Updated on Aug 04, 2001

The KSE - Overview: Temporary Relief?

The continuous decline of the KSE-100 Index was halted and the market consolidated 10 points to close up at 1252 level this week. Even though the market maintained its choppy behavior, moving within the range of 1224 - 1257, the much-needed support by some local institutions stopped the market from breaking downwards. The average daily volume (ADV) increased by 22.7% to 60.62mn shares from 49.41mn shares last week with major activity seen in large cap stocks Hubco and PTCL. Both, Hubco and PTCL, remained in the limelight during the week, accounting for over 61% of the total market turnover during the week.

As mentioned in our earlier weeklies, the recent bearish trend in the market is likely to continue as the quantum of foreign selling rises. In our opinion, the market would remain under foreign selling pressure and any return of significant foreign portfolio investment should not be factored into domestic players' calculations until Pakistan's admission into IMF's PRGF program and external debt restructuring by Paris Club later this year.

However, we still believe that even without any foreign portfolio interest, the market does offer good value at current levels to genuine investors with an investment horizon of 8-12 months. In our previous market update (July 28, 2001Weekly) we focused extensively both on institutional and retail clients for what investment approach to adopt in current scenarios. We reiterate our stance that the future dividend flows and potential capital gains from current low levels do offer good return (30% over next 12 months) to equity investors. During the last week market saw dividend announcement by Fauji Fertilizer, Century Paper and Board and Dawood Hercules of 25%, 15% and 35% respectively. We believe that more positive dividend announcements in the near term, especially by Hubco, would help alleviate negative sentiments in the market. Meanwhile, the Karachi Stock Exchange has announced introduction of 1-month Futures Contract from September 1, 2001. The system, according to KSE, would be implemented after all sectors are inducted in T+3. The KSE board has also exempted condition of cash deposit on futures contract on brokers up to PkR50mn and decided to adopt weekly clearing of differences from the current daily clearing system. Technically for short-term traders, in our view, the Index has reached its peak for short-term 5-day cycle and investors should start profit taking as we expect a correction during next week. This behavior of the market is evident from past several weeks and has characterized the short-term behavior of the market.

Commercial Union Life Assurance:

1H01 Results
Modestly Positive
Insurance Structure Overview

The insurance industry of Pakistan comprises 55 private general insurance companies 49 local, 6 foreign, 5 life assurances, the state-owned State Life Insurance Corporation (SLIC), 4 private companies, two local and two foreign. In addition, there are two other state owned companies Pakistan Insurance Corporation (PIC) and National Insurance Corporation (NIC), the former primarily functioning as a sole reinsurance company to which all insurance companies in the country have to cede 15% compulsory cession, plus 35% of the voluntary cession while the latter insures all government assets and properties. Both PIC and NIC enjoy a complete monopoly in their respective fields as PIC enjoys the statutory cession from the insurance companies and the NIC has no competition from the private sector.

Insurance Ordinance

The Insurance Ordinance was promulgated at the end of CY00, which replaced the Insurance Ordinance Act 1938. The salient features of the Ordinance include phased increase in the paid up capital of the life assurance companies to PkR150 million and PkR80million for the non-life insurance companies by December 31, 2004.

The Solvency Margin has also been increased from PkR500,000 in the Insurance Act 1938 to a minimum of PkR5million over liabilities or assets of an individual non-life insurance company. In addition, every life assurance company has to keep at least PkR10million as statutory deposit with the central bank, the SBP, compared to PkR3.5million previously. The Insurance business will now be regulated by the Securities and Exchange Commission of Pakistan (SECP) and not by the Ministry of Commerce through the Department of Controller of Insurance, as was the case in the past. However, the policy-making powers would still remain with the Ministry.

Commercial Union Life Assurance 1H01 Results: Modestly Positive

Commercial Union Life Assurance Company Pakistan (CU) was incorporated in 1995 as a public limited company. CU is among the top-tier life assurance companies in Pakistan offering life assurance, health insurance and pension on professional lines. The company is sponsored by Commercial Union Assurance Company Plc , which holds 51% of the shares of CU. According to news sources, Old Mutual Plc, a London listed financial services company has entered into an agreement with International Insurance Plc (CGU), to acquire all its existing business in Pakistan, effective from October 2001. The effect of this transaction on CU remains to be seen in the near future however, we feel that it shall be neutral if not positive.

Recently CU announced their 1H01 results reflecting a decrease in their loss by 14% from PkR38million in 1H00 to PkR33million in 1H01. Our modestly positive view on CU is based on the fact that the insurance sector is extremely vulnerable to the harshness of the economic environment. The 14% recovery in the loss figure is mainly attributable to a top line growth of 38% from PkR76million in 1H00 to PkR105million in 1H01.

Furthermore, in our opinion, CU at this point in time does not classify as a mature company (in the Pakistan market) it will not be before a few years time for them to build up sufficiently large pool of funds for investment in the marketing network. This explains the miniscule 1% increase in the Interest income from PkR12.8million in 1H00 to PkR13million in 1H01, which has not been able to cushion the underwriting income.

Life assurance firms globally generate profits on the spreads between their investment income and cost of funds (rates/returns offered on pool of funds to policyholders). As yet, we feel, CU has not attained the critical mass of funds required to cover expenses. At present its pool of funds stand at PkR156mn for 1H00 from PkR177million for 1H99 reflecting a 12% decrease. This transition was witnessed due to the encashment of some investments by the management to meet additional expenditure. On the other hand, deft handling by the management will be required, as investment avenues such as NSS instruments are no longer available. But the growing issuance in the debt market should mitigate the effect somewhat. The expected rise in the interest rate structure also augurs well for growth and the spread.

The expenses, which mainly account for commission to insurance agents and salaries have increased by 21% from PkR114million in 1H00 to PkR139million in 1H01 in line with the 38% increase in the revenue account. Growth in salary expense and commission to insurance agents expense are not just concurrent to growth in the premiums but are also proportionate to each other. Historically these two expenses have accounted for more than 60% of the operating expenses.

We shall wait for the in depth results before venturing into future financial forecast and valuations.

Stock Market Synopsis
	Last week	This Week	%Change
Mkt. Cap (US $ bn)	4.94	4.92	-0.40
Total Turnover (mn shares)	247.03	303.10	22.70
Value Traded (US$ mn.)	120.04	119.38	-0.55
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	49.40	60.62	22.70
Avg. Dly T/O (US$ mn)	24.01	23.88	-0.55
KSE 100 Index	1242.83	1252.58	0.78
KSE All Share Index	801.13	806.06	0.61

 

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ASIA PACIFIC & AUSTRALIA
EXCHANGE	INDEX	LEVEL	CHANGE	EXCHANGE
Bombay	BSE	3325.38	+26.60	0.81%
Hong Kong	Hang Seng	12269.1	-197.29	-1.58%
Singapore	Straits Times	1649.36	-20.72	-1.24%
Sydney	S&P ASX 200	3405.4	+1.30	0.04%
Tokyo	Nikkei	12242	-157.23	-1.27%

 

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EUROPE & UNITED STATE OF AMERICA
EXCHANGE	INDEX	LEVEL	CHANGE	EXCHANGE
Frankfurt	DAX	5735.88	-41.40	-0.72%
London	FTSE	5547.6	-36.90	-0.66%
Paris	CAC	5031.29	-57.41	-1.13%
Dow Jones	Industrial	10512.78	-38.40
Nasdaq	Composite	2066.33	-21.05