Formerly called the "Pakistan Insurance Corporation", Pakistan Reinsurance Company Limited is the only professional reinsurance organisation operating in Pakistan.

Its principal business 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. 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 DECEMBER'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, the same 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 witnessed 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 by a massive 454%. Earning per share for the year 2007 were 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. Its gross and net premiums increased. This improvement was due to increase in premium written and decrease in reinsurance ceded. The management expenses were under control meanwhile 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 management's better negotiation there was only a marginal increase.

Net claims of the company for the year 2007 were Rs 931 million as compared to Rs 777 million in the corresponding period last year showing an increase of Rs 154 million. However, the percentage of Net Claim to the Net Premium remained unchanged ie 55%. Further this also includes impact of losses (to an extent of claims lodged and recorded by the company as outstanding, net of outstanding recoveries from reinsurance arrangements) which has arisen due to riots/violence in the country as a result of 27th December, 2007 incident.

The commission expenses for the year 2007 were Rs 400 million as compared to Rs 367 million in the corresponding period last year. Expenses would have been more, as the company accepted the more business and retrocede less, however as a result of management's better negotiation, there is a nominal increase of Rs 33 million only. The investment income in the year 2007 increased to Rs 3,689 million as compared to Rs 772 million in the year 2006. The increase in investment income was mainly due to realization of capital gain and improved dividend on NIT units.

The realization of capital gain would strengthen the company's equity base and support overall growth of the company's reinsurance business in the country. The sale and repurchase transactions were performed in view of possible tax exposure on capital gain in future years. The break-up value of PRC's share as at 31st December 2007 was Rs 117.9 per share of Rs 10.00 each and the earning per share was Rs 69.02.

The profit before tax was Rs 3,860 million. After making provision for taxation of Rs 133 million, the profit after tax works out to Rs 3,727 million as compared to profit after tax of Rs 672 million in the year 2006.

DEPARTMENT-WISE RESULTS ARE AS FOLLOWS:

FIRE DEPARTMENT: The gross premium of fire department was Rs 1,910 million, which contributed about 40% to the company's revenue. The net premium of this department was Rs 862 million. The claim ratio was 62%.

MARINE DEPARTMENT: The gross premium of marine department was Rs 411 million, which contributed about 9% to the company's revenue. The net premium of this department was Rs 214 million. The claim ratio was 9%.

AVIATION, ENGINEERING AND ACCIDENT DEPARTMENTS: The gross premium of aviation, engineering and accident department was Rs 2,409 million which contributed about 51% to the company's revenue. The net premium of the department was Rs 618 million. The claim ratio was 29%.

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 much lower than gross premiums mainly because of reinsurance expenses that measure more than half of the premiums earned. The aviation and the fire 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 international aviation market. Further, the increase in gross premium is mainly due to 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 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 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 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 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 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 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 support of compulsory cession. The company being the only reinsurance organisation in Pakistan has the monopoly. 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.

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 PRCL or any other foreign company. This may provide 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 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 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.

The government has also provided an exemption of 5% excise duty on non-life insurance companies in budget policy of 2008. This may benefit the 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 the capacity of retaining more business on its own account by enhancing the capital base of the company. In 2007, the 20% of capital had 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.