenue of profitability and contribution towards the economic development of the country. In 2007-08 budgets, the requirement of the compulsory reinsurance with the PRCL has been removed from the insurance ordinance. Consequently, the non-life insurance companies are free to get their reinsurance done from either PCRL or any other foreign company. Moreover, the extension of tax exemption on the gain from sale of Modaraba certificates or listed up to June 2008 will be an incentive to the insurance companies to realize their capital gains on their equity investments in 2008. This will enable the firms to support a larger equity base.
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PAKISTAN REINSURANCE COMPANY LIMITED-KEY FINANCIAL DATA
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Earnings CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Rupees in 000s
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Gross Premium 4,697,000 5,241,438 4,159,567 4,499,166 4,750,000 4,555,120
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,693,083 1,895,575
Total Claims Incurred 1,011,270 1,931,052 1,677,201 776,710 931,289 962,692
Underwriting Expenses 359,919 924,012 516,812 513,755 153,960 250,091
Underwriting Result 76,290 51,112 391,436 125,041 207,951 206,136
Investment Income 332,811 360,525 464,695 771,733 3,689,377 846,394
Profit Before Tax 366,296 390,842 782,386 783,044 3,725,254 886,225
Profit After Tax 297,296 325,535 594,427 671,844 3,781,099 2,207,325
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Balance Sheet CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Rupees in 000s
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Paid up capital 450,000 450,000 450,000 450,000 540,000 3,000,000
Equity 1,543,568 1,756,603 2,238,531 2,730,374 6,379,519 7,265,744
Investments (Book Value) 1,885,976 2,719,944 2,872,640 3,588,323 6,412,290 5,458,935
Cash & Bank balances 549,610 314,794 271,389 209,984 1,021,124 2,836,632
Total Assets 6,225,007 6,613,612 5,633,585 6,464,289 11,497,050 12,528,459
Total Liabilities 4,681,439 4,857,010 3,395,055 3,733,915 5,117,531 5,262,715
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Operating Performance (%) CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Underwriting Profit / Net Premium 5.27 2.23 19.53 8.83 12.28 10.87
Underwriting Profit / Gross Premium 1.62 0.98 9.41 2.78 4.38 4.53
Loss Ratio 69.86 84.35 83.67 54.87 55.01 50.79
Expense Ratio 24.87 40.36 25.78 36.29 9.09 13.19
Combined ratio 94.73 124.71 109.45 91.17 64.10 63.98
Return on Assets 4.78 4.92 10.55 10.39 32.89 17.62
Reinsurance Expense/Net Premiums 224.50 128.95 107.50 217.85 180.55 140.30
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DEBT MANAGEMENT CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Debt/Assets Ratio 75.20 73.44 60.26 57.76 44.51 42.01
Debt/Equity 3.03 2.77 1.52 1.37 0.80 0.72
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Capital Adequacy CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Paid-up Capital / Total Equity 0.29 0.26 0.20 0.16 0.08 0.41
Equity/Total Assets 0.25 0.27 0.40 0.42 0.55 0.58
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Profitability Ratios CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Investment income/Net premiums 22.99 15.75 23.18 54.52 217.91 44.65
Investment income/Investment assets 17.65 13.25 16.18 21.51 57.54 15.50
Profit After tax/Net Premium 7.80 7.46 18.81 17.40 78.43 19.46
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Market Value Ratios CY'03 CY'04 CY'05 CY'06 CY'07 CY'08
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Earnings Per Share 6.61 7.23 13.21 14.93 12.42 2.95
Dividends per share 1.50 2.48 2.54 3.98 0.00 2.50
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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