Earned to written premium ratio at attractive level

May 15 - May 21, 2006

Ten years summary of financial and operating results of Adamjee Insurance Company (AIC) show that the company achieved record performance in terms of Gross Premium, Net Premium underwriting result, investment income and pre and after tax profits. This also enabled the company to pay cash dividend as well as issue Bonus Shares. The buoyant stock market, the company's attractive profit distribution, highest operating and financial results, increased technological capabilities, top financial strength ratings and decision to continue business in UAE, all these factors proved critical success factors (CSF) for the organization.

These CSFs have positioned the company to not only maintain market leadership but also meet the challenges of globalization, digitization and mobile communication. During the year the company wrote gross premium at Rs 6.682 billion (2004: Rs 5.266 billion) registering commendable growth of about 30% over preceding year's. Net Premium in the sum of Rs 3.997 billion (2004: Rs 3.678 billion) increased by 8.7% but net claims at Rs 2.511 billion (2004: Rs 2.683 billion) were 6.4% lower compared to previous year. Investment income at Rs 1.147 billion shows commendable increase of 133% over 0.494 billion for the last year. Earning per Share (EPS) at Rs 14.08 was higher by Rs 10.12 over previous year's EPS of Rs 3.96.

AIC was incorporated in the province of Sindh on September 28, 1960. The company is listed on all the three stock exchanges of Pakistan. It is engaged in the non-life insurance business. The company was listed on the Karachi Stock Exchange (KSE) in 1961. According to the stock market's published data on April 26, 2006, the closing price of AIC Insurance share was quoted at Rs 176, which is nearly 18 times of the par value. The share price crossed Rs 100 per share during 2005 otherwise the price remained around Rs 60 per share had during the last four years. Apart from the buoyant stock market followed by high growth rate of the economy, the other reasons for high market value in 2005 are its strong fundamentals coupled wide network of branches/offices.

An impressive 6% GDP growth combined with the positive correlation between GDP and insurance premiums has reflected in improved premium collection of 23% YoY growth of AIC for January-March 2006 period. This has, in turn, kept earned to written premium ratio at an attractive 90% during the quarter. The factors contributing to growth in the company's underwriting business are 1) de-risked business model (reduced dependence on motor insurance) as motor insurance contribution has been capped at 30%, 2) captive customer in the form of MCB Bank, 3) discontinuation of foreign business drag 4) robust investment activity in the country leading to additional avenues for fire and property insurance.

AIC carries an investment portfolio worth Rs 3,040 million on its books as of 31st December 2005), with a market worth of approximately Rs 6,600 million, i.e. unrealized capital gains of Rs 39 per share. With the capital gains tax no longer in place (insurance companies' capital gains were earlier taxed at the corporate rate of 35%), the company can potentially book a large portion of these gains which will now flow through the profit and loss statement of the company and hence reflect positively on the bottom line.

However, it is worth noting that 1) the company has not provided any detail of the securities where the money has been invested and 2) these securities have been classified as marketable securities. According to some analysts AIC has been giving the details in its previous reports and it is difficult to find a possible justification for not giving the details. They also say that terming these securities as marketable is not appropriate as it gives the impression that the company is actively participating in day trading.

It is evident that aims at achieving accelerated growth. On the one hand it has embarked on Business Process Re-engineering (BPR) on the other, application of full-fledged information technology with the implementation of Oracle Program. To implement BPR and effective Management Information System (MIS) the company appointed a reputable firm of consultants. The company has developed Oracle Program that has been designed, implemented and programmed in-house. This has resulted in an IT system that is tailored to the needs of the company and its customers. The company is working towards having all the branches and departments online and inter connected. Electronic payments of claims have been initiated at some branches and it is expected that through connectivity all the manual payments will be converted to e-payments. To achieve this, help of one of the reputed financial institutions has been taken.

As regards financial strength ratings of the company, its rating agency, JCR-VIS has upgraded its rating to AA (Double A) from AA- (Double A minus). It has been clarified that the ratings recognize the company's nationwide outreach and its financial strength as reflected in the reserves and diverse earning sources. The upgrade in rating takes into considering the company's focus on enhancing its technological capabilities and human resource development.

While the company's prospects as a whole remain attractive, it is believed the market has already discounted the potential positives into the stock price, which reflects an increase of 182% in its stock price since June 2005. The market could continue to remain excited over the short term given the capital gains driven earnings level. Given the fact that certain quarters are indicating that capital gains tax might be re-imposed, one should expect AIC to book the gains sooner rather than later.