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A study on ratio analysis on EFU

BY
Usman Malik
Faizan Asghar

A project report submitted to the department of accounting and finance, faculty of


management
Sciences, international Islamic university, Islamabad
In partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION


(FINANCE)

Department of Accounting & Finance


Faculty of Management Sciences
International Islamic University Islamabd

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Supervisors Certificate

This is certified that Mr. Usman malik (reg no 6344) and Faisan Asghar (reg no 6345) of MBA 21 have
completed their project report entitled „Ratio of Analysis of EFU‟ under my supervision. I have checked
this report and found in bonafide work of authors.

CH MAZHAR HUSSAIN
SUPERVISOR
Assistant professor

DR. ZAHEER ABBAS


Head, Department of Accounting & Finance
Faculty of Management Sciences
Internation Islamic University Islamabad

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Acknowledgment

We made afford on the report of this project. However, it would not be done by combine effort
of my group mate we are extremely obliged to Sir. CH. Mazhar for their help and endless
direction as well as for providing necessary information regarding the Different phases & also
for their provision in completing the project.

We would like to express our thanks to insurance industry persons for helping and providing us
time

Our appreciations and thanks also go to our colleagues making the project and people who
helped us with their special abilities

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Contents
1 Proposal:..........................................................................................................6
1.1-Background ..................................................................................................6
1.2- Objective..................................................................................................... 6
1.3- Introduction..................................................................................................6
1.4-Scope ............................................................................................................ 7
1.5-Details of the Existing system.....................................................................7
1.6- Software and hardware Requirements ...........................................7
1.7- Solutions.........................................................................................7
1.8- Project Phases:- ..............................................................................8
1.9- Methodology ;…………………………………………………….9
2-Analysis Phase........................................................................................................9
2.1- Introduction:...................................................................................................10
2.1.1-Insurance : ..................................................................................................10
2.1.2-History:.......................................................................................................10
2.1.3Historical claims:...........................................................................................11
2.1.4- Importance of Insurance: ............................................................................11
2.1.5-Insurers Business Model:..............................................................................12
21.6-Insurance sector in Pakistan:...........................................................................12
2.1.7-Insurance Industry Overview:.......................................................................14
2.1.8-EFU General Insurance Limited: ..................................................................15
2,1 9-Products & Services by EFU: .......................................................................15
2.2. LITERATURE REVIEW:.................................................................................19
2.3-Data Collection and Fact Finding ..........................................................................26
2.4-Analysis of data:......................................................................................................27
2.5-Interview:..................................................................................................................32
2.6-Data interpretation:....................................................................................................33
3-Implementation Phase: .....................................................................................................34
3.1.Introduction to implementation Report:.......................................................................34
3.2-Implementation methodologies:...................................................................................35
4-Ratio Analysis:.................................................................................................................36

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4. 3.1- Market Ratio ..........................................................................................................36
4. 3. 2-Debt Management:..............................................................................................40
4. 3. Operating Performance (%):.......................................................................................42
i Profitability Ratios ....................................................................................51
ii Liquidity
Ratio:...........................................................................................................54
4.4-Interpretation of horizontal analysis:...................................................................................55
4.5-EFU Key financial data analysis:......................................................................................56
4.6- Problems identification: ....................................................................................................57
Remarkable decrease in Investment income:................................... ..............................57
EFU Revenue Decreasing: .....................................................................................................57
Other
Problems:..................................................................................................................................57
4.7-Discussion of Possible Solution:............................................................................................58
4.8.Suggestions for further work..................................................................................................59
4.9-Conclusions............................................................................................................................59
5.Bibliography..................................................................................................................................60

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List of Table
Price to earning ratio…………………………………………………………………………..38

Payout ratio…………………………………………………………………………………..…38

Dividend yield…………………………………………………………………………………....39

Debt management ………………………………………………………………………………40

Debt to asset……………………………………………………………………………………..41

Underwriting Profit / Net Premium Ratio……………………………………………………….43

Underwriting Profit / Gross Premium Ratio…………………………………………………….43

Loss ratio………………………………………………………………………………………….44

Expense ratio………………………………………………………………………………………45

Combined ratio……………………………………………………………………………………46

Reinsurance Expense/Net Premium Ratios………………………………………………………..47

Return on Capital
Employed(ROCE)……………………………………………………………………………..……48
Return on equity (ROE)…………………………………………………………………………...48
The return on assets………………………………………………………………………….

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List of Figures
Price to earning ratio…………………………………………………………………………..38

Payout ratio…………………………………………………………………………………..…38

Dividend yield…………………………………………………………………………………....39

Debt management ………………………………………………………………………………40

Debt to asset……………………………………………………………………………………..41

Underwriting Profit / Net Premium Ratio……………………………………………………….43

Underwriting Profit / Gross Premium Ratio…………………………………………………….43

Loss ratio………………………………………………………………………………………….44

Expense ratio………………………………………………………………………………………45

Combined ratio……………………………………………………………………………………46

Reinsurance Expense/Net Premium Ratios………………………………………………………..47

Return on Capital
Employed(ROCE)……………………………………………………………………………..……48
Return on equity (ROE)…………………………………………………………………………...48
The return on assets………………………………………………………………………….

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1-Proposal:

1.1- Background
 The early 30s, below the encouragement of the Quaid-, establishment to appear
symbols of economic revival of the Muslims.
 Shipment, Airline, Funding and Assurance enterprises complete their
introduction. June 1990 the Administration of Pakistan obvious to permit Life
Guarantee corporate in reserved sector also. 18 November 1995, EFU Lifecycle
was settled a warrant to transfer on life assurance industry.
 Operations began instantly with Set Lifecycle products and in March 1995 flung
its Single Life merchandises. EFU arrived the pitch of life guarantee with the
effort on the altering requirements of the people.
 In March 2001, Allianz, a total front-runner in the assurance industry with a lively
attendance in 80 markets athwart 3 continents and EFU Cluster contracted a
combined venture to make a new business for giving healthiness assurance shield
to the public of Pakistan. Allianz EFU , permitted by the Administration of
Pakistan, is the initially dedicated health coverage benefactor in the country and
objects to compose a essential role in evolving the health cover market place in
Pakistan

1.2 Objective

 The project objective is to conduct EFU General Insurance Company analysis of


the financial statements to find out why the company suffered losses and the make
recommendations for the situations.
 As several insurance companies are working in Pakistan but the comparison is
made with top company in the industry to find the financial position and
performance of our concerned company.
 The analysis would be compared with the AdamJee Insurance General Company.
Comparison in terms of companies polices and expected outcomes would also
include the assessment of financial policy and the slits for quick financial losses.

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1.3-Introduction

 The EFU General Insurance Company was assimilated on September 2, 1942 and
is involved in non-life protection industry covering of Possessions,
Oceanic/Aeronautics, Motor and other assorted merchandises.
 The stocks of the business are mentioned on Karachi and Lahore Stock Talks of
Pakistan. The Main dwelling of commercial is situated at EFU Line, M.A. Jinnah
Street, Karachi, Pakistan.
 The business runs through 63 outlets in Pakistan. EFU clutch contains of EFU
Universal Assurance Limited, EFU Life Assurance Limited and Allianz
Healthiness Assurance Limited.
 The product and services offered by EFU are Aviation, marine cargo, Travel
Insurance Theft (Stuff belonging to a corporate or a domestic may be taken from
the business evidences or the home), acclaim card insurance, computer
misconduct assurance, machinery assurance, electronic tackle assurance and
mixed counting special accidents etc.
 The company‟s inventiveness is to alter its business Info System with an
expiration to close answer including Oracle's modern scientific software and
hardware as portion of the structure answer to encounter Company's expected
Online Matter Dispensation needs, custody in view both the extant goods and
future essentials such as Data Hayloft, business intellect and C R M System.

