Insurance:- PAKISTAN REINSURANCE COMPANY LIMITED - Analysis of Financial Statements Financial Year 2003-2003 Q Financial Year 2007
Formerly called the "Pakistan Insurance Corporation", Pakistan Reinsurance Company Limited is the only professional reinsurance organization operating in Pakistan. The principal business of the company is provision of insurance and reinsurance services in all classes except life. The company provides fire, aviation, engineering, accident and marine insurances.
It has an 18% share of the insurance market and a 45% share of the reinsurance sector in Pakistan. In addition, the company has been placed on the privatization list by the government.
The company accepts 15 percent compulsory quota share from the general insurance companies operating in Pakistan who are also required to offer, at least 35 percent obligatory surplus to PRCL. It also accepts local facultative business and foreign treaty and facultative cessions.
Industry
The recent political instability followed by the assassination of former Prime Minister Benazir Bhutto, elections and its preceding violence have led to an increase in premiums charged by the insurance companies, which will have a positive impact on the profit and loss statements of these companies at least in the near future.
The insurance industry of Pakistan forms a minimal portion of the GDP compared to other nations of the world. With penetration of merely 0.5%, the industry is still in its beginning stage due to lower demand.
Pakistan's insurance sector is yielding the benefits of a dynamic economy coupled with the insurance sector reforms, soaring trade activities, improving per capita income and competition among the insurance sector companies, which are driving the current growth in the insurance sector. Moreover, higher interest rates and tax exemption on capital gains also supported the investment income of the companies, which provided further impetus to the insurance bottom-line.
The gross premiums and net premiums of the insurance industry have shown an increasing trend, due to the improved marketing environment. In addition, the percentage of gross premium to GDP also showed an increasing trend over the period under assessment. This trend is indicative of growth of insurance penetration in the economy.
ANALYSIS OF FINANCIAL PERFORMANCE (DECEMBER'03-9MONTHS'07):
The operating performance of the company has been fluctuating. The gross premiums of the company have hovered around a common level except a peak in 2004. This peak was due to an increase recorded in the fire, aviation and marine cargo businesses. Up to 2004, the company had a compulsory cession requirement.
Under this, the PRCL was bound to accept good and bad business. However, this requirement was withdrawn in 2005 whereby the company became selective in accepting the business under treaty and facultative.
The decrease in gross premium in 2005 was due to this withdrawal because the compulsory cession contributed about 32% of the gross premium market share. Nonetheless, this decrease was contained by increasing business under Treaty and Facultative. The 2006 increase in gross premium was due to the increase in facultative business.
The net premium of the company showed a similar trend. It declined in 2006. The 2005 higher unearned premium, as reflected in the premium reserve, was unavailable in 2006. This negatively influenced the growth of net premium. Moreover, a small decline was witnessed in the business under Treaty as compared to 2005.
The underwriting profit of the company declined in 2004 primarily on account of higher net commission and an underwriting loss in fire. The net commission declined in 2005 due to the cession absence, the premium reserve increased and the underwriting result under treaty became positive. Hence, the underwriting profit increased eight times. However, it decreased in 2006 due to lower net premiums.
The profit after tax for the nine months ended September 30, 2007 increased to Rs 2,741 million from Rs 736 million. The contributory factor for such an increase was a one time realized capital gain occurring from the sale of NIT Units. The same number of NIT Units was repurchased simultaneously so that they continue to be the part of investment portfolio.
The gross and net premiums rose. The management expenses were under control meanwhile the investment income increased due to higher dividend income received on NIT units. In FY07, NIT released capital gains of Rs 16.82 billion, a significant growth of 147.1% in capital gains of the trust from the last year mainly due to the block sale of NIT's holding in Lakson Tobacco, PICIC, Prime Bank.
The underwriting profits for the period under review were reported as Rs 85 million. The main reasons for decline over the last year were increase in net claims and creation of premium reserve for unearned premium due to company's policy to enhance its retention. The company is expected to report almost the same level of earnings for the year ending December.
The gross premiums and net premiums of the company have paralleled for most of the time. The net premiums have remained much lower than gross premiums mainly because of re-insurance expenses that measure more than half of the premiums earned.
