Insurance: EAST WEST INSURANCE COMPANY LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2009

At present there are 54 insurance companies out of which 49 companies offer non-life insurance and 5 offer life insurance services. The non-life insurance industry also includes six companies that provide health insurance coverage as well.
The insurance industry of Pakistan forms a meager part of the GDP as compared to other nations of the world. With penetration of merely 0.5%, the industry is still in its nascent stage in consequent of lower demand. There is a monopolistic competition within the non-life insurance sector in Pakistan as there are around 49 non-life insurance companies. However the industry is highly concentrated as the top 5 companies hold 70 percent in the overall assets and net premium of the sector.
Motor and Fire insurance are the largest segments with the overall market share of 35 percent and 34 percent, respectively. This is followed by marine insurance with around 16 percent share.
The profitability of the non-life insurance sector has been on the decline from the last 3 years. The major reasons for which is primarily the poor economic condition of the country. The factors that have contributed to the decline in profitability include declining gross premiums because of lower demand, losses on investments on account of poor stock market and higher claims due to poor law and order.
East West Insurance Company Limited appeared on the horizon of insurance industry in Pakistan in 1983, founded by late Unus Khan who was its first chairman. Over the years the company, with the help of its management and diligent staff, has successfully accomplished the essential task of gaining the goodwill and confidence of its policyholders as one of the leading insurance companies with a vast network of branches all over the country.
Besides transacting traditional insurance business like fire, marine and motor, East West Insurance underwrites specialized portfolios for which it has created specialized divisions within the company namely engineering, crops and livestock divisions. Its business is well diversified and provides coverage to a wide range of agricultural and commercial business activities.
PRODUCTS AND SERVICES
The major contributor of net premium has been fire and insurance, which accounted for 47% of the total net premium followed by motor 20%, marine, aviation and transport 40%, miscellaneous 19%, as of December 31, 2009. Of the total net claim in 2009, fire and property accounted for major chunk ie 43% followed by motor 24%, marine, aviation and transport 13% and miscellaneous 19%.
OPERATING PERFORMANCEThe operating profits for the year ended December 31, 2009, shrunk 291% from the last year. Although the underwriting profits increased by 11% from the last year, still East West sustained a loss of Rs 5.27 million. The reason behind such a major decline in profit was the fall in investment income that was a chief contributor to East West's profits in FY08 representing 63% of sales.
In FY09 the investment income decreased by 320% to an investment loss of Rs 561 million. Although, improvement in financial activities after the restoration of judiciary in March 2009 was seen, but it deteriorated with countrywide suicide attacks followed by military action in Swat, Malakand and South Waziristan against the militants. Resultantly, the overall business environment remained under distressed with stagnant growth in the financial sectors including banks and insurance companies.
Most of the insurance companies incurred huge losses in their investment in stocks because of extreme volatility of KSE 100 index due to political instability, law and order situation and lack of foreign direct investments. East West Insurance incurred losses of 129% of net premium in 2009 as compared to 63% profit of net premium in 2008.
As a result income before tax which accounted for 68% of net premium in FY08 plunged to a loss of 123% in FY09. The loss in investments had an adverse impact on the balance sheet of the company causing a steep decline in its equity from Rs 867 million to Rs 330 million in FY09.
Due to overall loss in investments, total assets of the East West Insurance have decreased from Rs 1.27 billion in the year 2008 to Rs 660.48 million in 2009. Consequently, earning per share in the year 2009 has decreased from Rs 11.63 in 2008 to Rs -23.50 in 2009.
The position of net claims has relatively improved compared to the year of 2008. Net claims during 2009 were Rs 178.30 million giving a loss ratio of 40.8% as against 41.52% in previous year. The debt to equity has crept up to 1 in FY09 from 0.47 FY08.
Although the East West has reduced its debt by 19%, but still the debt to equity has changed considerably due to a huge loss of Rs 537 million incurred in 2009 that wiped off the equity of the company by 62%. As a consequence, debt to asset ratio of the company weakened due to value impairment of investments.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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