January 16, 2008	Wednesday	Muharram 06, 1429

KARACHI, Jan 15: Bigger insurance companies in the country would be seen to post record profit for the year ended Dec 31, when accounts are unveiled in the next few weeks. That is expected to be notwithstanding the huge claims of the final five days of the year, which industry stalwarts suggested would cause no more than a ripple in the extensive pond of their liquidity.

In their meeting with the chairman, Securities & Exchange Commission of Pakistan (SECP), on Friday, the Insurance Association of Pakistan had presented tentative figures of claims at Rs4 billion, arising out of riots, fire, damage to property and civil commotion in the aftermath of assassination of Ms Benazir Bhutto on Dec 27. The claims were surely slated to rise, but the insurance companies had assured SECP chairman that they would be able to meet all claims. Companies particularly the big ones, were insulated by the re-insurance arrangements.

Re-insurers agree to indemnify an insurance company against all or a portion of the primary insurance risks underwritten by the company under one or more insurance contracts.

Industry experts suggested that as per usual terms, as much as 70 per cent of the claims were passed on to the re-insurers. According to section 41 of the Insurance Ordinance 2000, insurance companies are required to have re-insurance agreements from “A” rated companies worldwide. In normal times, re-insurance haunts as a major expense for insurance companies, since the world’s largest reinsurers, such as Lloyds, Swiss Re, Munich Re, and Berkshire Hathaway, ask for nothing less than a pound of flesh in exchange for the risks that they cover.

But the events of Dec 27 have paid off. A senior official of one of the major companies calculated that on claims amounting to say Rs10 billion, the share of local companies — after passing over the 70 risks to re-insurers — could amount to no higher than Rs3 billion.

But the basis of confidence of insurance companies that their bottom line would not take a hit, stemmed more from the staggering sums of unrealised port folio gains that all companies booked during the year 2007. That was done to pre-empt levy of capital gains tax if one were to be imposed following its expiry on June 30.

Since analysts follow few of the large insurance companies with bigger free float and high volumes, Adamjee Insurance — the largest in the sector — has been taken as an example by some analysts to prove the point.

The company holds 29 per cent share of the market in terms of underwriting premium.

“If 29 per cent share of the riot claims losses of Rs 3 billion (exclusive of re-insurance) falls on Adamjee, the impact on its earnings would amount to Rs870m,” calculates analyst Farid Khan.

At the extraordinary general meeting of Adamjee, the management had decided to book capital gains in the sum of Rs2 billion until 3Q07. More of the capital gains were to be realised in 4Q07. Adding to that the dividend income of Rs300 million and net underwriting premium of Rs5.6 billion, 5.9 per cent higher than Rs5.3 billion earned the previous year, “would all but put into insignificance the Dec 27 damages claims,” comment analysts.

Brokerge firm, Khoja’s Capital Market released a report on Tuesday forecasting AICL net claims for CY07 at Rs3.448 bn, 2.8pc higher over Rs3.355bn in CY06.

“Our sensitivity shows that core income will outpace claims,” stated the KCM report, which put the profitability figure of AICL at Rs4,574m (EPS: Rs44.72) for CY07 (recurring EPS: Rs 15.14), as against Rs1,576m (EPS: Rs15.42) reported in CY06.

Other big private insurance companies were expected to be similarly insulated against Dec 27 damages and claims. But Furkan Ellahi, analyst said it would be interesting to see how the National Insurance Company Limited (NICL) is able to grapple with the claims, for it has enjoyed the exclusiveright to write all of the insurance business of public sector assets, which bore the brunt of the blow of Dec 27 riots. NICL has assets of over Rs12 billion and holds reserves amounting to over Rs10 billion.