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Adamjee Insurance Company Limited: Annual Report 2020

IM Insights
By IM Insights
3 years ago
Adamjee Insurance Company Limited: Annual Report 2020

Arif, Ijara, Mudarib, Mufti, Shariah, Shariah advisor, Shariah compliant, Sukuk, Takaful, Waqf, Zakat, Credit Risk, General Takaful, Mark-Up, Net Assets, Participation, Provision, Receivables, Reserves, Sales, Term Insurance, Individual Family Takaful, Group family Takaful

Sukuk

Waqf

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  3. Adamjee Insurance has a legacy of providing protection and security to our customers , securing their futures so that they have the confidence to make the most of the present
  4. ANNUAL REPORT 2020 ORGANIZATIONAL OVERVIEW AND EXTERNAL ENVIRONMENT 53 STRATEGY AND RESOURCE ALLOCATION RISKS AND OPPORTUNITIES 67 141 CONSOLIDATED FINANCIAL STATEMENTS WINDOW TAKAFUL OPERATIONS 363 133 SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY UNCONSOLIDATED FINANCIAL STATEMENTS 211 105 OUTLOOK STAKEHOLDERS ’ RELATIONSHIP AND ENGAGEMENT 137 59 GOVERNANCE PERFORMANCE AND POSITION 129 06 OTHER INFORMATION 315
  5. TABLE OF CONTENTS ORGANIZATIONAL OVERVIEW AND EXTERNAL ENVIRONMENT 9 Vision & Mission 10 Core Values 12 Strategic Objectives 13 Financial Highlights 14 Company Information 16 Code of Conduct, Ethics and Values 18 Chairman's Review (English) 19 Chairman's Review (Urdu) 20 Chief Executive Officer's Message 22 Board of Directors 25 Roles & Responsibilities of Chairman 27 Management Team 29 Roles & Responsibilities of Chief Executive Officer 30 Board Committees 31 Management Committees 32 Events Highlights 2020 33 Sports Events Highlights 2020 34 Company Profile 35 Products and Services 36 Awards 37 Insurer Financial Strength Ratings 38 Our Geographical Presence 40 Organisational Structure 41 ISO 9001:2015 Certified Company 42 Competitive Landscape and Market Positioning 44 PESTEL Analysis 46 SWOT Anlysis 47 Internal Value Chain Analysis 49 Our Leading Business Model 52 Effect of Seasonality on Business 52 Significant Changes from Prior Year STRATEGY AND RESOURCE ALLOCATION 54 Strategic Objectives 54 Strategies to achieve our strategic objectives and Key Performance Indicators (KPI's) 56 Organizational Resources and their Allocation 58 Strategy to Overcome Liquidity problems 58 Significant plans and decisions such as corporate restructuring and business expansion 58 Significant Changes from Prior Year RISKS AND OPPORTUNITIES 60 Enterprise Risk Management (ERM) Framework 61 Commitment of the Board on the ERM Process 61 Analysis of Key Risks 65 Analysis of Key Opportunities 66 Adequacy of Capital Structure and information about default in payment of debts GOVERNANCE 68 Directors' Report (English) 83 Directors' Report (Urdu) 84 Statement of Compliance with the Code of Corporate Governance 88 Independent Auditors' Review Report to the Members on Statement of Compliance with Best Practicies of Code of Corporate Governance 89 Ownership/ Shareholding Structure 90 Operating Structure 90 Relationship of Group Companies 90 Independent Directors and justification for their independence 90 How Board Operates 91 Decisions taken by Board 91 Decisions taken by Management 91 Performance evaluation of the Board members and its committees 91 Board’s performance evaluation by external consultant 91 Formal orientation Courses for the Directors 91 Directors' Training Program 91 Directors’ Remuneration Policy 92 Policy regarding Fee Earned by Executive Director against his services as NonExecutive Director in other companies 92 Policy for Security Clearance of Foreign Directors 92 Board’s Policy on Diversity 92 Policy for Related Party transactions 92 Board Meeting Outside Pakistan 93 Policy for Actual and Perceived Conflict of Interest 93 Grievance Policy 93 Policy for Safety Records of the Company 93 IT Governance Policy 94 Whistle Blowing policy 94 Human Resource Management Policies including Preparation of a Succession Plan 94 Social and Environmental Responsibility policy 95 Business Continuity Plan 95 Salient features of TOR and attendance in meetings of the Board Committees 100 Presence of the Chairman of Audit Committee in Annual General Meeting 100 Use of External Search Consultancy in Appointment of Chairman or Non-Executive Director 100 Chairman’s Significant Commitments and any Changes 101 Pandemic Recovery Plan by the Management and Policy Statement 101 Cyber Security Policy 102 Anti Money Laundring and Countering Financing Terrorism Policy 102 Access to Reports and Enquiries
  6. ANNUAL REPORT 2020 102 103 103 104 Video Link of Chief Executive Officer ’s Review Statement of Unreserved Complaince Of International Financial Reporting Statndards (IFRS) Issued By International Accounting Standard Board (IASB) Statement of Adherence With The International Integrated Reporting Framework Statement Under Section 46(6) of the Insurance Ordinance, 2000 PERFORMANCE AND POSITION 106 Performance Evaluation Against Targets / Budgets 107 Six Years - Financial Performance (2015-2020) 108 Six Years - Horizontal Analysis (2015-2020) 109 Six Years - Vertical Analysis (2015-2020) 110 Six Years - Financial Ratios (2015-2020) 111 Six Years - Graphical Summary (2015-2020) 114 Six Years - Graphical Summary of Ratios (2015-2020) 116 Comments on Horizontal & Vertical Analysis 117 Comments on Ratios 118 Duopont Analysis 119 Free Cash Flows to the Company 120 Six Years Summary of Cashflow Statements 121 Graphical Presentation of Financial Statements 123 Quarterly Performance Analysis 2020 124 Method and Assumptions in Compiling Indicators 125 Market Statistics of AICL Share 126 Share price sensitivity analysis 126 Sensitivity Analysis of Change in Market Capitilization 126 Sensitivity Analysis for Effect of Currency Fluctuation 127 Major Capital Expenditure 127 Major Events in 2020 OUTLOOK 130 Forward Looking Statement STAKEHOLDERS RELATIONSHIP AND ENGAGEMENT 134 Stakeholders’ engagement process and the frequency of engagements 135 Steps to encourage minority shareholders to attend the general meetings 135 Investors' Relations section on the Company's website 135 Issues raised in last AGM, decisions taken and their implementation status. 135 Stakeholders engagement policy, Corporate Briefing sessions and Analyst Briefings 136 Statement of value added and its distribution SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY 138 Corporate Social Responsibility Program 138 Health, Safety & Environment 139 Commitment to Excellence 139 Certifications Acquired for Best Sustainability and CSR Practices UNCONSOLIDATED FINANCIAL STATEMENTS 142 Independent Auditor’s Report 146 Unconsolidated Statement of Financial Position 147 Unconsolidated Profit and Loss Account 148 Unconsolidated Statement of Comprehensive Income 149 Unconsolidated Cash Flow Statement 151 Unconsolidated Statement of Changes in Equity 152 Notes to the Unconsolidated Financial Statements CONSOLIDATED FINANCIAL STATEMENTS 212 Independent Auditor’s Report 215 Directors' Report to the Members 216 Consolidated Statement of Financial Position 217 Consolidated Profit and Loss Account 218 Consolidated Statement of Comprehensive Income 219 Consolidated Cash Flow Statement 221 Consolidated Statement of Changes in Equity 222 Notes to the Consolidated Financial Statements WINDOW TAKAFUL OPERATIONS 316 Shariah Advisor Profile 317 Statement of Compliance with the Shariah Principles 318 Independent Reasonable Assurance Report to the Board of Directors on the Statement of Compliance with the Shariah Principles 320 Shariah Advisor's Report to the Board of Directors 321 Independent Auditors’ Report 324 Statement of Financial Position 325 Profit and Loss Account 326 Statement of Comprehensive Income 327 Statement of Changes in OPF and PTF 328 Cash Flow Statement 329 Notes To and Forming Part of Financial Statements OTHER INFORMATION 364 Notice of Annual General Meeting 368 Pattern of Shareholding 370 E-Dividend Mandate Form 371 Form of Proxy
  7. SECURING THE LANDSCAPE ORGANIZATIONAL OVERVIEW AND EXTERNAL ENVIRONMENT
  8. ANNUAL REPORT 2020
  10. ANNUAL REPORT 2020 VISION & MISSION Our will is to Explore, Innovate and Differentiate. Our passion is to provide leadership to the insurance industry.
  11. CORE VALUES Integrity - Transparency and honesty without compromise Humility - Empathy , self-esteem and respect in all relationships Fun at Workplace - Work-life balance Corporate Social Responsibility - Service to humanity
  12. ANNUAL REPORT 2020
  13. OUR GUIDING STRENGTH STRATEGIC OBJECTIVES To lead the insurance industry by providing outstanding customer service whilst maximizing the long term value for shareholders Add value to our stakeholders ’ relationship Utilise technology to enhance our productivity, reduce operational costs, ensuring risk mitigation while being fully compliant with laws and regulations
  14. FINANCIAL HIGHLIGHTS Rs . 1.1 Billion Rs. 5.36 Earning Per Share Rs. 19.8 Billion Rs. 49.5 Billion Gross Premium / Contribution Written Asset Base Investment Income Rs. 13 Billion Claims Paid Rs. 1.9 Billion Rs. 26.6 Billion Profit After Tax Investments Rs. 22.2 Billion Equity & Reserves * All figures are inclusive of Window Takaful Operations.
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  19. Chairman ’s Review I am pleased to present my review to the shareholders of Adamjee Insurance Company Limited (AICL) on the overall performance of the Board of Directors and effectiveness of the role played by the Board in achieving the Company objectives. Once again, we are proud of how the Company has persevered and prospered during the unprecedent times due to the onset of Covid-19 pandemic. The pandemic led to extremely tough macroeconomic conditions in Pakistan and the world over. We have maintained our reputation as a leader in the Insurance Industry. Our most valuable asset, our employees, has been at the center of our continued success and we are sincerely grateful for their commitment to hard work and dedication to the Company during the lockdown periods. Despite the continuing Covid-19 pandemic, I expect the year 2021 to be a year of great opportunity, provided we are ready to face the headwinds with courage. Infrastructure projects under CPEC are fast approaching completion which are now required to be put to optimal utilization for realization of their full benefits to the Pakistan economy during the industrialization phase of the CPEC. Successful development of Special Economic Zones (SEZ) under the next phase of CPEC is imperative for the country. Availability of power and other utilities to the industry by the government, will particularly affect the manufacturing and export-oriented industries which together with agriculture sector constitute the backbone of the economy. Adamjee Insurance performed exceptionally well during the turbulent times of Covid-19 outbreak. We remained focused on our mission to lead the insurance industry. This annual report presents a very holistic view of the organizations value creation. The value of a business cannot be measured in numbers alone; the relationships with stakeholders affect our ability to create that value. I would especially like to comment on the admirable performance of the Board of Directors where all the members fulfilled their responsibility with conviction and helped in creating the long-term value for its shareholders. The management played a vital role and faced these challenging times with utmost resilience. Under the experienced leadership of the Board of Directors, the management was able to execute its strategic plans which helped the Company achieve profitability targets in 2020 despite difficult circumstances. I would like to thank our customers for their continuous confidence and trust in us and with our customer-centric approach we will continue to improve the customer experience. I would also like to extend my gratitude to our employees, business partners, reinsurers, the State Bank of Pakistan, the Securities and Exchange Commission of Pakistan and Pakistan Stock Exchange for their support and guidance which has helped Adamjee Insurance deliver on all fronts. With our commitment to excel in performance, we look forward to this year and beyond, with the same determination and passion. Umer Mansha Chairman
  20. ǘǍ ǎ ę庠᱑Ĩ㥃Ĩ啓‫ٌٳ‬ Ĩ啵Ĩěî‫܉‬Ĩ㺸îĨ äì㨱ĨᰂĎ吴Ĩ㺸Ĩ ĒîୢĨ啵Ĩ⭒ĨⴣäĨîþäĨ䅎ì㨱î㥃Ĩ㑽䶬Ĩ㷨Ĩ㺕 äî äĨ㺸Ĩ ĒîୢĨ啵Ĩú▖Ĩ㺸ウ冬Ĩ㺸Ĩ㮏㱾Ĩü㗊徉Ĩ░Ĩ㺸Ĩ䧶Ĩ㮏Ĩ垎î堞äĨᾜĨ ûìßĨ䶵 ĜĨ嵗Ĩ⿽⠩Ĩ很峤Ĩᥢ㨱Ĩę㻠ßĨ⸞ĨěᏌĨᄭä Ĩ啵ĨహĨ媜ìĨîþäĨü㨾ຩĨ嬸ĨÞ‫܉‬þĨðäĨĜĨ峭îĨᣲ㨱Ĩû㥃Ĩᡀ⡜Ĩ㺸Ĩ൝咍㥃ĨþĨú⤧äĨ㮏Ĩ೧Ĩü äîþìĨ㺸Ĩ㞺þĨ倏Ĩ㺸ĨÞ‫܉‬þĨ㷨ğħĜĨĒąþ㱾Ĩ㲁Ĩ嵗Ĩû冬Ĩ㥃Ĩ㘀ĨᇆĨî‫܉‬Ĩ愡äĨ䬈Ĩěî屩 Ĩ佻Ĩ Ěî屩ĨÛĨ啓ï剚Ĩěî屩Ĩᰴ᯳äĨ㤔Ĩ⸞Ĩ⡞Ĩ äî屩ĨĜĨ㲢îîĨ ä㟥࢑Ĩ㱾Ĩ⚜Ĩ㷨ĨþጩĨᄣäĨ啵ĨㄚĨ㷨ĨุĨ嬸Ĩ屨ĨĜĨ嵗Ĩ㷩Ĩᰂ䱱Ĩǘ ࿀Ĩ嬸፮Ĩě࢓Ĩ㱾ĨúᒄîㄯĨ Ěì㟁ä ĨĜ嵉îĨ ä㽽Ĩ⽇Ĩ⸞Ĩ úìĨąᠣĨ㺸Ĩû㍛Ĩ㺸ü Ĩ äĨîþäĨ也Ĩ噱äĨ㷨ĨüäĨᡀ⡜Ĩ㺸Ĩ䟯Ĩ䬈Ĩ㺸Ĩ㮏Ĩ啵Ĩ嬰 äîþìĨ㺸Ĩü‫ ͽٵ‬äĒĨĕ䆨Ĩ屨ĨîþäĨ嵗îĨ㨳亾Ĩ㥃Ĩė๦咍㥃 ĨĜĨ嵉îĨîᣳĨ䬈Ĩ㺸Ĩ嬸㨱Ĩ匈⡜Ĩ㥃Ĩ䚴买Ĩìą ‫܉‬Ĩᡀ⡜Ĩ㺸Ĩ屮Ĩ屨Ĩ㊯࣢Ĩ䆎Ĩ徃ßĨ哻Ĩ㡃ä吴Ĩ␺äĨ୧Ĩ岫Ĩ啵ĠĞĠğĨú⡜Ĩ㲁Ĩ嵗Ĩ㡃ᠢĨ䶵ĨìṎþ‫܉‬Ĩ㺸ĨÞ‫܉‬þĨ佻Ĩ㷨ğħĜĨĒąþ㱾 Ĩ媎äü Ĩ äîþìĨ㺸Ĩ☄ä亾ĨㄝĨ㺸ĨⴣĨĚäĨኸĨⴣĨ㲁Ĩ嵗Ĩ çîþㆈĨ㷨Ĩç‫܉‬ĨðäĨîþäĨ嵉Ĩ嵗îĨĘ࢓Ĩ嗜᱑Ĩ㷨ĨᛩĨᡀ⡜Ĩ㺸ĨĚᤓĨ୧Ĩ๵厎Ĩ Ěì୘Ĩ Ěî᱑ĨᒅĨ㺸ĨⴣĨĚäĨኸĨⴣ Ĩ㣰ᔊĨ⸞Ĩ൝咍㥃Ĩ㷨 6(= ĨüþïĨ凪㯵äĨ⣐äĨᒅĨ㺸ĨîþìĨ㿩äĨ㺸ĨⴣĨĚäĨኸĨⴣĨĜĨ很᱑Ĩ徉䆨Ĩî㥃Ĩ很þ࢑Ĩ ęì徉ïĨ⸞Ĩ ęì徉ïĨ䬈Ĩ㺸Ĩ啵Ĩç äì关Ĩ戆୩Ĩ㺸Ĩ儻Ĩ㷨Ĩü㨾ຩ Ĩ㌤äîïĨ⚜Ĩ㷨ĨᷩĨ䅎峤ïĨ ä垆äĨᰂäĨ࿀ĨėㄜĨᣲä人ß࢑ĨîþäĨ㖺═Ĩと❴ĨÛĨ岢ä㘄Ĩ㷨Ĩç䬊ⴑĨ憇ìĨîþäĨ޴Ĩ㱾ĨㄚĨ⸞Ĩ嗜᱑Ĩ㷨Ĩ䱰◾ĨĜĨ嵗Ĩ恗㽽嗚Ĩ弥噬äĨ䬈Ĩ㺸Ĩ劖 Ĝ嵗Ĩ婏䰮Ĩ㷨ĨĚ寁Ĩ㷨ĨĘ恘îĨ㷨Ĩ儻Ĩ Ěïä䴌Ĩ㺸Ĩ⻳Ĩ㺸 ą 嬸Ĩ垎î堞äĨᾜĨ ûìß Ĩ䬈Ĩ㺸Ĩ㶝îĨ廫㞑Ĩ çì㣱Ĩ㷨ĨㄚĨ㷨Ĩ垎î堞äĨ嬸Ĩ屨ĨĜĨ㷩Ĩę寄傴Ĩ㥃Ĩ䅎ì㨱î㥃Ĩ䬉儢Ĩ㖓Ĩ೧Ĩü äîþìĨ㺸Ĩç㞑þäĨ戆ᔊĨ倏Ĩ㺸ĨቾĨÞ‫܉‬þĨ㷨ğħĜĒþ㱾Ĩ Ĩ㚔Ĩ㱾Ĩî‫܉‬þî㥃Ĩ೧Ĩ㩴ĨĜ嵗Ĩᣲ㨱ĨጦĨ抁塴Ĩ僁᱑Ĩ峭Ĩ୧Ĩ愡äĨ啵ĨㆼĨ㺸Ĩ嬸㨱ĨᓯĨî㟣Ĩ㷨ĨėþîäìäĨ ďîᄯîĨ婨䆨⡜Ĩ抁ĨĜĨ嵗Ĩ㶢îĨï㱾亾Ĩ࿀Ĩウ冬ĨᄭäĨṏᠢĨᄣäĨ佻 Ĩąਮ㞑Ĩ㷨Ĩï愫废äĒĨøßĨ ĒîୢĨ࿀Ĩî㊓Ĩㄹ❴Ĩ啵ĨĜĨ嵉Ĩᥢ峤ïĨ ä垆äĨᰂäĨ࿀Ĩ⚓リĚî屩Ĩ啵ĨᓯĨ㷨Ĩî㟣ĨðäĨçᗼĨ岢‫܉‬Ĩᡀ⡜Ĩ㺸ĨėþîäìäĨ▛ĨÛĨ⫈Ĩ᱑Ĩ㲢࿀Ĩ媎Ĩ⸞Ĩìä㍗ä Ĩ⭒Ĩ㺸ĨᓯĨ㷨Ĩî㟣Ĩì䧺äĨ憗㊓Ĩ䬈Ĩ㺸Ĩü㗊徉Ĩ░ĨᄭäĨîþäĨ徉嘃Ĩ㱾Ĩ ĚîäìĨ吶íĨᄣäĨᡀ⡜Ĩ㺸Ĩ峭្Ĩ ĚîᄯĨ嬸Ĩ㺕 äî äĨûᝯĨėṐĨė峤Ĩ孫‹Ĩ䨆 äĒĨ⿘ þî࿀Ĩ䅎ì㨱î㥃Ĩ庫⣝ ĨᄭäĨ啷噣äĨ峭ĨᒅĨ㺸Ĩ çì㣱Ĩę恔垆ṐĨ㷨Ĩï愫废äĒĨøßĨ ĒîୢĨĜ㷩Ĩ匈⡜Ĩᡀ⡜Ĩ㺸ĨᒽĨ弥噬äĨ㥃Ĩė技䂻Ĩ倏ĨüäĨîþäĨ徉嘃Ĩ൝ࢁîĨ äì㨱ĨჄäĨ嬸Ĩ啷噣äĨĜĨ嵗îĨî㻠ì人Ĩ啵 ĨĜĨ勀Ĩì人Ĩ啵Ĩ嬸㨱Ĩラⓥø Ĩ ä寀äĨ㺸Ĩ㙟匈Ĩ啵ĨĠĞĠĞĨìṎþ‫܉‬Ĩ㺸Ĩç䆨ⓥĨ୤Ĩ㾝嗚Ĩ㱾Ĩ㮏Ĩ䉺þࢌĨ㷨ĨᳮĨ弥峤Ĩਮ㞑Ĩ㺸Ĩ人ßĨî㑀Ĩ࿀Ĩėୢ厎Ĩ㺸Ĩ㑃Ĩą◳ Ĩ୩Ĩ㱾Ĩ䅎ì㨱î㥃Ĩ啵Ĩ⿘ þîĨ㷨Ĩ๵ᑋĨ㺸ĨüäĨîþäĨ很峤Ĩ㳉îĨ啵Ĩę妊ĨąĨ㨳亾Ĩ㱾Ĩ㝵îでĨᄭäĨîþäĨ孆îĨラⓥĨ岫Ĩì㌴äĨîþäĨⳤþహĨ佻Ĩ㥃ĨᷩĨė峤îĨ ä㽽Ĩ⽇Ĩ㥃Ĩ㝵îでĨᄭäĨ啵 Ĩė峤îĨ ä㽽Ĩ⽇Ĩ೧Ĩ㥃Ĩ慂äĨĕ⥸äĨü㨾ຩĨîþäĨü㨾ຩĨøßĨ㯜Ĩ慂äĨ戴äĨ忮î‫ٵ‬Ƭǎ ƸǎĽƶƛĨÛĨü㨾ຩĨ䉺 þìĨํĨÛïîî堞äĨ ĚîĨÛĨėþîäìĨ㥵ä⻑Ĩ Ěî‫܉‬þî㥃ĨÛĨ㑇ĨᄭäĨ啵ĨĜ䆎Ĩ徃૾ ĜĨ勀Ĩì人Ĩ啵Ĩ嬸㲢ìĨ䅎ì㨱î㥃Ĩė徉娚Ĩ㱾Ĩ垎î堞äĨᾜĨ ûìßĨ䉺þࢌĨ㷨Ĩ弥峕äîĨîþäĨüþᗐĨ㺸Ĩᷩ Ĩ⏨äĨ೧Ĩ䬈Ĩ㺸ĨीĨ㺸ĨðäĨîþäĨú⡜ĨðäĨ㨱Ĩ䰍Ĩ㱾Ĩ๵᳨ĨⴣäĨ㺸Ĩù⺞äĨîþäĨû㍛Ĩ⨏ äîĨᄭäĨ屨Ĩᡀ⡜Ĩ㺸Ĩ和㟣Ĩ‫ܫ‬᯳Ĩ啵Ĩěìäî äĨ㺸Ĩ嬸૾Ĩ୩Ĩ೧ĨîþäĨ㱾Ĩ䅎ì㨱î㥃ĨᄣäĨ ĨĜĨ嵉Ĩ㳉îĨç㡄ᠢ Ĩ卼Ĩ㐸 Ĩ啓ĨⓆ "//6"-3&1035 