1.4-Scope
Cash flows of 3 years would be considered of EFU Universal Assurance Company
Limited with AdamJee Insurance Limited Business acting as a benchmark for our
concerned Company. Microsoft Excel is used to examine the documents formally. Share
Price is also determined. Hence it has been mention in the introduction phase (Referred to
Heading.1) the EFU Insurance corporation has stated loss per segment of Rs. 3.31at 2013
as linked to eps of Rs 5.86 at 2012.

1.5-Details of the Existing system


EFU General Insurance corporation has described faced loss each cut of Rs. 3.31 at 2013
as related to earnings each share of Rs 5.86 at 2012 The Business‟s loss afterward tariff
for the year over 2013 was Rs. 413 squillion related to profit after tax was Rs. 732 million
in 2012. The Company‟s Directors announced extra of Rs. 1.25 per share (12.5%) to the
stockholders whose designations look in the stake register of the Business at the end of
occupational on April. Claims as a proportion of net exceptional revenue were 64% as in
contradiction of 66% at 2013 and the backing income for the year was Rs. 263 million
related to Rs.187 million at 2013. Motor trade remains in profit as the outcome of steps
taken by the business to improve guaranteeing of this class of commercial despite lower
bulk of best income

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1.6- Software and hardware Requirements
There are four tools that would be used:-
1. Microsoft Word
2. Microsoft Excel
3. Microsoft Power Point
4. SPSS

1.7- Solutions

Ratio analysis is uses as diagnostic tools for the cure for the organization. Our concerned
company that is EFU General Insurance Company has bear losses in Year 2013 and Year 2011.
Hence we are conducting a financial analysis of the financial statements of EFU Insurance
Company relating with the risk that is involved in policy maker‟s decisions for the future and the
industry standards. For example the company‟s share price gets weak, it would be recommended
that how it gets valued in the future. Ratio analysis is the way to spot the flaws in the company.
Percent change in the sales and overall analysis with the interpretation would be taken in to
account. Main finding also include leverage, performance, profitability and liquidity.

1.8- Project Phases:-


1) Accessing the EFU financial statements

2) Entry of financial data into Microsoft Excel

3) Derivation of share price

4) Growth Rate Calculations

5) Financial analysis of Statements

i) Liquidity

ii) Performance

iii) Efficiency

iv) Profitability

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6) Comparison of financial analysis as compared to AdamJee General Insurance Company 7)

Critique of Financial decisions and policies.

Methodology
 The project objective is to analyze financial statement analysis of EFU General Insurance limited
with a view to find solid ways for the bearing of losses by the company and make
recommendation for corrective action.

 The project focus on general insurance sector of Pakistan, as EFU was on top and awarded with
association of Pakistan (IAP), but EFU face losses in 20111. Since here are 37 universal (non-
life) assurance businesses in Pakistan, comparison would be made with best company in sector to
evaluate the financial performance and position of EFU.
Adamjee Protection Business limited is chosen for comparison.
 The previous 4 eons Cash flows ,EFU Universal Assurance Limited will be used and comparison
would made with the Adamjee Insurance Company Limited which will be acting as a bench
mark for our concerned company.
 Ratio analysis and Trend Analysis will be undertaking in this regard. In Ratio analysis Liquidity,
Solvency, Market and Profitability Ratios will be used in the Ratio analysis. SPSS and Excel
would be used to analyze and statistically.

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Chapter 2

2.a- Starter:
2.1.1-Assurance:
It is a mechanism in which hazard is transmission. This is a method of changing the
Accountability for fatalities to authorities (insurance businesses) who grip the threat by
scattering it above a big number of society or companies.

A scheme of safety beside loss in which a number of folks decide to compensation sure amounts
of money, named premiums, to generate a lake of cash which will custom the influence of these
single to emolument the victims of the few produced by proceedings such as vigor, mishap,
illness, or death.

2.1.2-History:
Past is significant for any topic. Cover has stimulating history. Its start was humble but it
grow slowly. As skill and manufacturing progressive, the need of cover was stroked and then
organization of assurance was conceived.

Agreements, known as bottomry, were cast-off by cash lender to swing the weight of risk from
holder of vessels to themselves. The credit was annulled, if the vessel or cargo was misplaced
throughout a journey. Loans in the method of bottomry were recognized to the dealers of
Babylon in 4000-3000 B.C. It is also noted that bottomry was trained by the Hindus in 6000 B.C.

Maritime cover is the first group of assurance business that was industrialized. Edward Lloyd‟s
was a individual who gave maritime assurance a better advantage. Really, he was holder of
coffee house recognized as Lloyd‟s Coffee House. In Coffee House, manufacturers would come
for brunette and sit depressed to exchange about their commerce and would exchange material

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about the activities of ships. Lloyd starts issuing a newsletter in which modern information about
undertaking of ships was agreed. When the claim for the newsletter enlarged, he assumed why
not open a common fund in which all businessmen would contribute and deposit money
rendering to their incomes. This was the opening of assurance.

Lloyd‟s is not currently an cover company but an assurance corporation and it is said that it is
the main insurance group in the world and contributes in the business of each insurance business
of every country. In other words, where there is assurance, there is Lloyd‟s.

2.1.3Historical claims:
The Quake fervor in San Francisco in 1916 caused in the expense by Lloyd‟s of 25 million
pounds.
In 1971, one aircraft was take over and devastated by intensity. Lloyd‟s rewarded twelve million
pounds.
In 1964, a Turkish Carriers DC-10 stopped near Paris, and Lloyd‟s rewarded its filled covered
worth of one million pounds.

After Lloyd‟s, hundreds of cover businesses have originate into being many of whom have
worldwide standing and stand-up. After the detection of marine assurance other classes of
assurance such as fire, life, motor, accident etc. looked in the marketplace (IAP).
2.2.4- Importance of Insurance:
Economic care is vital refuge after, life-security. An actual gadget of guaranteeing security
is Assurance-might be the safety of the dependents of the dough-winner or it could be the
sanctuary of goods missing by the ordinary, unintended or indirect calamities.

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In all circle of a man‟s life, protection helps and backing him, remain it motor protection, or fire
or life or any other assurance class. Supporting of protection is always here for security and
deliver him monetary safety.

Cover is a great reason of income to the nationwide exchequer. In small, “monetary is more
donated by armies such as assurance, societal and technical development of man”. In other
words, growth of assurance is connected with the growth of man. During war, assurance plays its
important role as no other fiscal movement can.(IAP).

Deprived of insurance shelter all industrial, economic and social action of the biosphere would
restriction. There would be a disorder. This expressions that assurance is a substitute of human
development, success and progress.

2.1.5-Insurers Business Model:

Profit = earned premium + investment income - incurred loss - underwriting expenses

Insurers get benefit in two ways - through underwriting, the method by which insurers chooses
the risks to insure and agree how much in premiums must be charge for accepting those risks and
by financing the premiums they baged from the insured.

The most complicated side of the insurance business is the policies underwriting. Using a wide
range of data, insurers predict the likelihood that a claim will be made against their policies and
price products accordingly. To this end, insurers use actuarial science to quantify the risks they
are willing to assume and the premium they will charge to assume them. Data is analyzed to
fairly accurately project the rate of future claims based on a given risk.

Insurance companies also earn from investment. Available reserve is the amount of money, at
hand at any given moment that an insurer has collected in insurance premiums but has not been

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paid out in claims. Insurers start investing insurance premiums as soon as they are collected and
continue to earn interest or returns on them until claims are paid out.

