Rupees in Million

FIRE DEPARTMENT

As mentioned above, a new accounting regulations and format for the financial reporting of the Insurance companies has been issued by the SECP through SRO 938 dated December 22, 2002. The major changes, as far as the underwriting results are concerned, are the method of calculation of reserve for unearned premium, deferment of commission and the booking of IBNR (Incurred But Not Reported Losses). Thus, in the current year financial statements of your Company, the increase in the underwriting results can be segregated into two sections (a) the overall growth of the company and (b) the effect of change in accounting regulations. The gross premium of the fire department for the year 2002 was Rs. 121million as against the gross premium of last year of Rs. 96 million. This represents the actual expansion of the fire insurance business of your company by 26%. The reserve for unearned premium computed on the basis of new regulations was at Rs. 39 million. On the repealed Insurance Act basis the reserve would have been Rs. 60 million and the contribution to the profit by fire department would have been lower by Rs. 21 million. On the same note, the prepaid reinsurance premium ceded is booked at Rs. 35 million. Should this have been computed on the previous method, the prepaid reinsurance would have been Rs. 58 million and the contribution to the profit would have increased by Rs. 23 million. Similarly, based on the new accounting regulations your company has adopted a policy to defer the commission income earned on the reinsurance premium ceded. The commission deferred in Fire business for the year is Rs. 17 million. Should this have not been booked the profit from the fire business would have been higher by the same amount. Also an IBNR of Rs. 0.064 million was charged and clubbed in the outstanding losses, which resulted in the lower profit, by the same amount. Thus, overall impact on the operating results of the fire business because of the adoption of the new format was the decrease in the contribution to the profit of the company by Rs. 19 million.

In summary, Gross Premium (GP) written at Rs. 121 million increased by 26% over Rs. 96 million for the year 2001. The growth of 26% was highly commendable as it provided an appropriate facilitation to negotiate relatively good treaty arrangements with re-insurers in a background of increased pressure to accept less favorable terms. Net losses at Rs. 3 million decreased by 40% against Rs. 5 million of 2001. The contribution to profitability of Rs. 8 million was lower compared to Rs. 22 million last year, which was the result of change in accounting policy explained above.

MARINE DEPARTMENT

The gross premium of the Marine business for the year 2002 was Rs. 70 million as against the gross premium of last year of Rs. 65 million. This represents the actual expansion of the Marine insurance business of your company by 8%. The low growth of the business was due to the lower investing activities. The reserve for unearned premium computed on the basis of new regulations is Rs. 8 million. On the repealed Insurance Act basis the reserve would have been Rs. 35 million and the contribution to the profit by Marine department would have been lower by Rs. 27 million. On the same note, the prepaid reinsurance premium ceded was at Rs. 4 million. Should this have been computed on the previous method the prepaid reinsurance would have been Rs. 18 million and the contribution to the profit would have been increased by Rs. 14 million. Similarly, based on the new accounting regulations your company has adopted a policy to defer the commission income earned on the reinsurance premium ceded. The commission deferred in Marine business for the year is Rs. 2 million. Should this have not been adjusted the profit from the Marine business would have been higher by the same amount. Also an IBNR of Rs. 0.127 million was charged and clubbed in the outstanding losses, which resulted in the lower profit, by the same amount. Thus, overall impact on the operating results of the Marine business, because of the adoption of the new format, was the increase in the contribution to the profit of the Company by Rs. 11 million.

In summary, Gross Premium (GP) written at Rs. 70 million increased by 8% over Rs. 65 million for the year 2001, because of lower investing activity. Net losses at Rs. 5 million decreased by 17% against Rs. 6 million for the year 2001 enabling an increased contribution to profitability of Rs. 45 million compared to Rs.31 million of last year, as explained above.