  21. CEO ’s Message The Year 2020 came with unique challenges which impacted everyone around the globe. The unprecedented onslaught of Covid-19 pandemic, torrential rains in August 2020 in the Province of Sindh and pan-Pakistan floods which affected the crops and livestock, to name a few. While for some business owners 2020 became an opportunity for growth but for many it has been a very challenging year. As I reflect on the challenges faced in 2020, I have to admire the resilience of the Adamjee team, who continued to serve our customers seamlessly and made sure that we maintained our operational excellence during lockdown periods as well. Operationally, Adamjee Insurance performed remarkably well. Despite the challenges of Covid-19, such as prolonged lockdowns, work from home restrictions, travel restrictions and uncertain economic outlook, at Adamjee Insurance we remained focused on our long-term goals and continued to work towards achieving sustained growth and profitability targets. Like other sectors of the economy, Covid-19 pandemic and its resultant lockdowns brought about major disruption in the insurance industry; Adamjee Insurance’s robust Business Continuity Plans and its readiness with digital infrastructure and technologies, enabled it to serve its customers and carry out all its operational activities completely remotely, without any hurdles. Our growth strategy is based on the commitment to our stakeholders and in maximizing value for its shareholders. The Company has always strived for and has maintained high corporate standards and has showed strict compliance with laws and regulations. Since the start of the pandemic, the Company was comfortably able to adhere to the work-related SOPs issued by the Government from time to time to keep its employees and customers safe. Our employees are our biggest asset; I endeavor, we continue to prosper by investing in our employees with the best training and attractive career growth opportunities so that they are able to serve our customers impeccably. I am optimistic that the year 2021 will bring new growth opportunities for us whilst we will remain focused on our long-term goals. Lastly, I would also like to appreciate and acknowledge the Board of Directors for their valuable support and guidance, our employees for their ultimate commitment to the Company, our customers for their continued trust in us and other stakeholders including all the regulatory bodies for their continuing support. Muhammad Ali Zeb CEO
  23. BOARD OF DIRECTORS Umer Mansha Ibrahim Shamsi Imran Maqbool Umer Mansha holds a Bachelor ’s degree in Business Administration from USA. He has served on the Board of Directors of various listed companies for more than 22 years. He also holds the position of Chief Executive Officer of Nishat Mills Limited and Adamjee Life Assurance Company Limited. In addition, he has been serving on the boards of various other businesses. Ibrahim Shamsi is the Chief Executive Officer of Joyland (Pvt.) Limited and AA Joyland (Pvt.) Limited and is the Chairman of Cotton Web (Pvt.) Limited. Ibrahim earned his MBA from the Lahore University of Management Sciences (LUMS). He has done Advance Management Program from Harvard University, USA. Imran Maqbool serves as President & Chief Executive Officer of MCB Bank Limited. He is a seasoned professional with over three decades of diverse, international banking experience. Prior to his current role, he was the Head of Commercial Branch Banking Group, where he successfully managed the largest group of the Bank in terms of market diversity, size of the workforce, number of branches, on a countrywide basis and diversified spectrum of products. His earlier, multi-faceted Group-Head assignments included heading Wholesale Banking Group–North, Special Assets Management and Islamic Banking. He was also posted as Country Head, MCB Sri Lanka. Before joining MCB Bank in 2002, Imran was associated with local banking operations of Bank of America and Citibank for over seventeen years, where he worked in various senior management roles in the respective banks. Imran holds an MBA degree from the Institute of Business Administration (IBA-Karachi) as well as an MS in Management from the renowned Sloan School of Management (Massachusetts Institute of Technology) in the USA. Imran also serves as Trustee/ Chairman of MCB Employees Foundation. Other Directorships: Chairman Other Directorships: Nishat Mills Limited MCB Bank Limited Adamjee Life Assurance Company Limited Nishat Dairy (Private) Limited Nishat Hotels and Properties Limited Nishat (Aziz Avenue) Hotels and Properties Limited Nishat (Raiwind) Hotels and Properties Limited Nishat (Gulberg) Hotels and Properties Limited Nishat Developers (Private) Limited Nishat Agriculture Farming (Private) Limited Hyundai Nishat Motor (Private) Limited, Nishat Agrotech Farm (Private) Limited Nishat Sutas Dairy Limited Director Other Directorships: A. Joyland (Pvt) Limited Agrohub International (Pvt) Limited Cotton Web (Pvt) Limited Dupak Developers Pakistan (Pvt) Limited Dupak Properties (Pvt) Limited Dupak Tameer Limited Fortress Square Services (Pvt) Limited Fortress Supplies (Pvt) Limited Fortress Financials Services (Pvt) Limited Joyland (Pvt) Limited MCB Islamic Bank Limited Siddiqsons Energy Limited Siddiqsons Limited Siddiqsons Tin Plate Limited Director MCB Bank Limited MCB Financial Services Limited (upto 20 November 2020) Adamjee Life Assurance Company Limited
  24. Muhammad Anees Director Muhammad Anees joined Mahmood Group in 2003 as a member of the Board of Directors . Under his dynamic leadership and guidance, Mahmood Group flourished as he started managing strategic decisions related to Marketing, BMR, along with Production, Administration, Audit, IT, and ERP. Mahmood Group became the top 10 exporters of Pakistan assisted by his outreach to global markets. The will of being a responsible corporate citizen motivated him to be one of the largest private solar energy producers in Pakistan. His academic background and prowess have been from the finest business schools around the globe. He polished his skills by studying Financial Management and Risk Analysis from Wharton Business School (USA) after his MBA. He channelized and sharpened his inner strategist and attended Harvard Business School (USA) for a global understanding of Strategic Management in organizations. He strongly believes that his exposure to personal development and inspiring entrepreneurial growth has enhanced during his time at the London School of Economics and London Business School, UK. Being a compassionate patriot, he is also involved in CSR activities representing Mahmood Group at various platforms in the field of education, health, clean water, and the environment. Other Directorships: Export Development Funds (EDF) D.G. Khan Solid Waste Management Company Limited Mahmood Textile Mills Limited Masood Spinning Mills Limited Multan Solid Waste Management Co. Limited Pakistan Single Window Punjab Industrial Estate Development Authority Punjab Social Security Health Management Company Roomi Foods (Pvt) Limited Roomi Poultry (Pvt) Limited Mohammad Arif Hameed Director Mohammad Arif Hameed is a former Managing Director of Sui Northern Gas Pipelines Ltd., a company he served for 37 years. He has vast managerial experience in Gas Distribution, Sales, Billing, Logistics Support, Procurement, and Legal. He has served as Director on the Boards of Sui Southern Gas Company Ltd., Inter State Gas System (Pvt.) Ltd., Petroleum Institute of Pakistan and LUMS. He is a Mechanical Engineer by profession, and is registered with the Pakistan Engineering Council (PEC). He also holds a Masters in Administrative Sciences and is a Law Graduate from University of the Punjab, Lahore. Other Directorships: Soxlinks (Pvt) Limited Sadia Younas Mansha Director Sadia Younas Mansha has more than 19 years of diversified professional experience in Textile, Knitwear, Dairy and Agriculture Farming. She is currently serving in the capacity of Managing Director of Nishat Dairy (Pvt) Limited and Nishat Agriculture Farming (Pvt) Limited. She is also the Chief Executive Officer of Golf View Land (Pvt) Limited. Other Directorships: Golf View Land (Pvt) Limited Nishat Agriculture Farming (Private) Limited Nishat Sutas Dairy Limited Nishat Dairy (Private) Limited Pakgen Power Limited
  25. Shaikh Muhammad Jawed Director Shaikh Muhammad Jawed was previously a Director of Din Leather (Pvt) Limited and has vast experience of running a modern tannery. Due to his technical expertise, Din Leather has received several export performances awards, merits as well as best export performance trophies for the export of Finished Leather from Pakistan and the company’s contribution is earning valuable foreign exchange for the country. Due to excellence in quality and supply, the company has also received a Gold Medallion Award from the International Export Association, UK. He has received technical education in Leather Technology from Leather Sellers College, UK. Other Directorships: Adamjee Life Assurance Company Ltd. Muhammad Ali Zeb Managing Director & Chief Executive Officer Muhammad Ali Zeb is a fellow member of the Institute of Chartered Accountants of Pakistan and completed post graduate diploma in Organizational Leadership from Saïd Business School, University of Oxford. He has over 26 years of diverse experience in the Manufacturing, Financial and Insurance sectors. He started his professional career from Nishat Mills in 1995 and joined Adamjee Insurance as the Chief Financial Officer in 2005 where he was promoted as Executive Director Finance. He was appointed as the Chief Executive Officer in 2008 and remained in this position until March, 2011. Before rejoining Adamjee Insurance as the Chief Executive Officer in June 2013. Ali also served as the Chief Financial Officer at City School (Pvt) Limited. He has served as the Chairman, Insurance Association of Pakistan in 2014. Other Directorships: MCB Bank Limited Adamjee Life Assurance Company Limited Nishat Sutas Dairy Limited
  26. 3PMFT BOE3FTQPOTJCJMJUJFTPG$IBJSNBO y $IBJSNBOQSPWJEFTMFBEFSTIJQUPUIF#PBSEBOEQSFTJEFTUIF#PBSENFFUJOHT y &TUBCMJTIFTBTUSPOHHPWFSOBODFTUSVDUVSFJOXIJDIOPUPOMZUIFFGGFDUJWFOFTTPGUIFPWFSBMM#PBSE CVU BMTPPGBOJOEJWJEVBMNFNCFS JODSFBTFT y $SFBUFTBOFOWJSPONFOUUIBUQSPNPUFTPQFODPNNVOJDBUJPO TUSPOHDPSQPSBUFSFMBUJPOTUIBUBMMPXFWFSZ JOEJWJEVBM NFNCFS UP FYQSFTT UIFJS WJFX QPJOUT BOE IBWF DPOTUSVDUJWF EFCBUFT BU &YFDVUJWF BOE NBOBHFNFOUMFWFMPGUIFPSHBOJ[BUJPO y &YFSDJTFTUSJDUJNQBSUJBMJUZPOFWFSZNBUUFSBOEFOTVSFTUPBDUJOBDDPSEBODFXJUIUIFQSPWJTJPOTPGUIF $PNQBOJFT "DU   $PEFT PG UIF $PSQPSBUF (PWFSOBODF BOE UIF .FNPSBOEVN BOE "SUJDMFT PG "TTPDJBUJPOPGUIF$PNQBOZ y &OTVSFT UIBU UIF $PNQBOZT QPMJDJFT BOE PCKFDUJWFT TFU CZ UIF #PBSE BSF JO UIF CFTU JOUFSFTUT PG UIF PSHBOJ[BUJPOBOEFODPVSBHFGVUVSFEFWFMPQNFOUBOETVTUBJOBCMFMPOHUFSNHSPXUI y $POEVDU NFFUJOHT XJUI UIF $IJFG &YFDVUJWF 0GGJDFS $&0  UP FOTVSF UIBU UIF PCKFDUJWFT BOE TUSBUFHJFT TFUCZUIF#PBSEBSFTVDDFTTGVMMZJNQMFNFOUFECZUIFNBOBHFNFOU y .BLFTTVSFUIBUBMMUIFJNQPSUBOUJTTVFTBOEVQDPNJOHDIBOHFTBSFUIPSPVHIMZEJTDVTTFEJOUIF#PBSE NFFUJOHTBOEBXBZGPSXBSEJTFTUBCMJTIFE y &OTVSFT UIBU TIBSFIPMEFST BOE PUIFS TUBLFIPMEFST WJFXT BSF UBLFO JOUP DPOTJEFSBUJPO BOE FGGFDUJWF DPNNVOJDBUJPOJTFTUBCMJTIFECFUXFFOUIFTUBLFIPMEFSTBOEUIF#PBSE "//6"-3&1035 
  28. MANAGEMENT TEAM Muhammad Ali Zeb Managing Director & Chief Executive Officer Muhammad Ali Zeb is a fellow member of the Institute of Chartered Accountants of Pakistan and completed post graduate diploma in Organizational Leadership from Saïd Business School, University of Oxford. He has over 26 years of diverse experience in the Manufacturing, Financial and Insurance sectors. He started his professional career from Nishat Mills in 1995 and joined Adamjee Insurance as the Chief Financial Officer in 2005 where he was promoted as Executive Director Finance. He was appointed as the Chief Executive Officer in 2008 and remained in this position until March, 2011. Before rejoining Adamjee Insurance as the Chief Executive Officer in June 2013. Ali also served as the Chief Financial Officer at City School (Pvt) Limited. He has served as the Chairman, Insurance Association of Pakistan in 2014. Muhammad Asim Nagi Executive Director Finance & Chief Financial Officer Muhammad Asim Nagi has over 23 years of experience in Accounts and Finance. He is an Economics graduate from University College London and is a Fellow of the Institute of Chartered Accountants in England & Wales. Asim is also a member of the Institute of Chartered Accountants of Pakistan and a Fellow of the Association of Chartered Certified Accountants in United Kingdom. He has worked with a number of organizations at the management level in the UK, including Ernst & Young LLP and UHY Hacker Young LLP in London. His experience in UK comprised assurance and transaction advisory, in particular, IPOs, stock exchange flotations and reverse takeovers. He has also worked with A.F. Ferguson & Co., Chartered Accountants (a member firm of Pricewaterhouse Coopers) and has headed the Internal Audit function at DH Corporation Limited. Asim has been with Adamjee Insurance Company Limited since November 2011 and has served as the Executive Director Finance & Chief Financial Officer since 2014. Adnan Ahmad Chaudhry Executive Director Commercial Adnan Ahmad Chaudhry has over 28 years of combined experience in engineering, manufacturing and insurance sectors. .He is a qualified engineer B.E. (Electrical) from UET Lahore. He has done his Master’s in Counselling and Coaching for Change from INSEAD. He is also a CMILT from London. He started his career in 1993 from Arden Engineering & Automation after which he moved to ALSTOM in 1995. He served as Senior Sales Engineer (Abu Dhabi Branch) at Al Hassan Group of Companies in 2000 and as General Manager Sales & Operations at Classic Needs Pakistan (Pvt.) Ltd. from 2003 to 2007. In 2008, Adnan joined Adamjee Insurance as the Head of Motor Department and became General Manager Operations in 2010 He is currently serving as the Executive Director Commercial. He also held the position of the Chairman of Lahore Insurance Institute.
  29. Asif Jabbar Executive Director Technical Asif Jabbar has 28 years of insurance experience in the areas of underwriting , risk management, operations, and sales. He started his career in 1993 with Adamjee Insurance Company Limited where he held different leadership roles. In 2012, he moved to Marsh Operations in Pakistan with Unique Insurance Brokers as Chief Operating Officer. As an insurance broker, the areas of his specialty were energy, property, and business interruption. In 2013, he rejoined Adamjee Insurance Company Limited as an Executive Director Technical. He specialises in Project Finance Insurance. He holds a Bachelor’s degree in Commerce & Economics. He is a Fellow of the Chartered Insurance Institute, London and a Chartered Insurer from CII, London. He is also a CMILT from London. Muhammad Salim Iqbal Executive Director Reinsurance Muhammad Salim Iqbal has over 32 years of experience in the insurance and reinsurance sector. Salim started his career in 1987 from Wahidis Associates (Pvt.) Ltd. He then joined Adamjee Insurance in 1989 as Probationary Officer and was progressively promoted to the position of Deputy Chief Manager Engineering Department in 1994, after which he joined Al-Dhafra Insurance Company, Abu Dhabi in 1995 as Manager Marine Aviation and Reinsurance. Salim returned to Pakistan in 2005 and joined New Jubilee Insurance Company as Head of Reinsurance. He later joined Adamjee Insurance Company Ltd. in 2006 as Deputy General Manager, Reinsurance. He moved on to IGI Insurance Limited in 2009 as Head of Underwriting and rejoined Adamjee Insurance in 2010 as General Manager Technical. Salim is currently serving as Executive Director Reinsurance. He is a Chartered Insurer and Life Member of Pakistan Engineering Council. Muhammad Salim Iqbal is a qualified engineer B.E. (Civil Engg.) and Fellow of Chartered Insurance Institute (FCII). He has served as member of IAP’s Fire Section Committee & Engineering Insurance Sub-committee in 2009-10 and was also a member of Marine Technical Committee of Emirates Insurance Association from 1997 till 2005.