2.1.6-Insurance sector in Pakistan:

1-History of Insurance Industry in Pakistan:

On the period of independence, the country had 5 internal and 77 far-off insurance concerns.
These businesses were planned below the Insurance Act of 1938. The government in 1948
recognized the Section of Insurance inside the area of Ministry of Business to oversee the affairs
of insurance manufacturing and to defense the interests of the protected. The Act was edited in
1958 for the initial time custody in view the supplies of national marketplace and to have real
control ended the insurance premium rates. Meanwhile, numerous alterations have been
complete in the Act. The Department of Insurance further created the Controller of Insurance for
the same purpose that was eliminated in 2000 when SECP was complete responsible for
overseeing insurance commercial in the country.(SBP-2004)

One of the important deviations in insurance guideline was the ending of the office of controller
of insurance and after the change of Corporate law Specialist in to SECP, a new division was
shaped in SECP to gaze after the businesses of the insurance industry. Since the Insurance Act
1938 had become outmoded, it was wise decision to substitute it with some new regulations. The
new Insurance order was broadcast in August 19, 2000 by the SECP that amplified the minimum
rewarded-up capital of non-life assurance businesses to Rs. 89 million and for life assurance
businesses to Rs. 134 million.(SECP)

2-Insurance companies in Pakistan :


As of October 20, 2010 forty nine (49) insurance and takaful companies are transacting
insurance business in Pakistan along with one government owned reinsurance company PRCL.

2.1-Non⬆life (general) Insurance Companies:

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Out of the total, Thirty⬆seven (37) companies are transacting non⬆life (general) insurance
business, including the government owned National Insurance Company
Limited and the government owned reinsurance company, Pakistan Reinsurance
Company Limited (PRCL).(SECP-2010)

There are five categories of general insurance, Motor insurance, Marine insurance, Fire
insurance, Health insurance and Miscellaneous category includes aviation insurance, travel
related insurance and cash insurance etc. the premium collected earned from these categories is
shown in chart. (see appendix-1 chart-2)

2.2-Life Insurance Companies:


Six (6) insurance companies are transacting life insurance business, including the government
owned State Life Insurance Corporation of Pakistan

2.3-Health Insurance Companies:


Two (2) Insurance companies (one life and one non⬆life insurance company) are dedicatedly
providing health insurance services.

2.4-Takaful Operators:

Five (5) Takaful operators are currently providing Islamic Insurance to the masses of which 2
operators are transacting family (life) takaful business and 3 are transacting non⬆life (general)
takaful business.

2.5-Reinsurance Company:

There is one reinsurance company operating in Pakistan, the government owned Pakistan
Reinsurance Company Limited (PRCL).

2.1.7-Insurance Industry Overview:


The total premium under-written by the insurance industry in 2009, amounts to Rs. 87 billion.
Non⬆life (general), life and Health insurance companies contributed Rs. 42.5 billion, Rs. 41.8
billion and Rs. 1.2 billion respectively. The premium underwritten by takaful operators (family
and General) amounted to Rs. 1.4 billion.

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The statistics shows that the country‟s total insurance premium remains at 0.7% of total
economic output (Insurance Penetration), with per head expenditure on insurance at US$6
(Insurance Density) since the year 2001, one of the lowest in the world, mainly due to lesser
awareness about the insurance in the masses.(SECP 2010)

The two key businesses which lead universal insurance subdivision are EFU broad insurance limited and
Adamjee Cover Business, the together have 52% of part in entire universal insurance market.
Conflicting to life assurance sector, universal insurance sector is mainly conquered by secluded
assurance corporations.(IAP-2009).

2.1.8-EFU General Insurance Limited:


The Company was combined on September 2, 1922 and is promised in non-life assurance business
including of Material goods, Maritime/Flight, Motor and other assorted products. The stocks of the
company are cited on Karachi and Lahore Stock Exchanges of Pakistan. The Main abode of business is
situated at EFU Line, M.A. Jinnah Street, Karachi, Pakistan. The company functions through 63
branches in Pakistan.

EFU is solitary of the insufficient Pakistani groups run completely by expert management and extremely
interested field force. Client-sordid includes of many foremost corporate houses and multinational
businesses.

The business has also occupied the creativity to alter its Initiative Information System by an finish to
end result including Oracle‟s latest technical software and hardware as part of the substructure solution
to meet Business‟s projected Online Transaction Handling needs, care in view together the present
requirements and upcoming needs such as Data Warehouse, business intellect and CRM

2.1.9-Products & Services by EFU:

1-Aviation:
The assurance related to flying.

The major modern jets cost up to Pak Rupees 24 billion apiece and may transmit over 300 passengers
whose shared worth, if recompense for death or injury has to measured, may run to a further Pak Rupees
50 billion. Even a small private airplane may be the cause of a midair crash with similar financial

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penalties. The failure of a constituent factory-made by a small business may outcome in the loss of a
completely laden aircraft

2-Marine:
There are two types of marine insurance:

2.1-Maritime Cargo:
"Maritime Insurance is said to be Mom of all Covers".
In Maritime Insurance attention is providing for properties in transportation for together Import and
Export.

2.2-Marine Hull:
The insurance for time period of normally 12 month during which ship is in process of
construction. The insurance, which compensate risk of any miss-hap during construction.

3- Miscellaneous:

3.1-Personal accidents:
Personal Accident cover for individual persons.

3.2-Workmen compensation :
The Workmen‟s Compensation Act provides no-fault benefits in the event of death or injury to a
‟Workman‟ (normally with an income of less than PKRS 3,000 per month) due to an accident at work.

3.3-Travel care:
24-Hour Non-Stop Travel care to any destination all around the world which is specially designed
for the travelers traveling abroad

3.4-Liability insurance:
Any firm or any individual in the normal course of business or other activities may negligently cause
damage to the property of others or injury to others, if so insurer compensate insurance policy holder .

3.5-Fidelity guarantee:
If a company suffer a direct financial loss as a result of an employee‟s dishonest activities, efu
Fidelity Guarantee policy will compensate the company for such loss.

3.6- Money insurance:

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A business may be robbed of cash either during normal business hours or after normal business
hours. Money may be stolen whilst in transit between the bank and the office or on any other route. EFU
Cash in Transit, Cash in Safe and Cash in Drawers policy will compensate the business for such loss

3.7-Plate glass insurance:


Plate Glass is costly to replace and certain businesses find glass insurance an important part of
their insurance portfolio. This applies particularly to retail shops, department stores, showrooms, etc.
3.8-Burglary:
Property belonging to a business or a household may be stolen from the business premises or the
home. EFU policy will compensate the business or the individual in the event of loss of property from
the insured premises

3.9-Golfers insurance:
The golf is one of the luxurious sports, so insurance is done of its equipments used in this business.

3.10-Credit card insurance:


Insurance is done of credit card to compensate policy holder, if illegal transaction done from insured
credit card.

3.11-Computer crime insurance:


The Policy covering computer theft of money and securities. it also cover computer theft of information
and computer vandalism.

4-Motor:
The largest form of non-life insurance in Pakistan, covering issues related vehicles.

5-Property:

5.1-Engineering:

5.1.1-Contractors all risk insurance:


Contractor All Risks Insurance offers comprehensive and adequate protection against loss or
damage in respect to contract works of civil engineering projects.

5.1.2-Machinery insurance:
Machinery Insurance is developed to grant industry the effective insurance cover for
expensive plant, machinery and mechanical equipment.

5.1.3-Electronic equipment insurance:

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Electronic Equipment Insurance is today a common policy for high valuable electronic equipment.
The term electronic equipment comprises all electrical systems having moderate power requirement
such as

1) Electronic data processing ( EDP ) equipment

2) Electrical and radiation equipment for medical use


Communication facilities

In other words all types of equipment which generate, convert, store transfer and/or process physical
data and information can be insured.

5.1.4-Comprehensive machinery insurance policy:


The Comprehensive Machinery Insurance policy is intended to provide property cover for machinery
and industrial plant as an enhancement of machinery insurance and is specially aimed at risks which are
demanding from underwriting perspective.

