Reinsurance: PAKISTAN REINSURANCE COMPANY LIMITED - Analysis of Financial Statement Financial Year 2003 - 2001 Q Financial Year 2008
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.
The company 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 privatisation list by the government. It also accepts local facultative business and foreign treaty and facultative cessions.
INDUSTRY
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 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 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.
Recent performance, quarter ended March 31, 2008
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30 June-08 30 June-07
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Net Premium Revenue(mio) 973 797
Net Claims Expense 501 522
Investment Income 217 193
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Net Profit before tax and after tax for 1H08 was Rs 390 million and Rs 286 million respectively as compared to Rs 198 million and Rs 146 million for the corresponding period of the last year, showing an increase of 96% and 95.8% respectively. The EPS has been Rs 0.96 vis-a-vis Rs 0.46 for the corresponding period of FY07. The underwriting result has been quite impressive at Rs 140 million as compared to a negative Rs 3 million for the same period last year. The reason behind this turnaround has been increase in premiums along with 22.1% increase in the net premium, and a corresponding decline in net claims by 3.8%.
Major revenue contributor was the treaty business, while from the facultative side, fire contributed the most and then engineering in terms of net premium revenue. In terms of underwriting result, fire contributed 73% of the underwriting result while engineering and treaty posted negative underwriting results. Investment income also increased by a modest 12.4%, while rental income and exchange gains also exhibited a growth of 46% and 557% respectively.
ANALYSIS OF FINANCIAL PERFORMANCE (DEC'03-DEC'07) The operating performance of the company has been fluctuating. The gross premiums increased over the years with a peak in 2004. This peak was due to an increase recorded in 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 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, there was witnessed a small decline 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 year ending 2007 increased massively by 454%. Earning per share for the year 2007 was recorded at Rs 69.02. The contributory factor for such an increase was a large increase in the investment income, specifically the capital gains on the sale and repurchase of NIT units. The gross and net premiums rose. This improvement was due to an increase in premium written and a decrease in reinsurance ceded.
The management expenses were under control, while the investment income increased due to higher dividend income received on NIT units. Claims of the company also increased as has been the case in the insurance sector, due to the riots and violence attributed to unstable political scenario in December 2007. For the same reason the premiums of the company also recorded an increase. The commission expenses of the company increased nominally. Expenses would have been more as the company had accepted more business and retrocede less, however because of the management's better negotiation, there was only a marginal increase.
The gross premiums and the net premiums of the company have paralleled each other in pattern for most of the time. The net premiums of the company have remained mush lower than gross premiums mainly because of re-insurance expenses that measure more than half of the premiums earned.
He aviation and the fire have contributed heavily to the gross premiums of the company. Better marketing efforts have been behind this increase in nearly all the departments. However, as compared to the last year, the aviation and engineering gross premiums were lower this year due to the competition in the aviation international market. The increase in gross premium is mainly due to an increase in treaty businesses as shown in the diagram. It may be said that the company was selective in accepting treaty and facultative business.
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 mainly 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. This has gives it an advantage.
The equity portfolio of the company performed well due to the realized capital gains as the market value of the shares appreciated. In addition, the company also has investments in the real estate sector which has great potential. This will further enhance the portfolio value of the company and the company may be expected to generate higher investment income in the future.
The investment income to net premium ratio witnessed a steep increase in 2007 after a fair rate increase in the previous years. This is because the investment income increased at a rate greater than the net premiums. The investment income to investment assets ratio has pursued a similar rising trend. Initially 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 0.64. Meanwhile the total asset base of the company has also increased. Hence, a decreasing debt to assets ratio has been witnessed. The expenses of the company increased in 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 due to the commission received from abroad on various projects placed on fronting basis that resulted in lower expenses.