  30. 3PMFT BOE3FTQPOTJCJMJUJFTPG$IJFG&YFDVUJWF0GàDFS y 3FTQPOTJCMFGPSMFBEJOHUIF$PNQBOZTMPOHUFSNTUSBUFHJFTUIBUNBYJNJ[FTIBSFIPMEFSTWBMVF y 1SPWJEFT MFBEFSTIJQ UP UIF NBOBHFNFOU UP FGGJDJFOUMZ BOE FGGFDUJWFMZ SVO UIF CVTJOFTT QSPDFTTFT JO BDDPSEBODF XJUI UIF QMBOT BOE QPMJDJFT BQQSPWFE CZ UIF #PBSE 'VSUIFSNPSF  EFDJEFT UIF DPVSTF PG BDUJPOTOFFEFEUPBDIJFWFUIFPCKFDUJWFTTFUCZUIF#PBSE y #F B DPNNVOJDBUJPO CSJEHF CFUXFFO UIF #PBSE BOE UIF NBOBHFNFOU BOE DPOWFOF NFFUJOHT XJUI $IBJSNBOPOUIFDSJUJDBMJTTVFTUIBUOFFEUPCFEJTDVTTFEXJUIUIF#PBSE y &OTVSFT UIBU UIF NBOBHFNFOU SFQPSUT QSPNQUMZ UP UIF #PBSE XJUI SFMJBCMF BOE BDDVSBUF JOGPSNBUJPO XIJDIIFMQTUIF#PBSEUBLFJNQPSUBOUEFDJTJPOT y &OHBHFJOFGGFDUJWFDPNNVOJDBUJPOXJUIWBSJPVTTUBLFIPMEFSTBOEFTUBCMJTITUSPOHSFMBUJPOTIJQT y 6OEFSUBLFBMMOFDFTTBSZBDUTGPSPSEJOBSZDPVSTFPGCVTJOFTTXIJDIBSFJOUIFJOUFSFTUPGUIF$PNQBOZ y )BWF UIF BVUIPSJUZ UP BQQPJOU PS UFSNJOBUF BOZ FNQMPZFF FYDFQU UIF BQQPJOUNFOU  SFNVOFSBUJPO BOE UFSNTBOEDPOEJUJPOTPGFNQMPZNFOUPG$IJFG'JOBODJBM0GGJDFS $PNQBOZ4FDSFUBSZBOE)FBEPG*OUFSOBM "VEJUXIJDIJTEFUFSNJOFECZUIF#PBSEBOEUIFZTIBMMCFSFNPWFEPOMZBGUFSUIFBQQSPWBMPGUIF#PBSE y 5PFOTVSFUIBUUIF$PNQBOZNBJOUBJOTUIFIJHIFTUTUBOEBSETJODPOEVDUJOHUIFCVTJOFTTXJUISFHBSEUP BQQMJDBCMFMBXTBOESFHVMBUJPOT y 5PNPOJUPSSJTLNBOBHFNFOUUPNBLFTVSFUIBUNBOBHFNFOUJTBCMFUPDPOUSPMBOENJUJHBUFSJTLT y &OTVSFUIBUFGGFDUJWFBOEFGGJDJFOUJOUFSOBMDPOUSPMTBSFFTUBCMJTIFEBOEGPMMPXFECZUIFNBOBHFNFOU y 5PFOTVSFBOEVQIPMEQPTJUJWFJNBHFPGUIF$PNQBOZ "//6"-3&1035 
  31. Board Committees Audit Committee : Muhammad Anees Chairman - Independent Director Ibrahim Shamsi Member - Non-Executive Director Shaikh Muhammad Jawed Member - Non-Executive Director Umer Mansha Member - Non-Executive Director Investment Committee: Umer Mansha Chairman - Non-Executive Director Imran Maqbool Member - Non-Executive Director Muhammad Ali Zeb Member - Executive Director Muhammad Asim Nagi Member - Chief Financial Officer Ethics, Human Resources and Remuneration Committee: Muhammad Anees Chairman - Independent Director Ibrahim Shamsi Member - Non-Executive Director Muhammad Ali Zeb Member - Executive Director Umer Mansha Member - Non-Executive Director
  32. Management Committees Underwriting Committee : Umer Mansha Chairman Muhammad Ali Zeb MD & CEO Asif Jabbar Head of Underwriting Claim Settlement Committee: Muhammad Ali Zeb Chairman Muhammad Asim Nagi Chief Financial Officer Syed Ameer Hassan Naqvi Head of Claims Risk Management & Compliance Committee: Muhammad Ali Zeb Chairman Muhammad Asim Nagi Chief Financial Officer Asif Jabbar Head of Risk Management Syed Ameer Hassan Naqvi Head of Compliance /Claims Tameez ul Haque Company Secretary Imran Ali Head of Internal Audit Reinsurance & Coinsurance Committee: Muhammad Ali Zeb Chairman Muhammad Salim Iqbal Head of Reinsurance Asif Jabbar Head of Underwriting Adnan Ahmad Chaudhry Head of Commercial
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  36. PRODUCTS AND SERVICES (CONVENTIONAL/ TAKAFUL) FIRE & PROPERTY Property All Risk Comprehensive Machinery Consequential Loss Of Profit Energy Ginning Stock Policy Home Fire Policy Shopowner's Comprehensive Policy ENGINEERING Machinery Electronic Equipment Boiler & Pressure Vessel Contractor’s All Risks Erection All Risks Contractor’s Plant & Machinery Comprehensive Projects HEALTH Micro Health Group Health Retail Health MARINE Marine Hull and Machinery Marine Cargo Marine Umbrella Liability Aviation MOTOR Comprehensive Car Commercial Vehicle Motorcycle Comprehensive Motor Third Party Liability MISCELLANEOUS All Risk Valuable Bankers Policy Burglary Cash in Safe Cash in Transit Cellular Mobile Phone Contractual Liability Credit Card Travel Incovenience Policy Crop Director & Officers Liability Doctor Professional Indemnity Policy Electronic & Computer Crime Employer's Liability policy Fidelity Guranatee Policy Foreign Exchange Dealers Policy General Professional Indemnity Policy Gosecure Travel Kidnap & Ransom Livestock Loss of Licence Neon Sign Policy Personal Accident Plastic Card Plate Glass Product Liability Policy Public Liability Workmen's Compensation
  37. AWARDS Global Insurance Awards 2020 By World Finance Best General Insurance Company in Pakistan Global Insurance Awards 2019 By World Finance Best General Insurance Company in Pakistan INSURANCE ASIA AWARDS 2019 WINNER Domestic General Insurer of the Year YALLACOMPARE Banking and Insurance Awards UAE 2019 Global Insurance Awards 2018 By World Finance Best General Insurance Company in Pakistan Global Insurance Awards 2017 By World Finance Best General Insurance Company in Pakistan “Asia's 200 Best Under A Billion $” by Forbes in 2016
  38. INSURER FINANCIAL STRENGTH RATINGS IFS CREDIT RATINGS LONG TERM RATING AA + WITH STABLE OUTLOOK BY PACRA B LONG TERM ISSUER CREDIT RATING “BB+” WITH STABLE OUTLOOK BY AM BEST - UK
  39. OUR GEOGRAPHICAL PRESENCE Peshawar Islamabad Mianwali Rawalpindi Jhelum Khushab Sialkot Narowal Gujrat Gujranwala Lahore Jhang Faisalabad Gojra Kasur Sahiwal Khanewal Okara Multan Sargodha Muzaffargarh Quetta Dera Ghazi Khan Shujaabad Vihari Bahawalnagar Bhawalpur Rahimyar Khan Sadiqabad Ghotki Sukkur Larkana Nawabshah Hyderabad Karachi Pakistan Badin Total No . of Employees (31 December 2020) 830 Head Office and Registered Office Divisional Office, Branch Office & Specialised Product Branches Window Takaful Operations Zones/Branches
  40. Sharjah Al Rashidiya Dubai Abu Dhabi United Arab Emirates Total No . of Employees (31 December 2020) Main Office and Branch Branch Offices Claim Centre 70
  41. ORGANIZATIONAL STRUCTURE  #PBSEPG%JSFDUPST  4IBSJBI"EWJTPS   *OWFTUNFOU $PNNJUUFF   &UIJDT )VNBO3FTPVSDF 3FNVOFSBUJPO $PNNJUUFF "VEJU$PNNJUUFF   )FBEPG*OUFSOBM "VEJU  4IBSJBI$PNQMJBODF 0GmDFS  )FBEPG8JOEPX 5BLBGVM 0QFSBUJPOT    $PNQBOZ 4FDSFUBSZ $&0   &YFDVUJWF %JSFDUPS $PNNFSDJBM   $'0&YFDVUJWF %JSFDUPS 'JOBODF  )FBEPG$PNNFSDJBM  0QFSBUJPOT.BSLFUJOH )FBEPG *OWFTUNFOUT $PVOUSZ)FBE 6"&  )FBEPG *OGPSNBUJPO 4ZTUFNT  FUNCTIONAL REPORING ADMINISTRATIVE REPORING  &YFDVUJWF %JSFDUPS 5FDIOJDBM   &YFDVUJWF %JSFDUPS 3FJOTVSBODF   )FBEPG $PNQMJBODFBOE $MBJNT   )FBEPG "DUVBSJBM4FSWJDFT )FBEPG (FOFSBM4FSWJDFT -FHBM 4BMWBHF "VDUJPO  $PNQMJBODF 0GmDFS  )FBEPG )VNBO3FTPVSDF 
  42. ISO 9001-2015 CERTIFIED
  43. Competitive Landscape and Market Positioning The state of competition in an industry depends on five basic forces , commonly described as ‘Porter’s Five Forces Framework’. According to this framework, competitiveness does not only come from competitors. Rather, the state of competition in an industry depends on five basic forces depicted in below diagram: ew B Bu arg ye ain rs in g Po w er of N of at re Th nt lE Po s te er nt m ia to us C ra nt s s nt tra En ow er B Su arg pp ain lie in rs g P ti bs Su e ut tit bs Su of at ts re uc Th rod P of rs lie pp tu Su te Existing Competitors The collective strength of these forces determines the ultimate profit potential of an industry and thus its attractiveness. 42 ANNUAL REPORT 2020
  44. Threat of new entrants Barriers to entry in the insurance industry is considered to be at a medium level with recent interest by foreign insurance companies in entering Pakistan ’s insurance industry especially in micro-insurance sector of the industry. However, with the Securities and Exchange Commission of Pakistan’s (SECP) strict monitoring and regulation of the insurance industry, the threat of entrants is limited to certain extent. In addition, a reasonable high capital requirement to start an insurance business and a broad distribution network requirement, further reduces the threat. Threat of substitutes Most large insurance companies offer similar products and services. May it be property, marine, motor, health or life insurance; chances are there for similar services. Customer’s inclination to substitute/another product to solve the same need constitutes a threat. AICL has introduced workable innovations in insurance products, including ondemand and usage-based insurance products, which have great appeal for consumers looking for an alternative to the traditional products. Bargaining power of the buyers Customer’s influence is a force to be reckoned as multiple alternatives for procuring products and service are available in the market. Customers have the right to demand lower prices and higher product quality. Large corporate clients paying millions of rupees in premiums have bargaining power too. With the online emergence of social media, and instantaneous access to awareness of coverages, pricing, and services, today’s customer demand more personalized attention and care for the premiums paid. To meet these expectations, AICL has strengthened its user-friendly workflows for customer-facing processes, including underwriting, policy issuance, endorsements, and claims. Bargaining power of suppliers Suppliers generally pressurize companies by raising prices, lowering quality, or tightly controlling product/service availability. Agents and brokers have historically leveraged the ability to influence policyholder choices into placing business with specific insurers. Employing the front-end tools to reach potential customers directly, AICL nullifies the bargaining power of suppliers. In addition, the prices in the insurance market is generally dictated by local or global performance of those reinsurers in the region. Competition among existing companies Distribution channels of AICL are very well equipped and customized to serve and satisfy digitally native customer of the day. Through our strength of assets, diverse and wide spread product mix provides an edge to AICL over its competitors in the industry. Companies are running lucrative media campaigns to retain the current customers and engage new customers by offering services at cost effective or affordable rates. Our long experience, tailor-made insurance plans and exceedingly prompt services have not only gained customer loyalties, but also provided us a competitive edge. Provision of maximum insurance protection at the most competitive rates keeps us competitive in the market. ANNUAL REPORT 2020 43
  45. PESTEL Analysis PESTEL (Political, Economic, Social, Technological, Environmental and Legal) analysis is a framework or tool used to identify key macro (external) factors that affect the business environment in which the organization operates and ultimately affect the objectives of the organization. Understanding each factor is important for the growth of the organization and plays a pivotal role in planning the right strategies which helps the management in assessing the risks specific to the insurance industry to take informed decisions. Furthermore, the Company can understand the opportunities and threats in the external environment and this framework provides the basis for business planning process. ialSoc ural lt Cu Tec h nol ogi cal Ec ent nm ono viro mic En al P ic olit al Leg al PESTEL Political The political stability of a country has always been a major factor in deciding the growth of an industry. Government has taken serval decisions to overcome uncertainties of exports and gradually imposed duties on imports which is a positive step to reduce current account deficit. The efforts made by the Government towards maintaining law & order situation is also creating friendly environment for ‘Ease of Doing Business’. Strict monitoring by Securities and Exchange Commission of Pakistan (SECP) ensures transparency for insurance sector. Government prioritized economic growth and better international relationships which helped in creating a better image of the country. Measures were taken to increase the penetration and growth of the insurance sector; some of the measures were reduction in the regulatory fee and relaxation to the industry from application of IFRS 16 (leases) to certain regulatory returns. The policies and efforts of the Government in managing the Covid-19 pandemic has also gained appreciations at international level. Economical Pakistan’s economic growth is projected to be slow since the challenges of Covid-19 Pandemic that has created crisis in the global economic environment and has caused further uncertainty. The Country is continuously in a low growth and high inflation situation. Decline in the purchasing power of people and increasing unemployment puts the 44 ANNUAL REPORT 2020
  46. country in a state of stagflation . With the rise in unemployment and lower purchasing power, households have reduced their consumption, increased external pressures due to global crises caused by the pandemic has resulted in imports and exports to decrease together with foreign investment in Pakistan. The IMF has forecasted Pakistan’s GDP at 1%, inflation at 8.8%, current account deficit at 2.5% of GDP and unemployment rising by 0.6 percentage points to 5.1% during the current fiscal year ending June 2021. This is in sharp contrast to the government’s targets of 2.1% GDP growth rate, 6.5% inflation and 1.5% current account deficit. The measures that were taken to control the outbreak caused the economy to come to a standstill. However, with the containment measures being lifted and the vaccine being developed, the economy is expected to recover, and the State Bank of Pakistan (SBP) has projected a 2.5% growth in the upcoming year, however future growth projection remains low. Moreover, there is significant uncertainty regarding the pandemic, the effectiveness and availability of vaccine will result in a slower growth rate. Social-Cultural Global digitalization has changed not only the economic, but also the social vision of the world. The digitalization has determined the continuous flow of data containing information, knowledge, ideas and innovations. Covid-19 has pushed the insurance industry to expedite its transformation towards digital products to its customers and it has also changed the habits of the Pakistan’s consumer market. As Islamic state, an increase in demand for takaful products has also been witnessed. Highly uncertain, but the significant flare-ups of the third wave of Covid-19 pandemic will require restrictions affecting adversely not only industrial growth, but the growth of service sector as well. Technological Innovative digital solutions are taking over the insurance market and have a very positive impact on the returns. Customers today look for convenience, so technological advancements have become a key factor in retaining and increasing the customer base. In addition, to that technology allows the Company to work with real-time information which gives it Company a competitive edge and informed decision making tools. Environmental One of the major challenges for insurance industry is the danger posed by the changing climate pattern which can lead to the risk of increase in frequency and severity of catastrophic events and put the insurance companies in a challenging position where they will have to make tough decisions to cater for such events both at the front and at the reinsurance level. Legal The Draft of the Insurance Ordinance (Amendment) Bill, 2020 proposed by the Securities and Exchange Commission of Pakistan (SECP) to address regulatory gaps in the existing law and creating a conducive regulatory environment to encourage market development is available at the Regulator’s website for stakeholder and public consultation. SECP has notified ‘General Takaful Accounting Regulations, 2019’ which are applicable from January 1, 2020. These rules and regulations are applicable to Window Takaful Operations (WTO) of the Company and are mainly related to presentational changes to the financial statements of WTO. No laws/regulations or joint policy framework of the Insurance Sector exists to cover losses arising out of disruption caused to business because of the outbreak of the pandemics like Coronavirus, as no physical loss occurs. The insurance companies need to come up with new policies with respect to the problems arising out of local/foreign legal jurisdiction especially in developing countries like Pakistan. ANNUAL REPORT 2020 45
  47. SWOT Analysis Ÿ Strong position in the market with a paid-upcapital of Rs. 3.5 billion Ÿ Low insurance penetration in the country Ÿ IFS Rating of “AA+” by PACRA and “B” (Good with stable outlook) by AM Best, UK Ÿ Ÿ Holds the position of one of the largest insurance company of Pakistan for decades Natural disasters due to environmental changes may impact adversely The only general insurer that has overseas operations and Strong geographical presence within Pakistan Ÿ Ÿ Lack of awareness in Pakistan market about insurance products Ÿ Due to religious beliefs customers avoid insurance products; hence, Takaful products Ÿ Strong and Reliable reinsurance partners Ÿ Diversified business and product portfolio Ÿ Dedicated management to ensure outstanding customer service S W O T New opportunities and economic reforms with CEPC Projects Ÿ Political and economic uncertainty Ÿ Employing the digital technology infrastructure Prevailing tense geopolitical situation of the region Ÿ Ÿ Exploring new overseas emerging markets Frequent changes in regulatory environment Ÿ Ÿ Growth potential of the UAE market Impact of the pandemic on the growth prospects of the insurance industry Ÿ Cut-throat competition in the industry Ÿ Ÿ 46 ANNUAL REPORT 2020
  48. Internal Value Chain Framework Sustainable Long Term Value Governance & Risk Management: Ÿ Implementation of Enterprise Risk Management framework Ÿ Maintaining SECP regulatory compliance Ÿ Compliance with Codes of Corporate Governance Ÿ Adequate Re-insurance/ Retakaful arrangements Ÿ Actuarial services to support operations Ÿ Strong internal control Claims Management: • Use of SECP Proficient surveyor’s network • Appointment of Surveyor’s as per risk merit • Dedicated centralized Claim management department • Hands on information of Claims Process • Smooth process for Claim Payments Assets & Investment Management: • Invest in Long-term quality fixed assets • Evaluate investment opportunities for placement of funds in diversified instruments for sustainable growth • Portfolios are built to mitigate market and interest rate risks Customer Experience & Service Quality: • Dedicated 24/7 Call Center for Claims & Complaints • 9001:2015 ISO Certified Company • Focus on use of digital technology to ensure excellence in customer experience • Department for Compliant Management • Customer Satisfaction Surveys SUPPORT ACTIVITIES Underwriting: • Focus on Enterprise Risk Management steps to underwrite risks • Diversified Product Portfolio for Insurance & Takaful • Adequate risk evaluation techniques before underwriting • Conduct timely training to risk professionals to practice new risk management techniques PRIMARY ACTIVITIES Marketing, Sales, and distribution: • Extensive branch network in Pakistan & UAE • Pioneer in establishing retail sales network • Experienced and competent sales force • Marketing, Public Relations & Corporate Communication and Advertising • Performance Marketing for Online Sales Generation using Social Media • Alliances with Online Sales Aggregators • Robust relationship with Insurance Brokers Technological Advancement: • Focus on digitalization • Implementation of Enterprise Resource Management Specialized for Insurance • Implementation of Takaful Specialized ERP • Implementation of Business Intelligence System • State of the art Information System Processes to meet highest security standards • Online Portals for Motor, Travel and Health Insurance/ Takaful Finance and Reporting: Ÿ Financial reporting in compliance with applicable IFRS and provisions of and directives issued under the Companies Act,2017, the Insurance Ordinance, 2000 and the rules & regulations formulated thereunder Ÿ Integrated ERP System for MIS reporting and decision making Ÿ Finance as a business partner Ÿ Investors’ Relations Management Human capital management: • Transparent and fair recruitment process • Focus on Training & Development Programs • Fair system for appraisal management and rewards • Activities for employee engagement and motivation • Collaborative and self-motivated environment ANNUAL REPORT 2020 47
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  51. Business Activities Model Mission , Vision, Code of Conduct & Ethics Governance Stakeholders Engagements Risks & Opportunities Strategy & Resource Allocation Performance & Position Outlook Conventional Insurance/ Window Takaful* Business Conventional Insurance/ Takaful* Activities Commercial Technical Re-Insurance/ Retakaful Claim & Compliance Actuarial Services Support Functions Investment Activities Fixed Assets Investments Equity Investments Fixed Investments *All the Window Takaful Activities are performed in consultation with Shairiah Advisor and Shariah Compliance Officer. 50 ANNUAL REPORT 2020
  52. Business Model & Value Creation INPUTS Financial Capital: • Paid-Up Capital: Rs. 3.5 Billion • Total Assets: Rs. 49.5 Billion • Equity: Rs. 22.2 Billion • Combined Investment and Cash & Bank Portfolio: Rs. 28.2 Billion Human Capital: • Total Employees: 900 • Highly Skilled, Experienced and Competent Employees • Training & Development Programs • Performance Management System Manufactured Capital • Property & Equipment Value is 4.9 Billion • 2 Call Centers (Pakistan & UAE) • 3 Dedicated Doctors Helplines Intellectual Capital: • Technological Infrastructure is based on Centralized ERP and integrated with functional and technical departments. • Dedicated Online Portals for Health, Travel, Motor and Window Takaful Operations . Social & Relationship Capital: • All Leading/ Regional Hospitals are on-board with Health Insurance. • All Leading Auto- Assemblers, Workshops on-board for Motor Claims • Partnerships with Local NGO’s for Micro Insurance • Dedicated Teams for CPEC & Special Projects • Globally renowned and Reliable Re-Insurers/ Retakaful Partners • Alliances with Digital Aggregators • Largest distribution network with Partner Banks, and Auto Assemblers, Dealerships Natural Capital: • Green Office Initiative • Largest Insurer of Renewable Energy Projects • Invested in Green Initiative Projects in Karachi and Lahore Head Office. i.e; Complete LED’s based Electrical Infrastructure OUTPUTS • Gross Written Premium & Contribution: Rs.19.8 Billion • Underwriting Profit: Rs. 375.7 Million • Claims Paid: Rs. 13 Billion • Total Investments: Rs. 26.6 Billion • Profit after tax: Rs. 1.88 Billion • Contribution to National Exchequer: Rs. 341 Million • Digital sales increase in retail segment and multi channel distribution • Credit Ratings: Pakistan Credit Rating Agency (PACRA) has given Highest Rating ‘AA+' and UK Based Rating Agency AM Best given 'B' • More focus on customer centricity, Service excellence and customer engagement • Strengthening actuarial capabilities & Market Expansion through analytics for existing and new product developments • Strong in house team based service architecture • Dedicated Compliance Monitoring team to mitigate internal control risk OUTCOMES Financial Capital: • Earnings Per Share (EPS): Rs. 5.36 • ROAE: 0.086 • Current Ratio: 1.7 times • Liquid Assets/ Total Assets: 0.665 Human Capital: • Female staff Ratio 12% • Male staff Ratio 88% • No. of Training Conducted: 8 • Employee Engagement Programs: 2 Manufactured Capital: • Addition of 1 New Branch for Window Takaful Operations • 4 Minutes Average Call Resolution Duration • 25000+ Customers received Value Added Services • 900+ Retail Distribution Network Intellectual Capital • 98% Policies issued through Electronically. • 3 New Product Developments • 25000+ Customers received Value Added Services Social & Relationship Capital: • Edge for Presence in all remote locations of Pakistan • Wellness Programs & Medical Camps • Increase in Crop & Livestock Portfolio • Better relationship with Brokerage Houses, International Re-Insurer/ ReTakaul Partners Natural Capital: • Plantation increased in Karachi and Lahore Offices • Efficient use of Electricity & Water • Reduction in Energy Cost • Paperless environment initiatives ANNUAL REPORT 2020 51
  53. Effect of Seasonality on Business in Terms of Sales Seasonality includes those changes that happen every year around the same time and impact the sales in a similar way every year . However, in the year 2020, Covid-19 pandemic created unexpected circumstances with lockdowns. The sales remained under huge pressure especially during the second quarter. Export restrictions disrupted the seasonality of the year 2020, hence, the demand varied this year. Despite, the drop in premiums in marine line of business, the renewals happened as usual. Most companies begin their fiscal year in July and some in January so overall renewals are high and sales are at their peak during this time. Motor insurance sales are affected in the month of Ramadan as lot of people plan to buy a new car before the occasion of EID. For agriculture insurance when farmers start farming, at the start and end of Rabi and Kharif seasons, they need funds to start the processes and similarly at the end of the season they need funds for storage and transportation, hence, premiums of agriculture insurance increase during these times. Travel insurance sales increase during holiday seasons. Significant changes from prior years There were no significant changes from the prior year except those encountered due to Covid-19 as mentioned in Effect of Seasonality on Business section as well. 52 ANNUAL REPORT 2020