6-Fire :
EFU Insurance writes a portfolio comprising a broad spread of quality business relating to industrial,
commercial and service activities, including transportation, oil production, manufacturing, engineering,
banking and etc. REVIEW:

Akhter and Rehman (2011) examination of financial performance of the insurance industry
of Pakistan under overall global context. Pakistan, insurance sector was been analyzed
between the period of 2001-2005, it was a good attempt to analyze the future growth and the
potential as well. Pakistan insurance industry was been analyzed from two way process,
comparing with the advanced developed countries and with the under-developed countries and
with the comparison of Pakistan to share the world insurance market. The research shows some
key economic indication that are important to create demand for the various insurances.

Akhtar & Rahman (2011) found that the all over financial performance of insurance has been
steadily increased in last decade. Pakistan‟s full share in the world insurance market is about
0.02% in

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2004 and that has steadily grown till 0.03% in 2006. It shows that insurance industry is steadily
growing.
73.6% of the people is a estimate figure which lies below the poverty line i.e. earning less at
dollar 2 per day (UNDP, 2006). It states that only 26.4% of the people are earning much than $2
per day. It has a affirmative point that the less purchasing power of the overall people which
leads towards low GDP per capita . If we compare the Asian regions it shows that, GDP per
capita of Pakistan is less than India and China. It is even much lower than the countries like Sri
Lanka that has even lower H.D.I (Human Development Index) valuation and quiet much low
insurance volume ranking as compare to Pakistan.

The financial analysis of insurance industry and the results of Pakistan in 2001-2005 shows that
average positive growth rate is 28% per year, compared to 22% for general insurance. If we
analyze that the total rise in the asset rate for life insurance business has 16% per annum as the
comparison of 18% for the general insurance. The total gross profit rise rate for the life insurance
business has almost about 14% annually with the comparison of 52% for the general insurance.
The total ROA (Return of Assets) for life insurance business is 0.36% annually when compared
with general insurance which is 8.1%. Therefore the overall performance of the general
insurance is far much better than the life insurance.
Pakistan is ranked on 58th position in the overall world insurance market by the volume which is
compared with the 9th position of the countries like China and 15th of India.

This research shows some critical indicators so that how the policy makers should improve
literacy rate, increase GDP per capita and other strategies which leads towards to achieve goal
and objectives of economic growth and such factors will also give a good strength to the
insurance sector of the country of Pakistan only due to the economic growth and the insurance
which have a link with each other.

Zoomkawala (2008), Pakistan‟s insurance market is comprised with the two segmentations
private sector and the public sector. National insurance company limited (NICL) is solely the
direct insurance provider for the public sector. Adamjee insurance company and EFU general
insurance limited are the two biggest insurance company in private sector and is having the
market share of 27% and 25%.

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Pakistan Reinsurance Company Limited (PRCL) was inaugurated by the Government of Pakistan
to provide the insurance capacity to the local insurance sector of the country. Many foreign
insurers from European countries, Middle East and Asian countries are also giving support to this
market.

Zoomkawala (2008), has analyzed about the issues faced by general insurance sector in Pakistan.
Riots of 27th December 2007 after the murder of ex prime minister Benazir Bhutto has created
huge deficit for the insurance industry of Pakistan. In future such crisis loss of the nature would
never be payable.
Insurance database, is a big issue, the database development at Insurance Association of
Pakistan (IAP) stage can promote good underwriting practices in the region and overall system
and avoid frauds and other malpractices. Human resource development is also important for the
usage of Information and technological resources and to improve competition and other services
been provided.
Fake insurance companies issuing unauthentic motor vehicle third party insurance policies for
registration of vehicle, is an issue general insurance sector is facing its consequences.
A perception about the conventional insurance is forbidden in Islam was another reason of low
penetration in the market. The Government had promoted the Takaful Rules in 2005, permiting
Takaful companies to start business. This promulgation has completed this issue to some level.
Insurance of public properties and assets is a problem faced by private and general insurance
sector companies to solve this problem in insurance of public properties and assets should be
opened to the privatized sectors.

The main challenges this sector as well as whole insurance industry is facing, is insurance in
rural areas, so far failure is faced because no insurance company had ever provide insurance in
rural areas as 71% of population of Pakistan is living in rural areas insurance sector is facing
challenges in penetration.
Bancassurance is a challenge faced by insurance companies in Pakistan because it break the
traditional way of selling insurance products and services through agents. By promoting
bancassurance (selling insurance through banks), insurance companies can generate large amount

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of premium. It is making its way in Pakistan as many cars that are leased by banks are also
insured so this distribution channel has a bright future in pakkistan.
Agriculture insurance is really important and as agriculture is backbone of Pakistan‟s economy
but it is not insured although its is primary threat, to provide insurance to agriculture can not only
benefit economy but also farmers. The insurance companies failed to avail this opportunity.
A new technology for selling insurance online known as E- insurance is a challenged faced by
many companies in this sector.
The future of non-life insurance market in Pakistan seems to be brighter than before. therefore
there are so many other challenges ahead from this stage, the low penetration in the non –life
insurance sector, and strong economical growth are the two factors which are likely to lead
towards significant premium growth in the coming years ahead which are coming.

Benoist (2002) New challenge for insurance industry around the world. Bancassurance is a
method of distributing insurance products through banks.It is a global system that is gradually
breaking down the traditional barriers between the various businesses of supplying financial
products and services.
Bancassureurs have found it hard to penetrate in non-life insurance sector worldwide, till 1999,
banking networks were ranked fourth among distributor of non-life insurance products, with a
market share of 8% which put them well behind general agents(35%), mutual insurer‟s direct
sales team (34%) and brokers(17%).

Benoist (2002),analyze worldwide development of bancassurance as uneven, but it is gaining


grounds in most of developed and developing countries.
Bancassurance is highly developed in Argentina because Argentine banks are very well placed
to tap private pension market and are actively acquiring interest in non-life insurance companies.

The distribution of insurance products by banking network has an advantage for both banks and
insurer‟s, that‟s why bancassurance is developing throughout world. Bancassurance make
distribution network more profitable as compare to traditional distribution networks.

23
It also help to build client loyalty because it makes life easier for clients. And selling same client
number of products helps to build loyalty.

Cultural differences between insurers and banks create real problems as determination of
commission and trade-offs between products.

There is no shortcut/miracle model for insurance, but major movement of funds through internet
will very gradually emerge as an additional distribution channel (E-Insurance). The companies
which will change themselves with emerging models and technologies will be successful and
managing critical success factor as quality, innovation, advance technologies and low costs.
The most important factor every insurance company is to build strong client relationships
because no model is successful until it fulfills the clients demands as clients are the most
important asset of every company.

Afza and Kausar (2010), technical efficiency of non-life insurance companies in Pakistan
from 2003 to 2007.
The technical efficiency being estimated by the financial institutions is the ability of a firm to
just only maximize the output from the desired inputs and it is only measured by the observation
of its output.

The insurance sector of Pakistan is not to large but is infact small and has only 0.04% of share in
the nonlife insurance market of the world, the Premiums (Swiss Sigma, 2009) and the density
and penetration of insurance is mere too low in Pakistan, the insurance density shows that it was
only $6.5 whereas the penetration is 0.7% in the insurance sector in year 2007 (Swiss Sigma,
2009).

Therefore most of the facts and figures are not in the favor of increase of non-life insurance
sector of Pakistan, But still it could be seen that it has shown a constant growth recently due to
various governmental reforms and changes in the financial sector

24
If we take an example, the minimum required paid up capital for non life insurance is 50 million
rupees in the year 2003 which goes to 120 million rupees in 2008 with a steady shift of all the
other responsibilities the insurance regulations to the SECP in year 2000, due to this changes in
economical system the non life insurance insurance sector grew with 18% from 2003 till 2007,
and the total assets increased by the rate of 32%, net premium 20% investments 78%. (state bank
of Pakistan 2007)

Non-life insurance was very much improved in terms of its efficiency level, so from 80% in the
year 2004 to 86% in the year 2007 but still it is seemed to be very inefficient up till now, the rate
of inefficiency was about17.6%.

