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The present state of affairs need immediate attention of the regulators

Nov 05 - 11, 2001

Since Adamjee Insurance Company (AIC) has released its half yearly accounts immense concerns are being expressed about the earning potential of the company. For the first half of year 2001 AIC has posted Rs 221.5 million loss after tax as against a profit of Rs 137.2 million for the corresponding period of previous year. The main reason for this seems to be huge claims paid against vehicles insured. However, analysts strongly believe that the company which had received Corporate Excellence Award of Management Association in the past, now seems to be a victim of negligence of good management practices.

The apprehensions being expressed by most of the sector analysts are genuine the top most being that AIC controls over 50 per cent of the total insurance business in the country. After the September 11 incident some of the largest insurance companies of the world are facing serious crisis. An analyst said, "Assume for a second that any catastrophe hits Pakistan and huge claims are filed most of the local insurance companies will not be able to discharge their contractual obligations."

This may look an over exaggeration but detailed analysis of half year report of AIC should be an eye opener for all the players, the corporates seeking risk cover and the regulators. Analysis of profit and loss account indicates that premium (less reinsurance) earned was less than the claims paid during this period. In case of vehicle insurance business the figures are mind-boggling. The premium earned was Rs 715 million and claims paid amounted to Rs 1,166 million yet huge claims were outstanding. If one adds the figure of outstanding claims the state of affairs is extremely alarming. Should claims of this magnitude arise in future, AIC may experience serious financial problems and will not be able to make timely payment of claims.

It is evident that the company suffers from gross weakness in income generating capacity. While premium collection during the period was Rs 1,496 million, income from other sources was as low as Rs 252 million. This included Rs 124 million from interest/dividend, Rs 77 million from capital gains and Rs 51 million miscellaneous income. This also hints lack of investment in good quality income generating assets. An analyst said, "AIC has thrived on its strong cashflow mainly comprising of premium. However, if premium receipts continue to be insufficient to pay claims, making timely payment of claims will be very difficult."

To substantiate his statement this analyst quoted from profit and loss account AIC collected Rs 1,495 million premium, paid claims worth Rs 1,514 million and outstanding claims as at June 30, 2001 were Rs 1,056.7 million. Many sector experts have expressed concern about increasing risk of vehicle insurance business. But in case of AIC it seems disastrous. The company collected Rs 716 million under this head, paid claims worth Rs 1,166 million and outstanding claims exceeded Rs 637 million at the close of half yearly accounts.

Analysts fear that AIC is either working in gray area or some of senior executives are making a fortune by approving large claims. In this regard some analysts hint towards an alleged link between AIC's management and its main surveyor. There are indications that most of the large claims are being paid on the recommendations of a particular surveyor who is also paid a handsome fee for authentication of these claims. Therefore, it may be said that while a few top officials are minting money, stockholders will emerge net looser, one day.

Some analysts also hint towards a weak Board of Directors of AIC. At the time of last election of directors, there were clear indications that Adamjee family had lost controlling shares to a large extent. It is the proxies held by a few others who maneuvered election of the present Board. Analysts forecast a similar tug of war in next election of Board. It is being said that shareholding of Adamjee family has further reduced, as a percentage of total paid up capital, lately. Therefore, a major change in the composition of Board cannot be ruled out in next election.

Some sector experts say that management of AIC cannot be blamed alone for the dismal state of affairs. The highest blame should go to Securities and Exchange Commission of Pakistan (SECP) which has been lately entrusted the responsibility of supervising insurance companies. On top of this some of the functions of insurance companies are still being looked after by the Ministry of Commerce. However, regulating insurance companies come very low on the priority of the Ministry. It is also being said that the SECP lacks expertise and has not been able to form a team of quality supervisory staff.

Therefore, the SECP must wake up and discharge its duty. So far it has not paid any attention to qualifying remarks of AIC's auditors in last year's annual report. It is not a question of following good governance. The mess at AIC will not only render the largest insurance company of Pakistan delinquent but can cause serious problems to those corporates who have acquired risk cover from the Company.