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  55. Strategy and Resource Allocation Strategic Objectives Short , medium, and long-term objectives to meet the Company’s vision and mission statement are as follow: Short term Ÿ Utilize technology to enhance our productivity, reduce operational cost, ensuring risk mitigation while being fully compliant with laws and regulations. Ÿ Focus on improving technical profits. Ÿ To further increase our market reach through product innovations to meet the changing needs of the customers. Medium term Ÿ Continuous technological advancement to maintain our strong market position and increase shareholders wealth. Ÿ Increase offering our retail-based products and market share of Window Takaful Operations. Ÿ Adding value to our stakeholders’ relationship. Long term Ÿ To lead the insurance industry by providing outstanding customer service and maximizing the long-term value for shareholders Ÿ Expanding our geographical presence in UAE Strategies in place to achieve our strategic objectives: Being one of the leading insurance companies, we have a massive responsibility towards our customers, and we strive to meet the changing needs of our customers by utilizing our digital infrastructure and capabilities to provide them seamless experience. We make sure that we evaluate the risk factors efficiently and come up with innovative solutions to mitigate risk. We have highly trained and dedicated employees who continuously work towards delivering the highest value to our customers. We believe there is always a room for improvement and we keep looking for areas to improve. We practice the highest standards of corporate governance and abide by all the laws and regulations of the country that we operate in. We will continue to build healthy relationships with all our various stakeholders. We believe in setting a high benchmark in the insurance industry and maintain our position as a market leader. We remain focused in achieving long term sustainable growth and maximize value for our shareholders. We will continue to make positive contributions to our community and strengthen our presence. 54 ANNUAL REPORT 2020
  56. Strategic Objectives Utilize technology to enhance our productivity , reduce operational costs, ensuring risk mitigation while being fully compliant with laws and regulations. Strategies to achieve objectives Ÿ Introduction of digitalization in insurance industry Ÿ Automation of policies and procedures Ÿ Automation of all operational and support Future relevance of KPI KPI Reduction in Operational cost This is an ongoing process and will remain relevant in future Increase in Profitability from core business This is an ongoing process and will remain relevant in future Increase in Revenue This is an ongoing process and will remain relevant in future Sustainable growth in shareholders' Value This is an ongoing process and will remain relevant in future Enhance our reach and Improve Quality of services This is an ongoing process and will remain relevant in future Corporate social responsibility This is an ongoing process and will remain relevant in future Sustainable Growth This is an ongoing process and will remain relevant in future Market Penetration in UAE This is an ongoing process and will remain relevant in future processes Ÿ Explore untapped market section to increase business pool Focus on improving technical profits Ÿ Ÿ Ÿ Ÿ Further strengthen underwriting process Improve reinsurance & retakaful treaties Streamlining of operational cost Consolidation of various offices to bring in operational efficiencies To further increase our market reach through product innovations to meet the changing needs of the customers Ÿ Ÿ Ÿ Ÿ Ÿ Continuous technological advancement to maintain our strong market position Ÿ Continuous upgradation of technological tools to Increase retail-based products and market share of Window Takaful Operations achieve competitive advantage Ÿ Use of artificial intelligences and Robotic process automation Ÿ Strengthen relationships with our business Ÿ Ÿ Ÿ Add value to our stakeholders' relationship Ÿ To lead the insurance industry providing customer service, maximizing the long term value for shareholders Ÿ Ÿ Ÿ Ÿ Ÿ Expanding our geographical presence in UAE Innovative and alternate product Products for students Development of rural market products for farmers Cross product selling of Health & Motor Micro Insurance in collaboration with leading NGO’s Ÿ Ÿ partners Open new branches for Window Takaful Operations Fulfil takaful needs of customers and provide Shariah Compliant Products to Islamic Banks Provide support for rural development through partnering with NGOs for micro-insurance To ensure customer satisfaction in all customer dealings Continue financial support to the community in various areas Strengthen leadership position by bringing all round positivity Anticipate the market dynamics and fulfil changing customers’ needs Expand techno-commercial teams working with local and international brokers Introduction of new motor insurance portal in UAE with new marketing strategy Utilize AICL’s closely working relations with brokers, online aggregators, and sales distributors to expand Expand digital presence in all seven emirates followed by physical presence ANNUAL REPORT 2020 55
  57. Organizational Resources and Their Allocation Organizational resources are the assets available with an organization for utilization in production of goods and services . Effective and efficient utilization of these resources is pivotal towards achievement of strategic objectives as resource allocation and strategy execution are interdependent. Strategy is dependent on resources, whereas resources leave influence on the strategy. Apart from other factors, the success of AICL at where it stands today is the result of in-depth and well thought out resource allocation planning, careful implementation and monitoring. Financial Resources Financial resources also termed as ‘Financial Capital’ include pool of funds that is available to an organization for use in the provision of services. Financial Capital is obtained through finance either equity or grants, or generated through operations or investments. Financial Capital of the Company is utilized effectively and efficiently under the guidelines developed by the Board of Directors. Below is brief synopsis of major financial resources and their management: a. Cash and Liquidity Management Maintaining adequate liquidity to meet the claims liability and investing surplus funds to generate income is the primary objective of the cash and liquidity management function which is handled by the ‘Treasury Department’ of the Company. Treasury Department is equipped with competent professionals with relevant experience of multiple years and operates under the supervision of the Chief Financial Officer. During the year, the Company has paid Rs. 13,010 million (2019: Rs. 15,336 million) on account of claims to the insured & takaful participants and Rs. 926.6 million (2019: Rs. 870.5 million) as dividends to the shareholders. Further, the Company also acquired Rs. 178.6 million (2019; Nil) from MCB Bank Limited, a related party, under the State Bank of Pakistan's (SBP) Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns ('Refinance Scheme'), with the approval of SBP. b. Investments Management Investments function is responsible for handling all investments of the Company. The function as per requirements of the Code of Corporate Governance is segregated into Front, Middle and Back Office to ensure adequate internal controls. Further, the investment function is equipped with professionals with experience of multiple years and is headed by Investment Committee of the Board. Decisions regarding investments are taken by the Investment Committee. Investment position and its performance is also reviewed by the Board on quarterly basis. Human Capital Human capital also termed as ‘Human Resource’ is important in myriad areas ranging from strategic planning to company image, customer satisfaction to legal compliance and so on. Hence, the importance of Human Capital for achieving organization’s strategic objectives cannot be over emphasized. The Company has a team of around 900 competent employees with adequate experience, skills and qualifications to manage the day-to-day operations. Various trainings are conducted from time to time to enhance skills of the staff. Further, management takes keen interest in planning the succession for all key positions. Ethics, Human Resource and Remuneration Committee of the Board oversee this function. 56 ANNUAL REPORT 2020
  58. Manufactured Capital Manufactured capital refers to manufactured physical objects that are available to an organization for use in the provision of services . The physical assets of the Company are broadly classified into: Ÿ Land Ÿ Buildings Ÿ Furniture & fixtures Ÿ Motor Vehicles Ÿ Machinery & equipment Ÿ Computer equipment All of the physical assets of the Company are efficiently utilized for the purpose of business and adequately covered against potential threats through insurance coverage, managing access to the Company premises via biometric / proximity card identification, monitoring entry and exit points through surveillance cameras and security guards. Physical assets are managed through Fixed Assets Register with each asset assigned an identification tag. Further, these assets are subject to both planned and surprise physical verification as well which is conducted from time to time basis. Intellectual Capital Intellectual Capital refers to organizational knowledge-based intangibles, including ‘Intellectual Property’ such as patents, copyrights, software, rights and licenses and ‘Organizational Capital’ such as knowledge, systems, procedures and protocols. The Company through its experience of operations spread over a 60 years has refined, standardized and documented its operating procedures. The procedures are flexible and adaptive to absorb innovations necessary to respond to changes initiated by external factors. The library of the said procedures is effectively and efficiently utilized to introduce new and alternate products, expand customer base, and resultantly increase profits. Social and Relationship Capital Social and Relationship Capital includes shared norms, common values and behavior, key stakeholder relationships, intangible association with organization’s brand and reputation and organization’s social license to operate. Social and relationship capital is one of the key assets that an organization has. It is the image and reputation of the organization that all stakeholders carry with them and plays an important role in achievement of strategic objectives and future growth. The Company realizes the due importance of social and relationship capital and assigns customer satisfaction as top priority in all customer dealings. The Company has maintained healthy relationship with customers, agents, surveyors, reinsurers, reinsurer brokers, vendors, banks and all other stakeholders. Natural Capital Natural Capital refers to all renewable and non-renewable environmental resources and processes that provide services that support the past, current or future prosperity of an organization and includes air, water, land, minerals, forests etc. Natural capital create the ecosystems for human beings to survive. It is of utmost importance that an organization efficiently manages natural capital to avoid any harm to the ecosystems in long term. The Company continues to contribute to the sustainable environment by gradually moving towards paperless operations, installing energy conservative technologies, encourage plantation across all its premises, and encourage efficient use of water to reduce water wastage. The Company will continue to work towards promoting green office environment. ANNUAL REPORT 2020 57
  59. Strategy to Overcome Liquidity Problems Liquidity refers to the ability of an organization to fulfil its short-term liabilities when they become due . Managing liquidity is important as even the profitable organizations may suffer to run their operations smoothly in absence of adequate funds or liquid assets. The key element of the Company’s liquidity management strategy is to maintain sufficient liquid assets to meet its claims and other liabilities. Liquidity requirements are kept into consideration while making investment decisions. Bank balance maintained with high rated scheduled banks amounts to Rs. 1,516 million (2019: 1,258 million). Further, liquid assets ratio is 1.3 times (2019: 1.2 times) as at 31 December 2020. In order to further strengthen the liquidity position during Covid-19 related lockdowns, the Company acquired Rs. 178.6 million (2019; Nil) from MCB Bank Limited, a related party, under the State Bank of Pakistan's (SBP) Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns ('Refinance Scheme'), with the approval of SBP. Out of total payable balance of Rs. 166.37 million as at 31 December 2020, Rs. 90.31 million is payable in the year 2021. The management foresees that operations of the Company would generate sufficient funds to easily meet the repayment of the liability on timely basis. Liquidity position is closely monitored on routine basis under the supervision of the Chief Financial Officer. Significant plans and decisions such as corporate restructuring, business expansion and discontinuance of operations In Pakistan, the insurance penetration is around 0.83% of GDP and if we compare it with other emerging markets it is recorded to be 6.3% of the GDP. Significant plans that are in-line with our mission & vision include the following: Ÿ Expansion & Growth in our existing Portfolio Ÿ Increase retail based product market including Health, Motor, Travel & Agricultural products Ÿ Expansion of Window Takaful Operations in Pakistan Ÿ Enhance Corporate Health Insurance in UAE Ÿ Product innovation with digitalization of all products for consumers Significant changes from prior years There were no significant changes during the year except the one disclosed in liquidity management section relating to loan obtained from MCB Bank Limited under SBP’s Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns ('Refinance Scheme'). 58 ANNUAL REPORT 2020
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  61. Enterprise Risk Management (ERM) Framework At Adamjee Insurance Company Limited, the Enterprise Risk Management (ERM) Process is broken down into five steps, which is shown below: Risk Identification Risk Estimation Risk Evaluation Risk Treatment Risk Monitoring Each step is explained in some detail below: Risk Identification: Ÿ By collaborating with a variety of departments at AICL, all the possible risks affecting the Company are identified, and to build an understanding about them, an in-depth knowledge about them is gathered. Ÿ At this stage, immediate stakeholders are also identified. For example, for Capital Adequacy Risk, the immediate stakeholder would be the Finance Department. Ÿ Risks are described in detail at this stage, and the source of the risk is exactly made clear. Risk Estimation: Ÿ Impact of the risk is estimated qualitatively, and how AICL will be affected by it directly. Ÿ Impact and probability of the risks are rated at this step, which assists in making a judgment about the risk rating, which can either be Critical, High, Moderate or Low. Ÿ A credible worst-case scenario is built and its impact on financial statements is checked based on its likelihood of occurrence. This helps in quantifying the risk to some extent. Risk Evaluation: At this stage, Risk is evaluated in terms of: Ÿ Risk appetite of AICL, as per Board’s guidance Ÿ Tolerance level of the risk, as per Board’s guidance Ÿ Risk treatment stance, which is either to avoid the risk completely, or merely reduce it. Risk Treatment: Ÿ Clear risk strategies are documented regarding each risk. Existing controls are also reviewed and a potential action for improvement is noted. Ÿ Residual risks are also established at this stage. Risk Monitoring: Ÿ A Key Risk Indicator is built for each risk, which rates the risk as Low, Medium, High, and Critical. Ÿ Based on these ratings, it is assessed what kind of actions needs to be taken regarding risk mitigation. 60 ANNUAL REPORT 2020
  62. Commitment of the Board on the ERM Process The Board of Directors of AICL oversees the risk management framework to make sure that the risks affecting AICL are identified and dealt with properly . In the above ERM framework, the Board’s input is mostly evident in the third, fourth and fifth steps. Following are the responsibilities of the Board of Directors with regards to ERM: Ÿ Ensure that AICL has a comprehensive ERM framework. Ÿ Advise on the risk appetite and tolerance regarding each risk, highlighted in Step 3. Ÿ Approve and advise on any steps that are necessary to control risks once the residual risk assessment is complete, highlighted in Step 4. Ÿ Make sure that risks are monitored appropriately, highlighted in Step 5. Ÿ Sit with the Risk Management Committee on a quarterly basis and take feedback on progress and compliance. Key Risks Following are the key risks that affect AICL, their consequences, their risk rating, and how the company has a control over them. Risk Business No. Activity 1 Strategic Risk Name Risk Description Consequences Impact Probability Regulatory Risk AICL may face regulatory risk because of the following events: a) Changes to existing law or regulations b) Introduction of new law and regulations c) New compliance laws, such as IFRS 17 d) Failure to address impact of such changes Major Moderate 2 Credit Risk The company is exposed to credit risk against the following counterparts: a) Reinsurance / coinsurance counterparties b) Assets held with banks c) Insurance debtors (Policyholders, brokers, and development officers) d) Receivables from employees e) Receivables from other insurance companies This may result in: a) An increase in operating cost of doing business in some markets b) Impacting some lines of businesses, or overseas operations c) Forceful transformation of some business practices If any counterparty fails to meet its obligations in accordance with agreed terms, it will cause a financial loss to the company, which will affect: a) Capital requirements b) Credit rating c) Liquidity position Financial Significant Moderate Risk Rating High High Control Regular meetings are held with relevant stakeholders, such as Appointed Actuary and Management, and the key is to anticipate changes to regulatory framework and how it can affect existing business AICL aims to transact with financially sound and reputable parties having high credit worthiness to avoid potential of loss. ANNUAL REPORT 2020 61
  63. Risk Business No . Activity 3 Financial Risk Name Risk Description Consequences Impact Probability Reserve Risk There is volatility associated with actual runoff of claims. There is volatility in frequency as well as severity. Note that this includes all reserves established by claims department as well. Major Moderate 4 Strategic 5 Strategic Capital This risk may arise due Adequacy/Solvency to: Margin Risk a) Credit Risk, in case key debtors' default b) Market risk, in case there is a significant decline in investment value c) Inadequate claim reserves d) Poor underwriting e) Inappropriate reinsurance arrangements f) Changes in solvency regulations Sovereign Risk AICL will be exposed to sovereign risk in case the following events happen: a) Worsening of foreign exchange balance of payments position b) Default by government of Pakistan/UAE in servicing of debts c) Unstable country credit rating by international rating agencies AICL will face unanticipated losses in certain quarters due to inadequate reserves, in case the actual IBNR is higher than expected IBNR. This would result in: a) An inability to meet minimum capital requirements, which will affect company's trade license renewal b) Company's credit rating 6 Strategic Political Risk 62 ANNUAL REPORT 2020 Company may fail to achieve its business objectives due to the following events: a) Political instability b) Riots, terrorism, or wars Risk Rating High Control Significant Moderate High AICL aims to maintain strong capital adequacy ratio or solvency margin at least 25% above regulatory requirement. Moreover, regular assessments of capital needs are made. The Company will face the following issues: a) Inability to maintain credit rating required by insurance law, which should impact the operations b) Relationships with international reinsurance companies will deteriorate, resulting in high reinsurance cost or no reinsurance arrangements Major Moderate High Due to political instability in the country: a) The Company may fail to meet the business Major Moderate High AICL aims to improve its foothold in the Middle East markets along with Pakistan. Hence, the company will: a) Regularly carry out sovereign risk assessments and the impact on operations b) Monitor economic indicators such as foreign reserves, discount rate and exchange rate c) Invest in assets that are not severely affected by country's default d) Keep the revenue mix diversified AICL aims to achieve optimal level of service performance to its customers. Hence, the Company will: Reserves are calculated with built in margins, especially for long tail claims, to ensure inadequacy is never experienced.
  64. Risk Business No . Activity Risk Name 7 Financial Liquidity Risk 8 Operational Processing of fake or fraudulent claims Risk Description Consequences c) Inadequate supplies of basic facilities in the country d) Deteriorating law and order situation e) Frequent power and gas outages targets b) Service to customers will be affected c) Cost of doing business will increase AICL is exposed to liquidity risk if any of the following events occur: a) Financial obligation falls due earlier than anticipated b) Credit default by significant counterparty Company's inability to pay off its contractual obligations in a timely manner may result in: a) Disputes with clients and litigations b) Delays in salaries to employees c) Delays in payment to government authorities d) Adverse impact on solvency and rating This may result in financial loss to the Company. There is a possibility of fines and penalties by the regulator as well. Company may be exposed to risk of financial loss on processing of fake or false claims due to: a) Ineffective claim authentication process b) Collusion of surveyors and employees Impact Probability Risk Rating Significant Unlikely High Moderate High Moderate Control a) Regularly carry out political risk assessments and the impact on operations b) Monitor economic indicators such as foreign reserves, discount rate and exchange rate c) Keep the revenue mix diversified d) Issue instructions to underwriters to exercise prudent judgment before accepting risks, in case of deteriorating law and order situation 5.Maintain adequate catastrophic cover from reinsurer AICL aims to maintain adequate liquidity to be able to meet liabilities when they fall due. Hence, it is preferred to avoid this risk. There are automated management information systems in place that help in managing this risk adequately. AICL has a strong control over claim payments as per approved claims authorization matrix. The protocols have been defined in ANNUAL REPORT 2020 63
  65. Risk Business No . Activity Risk Name Risk Description Consequences Impact Probability Risk Rating c) Undocumented claims payment process 9 Operational Credit Rating Risk AICL faces a risk of not maintaining the credit rating. This will happen if AICL does not manage capital adequacy ratio, credit risk, market risk and liquidity risk appropriately. Due to a deterioration in credit rating, AICL will face: a) Reputation risk b) Loss of customer confidence c) Loss of market share d) Risk of low reinsurance arrangements Significant Moderate High 10 Operational Data Breach Risk Company may be exposed to the risk of an incident in where sensitive, confidential, or protected data may be accessed or disclosed in unauthorized fashion. Data breaches may involve: a) Personal health information b) Personal identifiable information c) Trade secrets d) Intellectual property This will affect AICL's: a) Reputation b) Business operations c) Financial results Significant Moderate High 64 ANNUAL REPORT 2020 Control the internal claim manual. Moreover, claims are not processed without necessary documentation. AICL aims to maintain a strong IFS rating and financial strength. Company will manage operational and financial aspects to keep its rating strong and steady. Company strength is benchmarked against rating agency criteria from time to time, and any concerns that are highlighted are raised immediately. Moreover, the management reviews financial strength quarterly, and how it impacts IFS rating. AICL aims to maintain high security protocols to avoid data breaches. The Company uses high quality encryption tools to ensure data is not useable to anyone in case of breach. Other protocols are also in place such as firewall, encrypted storage, multifactor authentication security, etc.