Afzaa and kauser (2010),concludes in their research that large insurance companies are more
perfect intermediary and a provider of risk transfer, it may lead to contribute towards the basic
economic growth by allowing different kinds of various risks to be managed more effectively
and efficiently through utilizing the domestic savings.

Arena (2006), the author has analyzed in this research that no matter what if there is some
relationship between insurance market (life and non-life insurance) or if there is some
relationship with the economic growth.

The research shows that, life and non-life insurance premiums have a very good, in otherwords
significant results in the economic growth, in the case of non-life insurance, its impact is driven
by both high-income and developing (middle and low income) countries. However, the results
suggest that non-life insurance has a larger effect in high-income countries than in developing
ones. Pakistan was among low and medium income group in WDI (World Development
Indicators) issued by World Bank.

Daily times (2011), “Insurance industry playing a vital role in the economy”. The newspaper
report analyze insurance industry role in helping economy of Pakistan. Pakistan insurance

25
penetration is only 0.7% of GDP, which is one of the lowest in the world.The size of Pakistan‟s
insurance industry is relatively small in proportion to its gross domestic product (GDP).

The insurance industry plays an important role in the financial system by providing
indemnification of financial risk in the economy and also serves as an institutional investor for
both capital and money market instruments.

Insurance industry in Pakistan could enhance its outreach penetration in the market by leveraging
state of the art technology and accessing multiple channels of distribution. Apart from the
economic recession in a country and steady decrease in the overall purchasing power of
consumers could play a vital role, if the business to consumer selling strategy is adopted by the
various companies and small diversified type of products are developed to satisfy the consumer
needs then it‟s a best idea, this can meet the overall demand in the retail segment, the density of
insurance and penetration may increase and which may help to support the overall countries
economical system.

Swiss Re Sigma (2010),’ impact of inflation on insurences’. Inflation is described as economic


phenomena of increasing prices of goods and services. During financial crisis, inflation risk is a
real concern for financial institution.
For non-life insurers, inflation leads to higher claims costs thus decreasing profits.
Long periods of high inflation can be very costly for non-life insurers.

Inflation is concern for insurers because its potential impact on assets and liabilities.
Non-life insurers can mitigate this risk by effective contract design.
Therefore, insurance companies especially non-life insurers should be aware of not only inflation
risk but also should be aware of effects of deflation and hyperinflation consequences in future.

SBP(2010), Performance Stability and major Review of Insurance. Insurance sector provides
perfect side which shows that risks in this sector are pooled. American International Group
(AIG) in 2008 therefore the support of government bailouts and the global insurance sector carry
on to come towards getting positive and steady growth in premiums and the profitability rate.

26
This sector has a very vast potential in Pakistan which unfortunately has not been realized yet.
The sector can be effectively and efficiently mobilized in order to provide a better support to the
economy other than its small size and due to also because of its low penetration. The industry
can expand its reach, gets vast and penetrate in the market by leveraging state of the art changing
some reforms in rules and regulations, technological and by the usage of various different
distribution channels in the country.

2.4-Data Collection and Fact Finding


The data collection for this project have been taken from annual report of 2013 of EFU general
insurance limited, SECP annual reports on insurance sector of Pakistan issued by insurance
division of SECP ,SBP reports on insurance sector of Pakistan and from year book issued by
IAP(insurance association of Pakistan).

Literature review of five research papers, one whitepaper, one working paper and an article was
being made to analyze non-life insurance sector globally and Pakistan‟s nonlife insurance sector
in general. An oral interview is taken into consideration from Executive Vice President of EFU
General insurance limited and from researcher having huge knowledge of insurance sector of
Pakistan.

The teaching earned from finance courses was also applied to analyze financial condition of
company, which helped us a lot in understanding data.

27
2.5-Analysis of data
:

The profit after tax of company in 2012 was Rs.732 million, but company goes into losses in
2013,having loss after tax of Rs.413 million.

Profit/Loss After tax


20000

15000
R
U
PE 10000
E
IN
M 5000
IL
LI 0
OJ

-5000

-10000
2010 2011 2012 2013
Profit/Loss After tax 14536 -5471 732 -413

The last 4 years of EPS trends has been shown below, which shows dramatically changed
in
Eps each year, this shows massive risk is gathered in insurance business and Especially in
non
-life insurance business.

28
The insurance business model is given below, in which it is shown how company earn its
premium and form investments. It is certainly bases of financial performance.

The premium earned by different forms of insurance by all companies involved in non-life
Insurance business.

29
The market share of four largest non-life insurance companies in Pakistan.

Market Share Of Top Four non-life Insurance


Companies
30

25

20

15

10

0
EFU general Adamjee insurance NICL NEW Jubilee Others
insurance insurance

MARKET SHARE OF FOUR LARGEST NON-LIFE INSURANCE COMPANIES

( SECP-2008)

Balance sheet, profit/loss account and statement of cash flow is also given in appendix.1. This
data will be used in implementation phase to analyzing company position by applying trend
and ratio analysis.

31
2.5-Interview:
Senior Executive President of EFU general insurance limited was interviewed.

Q1-Why EFU General Insurance Company is in loss in 20103 as compare to in profit in


2012? What are the main reasons?

ANS: Net claims in financial year were high and income from investment and other sources was
only 3 million as compare to investment income of 1157 million in 2012.

Q2-How can company overcome its loss of 2013 in 2014?

ANS: Year 2014 was good for non-life insurance business in Pakistan, so if you analyze EFU
quarterly report you would come to know that EFU will overcome its losses in 2014.

Q3-Why EPS is negative?

ANS: EPS is in negative because earning is in loss.

Q4- Tell us about risk factor in non-life insurance and fraud involve in this sector which
effect performance of company?

ANS: As, everyone knows that insurance is all about risk management. And EFU have some
principal to control fraud.

a) Insurable interest: to know what interest of party is insuring.


b) Utmost good faith: to ensure that honesty should be there while insuring.
c) Proximate cause: to check that insurance is for same claim, for which it
isinsured.
d) Indemnity: to re-adjust the claimer with conditions as per before accident
.Contribution: to give contribution in loss.
Subrogation: if loss is recovered after some time then ,then benefit/money will be
given back to insurer:

If all these condition are fulfilled, then fraud chances are very minor.

Q5-What effect did natural disaster’s had on company performance (floods)?

ANS: As, insurance penetration is only 7% of GDP, so insurance level is low especially in rural
areas, so floods doesn‟t affect non-life insurance companies much. If they were insured then
floods might effect.

Q6-Which Rival company EFU should Benchmark?

33
ANS: EFU is only company not subsidiary of business group and efu is one of the first insurance
providers in Pakistan. And our mission is economic support and work for welfare for society.

Other interviews helped us to understand insurance business and processes, which were
informative for project.

2.6-Data interpretation:

EFU insurance limited is second best Insurance Company of Pakistan working since
1932. EFU past financial performance showed that it could overcome its losses competently.
Company was bearing loss of 5444 million in 2010 and overcome its losses and shows profit of
901 million in 2011.

EFU, written premium income was being good enough in 2010 as shown in annual report , but
large amount is given to additional coverage companies, so investment income had almost zero (
only 3 million) . So company bear losses, even before tax paying

So for this determination, ratio and trend analysis wouldl be done in implementation phase.
Trend and ratio analysis is explained as :

3-Implementation Phase:

3.1.Introduction to implementation Report:

The main focus behind the implementation report was to provide practical edge to the academic
suggestions and capabilities expressed in the analysis report. The implementation report will be
helping us to organization, an opinion, by the help of observed and statistical proof about the
main pointers of financial performance of EFU General Insurance Limited.

34
The method mentioned in the analysis report was applied upon the available financial
information of EFU General Insurance Limited for past four years (2010-13) to analyze about
performance.