The reinsurance expenses have been almost as high as the premiums earned in the aviation business in most of the years. This has almost nullified the effect of any increases in the gross premiums in the aviation category. The gross by class of business for the 9 months 2007 is shown. The greatest contribution as can be seen is from aviation.
The returns of the company from its investments have been much less than the income the company earns through underwriting. The investment income of the PRCL has been slowly increasing. The increases have been funded mainly by increases in dividend income that the company receives on its stocks.
In 2007, the increase in dividend income came from the NIT units, shares of PICIC, SNGPL, SSGC and units of PGF. The company also receives its investment income from rental income and interest on its bank deposits. The stock markets have generally performed better over the years.
This has reflected in the increasing investment income of the company. Moreover, PRCL has adopted a strategy of diversification and balances its portfolio between fixed income securities and equities as shown in the graphs below. The investment income to net premium ratio witnessed a steep increase in 2006 after a fair rate increase in the previous years.
This is because the investment income increased at a rate greater than that in its earlier years whereas the net premiums declined in 2006. The ratio stood at 54.52% in 2006, a more than twofold increase from 2005. This ratio increased at quite a slow rate in 2007, almost leveling off. This indicates that the company has been able to maintain its profitability through prudent investments and underwriting operations.
The investment income to investment assets ratio has pursued a slow rising trend. The investment incomes as well as the investment assets have increased at a steady pace. The company seems to have been pursuing a strategy of steady growth in its investments. However, the ratio declined in 2007 due to a lower investment income.
In the period under review, the PRCL was a more leveraged company with more debt financing than equity financing. However, gradually there has been occurring a shift in the composition of its assets. Increases in equity have been complemented by decreases in debt portion of the company such that that the debt profile of the company is improving.
The debt to equity ratios, therefore, have been declining and have systematically reached 40%. Meanwhile the total asset base of the company has almost remained at the same level. Hence, a decreasing debt to assets ratio has been witnessed.
The expenses of the company increased in the years 2004 and 2005 but then declined in 2006 and 2007 to levels almost that of 2003. The total claims of the company increased in the middle of the period because it had been operating under the compulsory cession requirement. This exposed the company to the risk of accepting a bad business.
However, since 2005 the claims and the losses resulting from that have decreased as the compulsory cession was called off. The company has been selective in accepting businesses. The commission expenses of the company have also been declining because of removal of the compulsory cession. Moreover, the commission expenses decreased in 2006 and 2007 due to the commission received from abroad on various projects placed on fronting basis that resulted in lower expenses.
The combined effect of losses emanating from claims and other expenses such as commissions and administration is shown. It has declined after 2004 due to decreasing expenses.
The net premium revenue has been decreasing also but at a rate lesser than that of the total expenses. The reinsurance expenses of the company have been maintained at almost a consistent level.
This indicates that the incidence of risk attached to various policies has not varied much and has been contained efficiently. Most of the reinsurance expenses have resulted from the aviation category followed by engineering business and then the fire business.
The profit after tax of the company has steadily increased throughout the years due to increases in gross premiums, investment income and commissions received, especially after the removal of the compulsory cession.
The capital adequacy of the company seems to be improving as its equity base is increasing and asset composition in favor of equity. The company has not issued any shares over the period concerned that has made its paid up capital to remain constant throughout the period until 2007 where it increased the paid up capital by 20%.
Since the total equity has been increasing due to increasing reserves and retained earnings, the paid up capital to equity ratio has been declining whereas the equity to assets ratio has been increasing. This indicates that the company is enhancing its capacity of retaining more business on its own account, which would enable it to ward off business risks better.
The earnings per share of the company have been rising, manifesting the improving profitability of the firm. The company has been distributing better dividends to its shareholders every year, while the PRCL's number of shares have remained constant.
This was until 2006. In these 9 months of 2007, the dividends distributed were as the company is planning to enhance its retention capacity and measures in this regard are under way. Moreover, the shareholders of the Company have approved the increase in the Authorized Share Capital of the Company from Rupees one billion to Rupees four Billion.
