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Updated on June 29, 2002


The KSE-100 Index lost 11 points on the very first day to close at 1768 with the trading volume declining by over 19% to 65mn shares from 81mn shares registered during the last week. The continued border tensions with India and rumors of new badla rules to curb speculation kept the individual and institutional investors from entering the market. On a more positive note, the US Defence Secretary, Donald Rumsfeld, has said that Pakistan cannot be blamed for each and every incursion across the LoC.

The Index remained range bound on Tuesday and closed up only 8 points to 1776. The news of government's decision to deregulate the import and price of High Speed Diesel led to some renewed interest in shares of PSO and Shell for the day. The daily turnover of shares traded however remained low indicating a "no interest" attitude of majority of investors. The management of the Karachi Stock Exchange also decided to raise the lower-limit of the circuit breaker to 5% from 2.5% from July 1, 2002 to gradually bring it back to the previous levels of 7.5%.

On Wednesday, the Index continued its neutral run as it closed down only one point to 1775 thus highlighting the apprehension by the market players to take any position in the stock market under the current situation. The Index lost 8 points on Thursday to close at 1767 with a sharp reduction in trading volumes which dropped by over 32% to 46mn shares as compared to 68mn shares on the previous closing day. Even though the overall trading interest dropped to the lowest level as compared to the last couple of weeks, the market remained above its 1750 support indicating the inherent strength for a quick rebound on positive signals going forward.

On the very last day of the week the Index lost another 7 points to close at 1770 with a drop of over 13% in daily trading volumes to 40mn shares. The ADV for the week remained closed to 56mn shares down 27% over the last week.

We had noted that KSE-Index would depict a range bound behavior, and see no reason to rehash our previous arguments. The only potential immediate term trigger seems to be the rumored cut in the Discount Rate. We think this is unlikely, but should it occur we would reduce our weight for the banking sector even further. We think investors should focus on Hub Power and MCB over the next week.


American Life Insurance Company (ALICO) was incorporated in Pakistan under the Companies Ordinance, 1984 as a public limited company on October 9, 1994. The firm commenced its operations on May 25, 1995 after registration with the Controller of Insurance on April 30, 1995. The firm is engaged in the Life Assurance and Accident and Health Business.


In our last weeks report on the life assurance sector in Pakistan, all the figures derived were directly from the respective companies annual reports. As per the Insurance Ordinance, 2000, life assurance companies are supposed to report the actuarial liability of policyholders on the face of the balance sheet. Although this regulation has been passed, both Metropolitan Life Assurance and ALICO continue to provide for policyholder liabilities as per their old accounting methods. To better analyze each individual company and the whole industry, we have taken the actuarial estimated amount of the liability and not the amount reported on the balance sheet for these companies as we believe this is a better estimate of policyholder liabilities

Premiums generated by the firm in FY01 amounted to PkR149.5mn, an increase of over 46% from FY00.

At the same time claims amounted to PkR26.8mn in FY01, an increase of only 27% from the previous year. On the other hand, the growth in premiums in the overall life assurance sector lagged the growth in claims in the same period. One of the main reasons for ALICO's rapid growth, in terms of premiums earned, is the increase in the full time sales force hired by the firm. The total workforce strength grew to 831 at FY01 year-end, a growth of 257% over the previous year.

Although the underwriting business of the firm has yet to show a profit, the company has reduced its losses from underwriting considerably over the years and is expected to make a profit in FY02 according to our estimates. The firm generated net income of PkR27.3mn in FY01 (FY00: PkR-1.2mn), a tremendous growth from the previous year. This is largely due to the company's careful selection and management of investments. Investment income amounted to PkR49.2mn in FY01 (FY00: PkR41.1mn), a growth of 20% over the previous year and a CAGR of approximately 10% from 1998 to 2001.

ALICO's market share in the life assurance public sector, as a percentage of total premiums earned in the sector, has also increased slightly from 12.5% in FY00 to 13.4% in FY01. This gives an indication that the firm is either exploring new markets or tapping in to existing customers of their competitors. Either way, the net result is a growth in the firms overall operations.

The firm's claims ratio is the lowest in the industry at 18% in FY01. The industry average of the claims ratio is approximately 22%. This gives an indication that the firm selects its customers carefully through thorough risk assessment of potential policyholders.

First year premiums have increased by over 72% over the previous year and they currently constitute 27% of total premiums earned by ALICO in FY01. Moreover, first year premiums have increased by a CAGR of 13% from 1998-2001. This gives a strong indication that ALICO is expanding its customer base. Also, group premiums constituted nearly 32% of total premiums earned in the public life assurance sector, second only to renewal premiums. This indicates that a large part of the market constituted by individuals is still relatively untapped. In the future this may represent a great opportunity for ALICO to further expand its customer base.

ALICO's ROE is currently the highest in the industry in FY01, at 11.1% as compared to -0.48% in FY00. Furthermore, the company is currently trading at a PER of 23x while EFU is trading at a PER of 25x. Both EPS and ROE have increased drastically since the previous year indicating that the company is growing rapidly. By seeing the EPS and ROE numbers it might seem as if ALICO's shares might be a good buy for investors, but the currently high PER for the company of 23x gives an indication that investors might have already taken this tremendous growth in to account at the current share price.


There seems to be an increasing awareness of life assurance in Pakistan as is evident by the growth in the overall sector in previous years. Specifically, in the period 1998-2001 premiums earned have increased at a CAGR of 28%. Therefore, as the customer base increases, revenues generated through the underwriting business will also increase.

The government has increased the paid-up capital requirement for life assurance companies from PkR100mn to PkR150mn, thereby significantly raising barriers to entry in this relatively infant industry sector. This will allow current companies in the sector to expand and not worry about threat of new entrants in the short run which may dilute the market share of existing companies in the public sector, thereby reducing profitability.


The company's ROE has increased over the years from -16.89% in FY99 to 11.1% in FY01. The EPS has also increased from PkR-1.37 in FY99 to PkR0.84 in FY01.

ALICO's combined ratio has been decreasing over the years from a high of nearly 200% in 1999 to 129% in 2001. Although a ratio of above 100% indicates that the company is paying out more in claims and expenses than it is taking in premiums, the gradual drop of the ratio indicates that the company's underwriting business is moving towards becoming profitable. A company with higher than a 100 combined ratio can still be profitable due to investment income, as is the case with ALICO.






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.Source: KSE, MSCI, KASB