The ratio analysis was performed to reach key ratios of EFU General Insurance Limited for last
4 years and with industry average ratios, which was given in clarification of each ratio. The
literature review performed in analysis report helped a lot to understand the working of general
insurance business.

This would helped us to select on the method of purpose for the execution report and for this
purpose 20 ratios were obtained from last 4 year financial data. Horizontal analysis made on the
income Statement, balance sheet and cash flow statement was performed to judge the internal
working of the EFU over the last few years. Analysis of key financial data is also performed.

All these information would help us to find problems in EFU and also facilitate us to overcome
the identified problems.

3.2-Implementation methodologies:

For implementing strategies suggested in analysis report the following steps need to be taken:

1. Performance of ratio analysis:

The major ratios includes market, debt management, operating performance,


profitability and liquidity ratio must be calculated for last four years of EFU. This
would help us to find and understand the trends if some of last four years .this also
helped us to identify problems and we could then easily analyze problem efficiently.

2. Comparison with industrial average ratios:

After finding ratios, the calculated ratios would be compared with the industry
average figures to measure the performance of EFU with respect to industry. This would

35
help us to determine whether the ratio gets above or below the industry average and what its
meaning.

3. Horizontal analysis:

The Horizontal analysis of last four years would be performed, which may help us to
analyze various internal aspects of EFU. Horizontal analysis of both balance sheet
and income statement would be done be done.

4. Analysis of key financial data:

It may performed to analyze most important factors of company and deep analysis had been
Performed to identify problem and also to suggest solution.

36
Chapter 4

3.3-Ratio Analysis:

3. 3.1- Market Ratio

3.3.1.1-Earning per share:

EPS=Net Profit after Tax/No. of Shares

2010 2011 2012 2012

120 (52) 6 (5)

EPS
140
120
100
80
PK 60
R 40
20
0
-20
-40
-60
2010 2011 2012 2013
EPS 120 -52 6 -5

INTERPRETATION:

Earnings per share showed profit to EFU from paid up capital. Earnings per share was being
decreasing in 2010 and 2013, which is not a good sign. The portion of a company's profit
allocates to each outstanding share of common stock. Earnings per share serve as an indicator of
an EFU‟s profitability. The computed ratios showed that the EPS has being declined due to
decrease in Profit and increase in expenses. As company reported loss after tax so EPS is
negative in 2013. Industry average was PKR.4.19.

37
3.3.1.2-Price to Earning Ratio:
Market Price Per Share/ Earning Per Shares
2010 2011 2012 2013

5 (4.5) 18 (14.32)

Price to Earning Ratio


20

15

10

TI 5
M
ES 0

-5

-10

-15 2013
2010 2011 2012
P/E Ratio 5 -4.5 18 -14.32

INTERPRETATION:

The P/E Ratio indicated how much investors were willing to pay per dollar of current earnings. As such,
high P/E Ratios were associated with growth stocks. (Investors who were willing to pay a high price for a
dollar of current earnings obviously expect high earnings in the future.)The P/E ratio was -4.5 times in
2011 and increase dramatically by 18 times in 2012. However, in 2013 it decrease by 14.32 times.
Industry average is 20.9 times, as EFU P/E Ratio was less than industry average because company EPS is
also negative and company gives nothing back from share holders point of view. If P/E was low than
industry, than it is underweighted stock.
3.3.1.3- Payout Ratio(%):

38
Dividend Per Share/ Earning Per Share

2010 2011 2012 2013

7.16 (9.43) 70.23 (40)

Payout Ratio
80

60

PE 40
RC
EN 20
TA
GE 0

-20

-40

-60
2010 2011 2012 2013
% 7.16 -9.43 70.3 -40

INTERPRETATION:
The payout ratio provided an impression of how well earnings supported the dividend payments.
More mature companies incline to have a higher payout ratio. This ratio identified the percentage
of earnings (net income) per common share allocated to paying cash dividends to shareholders.
The dividend payout ratio was an indicator of how well earnings support the dividend payment.
As in 2013 its negative that show that earnings were not supporting dividend payment. Industry
average in 2013 was being 78%.

3.3.1.4-Dividend Yield(%):
Annual Dividend Per Year / Price Per Share
2010 2011 2012 2012

2 3 4.5 4

39
Dividend Yield
4.5
4
3.5
PE
RC 3
EN 2.5
TA
GE 2
1.5
1
0.5
0
2010 2011 2012 2013
Dividend Yield 2 3 4.5 3.5

INTERPRETATION:

Dividend Yield ratio showed how much a company pays out in dividends each year relative to its
share price. Dividend yield was a way to measure how much cash flow you were getting for each
rupee invested in an equity position. So higher the dividend yield higher the profit, 2.84% was a
low percentage of dividend yield. Industry average is 3.7 %. So, EFU dividend yield was less
than industry average.

3.3.2-Debt Management:

3.3.2.1- Debt to equity ratio:


(Total debt/Total shareholders’ equity) * 100
2010 2011 2012 2013

130 120 115 200

40
D/E ratio
250

200

150

100

50

0
2010 2011 2012 2013
D/E ratio 130 120 115 200

INTERPRETATION:

It‟s the measurement the firm‟s used of fixed-cost financing source. It was the relationship b/w
borrowed funds and internal owner‟s. Increase or decrease in this ratio suggests a greater or
lesser dependence on debt as a source of financing. It would be minimum. Debtor checked how
much capital of owner was invested in business. EFU‟s Debt to Equity 200 was not efficient
because it was little high. The industry average was 65

3.3.2.2- Debt to asset ratio:


Total debt/Total asset
2010 2011 2012 2013

45 50 40 5

41
D/A Ratio
60

50

40

% 30

20

10

0
2010 2011 2012 2013
D/A Ratio 45 50 40 5 3
2

INTERPRETATION:

Indicates what sizes of the company‟s possessions being backed through obligation. If the ratio
was fewer than unique, utmost of the EFU‟s possessions were financed done fairness. If the ratio
was better than lone, utmost of the EFU‟s properties were backed through obligation. Company
by extraordinary debt/benefit ratios were thought to be "extremely leveraged”. Consequently
EFU remained extremely leveraged. The industry usual was 56.9.so EFU D/A ratio was below
industry figure.

Which means EFU was not dependent on the debt leverage decrease, which also effect the
profitability of the company.

Low risk, low return/profit.


3.3.3- Operating Performance (%):

3.3.3.1- Underwriting Profit / Net Premium Ratio:


(Underwriting Profit / Net Premium)
2010 2011 2012 2013

42
(4) 5 3 4

Underwriting Profit / Net Premium Ratio:


7
6
5
PE 4
RC
3
EN
2
TA
GE 1
0
-1
-2
-3
-4
2010 2011 2012 2013
Underwriting Profit / Net
-4 6 3 4
Premium Ratio:
1 2

INTERPRETATION:

The difference between net premiums earned and the sum of claim expenses and underwriting
expenses. Because underwriting profit excludes investment income, it is a commonly used
method of evaluating the performance of a property and casualty insurance company. If this ratio
is positive that shows company is stable. The industry average is 4.1% which is higher then EFU
ratio.

3.3.3.2- Underwriting Profit / Gross Premium Ratio:


(Underwriting Profit / Gross Premium)
2010 2011 2012 2013

(2) 4 1 2

43
Underwriting Profit / Gross Premium Ratio
5

PE 3
RC
2
EN
TA 1
GE
0

-1

-2

-3
2010 2011 2012 2013
Underwriting Profit / Gross -1.5 3 2 1
Premium Ratio
4 1 2

INTERPRETATION:

The change among net premiums made and the sum of right expenses and underwriting
expenses. Since underwriting income rejects investment revenue. The total payments, net of
acclaims and dissolutions, on insurance backed by an insurer or reinsurer through a quantified
period, before judgment of provision premiums conceded. If relation is confident that it container
be investigated that company has earned revenue from underwriting. So, in time 2010, it was -
1.5% which resources underwriting turnover is higher as linked to 2009.