In commission expenses of the company have only increased marginally in 2007. The net premium revenue has increased a rate faster 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 favour 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 has been rising, manifesting improving profitability of the firm. The company has been distributing better dividends to its shareholders every year, while its number of shares remained constant. This was until 2006. In 2007, the dividends distributed were less 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 authorised 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 being the only Reinsurance organization in Pakistan has a slight edge. As far as the insurance businesses are concerned, the company might develop innovative products in the face of contention.
However, 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. This creates competition to the company. Hence, this would require further strengthening of the investment portfolio and continuation of the prudent management of the portfolio.
The operating environment for PRCL in 2008 will be further challenging, as this would be third year without compulsory cession. PRCL will have to compete in the market for enhanced facultative business, to enable it to increase its profits, along with expanding aggressively in the treaty business segment, in which it is already a market leader. The company would have to take measures by strengthening its reinsurance retention capacity.
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. 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 realise 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.
The company is enhancing its capacity of retaining more business on its own account by enhancing the capital base of the company. In 2007, the company increased 20% capital by issuing bonus shares. Due to these measures, the 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 FY'07
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Rupees in Millions
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Gross Premium 4,697,000 5,241,438 4,159,567 4,499,166 4,671,902
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,694,788
Total Claims Incurred 1,011,270 1,931,052 1,677,201 921,619 2,236,125
Underwriting Expenses 359,919 924,012 516,812 464,621 679,655
Underwriting Result 76,290 51,112 391,436 125,041 205,998
Investment Income 332,811 360,525 464,695 771,733 3,689,377
Profit Before Tax 366,296 390,842 782,386 783,044 3,860,353
Profit After Tax 297,296 325,535 594,427 671,844 3,726,959
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Balance Sheet FY'03 FY'04 FY'05 FY'06 FY'07
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Rupees in Millions
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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 6,367,333
Investments (Book Value) 1,885,976 2,719,944 2,872,640 3,588,323 6,412,290
Cash & Bank balances 549,610 314,794 271,389 209,984 1,021,123
Total Assets 6,225,007 6,613,612 5,633,585 6,464,289 10,446,599
Total Liabilities 4,681,439 4,857,010 3,395,055 3,733,915 4,079,265
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Operating Performance (%) FY'03 FY'04 FY'05 FY'06 FY'07
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Gross Premium 4,697,000 5,241,438 4,159,567 4,499,166 4,671,902
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,694,788
Underwriting Profit / Net Premium 5.27 2.23 19.53 8.83 12.15
Underwriting Profit / Gross Premium 1.62 0.98 9.41 2.78 4.41
Loss Ratio 69.86 84.35 83.67 65.11 131.94
Expense Ratio 24.87 40.36 25.78 32.82 40.10
Combined ratio 94.73 124.71 109.45 97.93 172.04
Return on Assets 4.78 4.92 10.55 10.39 35.68
Reinsurance Expense/Net Premiums 224.50 128.95 107.50 217.85 175.66
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DEBT MANAGEMENT FY'03 FY'04 FY'05 FY'06 FY'07
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Debt/Assets Ratio 75.20 73.44 60.26 57.76 39.05
Debt/Equity 3.03 2.77 1.52 1.37 0.64
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Capital Adequacy FY'03 FY'04 FY'05 FY'06 FY'07
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Paid-up Capital / Total Equity 0.29 0.26 0.20 0.16 0.08
Equity/Total Assets 0.25 0.27 0.40 0.42 0.61
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Profitability Ratios FY'03 FY'04 FY'05 FY'06 FY'07
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Investment income/Net premiums 22.99 15.75 23.18 54.52 217.69
Investment income/Investment assets 17.65 13.25 16.18 21.51 57.54
Profit After tax/Net Premium 20.54 14.22 29.65 47.46 219.91
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Market Value Ratios FY'03 FY'04 FY'05 FY'06 FY'07
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Earnings Per Share 6.61 7.23 13.21 14.93 69.02
Dividends per share 1.50 2.48 2.54 3.98 1.66
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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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