KARACHI, June 21: EFU Life Assurance Company Limited traces its origins as far back as 1932 when Eastern Federal Union Insurance Co. Ltd. emerged in Calcutta as the first Muslim life and general insurance company in the sub-continent. Until 1972 when life insurance was nationalised, the company continued to grow and was the largest company writing more than a half of the country’s life insurance business. Following the re-opening of the business for private sector, the company was the first to take the plunge.

Besides EFU, there are currently three other life insurance companies in the private sector: Metropolitan Life, which started business in February 1993 and two foreign companies that came a little later: American Life Insurance Company, starting in 1995 and Commercial Union Life in July 1996.

With more than 85 per cent of the market share in total premium still accruing to State Life Insurance Corporation, the private companies are faced with teething competition among themselves, for what is left.

For the financial year 2001, EFU generated net premium of Rs563 million, which represented 25 per cent growth over the earlier year’s net premium at Rs450 million and was largest among the four companies. The company claims 60 per cent of the market share that is available to the private companies. EFU also reports having paid Rs704 million in claims till December 31, 2001; the claims ratio for the company stood at 19 per cent for 2001; claims ratio of other three as worked out by the stock brokerage firm, KASB & Co. stood at 18 per cent for American Life; 19 per cent Metropolitan and a huge 29 per cent for Commercial Union.

Not many equity analysts at large brokerage houses follow life insurance companies, since the scrips are unattractive, due to their small market capitalizations and poor liquidity. But those analysts who do anyway, say that as a general rule, profitability ought not to be expected from life insurance companies in their infancy. In a report on the industry, KASB & Co. noted: “since life assurance industry is in their infancy stage it is highly probable that operating expenses and claims exceed revenues generated through premiums. In the long run, fixed costs will be spread over higher earned premiums and core underwriting business of life assurance can be expected to generate profits.”

The companies need the initial few years to build up sufficiently large pool of funds for investment in the marketing network and other formation expenses. Since almost all these companies have taken up aggressive marketing through wide network of branches, their expenses would remain high. “Also companies have sometimes to pay as much as 90 per cent of the first year premium as commission to attract business,” said one analyst.

Analyst notes that life assurance companies primarily have two streams of revenue. The first one is generated by premiums and the second through investment of surplus cash in various financial assets.

Metropolitan Life—the smallest of the four —was the first in the sector to declare a dividend in December last year for the shareholders. The company paid dividend at 5 per cent to the minority shareholders “out of interest-free loan by the sponsor directors”. American Life followed also with 5 per cent dividend for the year 2001.

At the stock market the share in EFU Life is currently trading at Rs30.95, which is the highest among the four life insurance companies. The company has paid-up capital of Rs150 million, raised from Rs100 million by the issue of right issue at 50 per cent in 2001. The increase was in line with Insurance Ordinance, 2000, which stipulates minimum capital of Rs150 million for life insurance companies.

Private sector life assurance companies are banking upon their ability to introduce packages and innovative products through their branch and sub-office network, supported by a larger direct sales force. Going forward, they hope to explore the largely untapped potential in both rural and urban Pakistan, as well as to wrest some of the business from the public sector giant, which it has enjoyed through monopoly for a quarter of a century.