MOTOR AND MISCELLANEOUS DEPARTMENT

The gross premium of the Motor & Misc. department for the year 2002 was Rs. 107 million as against the gross premium of last year at Rs. 86 million. This represents the actual expansion of the Motor & Misc. insurance business of your company by 25%. The reserve for unearned premium has been computed on the basis of new regulations Rs. 31 million. On the repealed Insurance Act basis the reserve would have been Rs. 54 million and the contribution to the profit by Motor & Misc. department would have lower by Rs. 23 million. On the same note the prepaid reinsurance premium ceded was at Rs.7 million. Should this have been computed on the previous method the prepaid reinsurance would have been Rs. 15 million and contribution to the profit would have been increased by Rs. 8 million. Similarly, based on the new accounting regulations your Company has adopted a policy to defer the commission income earned on the reinsurance premium ceded. The commission deferred in Motor & Misc. business for the year is Rs. 2 million. Should this have not been adjusted the profit from the Motor & Misc. business would have been higher by the same amount. Also an IBNR of Rs. 0.7 million was charged and clubbed in the outstanding losses, which resulted in the lower profit, by the same amount. Thus overall impact on the operating results of the Motor & Misc. business, because of the adoption of the new format, was increase in the contribution to the profit of the Company by Rs. 13 million.

In summary, Gross Premium (GP) written at Rs. 108 million increased by 26% over Rs. 86 million for the year 2001. Net losses at Rs. 32 million were similar as were for the year 2001, despite the volume growth of 26% enabling an increased contribution to profitability of Rs. 38 million or 90% over Rs. 20 million for the last year, as explained above. The policy of careful selection of business in general has not only prevented profit margin from deterioration but also resulted in profit growth.

INSURER'S FINANCIAL STRENGTH RATING

The Pakistan Credit Rating Agency (PACRA), has assigned your Company, on the basis of financial statements for the year 2001, an "Insurer Financial Strength" (IFS) Rating of "AA" (Double A), for the third year in a row. The double A rating was highest in the insurance sector and should be an increasing assurance for our valued clients.

The Insurer Financial Strength (IFS) Rating of "AA" (Double A) is cited as under:

"Insurers are viewed as possessing VERY STRONG capacity to meet policyholder and contract obligations. Risk factors are modest, and the impact of any adverse business and economic factors is expected to be VERY SMALL."

INCOME FROM INVESTMENTS

Income from dividends on investments, profit on balances with banks and Term Finance Certificates (TFCs) at Rs. 147 million was an all time high showing an increase of 61% over Rs. 91 million last year. This was mainly due to the increase in dividend income, which also compensated a 19% decrease in interest income on deposits because of a fall in SBP discount rates. The above said investment income was inclusive of unrealized gain on shares held for trading at Rs. 10 million as against Rs. Nil for the last year. Other income of Rs. 4 million was better than last year at Rs 3 million, which represents mainly recovery of administrative surcharge.

INVESTMENTS

The Company made investments of Rs. 143 million during the year 2002, which were mainly in shares of listed associated companies as well as Term Finance Certificates (TFCs). Investments in associated companies were under the authority of shareholders resolution and approval of Securities and Exchange Commission of Pakistan. The market value of quoted investments increased from Rs. 1,674 million as at December 31, 2001 to Rs. 2,395 million or by 43% as at December 31, 2002. The provision for diminution in the value of investments at Rs. 23 million as against Rs. 32 million for last year, decreased by 28% and the impact on future revenues is continuing to reduce.

As per requirements of IAS 39, an unrealized gain of Rs. 10 million on appreciation of market value of shares held for trading was recognized in the profits of the Company. Market value of shares held for trading was Rs. 12 million as against Rs. 6 million of last year.

INSURANCE ORDINANCE, 2000

The Insurance Rules, 2002 under the Insurance Ordinance, 2000 have been finalized by the Government in December 2002, in addition to which the SECP has also notified a new format for company accounts on December 22, 2002. The overall regulatory frame work for the Insurance Industry has become more stringent in general but your Company has ensured, in line with its commitment to Good Governance, that all new requirements are met in time and with due diligence.

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