  66. Key Opportunities Following are the opportunities that are available to AICL . Opportunity Description Data Data has become to most important thing in the modern world. It is not only important to gather all the data from target market, but it is also important to store it properly so that it can be used for the company's benefits. Consequence AICL can make sure that all relevant data is gathered from the target market, such as policyholders. Once all data is gathered, it can be ensured that all data is stored properly, and can be extracted through relevant usable reports, where it shows key insights. Reinsurance Needs With the years of data that is available with AICL, the Company can predict how much reinsurance coverage is required. By following adequate methodologies of assessing reinsurance requirements, the Company can ensure that appropriate reinsurance is purchased, so that there is minimum risk of over reinsurance or under reinsurance. Skilled Human Resources The success of service industry mostly depends on customer satisfaction to some extent. With skilled human resources, AICL can ensure that customer facilitation is kept a priority. With skilled human resources, AICL will be able to make sure that customers get complete guidance, from insurance policy selection to claim handling. Automating Manual Processes Most of the companies are highlighting manual processes that consume time and energy and finding ways to automate them. By eliminating slow and tedious processes, AICL will be able to find overall efficiency and will be able to meet its obligations adequately. This will also save time of employees, who will then have more quality time to invest in the organization. Automation should also improve overall customer experience. Changing Customer Needs Considering how the market dynamics are changing, there is an opportunity to observe how the customer needs are changing and cater to them. For example, COVID-19 motivated people to buy health insurance, whereas some people discontinued their insurances due to slow economy. AICL can observe how the customer demands are changing and try to fill in the gaps by launching new products. Moreover, the Company can also investigate and offer discounts on existing products in case there are margins, and in case that is what the mass population requires as per changing economic environment. Strategy AICL can use new technology related to predictive analytics and data science to ensure that the stored data gives useful predictions and shows trends that might help AICL in decision making. With the help of automated Probability High High Impact High High High High High Moderate High High software AICL can predict with a certain level of confidence how much reinsurance is required, and what kind of reinsurance arrangements would be optimal. AICL can either hire new skilled resources who are experts in this service industry or carry out internal professional trainings to train the existing staff. From time to time, AICL can do audits of different processes such as internal administration process of employee expense reimbursement, or process of policy cancellations. Time should be devoted to how the processes can be made quicker. If required, technology can be acquired. Several stakeholders in the Company, such as Actuarial, Marketing and Underwriting can collaborate and see if discounts are viable and invest time in Research and Development of new insurance products. ANNUAL REPORT 2020 65
  67. Adequacy of Capital Structure and information about default in payment of debts The below table represents adequacy of capital structure : Share Capital and Reserves 2019 2020 Rupees in ‘000’ Authorized Share Capital 3,750,000 3,750,000 Issued, Subscribed and Paid -Up Capital 3,500,000 3,500,000 Reserves 4,486,946 4,555,491 Unappropriated Profit 14,247,913 13,325,001 Total Equity 22,234,859 21,380,492 Further, the Company has maintained adequate funds during the year and there has been no instance of default in payment of any debt. 2019 2020 Rupees in ‘000’ Cash and Bank 66 ANNUAL REPORT 2020 1,312,004 1,176,685
  68. ANNUAL REPORT 2020 67
  69. Directors ’ Report to the Members on Unconsolidated Financial Statements ECONOMIC OVERVIEW The year 2020 has seen unprecedented pressures on the world as well as on Pakistan’s economy mainly due to the effects of COVID-19 pandemic and the related global and potential domestic lockdowns. During the fiscal year 2019-20, the growth of Pakistan’s economy declined to negative 0.38%. In order to ease the pressure and curb the effects of the COVID-19 pandemic on the economy, State Bank of Pakistan took multiple measures including reduction of a cumulative 625 basis points in its policy rate, introduction of various financial assistance programs i.e. Refinance scheme for wages to prevent layoffs, Loan deferment and restructuring, Refinance scheme for Hospitals to combat COVID-19 and Refinance scheme for setting-up new projects or expansion. These programs contributed towards easing the pressure on the economy and substantial number of businesses availed the programs. Concerning the Pakistan Stock Exchange (PSX), the KSE-100 Index remained volatile during the year with the Index reaching as low as 27,229 during first quarter of 2020 and then recovering in later quarters. However, the KSE-100 index posted return of 7.4% in 2020 as against return of 9.9% in 2019, closing at 43,755 in the year 2020, as compared to 40,735 in 2019. The Company’s performance for 2020 was affected by the pandemic as well as other factors. However, the Company managed to minimize the adverse impact and foresees to follow the strategy of sustainable growth by focusing on further strengthening the risk and compliance management. In 2020, the gross premium decreased to Rs. 18,279 million (excluding Rs. 1,525.5 million of contributions generated through Window Takaful Operations) as compared to Rs. 22,507 million in 2019 (excluding Rs. 1,212.5 million of contributions generated through Window Takaful Operations). The net premium retention was 73% (Rs. 13,295 million) of total gross premium underwritten as compared to the net premium retention of 69% (Rs. 15,434 million) in 2019. 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 Standard & Poor's assigned Pakistan’s long-term credit rating to ‘B-Negative’ with stable outlook. 2020 Fire COMPANY PERFORMANCE REVIEW Since the resumption of business activity in office premises, precautionary measures are strictly being followed with zero tolerance against violation of precautionary measures. Further, the Company has alternate sites as well in different cities to ensure continuity of operations in case any of its office has to be evacuated due to COVID-19 or any other unforeseen reason. 68 ANNUAL REPORT 2020 2019 Marine Motor Accident & Health Miscellaneous Net Premium 12,000 11,000 10,000 Rupees in Million The year under review has been a challenging one especially amid the lockdowns caused by the COVID-19 pandemic. However, due to the effective planning, efficient human resource and IT infrastructure, the Company sufficiently managed all of its operations from distant locations / under work-from-home mode during lockdown periods. Employees were provided with necessary hardware, software and connectivity resources to manage the work and maintain sufficient contact with all the stakeholders. Digital as well as conventional banking channels were utilized for collections of premiums and all types of payments. Gross Premium 11,000 Rupees in Million On behalf of the Board of Directors, we are pleased to present the 60th Annual Report of your Company together with the audited unconsolidated financial statements for the year ended 31 December 2020. 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2020 Fire Marine Miscellaneous 2019 Motor Accident & Health
  70. The net claims ratio decreased to 60 % as compared to last year’s ratio of 64% per annum primarily due to decrease in loss ratio of UAE Operations. The underwriting profit decreased to Rs. 375.7 million from Rs. 653.6 million in the preceding year. The return on investment portfolio also decreased to 4% as compared to 5% last year. Marine, Aviation & Transport Marine, Aviation & Transport constitutes 5% of the total portfolio. The Company has underwritten a gross premium of Rs. 981.7 million in current year as compared to Rs. 903.9 million in 2019. The net claims ratio has decreased to 44% as against 51% last year. This portfolio showed an underwriting loss of Rs. 90 million in current year as compared to a profit of Rs. 13 million in 2019. Profit before tax amounted to Rs. 1,910.1 million recording a decrease of 25% over last year at Rs. 2,532.9 million. While Profit after tax improved by 3.45% to Rs. 1,875.5 million as against profits of Rs. 1,812.9 million, of last year. Marine, Aviation & Transport 800 700 Fire & Property Fire and property class of business constitutes 37% of the total portfolio. During the year, the Company has underwritten a gross premium of Rs. 6,773.3 million (2019: Rs. 7,436.6 million). Net claims ratio to net premium increased to 86% this year as compared to 45% last year. As a result of high net claims ratio, fire and property class posted an underwriting loss of Rs. 255.7 million as compared to a profit of Rs. 85.1 million in 2019. Rupees in Million 600 PORTFOLIO ANALYSIS 500 400 300 200 100 0 2020 Net Premium Revenue Net Commission 2019 Net Claims Expenses Motor This class of business constitutes 40% of the total portfolio. During the year, the Company has underwritten a gross premium of Rs. 7,402.3 million as compared to Rs. 10,304.3 million in 2019. The ratio of net claims to net premium for the current year is 55% as compared to 65% in 2019. The portfolio showed an underwriting profit of Rs. 535.6 million as compared to Rs. 174.5 million in 2019. Fire & Property Damage 900 800 700 11,000 600 in Million 10,000 500 400 Rupees Rupees in Million Motor 12,000 300 200 9,000 8,000 7,000 6,000 5,000 4,000 3,000 100 2,000 - 1,000 2020 Net Premium Revenue Net Commission - 2019 Net Claims 2020 Expenses Net Premium Revenue Net Commission 2019 Net Claims Expenses ANNUAL REPORT 2020 69
  71. Accident & Health INVESTMENT INCOME The Accident & Health class of business constitutes 11% of the total portfolio. During the year, the Company has underwritten a gross premium of Rs. 1,923.8 million as compared to Rs. 1,909.8 million in 2019. The ratio of net claims to net premium was 85% as against 87% in 2019. This portfolio showed an underwriting profit of Rs. 53.7 million in the current year against Rs. 21.4 million in 2019. Investment income of the Company witnessed a 20% decline in the current year mainly due to decrease in dividend income. 2,000 Accident & Health 1,800 Dividend income decreased by 29% in 2020 owing to the temporary restriction on distribution of dividends imposed by the State Bank of Pakistan, restricting banks to distribute dividends for two quarters amid COVID-19 situation. As a result, the overall income from investments amounted to Rs. 1,093 million in 2020 as against Rs. 1,372 million in 2019. The break-up of investment income is as under: 1,600 2020 2019 (Rupees in million) 1,400 Rupees in Million 1,200 Dividend income 1,000 800 Return on fixed income securities 600 Income from term deposits 400 Gain/(Loss) on sale of ‘available-for-sale’ investments (net of impairment) 200 2020 Net Premium Revenue Net Commission Net investment income 2019 Net Claims 1,000 1,407 39 48 171 170 (117) (253) 1,093 1,372 Expenses COMPANY’S ASSETS Miscellaneous The Miscellaneous class of business constitutes 7% of the total portfolio. The Company has underwritten a gross premium of Rs. 1,198 million as compared to Rs. 1,952.4 million in 2019. The ratio of net claims to net premium was 50% as compared to 33% in 2019. The portfolio showed an underwriting profit of Rs. 132.1 million in the current year as compared to Rs. 359.6 million in 2019. Total assets of the Company as on 31 December 2020 amounted to Rs. 49,520 million as against Rs. 49,538 million last year. Total investments increased by 2.74% at Rs. 26,596 million as compared to Rs. 25,888 million in 2019. The management’s strategy is to optimize utilization of funds over a long-term investment horizon to maximize investment returns. Assets 60,000 50,000 Miscellaneous 1,000 40,000 800 Rupees in Million Rupees in Million 900 700 600 500 400 30,000 20,000 300 10,000 200 100 - (100) 2020 Net Premium Revenue Net Commission 70 ANNUAL REPORT 2020 2019 Net Claims Expenses 2020 2018 Assets 2016 2014 2012 2010 2008
  72. widespread availability of vaccination has brought great hopes for turnaround in the pandemic . However, future outlook still faces concerns presented by new variants of the virus and the renewed waves. Assets Break-up 30,000 25,000 The Government is striving to revive sustainable growth by introducing favorable monetary and fiscal measures such as keeping lower policy interest rates while also ensuring that inflationary pressures on the economy do not significantly increase. Increase in foreign remittances and positive current account balance are very encouraging which can help the Country achieve targeted growth in the coming years if it becomes successful in implementing tangible measures and maintaining it in time. The government is also working hard for resumption of IMF program which was halted after the pandemic COVID-19 struck the country. Rupees in Million 20,000 15,000 10,000 5,000 2020 Investments 2019 Investment Property Cash and Bank Fixed Assets Other Assets WINDOW TAKAFUL OPERATIONS Company’s Window Takaful Operations (WTO) closed the year with a growth of 26% in gross written contribution at Rs. 1,525.6 million as compared to Rs. 1,212.5 million in the year 2019 and has made a profit after tax of Rs. 116.4 million as compared to profit of Rs. 76.7 million last year. OUTSIDE PAKISTAN OPERATIONS – UNITED ARAB EMIRATES & EXPORT PROCESSING ZONE The Company has three fully functional branches located in Dubai, Sharjah and Abu Dhabi and one branch in Export Processing Zone (EPZ). The UAE branches are regulated under the relevant UAE laws applicable to the local insurance companies. Outside Pakistan operations’ witnessed significant decline of 37% in gross written premium. The decline in gross written premium was somewhat compensated by reduction in loss ratio from 71% in 2019 to 61% in 2020. Outside Pakistan operations’ profit before tax amounted to Rs. 246.2 million as compared to Rs. 244.7 million in 2019. PROSPECTS FOR 2021 Following negative growth in FY20, the Country’s economy is expected to grow at a modest rate of 1.5% to 2.5% despite successive waves of the Novel Coronavirus (COVID-19). Recent breakthroughs concerning vaccine approvals and The financial sector, mainly the banking sector, has performed well during the period which is likely to have follow through impact on insurance sector as well in terms of the increase in potential business avenues specifically in lines of business for which growth is mainly driven by financing from financial institutions. The Company is aiming at healthy growth in the coming year in line with the positive GDP growth forecasts despite all the current volatility in the economy mainly brought about by the pandemic. The Company expects that its business growth strategies will help achieve its growth targets both in Pakistan and United Arab Emirates and the adverse effects of the current year`s negative growth will also bottom out in the next year. DIRECTORS Total number of directors was 8 during the year 2020 and comprises as under: 1. Total Number of Directors: I. Male 7 ii. Female 1 2. Composition of Board: i. ii. Independent Directors 2 - Muhammad Anees - Muhammad Arif Hameed Non-Executive Directors - Male - Ibrahim Shamsi - Imran Maqbool - Shaikh Muhammad Jawed - Umer Mansha 4 ANNUAL REPORT 2020 71
  73. iii . Non-Executive Director - Female - iv. 1 Sadia Younas Mansha Executive Director - 1 Muhammad Ali Zeb DIRECTORS’ REMUNERATION The Board of Directors has approved the remuneration of the members of the Board (Non-Executive Directors including independent directors) for attending meetings of the Board. The meeting fee of Rs. 10,000/- per meeting is paid to directors. Travel expenses by air from city of residence to the city of the meeting are paid with hotel accommodation, if availed. The aggregate amount of remuneration is mentioned at Note 37 of the Unconsolidated Financial Statements. BOARD MEETINGS & ATTENDANCE During year 2020, four meetings of the Board of Directors were held and attended by the Directors as under Umer Mansha 4 Ibrahim Shamsi 3 Imran Maqbool 4 Muhammad Anees 4 Mohammad Arif Hameed 2 Sadia Younas Mansha 2 Shaikh Muhammad Jawed 4 Muhammad Ali Zeb – CEO 4 BOARD COMMITTEES & ITS MEMBERS The Board has formed following committees: AUDIT COMMITTEE Muhammad Anees Independent Director Chairman Ibrahim Shamsi Non-Executive Director Member Shaikh Muhammad Jawed Non-Executive Director Member Umer Mansha Member Non-Executive Director ETHICS, HUMAN RESOURCES & REMUNERATION COMMITTEE Muhammad Anees Independent Director Chairman Ibrahim Shamsi Non-Executive Director Member Umer Mansha Non-Executive Director Member Muhammad Ali Zeb MD & CEO Member 72 ANNUAL REPORT 2020 INVESTMENT COMMITTEE Umer Mansha Non-Executive Director Chairman Imran Maqbool Non-Executive Director Member Muhammad Ali Zeb MD & CEO Member Muhammad Asim Nagi Chief Financial Officer Member STATEMENT OF COMPLIANCE WITH CODE(S) OF CORPORATE GOVERNANCE Statement of compliance with code(s) of corporate governance is separately provided in Annual Report at page 84. RISK MITIGATION Risk Mitigation is a proactive review and plan for the organization’s current and potential risks. One of the vital functions in risk mitigation at Adamjee Insurance is the Physical Risk Management of fixed assets being offered for insurance, whether Industrial, Infra-structure, Commercial or Private Dwellings. Risk Management involves assessment of the various sections, processes and departments and it analysis the perils to which these fixed assets are exposed to. Adamjee Insurance carries out risk surveys which give our underwriters an insight about pre-defined categories of risks and those risk which cross certain financial thresholds, sometimes even before issuing an insurance quotation and/or an insurance policy. This is the reason why we have a dedicated team of well qualified and experienced risk surveyors who carry out the largest number of risk-surveys every year in the industry. The underwriters equipped with maximum information about the risk are then in a better position to accept or reject the risk with more conviction and confidence. Once the risk is accepted for underwriting, a right price and appropriate terms are provided for the benefit of our valued customers. The recommendations made by the risk surveyors help the customers in improving their processes and operations, thus mitigating the risk exposures significantly. The Company pays particular attention to the underwriting controls. Each class of insurance is headed by qualified and experienced underwriters, who manage and control the underwriting in their respective class of business. The utmost aim in any underwriting process is to protect the bottom-line of the Company. This is achieved by accurately estimating the exposures and the probability of future losses and thereby developing appropriate terms and conditions for each proposed risk for insurance and also deciding carefully on the retention of each risk. Underwriting involves a number of technical controlling protocols. These protocols include Risk Categorization Grid, defined underwriting authorities, Check Lists for underwriters, guidelines by class of business, rate monitoring mechanism, underwriting peer reviews and practice for seeking guidance on
  74. large and intricate risks from Risk Exposure Group (REG). This Group is represented by Executive Director Technical, Executive Director Commercial, Head of Claims and Compliance and Executive Director Re-Insurance. The Risk Categorization Grid defines Very High Risks, High Risks, Medium Risks and Low Risks Categories. The Company has a very effective Reinsurance Treaty Programme in place which along with Facultative Risk Wise arrangements provides a bespoke protection to the Company against different types of risks. Both Reinsurance and Coinsurance arrangements are effectively used as risk mitigating tools against all types of risk exposures and to augment Company’s risk appetite. PATTERN OF SHAREHOLDING The pattern of shareholding is annexed in the Annual Report at page 368. The format of reporting, Form 34, has been slightly amended to comply with the reporting requirements under the Code of Corporate Governance for Insurers, 2016. For the category of ‘Executive’, the Board of Directors has set the threshold for the year 2020. In addition to CEO, CFO, Head of Internal Audit and Company Secretary, officers in the cadre of Executive Director and above are included in the category of ‘Executives’. The threshold is reviewed by the Board annually. CSR activities The CSR initiatives taken during the year 2020 have been separately mentioned in the annual report at page138. Impact of Company’s Business on Environment The impact of the Company’s business on environment is actually next to nothing, since Adamjee does not have any manufacturing and/or energy-resource based business set-up. With around 900 employees, we feel that we have a responsibility for environmental protection and have involved ourselves in areas that we can influence in a positive manner. We are focusing on reducing the use of paper and gradually moving towards a paperless environment. We are sensitizing our staff to behave in an environmentally friendly manner to save on electricity/power consumption and water usage. We have also achieved certification of environment from WWF for our main sites. HUMAN RESOURCE EARNINGS PER SHARE At Adamjee Insurance “It’s all about People”, as we truly believe that our employees are the greatest strength we have. Talent Management is a continuous process and we ensure that we hire right people on right jobs. Rewards are based on performance culture; culture is engaging and based on ethical values and ample career growth opportunities are provided to our employees. During the year under review, earnings per share were Rs.5.36/- (2019: Rs. 5.18/-). Detailed working has been reported in Note 36 to the financial statements in this regard. As a result, all key employee satisfaction indicators i.e. employee productivity, engagement index, employee turnover and female diversity for 2020 are encouraging. INTERNAL FINANCIAL CONTROLS AND ITS ADEQUACY ISO 9001:2015 CERTIFICATION The Board has adopted policies and procedures for ensuring orderly and efficient conduct of its business including adherence to the Company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records and timely preparation of reliable financial disclosures. The system provides, though not absolute, but reasonable assurance that adequate control mechanisms have been established within the operational businesses. The Company’s internal control system is commensurate with its size, scale and complexities of its operations. The Audit Committee of the Board of Directors actively reviews the adequacy and effectiveness of the internal control system and suggests improvements to strengthen the same. It also reviews the quarterly Internal Audit Reports. Internal financial controls deployed within the Company have been found satisfactory throughout the year. “Adamjee Insurance has always strived to enhance customer satisfaction through continually improving its quality management system practices, processes and standards. By the new version of ISO 9001:2015, Adamjee has once again assured customers that it will continue to fulfill their insurance, regulatory and quality requirements, adding even more value to its customer services. This upgraded standard is conferred by Lloyd’s Register Quality Assurance. The certification has a continuation of our adherence to internationally established standards for quality system At AICL, we are fully aware of how beneficial this standard (ISO 9001:2015) is for us which includes but not limited to enhanced organized operating environment, better working conditions, increased job satisfaction and enhanced customer satisfaction. ANNUAL REPORT 2020 73
  75. IFS Ratings During the year , The Pakistan Credit Rating Agency Limited (PACRA) has maintained the Insurer Financial Strength (IFS) rating of the Company as “AA+” (Double A plus). This rating denotes a very strong capacity to meet policyholders’ contract obligations. Risk factors are considered modest and the impact of any adverse business and economic factors is expected to be very limited. AM Best has affirmed the financial strength rating of the Company to “B (fair)” with stable outlook which denotes a strong risk-adjusted capitalization maintained by the Company. SUBSIDIARY COMPANY The Company has annexed its consolidated financial statements along with its separate financial statements. Adamjee Life Assurance Company Limited (ALACL) is a wholly owned subsidiary company of Adamjee Insurance Company Limited (AICL). A brief description of ALACL is given below. ALACL was incorporated in Pakistan under the Repealed Companies Ordinance, 1984 on 4 August 2008 as a public unlisted company and commenced operations from 24 April 2009. Until February 2020 ALACL was a subsidiary of AICL and an associate of IVM Intersurer B.V. (IVM) having 74.28% and 25.72% holding respectively in the capital of ALACL. In February 2020, the Company acquired the remaining stake of 25.72% in ALACL from IVM, which makes it a wholly owned subsidiary of the Company. Financial performance and position of ALACL is given in the consolidated financial statements annexed to the Annual Report. EVENTS AFTER BALANCE SHEET DATE There are no significant events that took place between the date of financial statements and date of this report. Listed Companies (Code of Corporate Governance) Regulations, 2019 (the Codes) and is pleased to give the following statements: Ÿ The financial statements, prepared by the Company, present fairly its state of affairs, the results of its operation, cash flows and changes in equity. Ÿ The Company has maintained proper books of accounts as required under the Companies Act, 2017. Ÿ The Company has followed consistently appropriate accounting policies in preparation of the financial statements. Changes wherever made, have been disclosed, and accounting estimates made on the basis of prudent and reasonable judgment. Ÿ Financial Statements have been prepared by the Company in accordance with the International Financial Reporting Standards as applicable in Pakistan. The departure therefrom (if any), is disclosed adequately and explained. Ÿ The system of internal control is sound and is being implemented and monitored. However, such a system is designed to manage rather than eliminate the risk of failure to achieve objectives and provide reasonable, but not absolute assurance against material misstatements or loss. Ÿ The fundamentals of the Company are strong and there are no doubts about its ability to continue as a going concern. Ÿ Key operating and financial data for the last six years is included in this annual report in summarized form. Ÿ There are no statutory payments on account of taxes, duties, levies and charges which are outstanding as at 31 December 2020, except those disclosed in the financial statements. Ÿ The value of investments including accrued income of provident and gratuity funds on the basis of un-audited accounts as on 31 December 2020, is as follows: RECOMMENDATION FOR DIVIDEND An interim dividend @ 12.5% (Rupee 1.25 per share) (2019: @ 10% [Rupee 1.00 per share]) was paid during the year. The Board recommended final cash dividend @ 12.5% (Rupees 1.25 per share) (2019: @15% [Rupees 1.50 per share]). STATEMENT OF CORPORATE AND FINANCIAL REPORTING FRAMEWORK The Corporate laws, rules and regulations framed there under spell out the overall functions of the Board of Directors of the Company. The Board is fully aware of its corporate responsibilities as envisaged under the Companies Act, 2017, the Code of Corporate Governance for Insurers, 2016 and the 74 ANNUAL REPORT 2020 (Rupees in ‘000) Provident Fund Gratuity Fund 1,135,019 230,138 AUDITORS The present auditors, namely, Yousuf Adil, Chartered Accountants being eligible gave consent to act as auditors for the next term. The Board of Directors on the suggestion of the Audit Committee recommended the appointment of Yousuf Adil, Chartered Accountants as statutory auditors for the next term.
