Insurance: PAKISTAN REINSURANCE COMPANY LIMITED - Analysis of Financial Statements CY 2003 - 1H 2010
COMPANY PROFILEFormerly called the "Pakistan Insurance Corporation", PRCL is the only professional reinsurance organization operating in Pakistan. PRCL is a public sector company, working under the Ministry of Commerce, Government of Pakistan. The principle business of the company is provision of insurance and reinsurance services in all classes except life.
The organization 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 authorised 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 organization it can provide reinsurance to and is not bound to provide for poor performing companies.
MARKET OVERVIEW
The insurance industry grew at a rate of 6% in the CY09, the same rate observed in the last 2 years. However the industry has a lot of room to grow, taking in account the fact that the industry only represents 0.8 percent penetration rate ie insurance premium represent only 0.8 percent, which is the lowest among the comparable countries. The reason for a somewhat low performance can be associated with the emergence of macroeconomic instability since late 2007, turmoil in global financial markets and dislocation of the domestic equity market along with the deteriorating security situation, posed substantial challenges to the sector in 2008.
Moreover, the year 2009 was a difficult year at both the local as well as the global economic front. The global recession and the stagnant domestic economy during 2009 had an impact on the General insurance industry of Pakistan. The year 2009 was highly volatile due to the worst global economic recession triggered by credit crisis. The country's economy was also adversely affected by high inflation rate, severe liquidity crunch, a steep decline in the value of Pak rupee and unfavourable conditions prevailing in capital markets.
RECENT RESULTS 3Q'10
Gross Premium for the period was Rs 4,107 million, Net Premium before unearned Premium Reserve was Rs 2,431 million and Net Premium after accounting for the effect of Premium Reserve adjustment was Rs 2,127 million. The Gross Premium, Net Premium before unearned Premium Reserve and Net Premium after Premium Reserve for the corresponding period of the last year were Rs 3,396 million, Rs 1,769 million and Rs 1,573 million respectively.
The net claims were recorded at Rs 1,377 as compared to Rs 790 million in the corresponding period of the last year. The main reasons for increase are Crops insurance losses due to floods, Health Insurance losses and Aviation losses. The Net Commission and Management Expenses have aggregated to Rs 704 million for the current quarter as compared to Rs 603 million for the corresponding period last year. Besides, the income from investment and rental and other income for the period were recorded at Rs 576 million as compared to Rs 927 million in the corresponding period of last year. Profit after tax for the current period after recognition of impairment loss were recorded at Rs 88 million as compared to Rs 197 million loss in the corresponding period of the last year. The financial position is better than the same period last year because of the lower value of write-offs for this year against the other year.
PRCL FINANCIAL PERFORMANCE CY'03 - CY'09
GROSS PREMIUM VS NET PREMIUM
The gross premium of the Company stood at Rs 5,839 million at the end of CY'09 - an increase of 28.19% viz-a-viz last year (CY'08: Rs 4,555 billion). The main reason for this increase in gross premium is due to higher acceptance of facultative business in Fire, Engineering and Aviation. The CAGR (CY'03: CY'09) of the gross premium has increased by 3.16%. The net premium of the Company was Rs 2,171 million in the year 2009 as compared to Rs 1,896 million in the corresponding period last year showing an increase of Rs 275 million. This improvement of 14.53% is due to favourable movement of Premium reserve during current year. The CAGR (CY'03: CY'09) of the net premium revenue has been 5.96%.
OPERATING PERFORMANCE
The underwriting profit/ net premium has increased from 10.87 in CY '08 to 22.18 in CY '09 due to an increase in underwriting result by 133.6% as compared to an increase in net premium revenue by 14.5% only. The underwriting profit/ gross premium has increased from 4.53 in CY '08 to 8.25 in CY '09, an increase of 82.2% over last year, primarily due to a significant rise in underwriting profits. This surge in underwriting profits was also attributable to a 6% decline in net claims of the Company during 2009. Net claims of PRCl for the year 2009 were Rs 905 million as compared to Rs 962 million during 2008. The percentage of Net Claim to the Net Premium also decreased ato 42% in the year 2009 as compared to 51% in the year 2008.
INVESTMENT RETURNS
The investment income/ net premium has increased from 44.65 in CY '08 to 50.64 in CY '09 while investment income/ investment assets has increased from 15.50 in CY '08 to 20.06 in CY '09 due to an increase in investment income by 29.89% on a y-o-y basis.
The investment income in the year 2009 increased to Rs 1,099 million as compared to Rs 846 million in the year 2008. Investment income mainly comprises of realised capital gain on available for sale and held for trading investments, profit on government securities, fixed income securities and dividend income. The main reasons for increase in Investment Income is realisation of capital gain amounting to Rs 402.268 million from AFS portfolio and Rs 22 million from HFT portfolio through transaction in certain listed securities in which the market prices were significantly higher than their holding costs. This was possible due to continuous monitoring of Investment Portfolio and market situation.
The HTM asset composition of PRCL shows that the Company reduced its holdings of Defence Saving Certificates by 6.2% and increased its holdings of PIBs by 101.3% in 2009 as compared to corresponding perios last year. In 2009, PRCL also kept a major portion of its HTM assets in the form of Treasury Bills.