3.3.3.3- Loss Ratio:


(Loss Adjustments / Premiums Earned)*100
2010 2011 2012 2013

75 67 64 60

44
Loss Ratio
90
80
PE 70
RC
EN 60
TA 50
GE
(% 40
) 30
20
10
0
2010 2011 2012 2013
Loss Ratio 75 67 64 603
83 67

INTERPRETATION:

The loss ratio shows what percentage of payouts was being settled with recipients. The lower the
loss ratio the better. Higher loss ratios indicated that EFU insurance company needs better risk
management policies to guard against future possible insurance payouts. It means that EFU paid
Rs.67 in claims of every Rs.100 earned through premiums in 2010.

3.3.3.4- Expense Ratio:

Underwriting Expenses / Net Premiums Written


2010 2011 2012 2013

27 33 35 38

45
Expense Ratio
40

35

PE 30
RC
25
EN
TA 20
GE
15

10

0
2010 2011 2012 2013
Expense Ratio 25 30 34 350

INTERPRETATION:

The commission expense, premium tax expense and all general and administrative expenses
incurring in operating the business expressed as a percentage of net earned premiums.
Underwriting expenses are the costs of obtaining new policies from insurance carriers. The lower
the expense ratio the better because it means more profits to the insurance company. As in 2010,
expense ratio is high so it is clear that EFU financial position is not much good in 2010.

3.3.3.5- Combined ratio:


Combined Ratio = Loss Ratio + Expense Ratio
2010 2011 2012 2013

105 101 103 104

46
Combined ratio
112

110
PE
RC
EN 108
TA
GE 106
(%
) 104

102

100
2010 2011 2012 2013
Combined ratio 106 101 102 103

INTERPRETATION:

Combined Ratio is measuring of performance used by underwriters/insurance companies. A joint


ratio of a smaller amount than 100 out of a hundred specifies backing profitability, while
whatever finished 100 specifies an underwriting harm. So EFU, is in underwriting loss EFU can
overcome its loss by making its underwriting operation more efficient. The industry average is
95.9%, which means EFU combined ratio is more than industry average which means company
facing underwriting loss.

3.3.3.6- Return on Assets:


(Net profit after tax/Total assets) *100
2010 2011 2012 2013

55 (20) 6.34 (4)

47
ROA
60
50

Pe 40
rce 30
nt
ag 20
e( 10
%)
0
-10
-20
-30
2010 2011 2012 2013
ROA 55 -25.77 6.34 -4

INTERPRETATION:

The return on assets (ROA) percentage shows how profitable a company's assets are in
generating revenue. This percentage indicating in appraising whether administration busy earned
a rational return by the possessions below the control. Relation would being high. It is
representative how firm is handling their strength and making income or return. As EFU, is not
handling its possessions properly consequently this is too one of the main reasons of EFU being
in loss in 2010. The industry average is 1.01 %.

3.3.3.7-Return on Equity:
(Profit after tax/Shareholders equity) *100
2010 2011 2012 2013

95 (60) 10 (8)

48
Return on Equity
100
80
60
PE
RC 40
EN 20
TA
GE 0
-20
-40
-60
-80
2010 2011 2012 2013
Return on Equity 95 -60 10 8

INTERPRETATION:

Return on equity (ROE) measured the rate of return on the ownership interest (shareholders'
equity) of the common stock owners. It measured a firm's efficiency at generating profits from
every unit of shareholders' equity (also known as net assets or assets minus liabilities). ROE
shows how well a company used investment funds to generate earnings growth. ROEs between
15% and 20% are considered desirable. In table, it is showed that in 2010 ROE was 95%, this
shows EFU was working very well and up to mark generating profits from shareholders equity.
But in 2013, the ROE is negative, which means that company is generating nothing from
shareholder equity. The insurance industry average ROE is 6.50%.

3.3.3.8- Reinsurance Expense/Net Premium Ratios:


( Reinsurance Expense/Net Premiums) *100
2010 2011 2012 2013

47 58 73 67

49
Reinsurance Expense/Net Premium Ratios
80

70

PE 60
RC
50
EN
TA 40
GE
30

20

10

0
210 2011 2012 2013
Reinsurance Expense/Net
50 60 70 65
Premium Ratios

INTERPRETATION:

This ratio provide parentage of how much an insurance company had paid to its reinsurers.

It also showed how much is paid to reinsurers from premium earned by company. From this
ratio, it can be analyzed that how percentage of premium is given to reinsurers. Company rely on
other insurance business and pay 67% as reinsurance. There is increasing trend.

3.3.3.9- Return on Capital Employed(ROCE)

ROCE = Net Operating Profit after Tax *10

Capital Employe

NOPAT=EBIT * (1-TAX)
2010 2011 2012 2013

89.37 (53.86) 7.66 (3.75)

50
ROCE
100
80
60
Pe 40
rce
nt 20
ag 0
e
-20
-40
-60
-80
210 2011 2012 2013
ROCE 80 -50 20 -10

INTERPRETATION:

This ratio could provide you with a good idea of how efficient a company was with the
capital that they have used. Other ratios may look at similar factors, but this ratio taken into
consideration debt and equity. This gave you a more realistic look.

ROCE compares earning with capital invested in company. As in EFU ROCE is negative
so it can be said that lower the capital invested so lower the earning. Industry average was up to
20%.

3.3.4- Profitability Ratios

3.3.4.1- Investment income/Net premiums Ratio:


Investment income/Net premiums
2010 2011 2012 2013

200 (90) 15 (10)

51
Investment income/Net premiums Ratio
300
250
PE
200
RC
EN 150
TA 100
GE
50
(%
) 0
-50
-100
-150
2010 2011 2012 2013
Investment income/Net
200 -90 15 -10
10
premiums Ratio

INTERPRETATION:

By estimating this ratio, profitability of EFU could be analyzed critically. Higher the ratio better
the company performance. As in 2010 it is negative so it can be analyzed that company is in loss.

The industry average is 11.3%.


3.3.4.2- Investment income/Investment assets Ratio:
Investment income/Investment assets
2010 2011 2012 2013

75 (30) 10 (20)

52
Investment income/Investment assets Ratio
100

80

PE 60
RC
40
EN
TA 20
GE
0

-20

-40

-60
2010 2011 2012 2013
Investment income/Investment
75 -30 10 -20
assets Ratio

INTERPRETATION:

This ratio tell how much investment was earned from investment assets. So higher the ratio,
higher the earnings. The industry average was 4%. So, EFU ratio was lower than industry from
which we could conclude than EFU was not earning much from investment assets.

3.3.4.3- Profit After tax/Net Premium Ratio:


Profit After tax/Net Premium
2010 2011 2012 2013

230 (80) 20 (10)

53
Profit After tax/Net Premium Ratio
300

250

200

150
% Profit After tax/Net Premium
100 Ratio

50

0
2010 2011 2012 2013
-50
years

INTERPRETATION:

The ratio tell us about how much a company profit was earned from net premium after paying
tax . if ratio was positive than it could be said that company was stable. The average industry
figure was 36%.
In 2013, EFU was not much stable as we could see by comparing EFU ratio with industry
average.
3.3.5- Liquidity Ratio:

3. 3.5.1-Current ratio:
Current Assets/ Current liabilities
2012 2013

0.94 0.97

54
current ratio
0.98
PE
RC 0.97
EN 0.96
TA 0.95
GE
0.94
0.93
0.92

2012
2013

2009 2010
current ratio 0.94 0.97

Interpretation:

An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the
more liquid the company. Current ratio was equal to current assets divided by current liabilities.
If the current assets of a company were more than twice the current liabilities, then that company
is generally considered to have good short-term financial strength. If current liabilities exceeded
current assets, then the company may have problems meeting its shortterm obligations. the
current ratio of EFU is 0.97 as compare to industry average 1.7. thus we can analyze that
company current ratio is lower than industry average so company is facing difficulties in
fulfilling short-term obligations.