As evident from the graph below, the price per share of the company has increased tremendously because of its profitability and the monopoly it enjoys being the only reinsurance company in Pakistan.
FUTURE OUTLOOK:
The company is operating in the highly competitive open market scenario without the support of compulsory cession. The company has the monopoly being the only reinsurance organization in Pakistan. Hence, the competitive scenario may not be a major threat to it in that area of business. As far as the insurance businesses are concerned, the company might develop innovative products in the face of contention.
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.
Due to the recent motor policy announced by the government, we may expect greater profitability in the motor insurance sector. In 2007-08 budget, the requirement of the compulsory reinsurance with the Pakistan Reinsurance Company Limited has been done away with 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. The PRCL due to the withdrawal of the compulsory cession has started experiencing better results, which will strengthen its position further. Government has also provided an exemption of 5% excise duty on non-life insurance companies in budget policy of 2008. This may benefit PRCL.
The government has also announced a new insurance policy of 2007 that aims to bring about a reform of the entire insurance sector. This is likely to improve the operations and efficiency of the overall insurance sector.
The company is enhancing its capacity of retaining more business on its own account by enhancing the capital base of the company. In 2007, 20% capital has been increased by issuing bonus shares. Due to these measures paid up capital will now become Rs 540 million against the existing capital of Rs 450 million. This will work towards increasing the capital adequacy of the company.
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PAKISTAN REINSURANCE COMPANY LIMITED KEY FINANCIAL DATA
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Earnings FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Rupees in thousand
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Gross Premium 4,697,000 5,241,438 4,159,567 4,499,166 3,520,867
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,229,213
Total Claims Incurred 1,011,270 1,931,052 1,677,201 921,619 583,939
Underwriting Expenses 359,919 924,012 516,812 464,621 395,197
Underwriting Result 76,290 51,112 391,436 125,041 84,561
Investment Income 332,811 360,525 464,695 771,733 718,751
Profit Before Tax 366,296 390,842 782,386 783,044 2,861,766
Profit After Tax 297,296 325,535 594,427 671,844 2,741,597
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Balance Sheet FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Rupees in thousand
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Paid up capital 450,000 450,000 450,000 450,000 540,000
Equity 1,543,568 1,756,603 2,238,531 2,730,374 5,381,970
Investments (Book Value) 1,885,976 2,719,944 2,872,640 3,588,323 6,140,219
Cash & Bank balances 549,610 314,794 271,389 209,984 327,371
Total Assets 6,225,007 6,613,612 5,633,585 6,464,289 9,069,803
Total Liabilities 4,681,439 4,857,010 3,395,055 3,733,915 3,687,833
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Operating Performance (%) FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Gross Premium 4,697,000 5,241,438 4,159,567 4,499,166 3,520,867
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,229,213
Underwriting Profit
/Net Premium 5.27 2.23 19.53 8.83 6.88
Underwriting Profit/
Gross Premium 1.62 0.98 9.41 2.78 2.40
Loss Ratio 69.86 84.35 83.67 65.11 47.51
Expense Ratio 24.87 40.36 25.78 32.82 32.15
Combined ratio 94.73 124.71 109.45 97.93 79.66
Return on Assets 4.78 4.92 10.55 10.39 30.23
Reinsurance Expense/
Net Premiums 224.50 128.95 107.50 217.85 186.43
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Debt/Assets Ratio 75.20 73.44 60.26 57.76 40.66
Debt/Equity 3.03 2.77 1.52 1.37 0.69
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Capital Adequacy FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Paid-up Capital/
Total Equity 0.29 0.26 0.20 0.16 0.10
Equity/Total Assets 0.25 0.27 0.40 0.42 0.59
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Profitability Ratios FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Investment income/
Net premiums 22.99 15.75 23.18 54.52 58.47
Investment income/
Investment assets 17.65 13.25 16.18 21.51 11.71
Profit After tax/
Net Premium 20.54 14.22 29.65 47.46 223.04
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Market Value Ratios FY'03 FY'04 FY'05 FY'06 9 monthsFY'07
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Dividends per share 1.50 2.48 2.54 3.98 1.65
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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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