PROFITABILITY RATIOS
At year end 2009, the profit before tax of the Company was Rs 318.280 million and after making provision for taxation the profit after tax was Rs 269.910 million, as compared to Rs 886 million in the year 2008. This 69.5% decline in profit after tax represents the unrealised impairment loss in the investment portfolio accounted for to comply with the requirement of IAS-39. As at December 31, 2008 impairment loss worked at Rs 2650 million which was conisdered as temporary and not therefore accounted for in the financial statements for the year 2008 (as allowed by SECP's circular). However, this impairment loss was then in the financial statements at the year end 2009, due to which the profit after tax to net premium ratio of PRCL has declined by 73%, from 46.75 in 2008 to 12.43 in the year 2009.
EXPENSE ANALYSIS
The loss ratio has decreased from 50.79 in CY '08 to 41.68 in CY '09 while the expense ratio has decreased from 13.19 in CY '08 to 10.66 in CY '09. The combined ratio has hence decreased from 63.98 in CY'08 to 52.34 in CY '09. The reinsurance expense/ net premium has risen from 140.30 in CY '08 to 168.96 in CY '09, an increase of 20.43% over last year. Hence, there has been a overall reduction in expenses of PRCL. This is mainly attributed to the reduction in net claims of the Company during 2009. However, this decline in net claims was slightly offset by a 15.7% increase in commission expenses. The commission expenses of PRCL for the year 2009 were Rs 553 million as compared to Rs 478 million in the corresponding period last year. The reason for increase was manily due to increase in business.
MARKET VALUE RATIOS
The EPS has declined from Rs 2.95 per share in CY'08 to Rs 0.90 per share in CY'09. This is mainly due to recognition of unrealised impairment loss. The earning per share of the Company before recognition of unrealised impairment loss on investment worked out to Rs 5.58 per share despite a huge capital base of Rs 3 billion. However, after taking the effect of unrealised impairment loss the EPS of the Company was Rs 0.90 for the year 2009 as compared to Rs 2.95 in the year 2008. The dividends of the Company were 2.50 per share in 2009, same as compared to corresponding period last year.
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 Co-operation Organization) 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.
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 the meantime, the Company's business strategy would continue to focus on providing prompt service to insurance companies with reference to facultative offers.
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RATIO SUMMARY
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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 CY'09
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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 5,839,000
Net Premium Revenue 1,447,479 2,289,349 2,004,643 1,415,505 1,693,083 1,895,575 2,170,950
Total Claims Incurred 1,011,270 1,931,052 1,677,201 776,710 931,289 962,692 904,799
Underwriting Expenses 359,919 924,012 516,812 513,755 153,960 250,091 231,410
Underwriting Result 76,290 51,112 391,436 125,041 207,951 206,136 481,499
Investment Income 332,811 360,525 464,695 771,733 3,689,377 846,394 1,099,397
Profit Before Tax 366,296 390,842 782,386 783,044 3,859,000 1,139,000 318,280
Profit After Tax 297,296 325,535 594,427 671,844 3,725,254 886,225 269,911
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BALANCE SHEET CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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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 3,000,000
Equity 1,543,568 1,756,603 2,238,531 2,730,374 6,379,519 7,265,744 6,785,655
Investments (Book Value) 1,885,976 2,719,944 2,872,640 3,588,323 6,412,290 5,458,935 5,481,883
Cash & Bank balances 549,610 314,794 271,389 209,984 1,021,124 2,836,632 1,833,647
Total Assets 6,225,007 6,613,612 5,633,585 6,464,289 11,497,050 12,528,459 12,372,615
Total Liabilities 4,681,439 4,857,010 3,395,055 3,733,915 5,117,531 5,262,715 5,586,960
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OPERATING PERFORMANCE (%) CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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Underwriting Profit / Net Premium 5.27 2.23 19.53 8.83 12.28 10.87 22.18
Underwriting Profit / Gross Premium 1.62 0.98 9.41 2.78 4.38 4.53 8.25
Loss Ratio 69.86 84.35 83.67 54.87 55.01 50.79 41.68
Expense Ratio 24.87 40.36 25.78 36.29 9.09 13.19 10.66
Combined ratio 94.73 124.71 109.45 91.17 64.10 63.98 52.34
Return on Assets 4.78 4.92 10.55 10.39 32.40 7.07 2.18
Reinsurance Expense/Net Premiums 224.50 128.95 107.50 217.85 180.55 140.30 168.96
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DEBT MANAGEMENT CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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Debt/Assets Ratio 75.20 73.44 60.26 57.76 44.51 42.01 45.16
Debt/Equity 3.03 2.77 1.52 1.37 0.80 0.72 0.82
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CAPITAL ADEQUACY CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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Paid-up Capital / Total Equity 0.29 0.26 0.20 0.16 0.08 0.41 0.44
Equity/Total Assets 0.25 0.27 0.40 0.42 0.55 0.58 0.55
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PROFITABILITY RATIOS CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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Investment income/Net premiums 22.99 15.75 23.18 54.52 217.91 44.65 50.64
Investment income/Investment assets 17.65 13.25 16.18 21.51 57.54 15.50 20.06
Profit After tax/Net Premium 20.54 14.22 29.65 47.46 220.03 46.75 12.43
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MARKET VALUE RATIOS CY'03 CY'04 CY'05 CY'06 CY'07 CY'08 CY'09
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Earnings Per Share 6.61 7.23 13.21 14.93 12.42 2.95 0.90
Dividends per share 1.50 2.48 2.54 3.98 0.00 2.50 2.50
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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