55
3.4-Interpretation of horizontal analysis:
i. The cash & deposits increased by 28.45% in 2013 this is high percentage in last 4 years ,
that‟s good sign for EFU because the company had enough cash and deposits.
ii. Loan to employees in 2013 is 20.67% this is highest percentage of loans given to
employees in last four years. These loans had better impact on employees but this might
be controlled as per company financial position.
iii. Investment was one of the most important way of earning and for making profit proper
investment is necessary, one of the reason that EFU was in loss in 2013 is because
……..its investment was in loss by -10%
iv. Over all total assets increased by 15% in 2013 as compared to 3% in 2012. This was
good for company financial stability.
v. Over all Total equity and liabilities increased by 16% in 2013. As by analyzing balance
sheet one can know that underwriting provision increases by 35% in 2013 as compared
to 2% in 2012 only. Creditors and accrual also increases by 25% in 2013 as against 15%
in 2012.
vi. Net premium revenue is by 9.96% in 2013 as against -15% in 2012.
vii. Investment income/ loss decreases by -163% in 2013, which means company
investments are in loss, as compared to 112% in 2012.
viii. Rental income decreases by -6% in 2013.
ix. Company profit/(loss) after tax in 2013 decreases by -186% as compared to increase by
120% in 2012.
x. The company general and administration expenses increases by 18% in 2013 as against
decrease of -10% in 2012.
xi. The company‟s written premium for the year 2013 was Rs.13.2 billion as compare to
Rs.18.6 billion in 2012.
xii. The net premium Rs.5.85 billion as against Rs. 5.57 billion in 2012.
xiii. The total under writing profit of EFU was Rs.118 million as against Rs.87 million in
2012.
xiv. The overall claims ratio was 70% against 71% in 2012

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3.5-EFU Key financial data analysis:

EFU paid up capital was Rs1350 million. Market share of EFU general insurance in 2013 was
30.90% as compared to 29.69% in 2012 so market share in 2013 lower by 3%. The printed first-
rate at 2013 stood Rs.10531.65 million as in contradiction of Rs.9814.01 million in 2012 and the
written premium growth rate in 2013 is 8%.

Net premium revenue in 2013 was Rs. 8846.59 million as compare to Rs. 7570.21 million by
calculating this figure net premium revenue increases by 5%. Net premium ratio to gross
premium is 60% in year 2013 by analyzing this ratio that means higher the ratio, high retention
or lesser transfer to re insurers.

Net claims expenses in 2013 was Rs 5941.58 million as compare to Rs4911.44 million in 2012,
so there was increase in claims by 4% . claim ratio calculated in 2013 is 67% as compare to 80%
in 2011 so one can analyze that claim ratio decreases by 3% in 2013 as compare to 2012.

Net commission expense in 2013 was Rs 656.32 million as compare to 461.19 million in 2012.
So there is increase of Rs 195.13 million in 2013. Operating expense in 2012\3 was Rs 1134.69
million as compare to Rs 1076.14 million in 2012. so operating expense increase by Rs 58.55
million in 2010. Total expense of EFU in 2013 was Rs 1613.35 million as compare to Rs
1504.17 million in 2012, so total expenses increases by 7% in 2013.

The underwriting profit in 2013 was Rs 211.87 million as compare to Rs 76.54 million in 2012.
Underwriting profits increases by Rs 34.33 million. The combined operating ratio in 2013 was
93%, COR was a combination of costs incurred in running the business compare to money
received. Lower the COR, higher the chances of making operating profits.

Investment income in year 2013 was Rs (357.96) million as compare to Rs 673.52 million in
2012. Investment income decreases by Rs (1031.48) million in 2013. Company shows loss after
tax of Rs (413.32) million in 2013 as compare to profit after tax of Rs 732.30 million so
company profit decrease by 156.44%.

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3.6- Problems identification:
After obtaining the required results for identifying problems the following are the some of
main problems EFU faced from 2007 to 2010:

Remarkable decrease in Investment income:


Investment income in 2013 is Rs.(357.96) million as compared to
Rs.673.52 million. Investment income in 2013 decreases by (153.15%) . Investment
income/Net premiums Ratio decreased by (6.1%). So we have identified problem on next
page we will discuss possible solution of this problem.

Investment Income/(loss)
20000000
15000000
10000000
PK
R 5000000
PKR
0
2012
-5000000 2013 2012 2013

-10000000
YEAR

EFU Revenue Decreasing:


Company shows loss after tax of Rs (413.32) million in 2010 as compare to profit
after tax of Rs 732.30 million so company profit decrease by 156.44%. so we will discuss
possible solution to overcome this problem in upcoming year. Profit After tax/N et Premium ratio
in 2010 decreases by (7%) as compared to industrial average 36% so EFU has lower ratio than
industrial average. Market ratio and debt management ratio gives evidence in this respect.
Market in 2010 almost crashes and investment Value decreases for EFU.

Other Problems:
-Management and Admin Expenses are increasing
-Investments are decreasing

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3.7-Discussion of Possible Solution:
Two main problems have been identified during the application of financial ratios and
horizontal analysis 2 major problems have been identified which require an abrupt solution.

A. Incredible decrease in Investment income.


B. EFU facing loss after tax in 2013

Solution A:

As tax release allowed on understands capital gain to the company expire from tax year 2014(
accounting year 2013), EFU had recognized capital gains of Rs.987 million in 2012 while in the
year 2013 to only Rs.27 million was realized as capital gains. The company had provided Rs.578
million as damage charges for decline in prices of some shares in equity portfolio. The total asset
loss for the day was Rs.58 Billion as alongside income of Rs.74 Billion last year.

Investment at international market and current market (Pakistan) was highly cheap market, EFU
may try to take over the market. Combination of risky and less risky securities like investment
banks and expand products should be elected so that this problem can be solved in upcoming
years.

Solution B:

Terrorist and unbalanced political situation in 2013 especially in urban areas create problem for
every business especially for insurance companies. We can solve this problem by growing
investment income and by declining expenses. Insurance consciousness in Pakistan was very
poor so by doing proper alertness campaign, assurance business can grow prosperously. By
learning new horizons of distribution of protection EFU can overwhelmed current problem.

New products and marketing is necessary for the increasing business, as compare to
international and domestic market. Huge capacity is there to increase business. Try to capture
banks and offer different services of insurance to banking sector like:

1. Auto loan insurance

60
2. Credit Card Insurance
3. Personal loan insurance
4. House loan insurance
5. Business loan insurance

This is best time to arrive and enlarge new insurance business. EFU have long-term investments
and has a record of standing firm in difficult situation. So one can expect that in upcoming year
by applying following solutions EFU can overwhelmed matters.

3.8.Suggestions for further work:


Making profound study extremely clear-cut forecasts for assurance industry in general and EFU
General insurance limited in particular. Up-to mark analysis opponent analysis can also be done.
Pakistan insurance industry may be examines with reference to developing countries insurance
industries in world.

Correlation and regression analysis must be done to determine more efficient results.

Pakistan insurance industry has not grown rendering to world insurance business. But as banking
insurance sector is also growing because banc assurance has become one of the instrument of
circulation of insurance, so more ladders can be studied in detail.

3.9-Conclusions
After the facet analysis of the financials of EFU General Insurance limited, we conclude that
EFU is big and stable company before and after independence of Pakistan.

This can also concluded that EFU had history of doing insurance business in Pakistan . in 2013
premiums were earned more than 2012. So we can conclude that there was no issue in premium
earned .literature review help us in this regard to understand insurance business more deeply.

Till facing many problem EFU is second largest General insurance company. Over all having
market share of 28.90%.

61
In conclusion, EFU can overcome its damages by applying solution and company has seen many
of these problems in its history and had overwhelmed it. This is provisional problem as per seen
in past history of EFU.

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