  76. STATUS OF PENDING INVESTMENT DECISIONS : The decision to make investment in Nishat Hotels and Properties Ltd, Nishat Mills Ltd and Hyundai Nishat Motors (Pvt.) Ltd under the authority of resolution passed on April 28, 2014, May 28, 2016 and March 26, 2018 respectively was not implemented fully. The status of decision is explained to members as under as required vide Regulation 4 (2) of the Companies (Investment in Associated Companies or Associated Undertakings) Regulation 2017. STATUS OF INVESTMENT UNDER REGULATION 4 (2) OF THE COMPANIES (INVESTMENT IN ASSOCIATED COMPANIES OR ASSOCIATED UNDERTAKINGS) REGULATIONS, 2017: Description Nishat Hotels & Properties Ltd Nishat Mills Ltd Hyundai Nishat Motor (Pvt) Ltd Date of approval April 28, 2014 May 28, 2016 March 26, 2018 Rs 625 million a) Rs. 1056 million – Equity b) Rs. 1277.10 – standby letter of credit Rs 161.053 million a) Rs. 923.6 million – Equity b) Rs. 1209 million – standby letter of credit The special resolution is valid for 8 years, hence no deviation The special resolution is valid for 6 years, hence no deviation The special resolution is valid for 4 years, hence no deviation. Jun 2013 Rs 12.26 Jun 2020 Rs 20.19 Jun 2015 Rs 216.56 Jun 2020 Rs 203.15 Dec 2017 Rs. 4.85 Dec 2020 Rs. 6.98 Total Investment Rs 500 million Amount of Investment made up to 31 December, 2020 Reasons for deviation from the approved timeline of investment, when investment decision was to be implemented in stipulated time - Material changes in financial statement since date of resolution passed a. Breakup value share b. Earnings (loss) per share Jun 2013 Rs (0.37) Jun 2020 Rs (0.79) Jun 2015 Rs 11.13 Jun 2020 Rs 9.97 Dec 2017 Rs. (5.74) Dec 2020 Rs. (2.64) Balance Sheet footing Jun 2013 Rs 2.86 billion Jun 2020 Rs 39.85 billion Jun 2015 Rs101.14 billion Jun 2020 Rs 110.66 billion Dec 2017 Rs. 1.7 billion Dec 2020 Rs. 25.34 billion c. per ACKNOWLEDGEMENT The Company would like to thank its shareholders for the confidence they have shown in us. We express our sincere thanks to our customers, employees, strategic partners, vendors and suppliers. We also appreciate the continuing support and guidance provided by the Securities and Exchange Commission of Pakistan and the State Bank of Pakistan during the year. For and on behalf of the Board Lahore : February 23, 2021 Ibrahim Shamsi Director Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 75
  77. Description Nishat Hotels & Properties Ltd Nishat Mills Ltd Hyundai Nishat Motor (Pvt) Ltd Date of approval April 28, 2014 May 28, 2016 March 26, 2018 Rs 625 million a) Rs. 1056 million – Equity b) Rs. 1277.10 – standby letter of credit Rs 161.053 million a) Rs. 923.6 million – Equity b) Rs. 1209 million – standby letter of credit The special resolution is valid for 8 years, hence no deviation The special resolution is valid for 6 years, hence no deviation The special resolution is valid for 4 years, hence no deviation. Jun 2013 Rs 12.26 Jun 2020 Rs 20.19 Jun 2015 Rs 216.56 Jun 2020 Rs 203.15 Dec 2017 Rs. 4.85 Dec 2020 Rs. 6.98 Total Investment Rs 500 million Amount of Investment made up to 31 December, 2020 Reasons for deviation from the approved timeline of investment, when investment decision was to be implemented in stipulated time - Material changes in financial statement since date of resolution passed a. Breakup value share b. Earnings (loss) per share Jun 2013 Rs (0.37) Jun 2020 Rs (0.79) Jun 2015 Rs 11.13 Jun 2020 Rs 9.97 Dec 2017 Rs. (5.74) Dec 2020 Rs. (2.64) Balance Sheet footing Jun 2013 Rs 2.86 billion Jun 2020 Rs 39.85 billion Jun 2015 Rs101.14 billion Jun 2020 Rs 110.66 billion Dec 2017 Rs. 1.7 billion Dec 2020 Rs. 25.34 billion c. 76 ANNUAL REPORT 2020 per
  78. ANNUAL REPORT 2020 77
  79. 78 ANNUAL REPORT 2020
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  81. Assets Break-up 30 ,000 25,000 Rupees in Million 20,000 15,000 10,000 5,000 2020 Investments Cash and Bank 80 ANNUAL REPORT 2020 2019 Investment Property Other Assets Fixed Assets
  82. 2 ,000 Accident & Health 1,800 Rupees in Million 1,600 1,400 1,200 1,000 800 600 400 200 2020 Net Premium Revenue Net Commission Assets 60,000 2019 Net Claims Expenses Miscellaneous 1,000 900 Rupees in Million 50,000 Rupees in Million 40,000 30,000 800 700 600 500 400 300 20,000 200 10,000 100 - (100) 2020 2018 Assets 2016 2014 2012 2010 2008 2020 Net Premium Revenue Net Commission 2019 Net Claims Expenses ANNUAL REPORT 2020 81
  83. Marine , Aviation & Transport 800 700 Rupees in Million 600 500 400 300 200 100 0 2020 Net Premium Revenue Net Commission 2019 Net Claims Expenses Fire & Property Damage 900 800 700 Rupees in Million 600 Motor 12,000 11,000 500 400 300 200 Rupees in Million 10,000 100 9,000 - 8,000 7,000 2020 6,000 Net Premium Revenue Net Commission 5,000 4,000 3,000 2,000 1,000 2020 Net Premium Revenue Net Commission 82 ANNUAL REPORT 2020 2019 Net Claims Expenses 2019 Net Claims Expenses
  84. ‫ز   ر رٹ‬ ‫ ر رٹ‬ ‫ت    ان   ڈا‬  ‫ ا ل  ہ‬ ‫ڈا‬ Gross Premium 11,000 10,000 9,000 Rupees in Million 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2020 Fire 2019 Marine Motor Accident & Health Miscellaneous 12,000 Net Premium 11,000 Rupees in Million 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 2020 Fire Marine 2019 Motor Accident & Health Miscellaneous ANNUAL REPORT 2020 83
  85. Statement of Compliance with Listed Companies (Code of Corporate Governance) Regulations, 2019, and Code of Corporate Governance for Insurers, 2016 This statement is being presented in compliance with the Code of Corporate Governance for Insurers, 2016 (the Code) and the Listed Companies (Code of Corporate Governance) Regulation, 2019 (the Regulation) for the purpose of establishing a framework of good governance, whereby the Adamjee Insurance Company Limited (the insurer) is managed in compliance with the best practices of corporate governance. The Insurer has applied the principles contained in the Codes in the following manner: 1. The Insurer encourages representation of independent non-executive directors and directors representing minority interests on its Board of directors (the Board). At present, the Board includes 8 directors: I. II. 7 Male 1 Female Category Names Independent Directors Muhammad Anees Mohammad Arif Hameed Executive Director Muhammad Ali Zeb Non-Executive Directors (Male) Ibrahim Shamsi Imran Maqbool Shaikh Muhammad Jawed Umer Mansha Non-Executive Director (Female) Sadia Younas Mansha All independent directors meet the criteria of independence as laid down under the Codes. 2. The directors have confirmed that none of them is serving as a director in more than seven listed companies, including this Company. 3. All the resident directors of the Company are registered as taxpayers and none of them has defaulted in payment of any loan to a banking company, a DFI or NBFI or, being a member of stock exchange, has been declared as a defaulter by a stock exchange. 4. No casual vacancy occurred on the Board during the year 2020. 5. The Company has prepared a statement of ethics and business practices and has ensured that appropriate steps have been taken to disseminate it throughout the Company along with its supporting policies and procedures. 6. The Board has developed a vision / mission statement, overall corporate strategy and significant policies of the Company. A complete record of particulars of significant policies along with the dates on which they were approved or amended has been maintained. 7. All the powers of the Board have been duly exercised and decisions on material transactions, including appointment and determination of remuneration and terms and conditions of employment of the Chief Executive Officer, and the key officers, have been taken by the Board. 84 ANNUAL REPORT 2020
  86. 8 . The meetings of the Board were presided over by the Chairman and, in his absence, by a director elected by the Board for this purpose and the Board met at least once in every quarter. Written notices of the Board meetings, along with agenda and working papers, were circulated at least seven days before the meeting. The minutes of the meetings were appropriately recorded and circulated. 9. The Board has a formal policy and transparent procedures for remuneration of directors in accordance with the Act and the Regulations. 10. The Board has established a system of sound internal control, which is effectively implemented at all levels within the Company. The Company has adopted and complied with all the necessary aspects of internal controls given in the Code. 11. The Board arranged one Orientation course(s)/training programs after election of directors in May 2019 for its directors to apprise them of their duties and responsibilities. During the year, a Directors Training Program could not be managed as few programs were offered due to Covid-19 pandemic. 12. There was no change of Chief Financial Officer and Company Secretary during the year. The appointment of Head of Internal Audit has been approved by the Board. The Board had approved the remuneration of Chief Financial Officer, Company Secretary and Head of Internal Audit Department. 13. The directors’ report for this year has been prepared in compliance with the requirements of the Code of Corporate Governance for Insurers, 2016 and fully describes the salient matters required to be disclosed. 14. The financial statements of the Company were duly endorsed by Chief Executive Officer and Chief Financial Officer before approval of the Board. 15. The directors, Chief Executive Officer and executives do not hold any interest in the shares of the Company other than disclosed in the pattern of shareholding. 16. The Company has complied with all the corporate and financial reporting requirements of the Code of Corporate Governance for Insurers, 2016. 17. The Board has formed the following Management Committees: Underwriting Committee: Claim Settlement Committee: Name of the Member Category Name of the Member Category Umer Mansha Chairman Muhammad Ali Zeb Chairman Muhammad Ali Zeb MD & CEO Muhammad Asim Nagi Chief Financial Officer Asif Jabbar Head of Underwriting Syed Ameer Hassan Naqvi Head of Claims Risk Management & Compliance Committee: Reinsurance & Coinsurance Committee: Name of the Member Category Name of the Member Category Muhammad Ali Zeb Chairman Muhammad Ali Zeb Chairman Muhammad Asim Nagi Chief Financial Officer Muhammad Salim Iqbal Head of Reinsurance Asif Jabbar Head of Risk Management Asif Jabbar Head of Underwriting Syed Ameer Hassan Naqvi Head of Compliance /Claims Adnan Ahmad Chaudhry Head of Commercial Tameez ul Haque Company Secretary Imran Ali Head of Internal Audit ANNUAL REPORT 2020 85
  87. 18 . The Board has formed the following Board Committees: Ethics, Human Resources and Remuneration Committee: Name of the Member Category Muhammad Anees Chairman - Independent Director Ibrahim Shamsi Member - Non-Executive Director Muhammad Ali Zeb Member - Executive Director Umer Mansha Member - Non-Executive Director Investment Committee: Name of the Member Category Umer Mansha Chairman - Non-Executive Director Imran Maqbool Member - Non-Executive Director Muhammad Ali Zeb Member - Executive Director Muhammad Asim Nagi Member - Chief Financial Officer 19. The Board has formed an Audit Committee. It comprises of four members, of whom one is an independent director and 3 are non-executive directors. The chairman of the Committee is an independent / non-executive director. The composition of the Audit Committee is as follows: Audit Committee: Name of the Member Category Muhammad Anees Chairman - Independent Director Ibrahim Shamsi Member - Non-Executive Director Shaikh Muhammad Jawed Member - Non-Executive Director Umer Mansha Member - Non-Executive Director 20. The terms of references of the Committees have been formed, documented and advised to the Committees for compliance. 21. The frequency of meetings of the committees were as per following; a) Audit Committee: quarterly meetings; b) Ethics, Human Resource and Remuneration Committee: Once a year; c) Investment Committee: quarterly meetings d) Management Committees: quarterly meetings 22. The Board has outsourced the internal audit function to A.F. Ferguson & Co., Chartered Accountants who are considered suitably qualified and experienced for the purpose and are conversant with the policies and procedures of the Company and they (or their representatives) are involved in the internal audit function on a fulltime basis. 23. The Chief Executive Officer, Chief Financial Officer, Compliance Officer and the Head of Internal Audit possess such qualification and experience as required under the Code of Corporate Governance for Insurers, 2016. The Appointed Actuary of the Company also meets the conditions as laid down in the said Code. Moreover, the persons heading the underwriting, claims, reinsurance, risk management and grievance functions / departments possess qualification and experience of direct relevance to their respective functions, as required under Section 12 of the Insurance Ordinance, 2000 (Ordinance No XXXIX of 2000); 86 ANNUAL REPORT 2020
  88. Name Designation Muhammad Ali Zeb Chief Executive Of ficer Muhammad Asim Nagi Chief Financial Officer Imran Ali Compliance Officer Shahraiz Hussain Actuary Tameez ul Haque Company Secretary Imran Ali Head of Internal Audit Asif Jabbar Head of Underwriting Syed Ameer Hassan Naqvi Head of Claims Muhammad Saleem Iqbal Head of Reinsurance Asif Jabbar Head of Risk Management Syed Ameer Hassan Naqvi Head of Grievance Dept. 24. The statutory auditors of the Company have been appointed from the panel of auditors approved by the Commission in terms of Section 48 of the Insurance Ordinance, 2000 (Ordinance No. XXXIX of 2000). The statutory auditors have confirmed that they have been given a satisfactory rating under the Quality Control Review programme of the Institute of Chartered Accountants of Pakistan, that they or any of the partners of the firm, their spouses and minor children do not hold shares of the Company and that the firm and all its partners are in compliance with the International Federation of Accountants (IFAC) guidelines on code of ethics as adopted by the Institute of Chartered Accountants of Pakistan. 25. The statutory auditors or the persons associated with them have not been appointed to provide other services and the auditors have confirmed that they have observed IFAC guidelines in this regard. 26. The Board ensures that the appointed actuary complies with the requirements set out for him in the Code of Corporate Governance for Insurers, 2016. 27. The Board ensures that the investment policy of the Company has been drawn up in accordance with the provisions of the Code of Corporate Governance for Insurers, 2016. 28. The Board ensured that the risk management system of the Company is in place as per the requirement of the Code of Corporate Governance for Insurers, 2016. 29. The Company has set up a risk management function / department, which carries out its task as covered under the Code of Corporate Governance for Insurers, 2016. 30. The Board ensures that as part of the risk management system, the Company gets itself rated from the credit rating agency which is being used by its risk management function / department and the respective Committee as a risk monitoring tool. The rating assigned by PACRA and AM Best was ‘AA +’ and ‘B’ in March 2020 and February 2020, respectively. 31. The Board has set up a grievance function, which fully complies with the requirements of the Code of Corporate Governance for Insurers, 2016. 32. We confirm that all other material principles contained in the Code of Corporate Governance for Insurers, 2016 and all the requirements of regulations 3, 6, 7, 8, 27, 32, 33 and 36 of the Listed Companies (Code of Corporate Governance) Regulations, 2019 have been complied with. By Order of the Board Date: 23 February 2021 Umer Mansha Chairman ANNUAL REPORT 2020 87
  89. Independent Auditors ’ Review Report TO THE MEMBERS OF ADAMJEE INSURANCE COMPANY LIMITED REVIEW REPORT ON THE STATEMENT OF COMPLIANCE CONTAINED IN CODE OF CORPORATE GOVERNANCE FOR INSURERS, 2016 AND LISTED COMPANIES (CODE OF CORPORATE GOVERNANCE) REGULATIONS, 2019 We have reviewed the enclosed Statement of Compliance with the Code of Corporate Governance for Insurers, 2016 (the Regulations) and the Listed Companies (Code of Corporate Governance) Regulations, 2019 (the Regulations) prepared by the Board of Directors (the Board) of Adamjee Insurance Company Limited for the year ended December 31, 2020 in accordance with the requirements of the Regulations. The responsibility for compliance with the Regulations is that of the Board of Directors of the Company. Our responsibility is to review whether the Statement of Compliance reflects the status of the Company’s compliance with the provisions of the Regulations and report if it does not and to highlight any non-compliance with the requirements of the Regulations. A review is limited primarily to inquiries of the Company’s personnel and review of various documents prepared by the Company to comply with the Regulations. As a part of our audit of the financial statements we are required to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. We are not required to consider whether the Board of Directors’ statement on internal control covers all risks and controls or to form an opinion on the effectiveness of such internal controls, the Company’s corporate governance procedures and risks. The Regulations require the Company to place before the Audit Committee, and upon recommendation of the Audit Committee, place before the Board of Directors for their review and approval, its related party transactions. We are only required and have ensured compliance of this requirement to the extent of the approval of the related party transactions by the Board of Directors upon recommendation of the Audit Committee. Based on our review, nothing has come to our attention which causes us to believe that the Statement of Compliance does not appropriately reflect the Company's compliance, in all material respects, with the requirements contained in the Regulations as applicable to the Company for the year ended December 31, 2020. Chartered Accountants Lahore: 23 February 2021 88 ANNUAL REPORT 2020
  90. Ownership / Shareholding Structure Ownership Structure The Company has a diversified ownership structure as detailed below: Directors Chief Executive Officer Executives / Executives' Spouses Associated Companies, Undertakings & Related Parties NIT & ICP Banks, DFIs and NBFIs Insurance Companies Modaraba and Mutual Funds General Public Others Categories Of Shareholders Directors Chief Executive Officer Executives / Executives' Spouses Associated Companies, Undertakings & Related Parties NIT & ICP Banks, DFIs and NBFIs Insurance Companies Modaraba and Mutual Funds General Public Others Number of Shares Stake % 111,705 7,073 104 72,047,050 0.032 0.002 20.585 2,164 9,091,203 31,378,884 22,081,051 100,827,630 114,453,136 350,000,000 0.001 2.597 8.965 6.309 28.808 32.701 100.000 ANNUAL REPORT 2020 89
  91. Operating Structure The Board of Directors has delegated authority to the Chief Executive Officer (CEO) to manage the day to day operations of the Company. Board Meetings are held in every quarter to review the performance of the Company. The CEO presents details of the important events held during the period. The Board of Directors has constituted Board Committees which lays down guidelines for the functioning and operations of various departments. Departments are headed by learned and experienced professionals who run the operations through committed and skilled managers and staff. Standing Operating Procedures have been formulated, documented and explained to all concerned and are available as ready reckoners. Responsibilities of each individual, may he/she be an executive, mid line manager or a lower staff have been defined and displayed at the sight of his/her duty. Important, crucial and sensitive issues are resolved during the meetings of Head of Departments/ Team Leaders with the CEO and or during the Management Committee. Issues staying unresolved especially those relating to Underwriting, Re-insurance, Claim Settlement and Risk Management are put before the relevant Committee for review and decisions. To effectively manage the employees and improve their emotions, teamwork, build trusting relationships and increase employee retention, AICL’s core values “Humility - Empathy, Self-esteem & Respect in all relationships” and Fun at workplace - Work-life balance” are enforced. Relationship with Group Companies & its Nature Adamjee Life Assurance Company Limited is a wholly owned subsidiary of Adamjee Insurance Company Limited. Common directorship of Directors among the companies is the main basis of relationship. Such companies are categorised as associated companies, of the Company. Name of independent Directors and justification for their independence The Listed Companies (Code of Corporate Governance) Regulations, 2019 in Regulation 6 makes it mandatory that each Listed Company shall have at least two or one third members of the Board, whichever is higher, as independent directors. The Companies Act, 2017 in Section 166 directs that an independent director to be appointed shall be selected from a data bank maintained by Pakistan Institute of Corporate Governance - an institute notified by the Commission. In compliance with the above Regulations and the Act, the below two directors were selected: i. Mr. Muhammad Anees Independent Director ii. Mr. Mohammad Arif Hameed Independent Director Statement on how Board operates Under the Companies Act, 2017 and Memorandum & Articles of Association of the Company, the control of the Company’s affairs vests with the Board. In order to facilitate them to operate, Chief Executive Officer is appointed by the Board executing a Power of Attorney in CEO’s favor to delegate authority and empower him to run the Company’s operations. CEO operates within the parameters of the delegated authority. Delegated authority is subject to review by the Board. The Board meets at regular intervals to keep an eye on operations and performance of the Company. 90 ANNUAL REPORT 2020
  92. Decisions taken by the Board The following are the important decisions taken by Board of Directors . Ÿ To Issue shares. Ÿ To Borrow moneys. Ÿ To Invest the funds. Ÿ To appoint or change Chief Executive of the Company & determine his remuneration. Ÿ To fill the casual vacancy on the Board. Ÿ To approve Financial Statements, quarterly, half yearly and yearly. Ÿ To recommend final dividend and to declare interim dividend. Ÿ To ensure that Rules and Regulations governing Company are complied with properly. Ÿ To approve business plan including budget. Decisions taken by the Management All day to day operations are handled by the management team under the supervision of the CEO with a focus on the business plan and guidelines given by the Board. Management team performs duties within the powers delegated to them. The management team sometimes comes across situation where they need guidance of superior authority the CEO refers these matters to the Chairman of the Board who either suggests the way to resolve or refers the matter to Board of Directors. Performance evaluation of the Board members and its committees The Board of Directors constituted a committee comprising of two directors to evaluate performance of the Board and its Committees. The Committee conducted a meeting which was coordinated by the Company Secretary. The performance of the Board and its Committees was evaluated and during the meeting various points were explained by the Secretary. The Committee submitted report on evaluation to all the Directors. Board’s Performance Evaluation by External Consultant Performance of the Board was evaluated by the committee of directors formed for this purpose. However, the Company did not avail the services of external consultant during the year to evaluate performance of the Board. Formal Orientation Courses for the Directors The Board was constituted in May 2019 after election of directors. For the elected directors, an orientation session was held in October 2019. A consultant on corporate laws after board meeting, briefed the directors about their duties, responsibilities and about other matters, pertaining to them. Directors Training Program In the year 2020, none of the directors attended Directors’ Training Program (DTP) nor any one availed exemption as few courses were offered due to Covid-19. Directors’ Remuneration The Board of Directors has approved the remuneration of the members of the Board (Non-Executive Directors including independent directors) for attending meeting of the Board. The meeting fee of Rs. 10,000/- per meeting is paid to directors. Travel expense by air from city of residence to the city of the meeting are paid with hotel accommodation, if availed. ANNUAL REPORT 2020 91
