In 1992 the Government of Pakistan opened up life insurance to the private sector, issuing licences to three Pakistani companies - EFU Life, Metropolitan Life and New Jubilee Life. The first two companies commenced business towards the end of 1992 while New Jubilee has yet to enter the market, perhaps having reconsidered its initial plans for commencing life business. The caretaker government of Mr. Moin Qureshi took the major policy (and somewhat controversial) decision of opening up Pakistan's life insurance market to foreign insurance companies in 1993, allowing American Life (ALICO) into Pakistan. ALICO commenced business in mid-1995. The barrier to foreign investors in insurance having been broken, Commercial Union Life followed a year later, commencing business in mid-1996.
The financial statements for 1997 of all four new entrants to the life insurance market have now been published. It is an opportune time, therefore, to look at the relative performance of the four companies given that these results reflect at least one full year of operations of even the newest entrant, CU Life.
Table-I sets out, in comparative form, the Revenue Accounts of the four companies, restated to an extent for comparison purposes.
One major impediment in comparing these accounts is the method used by the different companies with regard to the treatment of liabilities against life insurance policies. EFU Life (which set the lead) and Commercial Union Life have set up full actuarial reserves from the very first year of their 'respective operations. This approach is to be commended as it results in the best determination of the companies profitability. Metropolitan Life set up full actuarial reserves for the first time in 1997 and therefore declared a loss for the year of Rs.46 million. This is obviously the accumulated loss as, until 1996, Metropolitan simply showed the net result of income and revenue in the Revenue account as the fund at the end of the year, even if this figure was negative. ALICO has also, unfortunately, chosen the latter route. Even the financial statements for 1997 of ALICO show a negative life fund, although a hint at the actuarial reserves is given in the notes to the accounts which indicate that. reserves of Rs.28.622 million should have been set up as at end 1997. This would indicate a "true" net accumulated deficit in the Profit and Loss Account of Rs.58.1 million and not the Rs.29.4 million shown. It is of concern that these two companies have been allowed by the Department of Insurance and Ministry of Commerce to follow this basis of accounting. Even Metropolitan Life's change of accounting basis is apparently a result of the appointment of more professional actuaries rather than as a result of any pressure from the controller. Some key indicators have been worked out from the above results, which are given in Table-II.
Again there are difficulties in comparisons in that all the financial statements do not give, for example, gross premiums or claims, commissions and expenses separately for group and individual life business.
Ignoring minor inconsistencies, the picture which emerges indicates that EFU Life is emerging as a clear market leader among the private sector companies, writing 60% of total premiums (57% of new individual life premiums and 63% of group life premiums). The company has also made a clear dent in the overall group life market, writing close to 9% of premiums. It's entry in end 1992 brought about the first real competition to State Life which has resulted in sharp falls in group life premium levels to the benefit of insured organisations. Although EFU Life has not really made any significant impression in State Life's individual life business, it is obviously building up a steady portfolio of individual life clients which are the base of any life company's long-term profitability.
CU Life is a surprising second, writing 15% of total private sector life premiums. Given that 1997 represents only 18 months of operations, CU Life's performance is good. It has already captured 28% of the increasingly competitive Group Life market and has come close to individual new business levels of ALlCO and Metropolitan. It remains to be seen whether CU Life is able to make the same impact in the individual life market as it has successfully made in the Group Life one.
ALICO and Metropolitan Life, however, continue to struggle. This is especially surprising in the case of ALICO which has traditionally been a market leader in the countries in this region where it has a presence. It's total failure to penetrate the Pakistani market and to live up to the tall claims made by it's management prior to it's shares being floated on the stock exchange, call into question the wisdom of the caretaker government of Mr. Moin Qureshi in granting the company permission by name.
Whereas premium revenue is an important part of any company's performance, expense control cannot be ignored. The commission expense percentages of the three companies writing substantial group life business are relatively even. Metropolitan's high commission expense rate reflects the negligible group life premiums written. The management expense levels of all the companies are a source of concern. Even EFU Life's expense ratio of 46% is high. However the expenses being incurred by CU and ALlCO is of great concern and is something which needs to be watched carefully. Metropolitan's expense ratio is also high, but can be understood given the company's [TABULAR DATA FOR TABLE-I OMITTED] inability to write group business which has resulted in lower ratios for the other companies.
From a profitability perspective EFU Life is to be commended in showing a surplus of Rs. 1.4 million for 1997. The company has apparently bridged the initial financial difficulties which life insurance companies almost always have to go through, and which the other three companies still seem to be having to cope with. The financial status of Metropolitan Life should be a matter of concern for the Department of Insurance, given that Rs.46 million of it's Rs.60 million paid up share capital has been wiped out. So should the hidden losses being incurred by ALICO. CU Life, despite turning out a loss of Rs.27 million for 1997 (and a total accumulated loss of Rs.36 million), is less of a cause of worry, not least due to its paid up capital of Rs.300 million. However this also indicates that the company's real loss is much larger, as the investment return on the share capital would have reduced the actual loss considerably.
Given the above results the relative prices quoted for the shares of these companies reflect the lack of depth in our stock markets. EFU Life, despite being clearly the most successful company, has consistently been quoted lower than the other three, including Metropolitan Life the shares of which are obviously highly over-prices. ALICO's share prices of over Rs.20 reflects the lack of availability of the company's shares in the market.
[TABULAR DATA FOR TABLE-II OMITTED]
On balance the analysis indicates EFU Life and CU Life as being clear long term players in the market. ALICO and Metropolitan Life, on the other hand, require a serious review of their business plans and management style to date. Metropolitan Life's annual report indicates that such a review has been initiated which is to be welcomed. The analysis also indicates a need for the Department of Insurance to take a closer look at the way life insurance companies are managed.
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