  93. Policy regarding fee earned by Executive Director against his services as Non-Executive Director in other companies Muhammad Ali Zeb – Managing Director & Chief Executive Officer of the Company serves in the board of following companies: Ÿ Adamjee Life Assurance Company Limited (Subsidiary of Adamjee Insurance Company Limited) Ÿ MCB Bank Limited Ÿ Nishat Sutas Dairy Limited Meeting fee earned by Muhammad Ali Zeb for serving on the Board of the above mentioned companies is retained by him because he does not serve on the board as nominee of AICL. Policy for security clearance of foreign directors The Company’s Board of Directors consists of eight members and none of them is a foreign director. Hence, security clearance is not required. Board’s policy on diversity Adamjee Insurance has a firm belief that diversity is an important factor in contributing to the Company’s success as people with unique characteristics in terms of gender, knowledge, expertise and skills set add value and help the organization achieve its goals. At Adamjee, inclusiveness is always promoted in the organization’s culture. Diversity and inclusion are the foundation for the Company’s code of conduct and culture where every member of Board and employee comes from diverse backgrounds, at an individual level which includes capability, experiences, knowledge and at a social level which includes race, ethnicity, culture, religion and others. The Company believes that a diverse workforce plays a very significant role in enhancing efficiency at all levels of the organization. Policy for Related Party transactions The Company has formulated policy for related party transactions in accordance with the requirements of the Companies Act, 2017, Companies (Related Party Transactions and Maintenance of Related Records) Regulations, 2018 and Listed Companies (Code of Corporate Governance) Regulations, 2019. The policy has been duly approved by the Board of Directors. The Company has related party relationships with its associates, subsidiary company, directors, employee retirement benefit plans, provident fund, key management personnel and other parties. Transactions are entered into with such related parties in ordinary course of business on arm’s length basis for the issuance of policies to and disbursements of claims incurred by them, payments of rentals for the use of premises rented to / from them, payment & receipt of dividends and others. These transactions have been reported and approved by the Board of Directors of the Company as recommended by the Audit Committee of the Board. List of related parties along with summary of all transactions with them have been disclosed in annexed financial statements. Please refer to note 8, 9, 11, 15, 21 & 38 in unconsolidated financial statements. Board meetings outside Pakistan During the year 2020, all the Board meetings were convened in Pakistan using video-link facility. 92 ANNUAL REPORT 2020
  94. Policy for actual and perceived conflict of interest The Company is committed to the highest standards of corporate governance . In order to avoid, manage and monitor actual as well as perceived conflict of interest, the Chairman intimates in writing to all directors at the beginning of their term about their duties and making it obligatory for them to avoid or disclose any conflict of interest, whenever arises, in performing their professional duties for the Company. Any director of the Company who is in any way interested in any contract or arrangement to be entered into by the Company is required to disclose the nature of his interest. Such director neither takes part in board meeting in which such contract or transaction is approved by the Board nor votes on such item. The Company Secretary maintains a Register containing details of contracts in which directors have interest Grievance policy The Company assigns the grievances from investors as well as from policyholders their due importance and strives hard to resolve them as soon as possible. Handling the grievances to the satisfaction of the parties involved and in such a way that it turns out to be a win-win situation for stakeholders is important for the public image and as as a learning for better service delivery in future. The Company has provided all necessary details regarding lodging of complaints on its website. Below is the detail, also available on the Company’s website, of designated person for handling investors’ as well as policyholders’ complaints and grievances: Mr. Imran Ali Head of Internal Audit & Regulatory Compliance Adamjee House 80/A, Block E-1, Main Boulevard, Gulberg-III, Lahore - 54000 Phone: 111-242-111 (Ext. 8056) Email: info@adamjeeinsurance.com Policy for safety records of the Company The Company maintains records as per the requirements of the applicable laws and assigns due importance to the safety and availability of records stored in physical as well as digital form. Physical files and documents of the Company are placed in designated cabinets and racks in record rooms ensuring that these are protected from physical and environmental damages. Backups of records in digital forms are taken on regular basis and are stored on both onsite and offsite locations. Offsite backup tapes are maintained in secure and fire resistant storage locations. Samples from these backup tapes are restored on periodic basis to ensure the health of backup tapes. IT Governance Policy Information governance is an accountability and decision making framework put in place to ensure that the creation, storage, use, disclosure, archiving and destruction of information is handled in accordance with legal requirements and to maximize operational efficiency. It includes the processes, roles, policies and standards that ensure the compliant and effective use of information in enabling an organization to achieve its goals. AICL IT governance policy is intended to set out the high level principles of information governance across the organization and to highlight key information and related policies to employees. The primary goal of AICL IT Governance is to focus on: Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ Stakeholder value of business investments in IT Financial transparency Customer-oriented service culture Agile responses to a changing business environment Optimization of service delivery costs Operational and staff productivity Compliance with internal policies Product and business innovation culture ANNUAL REPORT 2020 93
  95. Whistle blowing policy The Company is committed to the highest possible standards of ethical , moral and legal business conduct. In keeping with this commitment, the Company has developed a ‘Whistle Blowing Policy’ detailing therein procedures to be followed for filing complaints under the policy and manners as to how these complaints are to be handled. The objective of the whistle blowing policy is to provide an open communication channel to our employees and external parties such as shareholders, vendors, customer etc. to raise concerns, expose irregularities, help uncover financial malpractices, prevent fraud & forgeries, eliminate personal harassments, improper conduct or wrongdoing and to address the concerns or attend to grievances of those associated, without any fear of retaliation or adverse consequences. Human Resource Management Policies including Succession Plan Human Resource (HR) plays a pivotal role in smooth running of the routine operations of an organization and in achieving its goals. Therefore, the Company recognizes the importance of efficient and effective management of HR. The Company’s talent-acquisition policies stems from unbiased criteria to hire individuals from any backgrounds provided they match the qualification and experience requirements. The Company also arranges various trainings, both, in-house and external, for the development of required skills among the employees. Other skill development technique i.e. job rotation, cross-functional transfers, assigning additional responsibilities etc. are also used to enhance knowledge and skill set of employees. Succession planning is a process for identifying and developing new leaders, who can replace old leaders when they move on. Succession planning increases the availability of experienced and capable employees who are prepared to assume these roles as they become available. The Company has an effective and efficient ‘Succession Plan’ for its employees. Being an equal opportunity employer, the Company is committed to create a work environment that promotes employee safety, growth and goal attainment. Social and environmental responsibility policy Adamjee Insurance’s social responsibility program addresses the key concerns in society related to health and education. The Company also reassures its responsibility towards its chief stakeholders in terms of overall sustainability through compliance, ethics and corporate citizenship. AICL has undertaken an array of initiatives, including improved communication and extensive training, to cultivate these aspects of its operations. AICL has always strived to develop capabilities that are at par with the international players in the global insurance industry and this gives AICL an edge in the market. AICL ensures that initiatives are taken to include internal awareness campaigns, specific trainings in detailed regulatory areas and focused efforts on sensitive areas such as conflict of interest. With environmental regulations becoming increasing strict and of utmost importance, environmental consciousness has become one of the key concepts in AICL’s policy and consistently awareness sessions on environmental issues are conducted. AICL’s advanced digital infrastructure allows it to work towards promoting paperless operations. Online services and electronic documentation help in reducing paper consumption which creates a very positive impact on the environment. In addition, AICL has also been awarded Certification of Green Office by WWF – ‘To Reduce Ecological Footprint’ which is a program that helps an organization cut down costs, reduce waste and create more environmental awareness. AICL has taken steps to reduce carbon footprint by reducing business travel and shifting to digital methods such as video conferencing. Moreover, for energy conservation, AICL has installed LED technology in all of its offices and replaced conventional air conditioners with DC inverters. AICL also works towards reducing dry waste with proper system in place where the waste can be reused as raw material for other industries. AICL aims to continue with its initiatives for environmental conservation in years to come and make sure that it adopts the global best practices. 94 ANNUAL REPORT 2020
  96. Business continuity plan (BCP) Businesses today face an unprecedented number of exposures with the potential to interrupt business activities. The frequency and severity of these exposures also seem to be increasing. Business continuity is a “holistic management process” that identifies potential threats to an organization and the impacts to business operations, those threats, if realized, might cause. It is the provision of a framework for building organizational resilience with the capability of an effective response that safeguards the interests of its key stakeholders, reputation, brand and value-creating activities. Ÿ The Company has developed a comprehensive ‘Business Continuity & Disaster Recovery Plan’. Salient characteristics of the plan includes: Ÿ Identification of key business services essential for the Company’s operations Ÿ Identification and prioritization of the key activities and resources and policies and measures adopted for safeguarding of these activities and resources including but not limited to backing up of data Ÿ Identification and evaluation of all sorts of possible threats that can interrupt business activities and can last over different time spans ranging from hour(s) to day(s) or even months Ÿ Impact analysis that these threats could have on the business of the Company Ÿ Recovery strategies to be followed, if any of such threats is materialized, to recover from disastrous situation with clear identification of roles of each member of disaster recovery team The primary objective the Company’s BCP is to continue and manage business operations under certain circumstances by the introduction of appropriate resilience strategies, recovery objectives, business continuity, operational risk management considerations and crisis management to resume operations before unacceptable levels of impact arise. The most recent example BCP in action was during Covid-19 lockdowns in 2020, when the Company’s BCP was triggered and executed successfully. Salient features of TOR and attendance in meetings of the Board Committees The Board of Directors of the Company has formed three Board Committees: Audit Committee Below are the salient features of the terms of reference of the Audit Committee: Ÿ Determination of appropriate measures to safeguard the Company’s assets Ÿ Review of annual and interim financial statements of the Company, prior to their approval by the Board, focusing on: ª major judgmental areas ª significant adjustments resulting from the audit ª going concern assumption ª any changes in accounting policies and practices ª compliance with applicable accounting standards ª compliance with these Regulations and other statutory and regulatory requirements and ª all related party transactions ANNUAL REPORT 2020 95
  97. Ÿ Review of preliminary announcements of results prior to external communication and publication Ÿ Facilitating the external audit and discussion with external auditors of major observations arising from interim and final audits and any matter that the auditors may wish to highlight (in the absence of management, where necessary) Ÿ Review of management letter issued by external auditors and management’s response thereto Ÿ Ensuring coordination between the internal and external auditors of the Company Ÿ Review of the scope and extent of internal audit, audit plan, reporting framework and procedures and ensuring that the internal audit function has adequate resources and is appropriately placed within the company Ÿ Consideration of major findings of internal investigations of activities characterized by fraud, corruption and abuse of power and management's response thereto Ÿ Ascertaining that the internal control systems including financial and operational controls, accounting systems for timely and appropriate recording of revenues and claims, receipts and payments, assets and liabilities and the reporting structure are adequate and effective Ÿ Review of the Company’s statement on internal control systems prior to endorsement by the Board and internal audit reports Ÿ Instituting special projects, value for money studies or other investigations on any matter specified by the Board, in consultation with the Chief Executive Officer and to consider remittance of any matter to the external auditors or to any other external body Ÿ Determination of compliance with relevant statutory requirements Ÿ Monitoring compliance with these Regulations and identification of significant violations thereof Ÿ Review of arrangement for staff and management to report to Audit Committee in confidence, concerns, if any, about actual or potential improprieties in financial and other matters and recommend instituting remedial and mitigating measures Ÿ Recommend to the Board the appointment of external auditors, their removal, audit fees, the provision of any service permissible to be rendered to the Company by the external auditors in addition to audit of its financial statements, measures for redressal and rectification of non-compliances with the Regulations. The Board shall give due consideration to the recommendations of the Audit Committee and where it acts otherwise it shall record the reasons thereof Ÿ Consideration of any other issue or matter as may be assigned by the Board Four meetings of the Audit Committee were convened during the year and below is the attendance of the members of the committee: Name of Members Status Meetings Attended Muhammad Anees Chairman (Independent director) 4 Ibrahim Shamsi Member (Non-executive director) 3 Shaikh Muhammad Jawed Member (Non-executive director) 4 Umer Mansha Member (Non-executive director) 4 96 ANNUAL REPORT 2020
  98. Report of the Audit Committee The Board Audit Committee (“the Committee”) comprises of four members, three of whom are Non-Executive Directors and one Independent Director who is the Chairman of the Committee. Following are the members of the Committee: Name of Members Status Role Muhammad Anees Independent Director Chairman Ibrahim Shamsi Non-Executive Director Member Shaikh Muhammad Jawed Non-Executive Director Member Umer Mansha Non-Executive Director Member All the members of the Committee have relevant knowledge and experience of finance and accounting matters and most of them also fulfil the definition of being ‘financially literate’. Further, the Board is satisfied that the members of the Committee are competent and possess necessary skills and experience required to fulfil their responsibilities. The Committee convened four meetings during the year. Role of the Committee towards financial statements The Committee is fully aware of its role in discharging its responsibilities for the significant issues in relation to the financial statements. Following are some of the key aspects the Committee considers in this regard: Ÿ The Committee reviews the annual and interim financial statements of the Company, before these financial statements are recommended by the Committee to the Board for approval. This review by the Committee ensures the overall integrity of financial statements and focuses on: ª Areas involving significant management judgements and assessing whether the judgements used by the management are appropriate. ª Significant adjustments resulting from the audit, if any. ª Validity of the Company’s ability to operate as going concern. ª Compliance with applicable accounting standards along with any significant changes in accounting policies and practices. ª All related party transactions. ª Adequacy of disclosures ª Proper and accurate accounting records have been maintained by the Company. During this review, the Committee also obtains assurance from Head of Internal Audit that financial statements are prepared in accordance with all applicable regulatory requirements, present true and fair view of the state of the Company’s affairs and are free from material misstatements. Ÿ The Committee reviews preliminary announcements of results before those are made public. Ÿ The Committee reviews the management letter issued by external auditors and the management’s response to the observations highlighted by the external auditors. Committee’s approach towards risk management and internal controls The Committee oversees the Company’s Enterprise Risk Management (ERM) function and Internal Control Framework. Risk Management Committee of the management reports to the Audit Committee on quarterly basis regarding potential existing and emerging risks being faced by the Company along with monitoring mechanism in place to address the identified risks. These risks are analyzed with reference to their: ANNUAL REPORT 2020 97
  99. Ÿ Ÿ Ÿ Ÿ Ÿ Proper identification and categorization Consequences Impact on the Company’s operations Probability of occurrence, and Controls in place to manage or mitigate the risks The Committees also update the Board of Directors of these risks, monitoring mechanism and controls in place. Role of Internal Audit to risk management and internal control The internal audit is entrusted with the responsibility to assess the risk management process for its appropriateness and internal controls for their adequacy and effectiveness. The Company has an in-house Head of Internal Audit with unrestricted access to the Committee, while the internal audit activities are outsourced to one of the big four firms namely, A. F. Ferguson & Co. (A member firm of PwC network). The Internal Audit Team conducts audit of different functions and departments of the Company and submits its findings to the Audit Committee on quarterly basis. Both, Head of Internal Audit and Internal Audit Team have unrestricted access to management, staff, information systems and data files to ensure transparency and effectiveness of their audit processes. Head of Internal Audit communicates the risks and deficiencies identified by the internal audit team to the Committee along with management responses thereto. The Committee based on the findings of the internal audit function assesses the adequacy and effectiveness of the internal controls. External Audit Process The Committee has assessed the effectiveness of the external audit process by evaluation of the technical expertise, relevant experience, independence, adherence to timelines and satisfactory rating assigned by the Institute of Chartered Accountants of Pakistan to the audit firm. Current statutory auditors, Yousuf Adil, Chartered Accountants, being eligible for reappointment expressed their consent and the Committee having assessed the effectiveness of their audit process recommended to the Board that ‘Yousuf Adil, Chartered Accountants’ be reappointed as statutory auditors of the Company for the year ending 31 December 2021. The Company does not obtain non-audit services i.e. tax consultancy from the statutory auditors. The Committee has evaluated the Annual Report of the Company and is satisfied that it is fair, balanced and understandable and it provides necessary information for the shareholders to assess the Company’s position and performance, business model and strategy. Covid-19 Pandemic related matters The outbreak of Covid-19 pandemic brought many challenges for businesses in general during the current year. These challenges impacted many businesses adversely rendering their ability to operate as going concern in doubts. In order to evaluate the Company’s ability to recover its receivables and maintain sufficient liquidity to meet the policyholder and other liabilities, the Committee exercised strict monitoring of cash and receivables position of the Company. The Committee using the video-link facility convened meetings with Chief Financial Officer (CFO) on quarterly basis where CFO updated the Committee regarding status of receivable balances, satisfactory pace of recovery of those receivables balances and cash & bank position of the Company. Performance of the Audit Committee The Board of Directors of the Company reviews the performance of the audit Committee on periodic basis. During the year, the Board constituted a committee comprising of two Non-Executive Directors to evaluate performance of the Audit as well as of other Board Committees. This evaluation of performance, in the context of Audit Committee, considers various factors including quality of the Audit Committee’s report as well as various recommendations forwarded by the Audit Committee to the Board. Muhammad Anees Chairman Audit Committee Adamjee Insurance Company Limited Lahore 98 ANNUAL REPORT 2020
  100. Ethics , Human Resources and Remuneration Committee Below are the salient features of the terms of reference of the Committee: Ÿ Recommendation to the Board for consideration and approval a policy framework for determining remuneration of directors (both executive and non-executive directors and members of senior management). The definition of senior management will be determined by the Board which shall normally include the first layer of management below the Chief Executive Officer level. Ÿ Undertaking, annually, a formal process of evaluation of performance of the Board as a whole and its Committees either directly or by engaging external independent consultant and if so appointed, a statement to that effect shall be made in the Directors’ Report disclosing therein name and qualifications of such consultant and major terms of his / its appointment. Ÿ Recommending human resource management policies to the Board. Ÿ Recommending to the Board the selection, evaluation, development, compensation (including retirement benefits) of chief operating officer, chief financial officer, company secretary and head of internal audit. Ÿ Consideration and approval on recommendations of the Chief Executive Officer on such matters for key management positions who report directly to the Chief Executive Officer. One meeting of the Committee was convened during the year with below attendance: Name of Members Status Meetings Attended Muhammad Anees Chairman (Independent Director) 1 Ibrahim Shamsi Member (Non-Executive Director) 1 Umer Mansha Member (Non-Executive Director) 1 MD & CEO (Executive Director) 1 Muhammad Ali Zeb Investment Committee Below are the salient characteristics of the role and responsibilities of the Investment Committee: Ÿ Formulate investment policy of the Company for Board’s approval and ensure implementation of the policy. Ÿ Define and monitor allowable exposure to various asset classes i.e. listed equities, unlisted equities, government securities, term finance certificates, mutual funds, real estate etc. Ÿ Define and monitor allowable exposure in single entity and in related parties. Ÿ Define, in investment policy, minimum rating requirement for rated instruments and other criterion for non-rated instruments. Ÿ Define ineligible asset classes and securities. Ÿ Ensure compliance with respect to issues relating to liquidity, exposure limits, stop loss limits including securities trading, management of all investment risks, management of assets and liabilities, scope of internal and external audit of investments and investment statistics and all other internal controls of investment operations. Ÿ Monitor solvency position of the Company to ensure that requirement relating to minimum solvency as laid down in Insurance Ordinance, 2000 and rules and regulations made thereunder is met at all times. Ÿ To assist the Board in reviewing the investment policy and its implementation at least once a year. ANNUAL REPORT 2020 99
  101. Ÿ Ensure adequate controls are implemented in investment functions and responsibilities are duly segregated into front, mid and back office. Ÿ Review and approve investment and divestment proposals. Ÿ Analyze performance of different sectors, impact of government policies on these sectors and decide line of action. Ÿ Ensure that all proposed investment transactions comply with the investment policy and regulatory guidelines Ÿ Review the overall investment portfolio of the Company with the objective of assessing adequacy of return being generated by the portfolio. Four meetings of the Investment Committee were convened during the year and below is the attendance of the members of the committee: Name of members Status Meetings attended Mr. Umer Mansha Chairman (Non-Executive director) 4 Mr. Imran Maqbool Member (Non-executive director) 4 Mr. Muhammad Ali Zeb MD & CEO (Executive director) 4 Mr. Muhammad Asim Nagi Chief Financial Officer 4 Presence of the Chairman of Audit Committee in AGM The Chairman of the Audit Committee remains present at the AGM to answer questions on the Audit Committee’s activities and matters within the scope of the Audit Committee’s responsibilities. Use of external search consultancy in appointment of chairman or non-executive director The Board of the Company was constituted in May 2019 after election of directors. At that time the Company used the database of ‘Pakistan Institute of Corporate Governance’ (PICG), an institute notified by the Commission, to appoint independent directors. However, during the year 2020, services of external search consultancy were not required. Chairman’s significant commitments and any changes Chairman’s significant commitments refer to his engagement in other entities. Umer Mansha, Chairman of the Board of Directors of the Company, has the following significant commitments: Company Designation Nishat Mills Limited Chief Executive Officer Adamjee Life Assurance Company Limited Chief Executive Officer MCB Bank Limited Non-Executive Director Nishat Hotels & Properties Limited Non-Executive Director Nishat Developers (Pvt.) Limited Non-Executive Director Nishat Dairy (Pvt.) Limited Non-Executive Director Nishat (Raiwind) Hotels and Properties (Pvt.) Limited Non-Executive Director Nishat Agriculture Farming (Pvt.) Limited Non-Executive Director Hyundai Nishat Motor (Pvt.) Limited Non-Executive Director Nishat Agrotech Farms (Pvt.) Limited Non-Executive Director Nishat Sutas Dairy Limited Non-Executive Director 100 ANNUAL REPORT 2020
  102. Umer Mansha is also serving at MCB Bank Limited as the Chairman of the Board ’s Business Strategy & Development Committee, Information Technology Committee, Committee on Physical Planning & Contingency Arrangements and Write-off & Waiver Committee and is also a member of Audit Committee and Risk Management & Portfolio Review Committee. Pandemic Recovery Plan by the Management and policy statement Covid-19 pandemic has brought as many unexpected changes and has accelerated the needs for digitalization in nearly all service sector. AICL was well equipped with the digital infrastructure needed to cope with this change during and after the pandemic and as a result of it the pandemic has not affected. However, this does not mean that the changing environment has been in favor of the business. The pandemic has been catastrophic for a lot of industries and has bought very unpredictable changes to the lifestyles and habits of the end consumers. AICL aims to tackle this situation its high standards. It is continuously working on improving the customer experience through digital technology. AICL has set strict guidelines for compliance that are in line with international standards that match our customer expectations. AICL has always worked for the betterment of its employees and customers during the difficult times of the pandemic, it continued working seamlessly with the support of its digital infrastructure and innovative techniques to bring best experience to its customers. Digital channels and online services are the new normal in the industry and future depends on digitalization of the business. With the new challenges posed by the ongoing pandemic, business operation have been made more processes efficient and user friendly both employees and customers. AICL continues to provide the best customer experience during the pandemic while is strictly adhering to the Government guidelines issued from time to time. Cybersecurity policy Insurance sector and cyber security in Pakistan has become highly competitive. To lead in this evolving market, insurance companies need to secure their information technology environment with strong security governance, latest technologies, security processes and mindset. This need has enabled AICL to be a market leader in security and protection of its policy holder’s data with its secure architecture, skilled resources and stringent processes. The SECP Guidelines on Cybersecurity Framework for Insurance Sector, 2020 became effective from 1st July 2020. AICL, always a step ahead, started adopting this framework prior to its official promulgation. The main objective was to protect the policy holder data and Company infrastructure from any unwarranted threats. Following steps have been taken to comply with the Cybersecurity guidelines issued by the SECP: Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ Ÿ A Cybersecurity Strategy has been developed in light of SECP’s guidelines. It is based on our core guiding principles aligned with the Company’s vision. A Cybersecurity Framework offers a blueprint for meeting all the regulatory requirements as well as putting in place the best possible defense against cyber-attacks. AICL has opted NIST (National Institute of Standards and Technology) as the Cybersecurity Framework (CSF) which is the best in its class. AICL has appointed a Virtual Chief Information Security Officer (vCISO) to develop and manage the implementation of its Cybersecurity program. ISO/IEC 27001 is being utilized for drafting Information Security Policies and Procedures. IT Risk Assessment is being carried out to ensure all vulnerabilities and shortfalls are addressed and managed properly. Assimilation of the assessment with Enterprise Risk Management of the organization is in progress. Vulnerability assessment and penetration testing (VAPT) is performed by a third party in order to identify and fill the gaps and to strengthen the security posture of the Company. AICL is in the process of implementing Security Information and Event Management (SIEM) solution to strengthen the security monitoring. AICL has developed and rolled out a comprehensive Cybersecurity Awareness Program for all the employees. This awareness has enabled the employees to think from security perspective before taking any action in their day-to-day work. The Cybersecurity Awareness trainings contain specialized content to highlight and address the importance of Information/Data Security, Privacy and Social Engineering. This training programs are also helping in enabling our employees to act as a human firewall in combating with any malicious attempt. ANNUAL REPORT 2020 101
  103. The idea is to incorporate Cybersecurity protocols in Adamjee Insurance ’s core so that it is easier to combat with any security threats or incidents in a more structured and efficient way. Anti-Money Laundering and Countering Financing Terrorism Policy Anti-Money Laundering and Counter Financing Terrorism (AML/ CFT) form the base lines steps for the economies of this modern world, especially among the players of financial sector. Money Laundering (ML) and Terrorism Financing (FT) have harmful and injurious implications for a country’s economic stability and good governance. Pakistan was grey-listed in June 2018 by Financial Action Task Force (FATF) because of its alleged ties with Islamist militant groups and its weak policies on anti-money laundering and combating the financing of terrorism (AML-CFT) regulations. Despite its best and concerted ongoing efforts necessary to ensure transparent and legal economic activity, it still continues with the same status of a non-cooperative nation running grey economy. Grey-listed nations suffer severe economic consequences such as: reduced foreign direct investments; imports and exports restrictions; sanctions on remittances, and limited access to international financial institutions. Throughout the past decade, the State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) have been issuing various guidelines, circulars, and recently revised the most wanted and FATF centric regulations on AML / CFT 2020 for proper and vigorous enforcement, providing sufficient clarifications in improving domestic and international compliance. Despite the fact that the risk level for ML / FT is not even rated as medium in the general insurance industry, Adamjee Insurance Company Limited (AICL) remained committed to fulfilling its obligations under above said directives and formulated a comprehensive policy and procedure approved by the Board of Directors of the Company. AICL’s AML / CFT policy aims at safeguarding the interests of all stakeholders by combining modern techniques on the subject. This necessitated not only the Company's interest in its ongoing efforts for aligning its AML/ CFT steps with technological development in its operations/ procedures and equipping related tools with the most recent possible learning. At AICL, we are fully aware of the fact that the AML / CFT steps, once introduced will do well for some time, but will prove not sufficient to deal with the rapidly evolving aspects of new ML / TF risks. To face such arising eventualities and contingencies, the Board is committed to setting examples by leading from the front. Access to Reports and Enquiries Financial Reports Annual Report 2020 and Quarterly reports may be downloaded from the Company’s website: www.adamjeeinsurance.com or printed copies can be obtained by writing a request to the Company Secretary. Shareholders’ Enquiries Shareholder’s enquiries about their shares, dividends and share certificate can be directed to Company Secretary or Share Registrar at the following address. Company Secretary 9th Floor, Adamjee House, I.I. Chundrigar Road, Karachi. CDC Share Registrar Services Limited CDC House, 99-B, Block B, S.M.C.H.S, Sharah-e-Faisal, Karachi. Stock Exchange Listing Adamjee Insurance Company Limited shares are listed on Pakistan Stock Exchange. The symbol code of the Company is AICL. Chief Executive Officer’s Review CEO presentation video explaining the business overview, performance, strategy and outlook is available at the Company’s website : https://www.adamjeeinsurance.com/pak/investors.php#ceo-message 102 ANNUAL REPORT 2020
  104. Statement of Unreserved Compliance of International Financial Reporting Standards (IFRS) Issued by International Accounting Standards Board (IASB) Management recognizes the responsibility of preparation and presentation of the financial statements in accordance with the accounting and reporting standards as applicable in Pakistan and the requirements of Companies Act, 2017, Insurance Ordinance, 2000, Insurance Rules, 2017, Insurance Accounting Regulations, 2017, Takaful Rules, 2012 and Takaful Accounting Regulations, 2019. Accordingly, the Company’s financial statements have been prepared in accordance with accounting and reporting standards as applicable in Pakistan. The accounting and reporting standards comprise of: Ÿ International Financial Reporting Standards 'IFRS' issued by the International Accounting Standards Board 'IASB' as are notified under the Companies Act, 2017; and Ÿ Provision of and directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, Takaful Rules, 2012 and the Takaful Rules, 2019. In case the requirements differ, the provisions of or the directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, Takaful Rules, 2012 and the Takaful Rules, 2019, shall prevail. The annexed 2020 financial statements are duly audited by the statutory auditors of AICL in accordance with the International Standards of Auditing as applicable in Pakistan. Statutory auditors has issued an unqualified opinion and confirmed that the financial statements are prepared in conformity with the accounting and reporting standards as applicable in Pakistan. The Board of Directors has reviewed and approved the annexed unconsolidated, consolidated and WTO financial statements. On behalf of the Board of Directors, the financial statements are signed by the Chairman, and two nominated Directors along with the Chief Executive Officer and the Chief Financial Officer. Statement of Adherence with the International Integrated Reporting Framework Economic dynamics have changed drastically and the Covid-19 Pandemic has brought many challenges and uncertainties. Digitalization is becoming the only way forward and is creating opportunities and avenues for further value creation for stakeholders, direct and indirect, of the Company. This value creation can be over different time frames; short, medium and long term. An integrated report describes this value creation process concisely including the business model, strategies, governance, processes, risks and opportunities. The Company has vast experience and strong presence in the insurance sector, in Pakistan and abroad, with large and diverse customer base. The Company aims to deliver innovative customer solutions, owing to its wide-ranging line of products. Since the Company always strives for best practices in corporate reporting for all stakeholders and general public, commitment towards adoption of International Integrated Reporting Framework is a step forward to give an overview of AICL’s philosophy to explain connection between its financial and non-financial information, which would enhance the user’s understanding as to how the Company works to improve its performance keeping in view the stakeholder’s interests. The business strategy information is linked directly to business activities and non-financial information, and provides explanations accordingly. The Company will continue to hone the information produced to make it even easier to understand, while taking into account the interests of stakeholders reading this report. The Company has included the following content elements for the users of this report: Ÿ Ÿ Ÿ Ÿ Ÿ Organizational overview and external environment Strategy and resource allocation Risk and opportunities Governance Performance and position Ÿ Ÿ Ÿ Ÿ Ÿ Outlook Stakeholders’ relationship and engagement Sustainability and corporate social responsibility Business Model Excellence in corporate reporting The Company’s Annual Report 2020 covers the twelve month period from 1 January 2020 to 31 December 2020 and is consistent with our annual reporting cycle for financial and integrated reporting. The most recent published previous report was dated 31 December 2019. ANNUAL REPORT 2020 103
  105. Statement Under Section 46 (6) of the Insurance Ordinance, 2000 The incharge of the Management of the business was Muhammad Ali Zeb, Managing Director & Chief Executive Officer and the report on the affairs of business during the year 2020 signed by Muhammad Ali Zeb, Ibrahim Shamsi and approved by the Board of Directors is part of the Annual Report 2020 under the title of “Directors’ Report to Members” and a. In our opinion the annual statutory accounts of Adamjee Insurance Company Limited set out in the forms attached to the statement have been drawn up in accordance with the Insurance Ordinance, 2000 (Ordinance) and any rules made thereunder, b. Adamjee Insurance Company Limited has at all times in the year complied with the provisions of the Ordinance and the rules made thereunder relating to paid-up capital, solvency and re-insurance arrangements; and c. as at the date of the statement, the Adamjee Insurance Company Limited continues to be in compliance with the provisions of the Ordinance and the rules made thereunder relating to paid-up capital, solvency and re-insurance arrangements. Umer Mansha Chairman 104 ANNUAL REPORT 2020 Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  106. ANNUAL REPORT 2020 105
  107. Performance Evaluation Against Targets / Budgets The Company prepares Annual Business Plan which mainly comprises of Annual Budget for the coming year. The objective of Annual Budget is to use it as a control tool to periodically gauge the operational performance of the Company against the preset annual targets. The Budget objectives are communicated to the relevant managers at the start of the year which also acts as a yard stick for evaluating the performance of different functions and departments on periodic basis and to make corrective decisions and actions where needed. Annual Budget is also broken down into monthly budget to compare the actual results with budgeted figures to identify monthly variances together with their reasons which are subject to rigorous review and follow up in subsequent monthly performance reviews. The process enables the management to ensure all the functions and departments are aligned towards the achievement of overall Company objectives. During the year, the Company reassessed the Initial Budget figures and flexed it based on changes in initial high level assumptions. Business Growth The business growth during the year stayed negative compared with both initial yearly target and last year figures. This was mainly attributed to overall negative growth of economy and challenging conditions due to Covid-19 pandemic. The decline in premium is largely due to drop in retail portfolios whereas the Company continued to retain its majority portion of the corporate portfolio by offering best professional services to its customers. Investment Income Current year witnessed a decline in investment income both from last year and initial budgeted investment income. This is largely owed to lower dividend payout from the banking segment of the equity portfolio due to temporary restrictions on dividend distribution imposed by the State Bank of Pakistan for two quarters (2nd & 3rd) during Covid-19 situation. The Company cautiously followed the development of the changing conditions and flexed its initial Budget to make it more realistic. Management ensures that revised targets are met by careful monitoring the investment returns against the revised targets and carry out actions, if required. Operational Profitability The Company succeeded in meeting its operational profitability objectives based on revised profitability targets adjusted for changes in assumptions of business growth and overall economic indicators brought about by volatility in the overall economic environment surrounding the business. The Company had to make adjustments in initial forecasts due to unforeseen circumstances creative by Covid-19 pandemic as well as torrential rains and floods during August 2020. 106 ANNUAL REPORT 2020
  108. Six Years Financial Performance (2015 - 2020) 2020 2019 2018 2017 2016 2015 Rs. Mln "" "" "" "" "" "" "" "" "" "" 3,500 4,487 22,235 22,589 26,596 402 4,556 1,312 16,654 49,520 27,285 3,500 4,555 21,380 21,781 25,888 402 4,301 1,177 17,770 49,538 28,158 3,500 3,784 19,663 21,006 24,114 3,593 2,211 17,926 47,845 28,182 3,500 5,001 20,364 18,649 23,749 2,632 2,279 18,727 47,388 27,023 3,500 6,278 21,872 17,359 24,337 1,250 3,811 16,242 45,640 23,768 3,500 1,409 14,561 16,220 20,780 1,301 2,072 12,787 32,380 17,819 - Conventional Gross Premium Net Premium Net Claims Net Commission Underwriting Result Financial Charges Total Expenses Investment Income Profit Before Tax Profit After Tax "" "" "" "" "" "" "" "" "" "" 18,279 13,295 7,987 1,833 376 15 3,161 1,093 1,910 1,876 22,507 15,434 9,877 1,507 654 8 3,100 1,372 2,533 1,813 20,387 13,806 8,386 1,280 816 3,438 1,285 2,174 1,239 18,522 11,535 7,434 1,090 557 2,683 1,494 2,121 1,221 16,270 9,615 6,210 763 1,078 2,329 3,502 4,054 3,492 13,639 7,747 5,223 558 242 2,178 2,404 2,214 1,943 - Window Takaful Operations Gross contribution written Net contribution revenue Net takaful claims - reported / settled Underwriting Result - PTF Surplus / (Deficit) - PTF Wakala fee Profit before taxation Profit after taxation "" "" "" "" "" "" "" "" 1,526 745 692 46 92 409 164 116 1,213 617 531 72 110 324 108 77 1,102 669 402 (8) 7 253 79 53 743 262 300 (38) (31) 176 67 47 187 19 29 (5) (5) 23 4 3 - "" "" "" 648 280 (793) (93) 3 (944) 1,892 (1,274) (685) 1,060 (1,210) (1,383) 222 2,225 (1,036) 838 254 (1,071) Balance Sheet Paid Up Capital Reserves Equity Investments (Book Value) Investments (Market Value) Investment Property Fixed Assets Cash & Bank Deposits Other Assets Total Assets Total Liabilities Operating Data Cash Flow Summary Operating activities Investing activities Financing activities Share Information Break-Up Value Per Share No. of Shares Share Price at Year End Highest Share Price During Year Lowest Share Price During Year KSE 100 Index Market Price to Break-Up Value Face Value Market Capitalization - Amount Rs. Rs. Mln Rs. Rs. Rs. 63.53 61.09 56.18 58.18 62.49 45.00 350 350 350 350 350 350 39.32 42.09 42.02 52.00 74.14 56.51 47.45 47.70 60.25 82.50 79.79 61.12 24.10 26.00 38.10 43.02 46.70 38.08 43,755.38 40,735.08 37,066.67 40,471.48 47,806.97 32,816.00 Times 0.62 0.69 0.75 0.89 1.19 1.26 Rs. 10.00 10.00 10.00 10.00 10.00 10.00 Rs. Mln 13,762.00 14,731.50 14,707.00 18,200.00 25,949.00 19,778.50 Distribution Dividend Per Share Total Dividend - Amount Cash Dividend Bonus Shares Total Dividend Rs. Rs. Mln % % % 2.75 962.50 27.50 27.50 2.50 875.00 25.00 25.00 2.00 700.00 20.00 20.00 4.00 1,400.00 40.00 40.00 3.00 1,050.00 30.00 30.00 3.00 1,050.00 30.00 30.00 ANNUAL REPORT 2020 107
  109. Six Years Financial Performance (2015 - 2020) Horizontal Analysis - Balance Sheet and Income Statement 2020 2019 2018 2017 2016 2015 2020 2019 2018 2017 2016 2015 % increase /(decrease) over preceding year Rs. Mln Balance sheet Assets Cash and Bank Deposits Loans to Employees Investments Deferred Taxation Current Assets-others Fixed Assets Investment Property Total assets of WTO-OP 1,312 45 26,596 16,020 4,556 402 589 1,177 49 25,888 17,295 4,301 402 426 2,898 17 15,393 84 12,687 1,301 - 11.5 (9.1) 2.7 (7.4) 5.9 38.2 (46.8) 10.0 7.4 (1.2) 19.7 100.0 11.6 (3.0) 4.7 1.5 (5.1) 36.6 58.5 (40.2) 138.9 (2.4) 14.4 110.6 143.4 31.5 5.9 58.1 (100.0) 27.1 (3.9) 100.0 0.7 21.4 14.2 (13.4) 11.8 16.8 - Total Assets 49,520 49,538 47,845 47,388 45,640 32,380 (0.0) 3.5 1.0 3.8 41.0 11.9 Total Equity Underwriting Provisions Deferred Taxation Deferred Liabilities Borrowings Creditors and Accruals Other Liabilities Total liabilities of WTO-OP 22,235 19,380 1,375 212 166 1,806 4,103 243 14,561 13,125 116 4,502 75 - 4.0 (7.0) 3.4 (5.8) 100.0 5.1 6.8 24.0 8.7 0.3 40.9 13.1 (22.1) 0.5 (14.8) (3.4) 0.7 (39.8) 29.2 17.1 44.8 63.1 (6.9) 20.1 (29.5) 90.1 13.4 2.5 206.5 50.2 30.9 100.0 (30.4) (63.1) 3,340.2 100.0 6.6 11.7 9.6 35.6 (21.6) - Total Equity and Liabilities 49,520 49,538 47,845 47,388 45,640 32,380 (0.0) 3.5 1.0 3.8 41.0 11.9 (13.9) (19.1) (8.8) 21.6 (42.5) (20.4) 275.2 260.6 (100.0) 5.7 167.3 80.1 100.0 52.1 (24.6) (95.2) 3.4 11.8 17.8 2.2 17.8 (19.9) 6.8 329.1 (32.7) 100.0 (19.2) (23.1) 100.0 (967.7) 36.3 16.5 (23.0) 46.3 19.7 20.0 12.8 19.7 29.0 59.5 17.4 42.9 (100.0) 142.5 46.5 (48.3) (14.0) (57.3) (22.2) 39.6 (1.0) (46.0) 65.9 (93.0) 20.0 (412.5) (34.9) (23.8) 17.9 1,559.2 2.5 (47.7) 3.9 60.4 1.5 (65.0) 24.1 18.9 3.8 36.7 (129.8) 346.0 45.7 1.7 (3.7) 10.4 (127.1) 43.4 100.0 83.1 106.3 79.8 22.9 15.2 4.9 54.1 100.0 (422.2) 16.7 5.7 51.4 17.7 100.0 37.3 39.5 80.1 35.3 21,380 20,848 1,330 225 1,719 3,840 196 2,211 45 24,114 17,499 3,594 382 19,663 20,784 944 199 2,206 3,819 230 2,279 43 23,749 18,444 2,632 241 20,365 20,639 1,567 154 1,884 2,638 141 3,811 18 24,337 16,125 1,250 99 21,872 17,184 2,223 81 1,661 2,573 46 Profit and Loss Account Revenue account Net Premium Revenue Net claims Underwriting Expenses Net Commission Unexpired risk reserve 13,295 7,987 3,099 1,833 Underwriting Result 376 Investment Income 1,093 Rental Income 113 Other income 231 Change in fair value of investment property Other / General And Administration Expenses 62 Exchange Gain / (Loss) 12 Finance Charges on Lease Liabilities 15 Workers' welfare fund charge / (reversal) Profit before tax from WTO-OP 164 Profit Before Tax 1,910 Provision for taxation 35 Profit after Tax 1,875 108 ANNUAL REPORT 2020 15,434 9,877 3,397 1,507 654 1,372 30 64 12 59 5 8 (356) 108 2,533 720 1,813 13,806 8,386 3,324 1,280 816 1,285 7 95 73 6 41 79 2,174 935 1,239 11,535 7,434 2,576 1,090 (122) 557 1,494 9 96 44 5 63 67 2,121 900 1,221 9,615 6,210 1,615 763 (50) 1,078 3,502 6 178 630 (2) 83 4 4,054 561 3,493 7,747 5,223 1,556 558 169 242 2,404 6 185 571 6 58 2,214 272 1,942
  110. Six Years Financial Performance (2015 - 2020) Vertical Analysis - Balance Sheet and Income Statement 2020 Rs. Mln 2019 % Rs. Mln 2018 % Rs. Mln 2017 % Rs. Mln 2016 % Rs. Mln 2015 % Rs. Mln % Balance sheet Assets Cash and Bank Deposits Loans to Employees Investments Deferred Taxation Current Assets-others Fixed Assets Investment Property Total assets of WTO-OP Total Assets 1,312 2.6 45 0.1 26,596 53.7 16,020 32.4 4,556 9.2 402 0.8 589 1.2 49,520 100.0 1,177 2.4 49 0.1 25,888 52.3 17,295 34.9 4,301 8.7 402 0.8 426 0.9 49,538 100.0 2,211 4.6 45 0.1 24,114 50.4 17,499 36.6 3,594 7.5 382 0.8 47,845 100.0 2,279 4.8 43 0.1 23,749 50.1 18,444 38.9 2,632 5.6 241 0.5 47,388 100.0 3,811 8.4 18 0.0 24,337 53.3 16,125 35.3 1,250 2.7 99 0.2 45,640 100.0 2,898 8.9 17 0.1 15,393 47.5 84 0.3 12,687 39.2 1,301 4.0 32,380 100.0 Total Equity Underwriting Provisions Deferred Taxation Deferred Liabilities Borrowings Creditors and Accruals Other Liabilities Total liabilities of WTO-OP Total Equity and Liabilities 22,235 44.9 19,380 39.1 1,375 2.8 212 0.4 166 0.3 1,806 3.6 4,103 8.3 243 0.5 49,520 100.0 21,380 43.2 20,848 42.1 1,330 2.7 225 0.5 1,719 3.5 3,840 7.8 196 0.4 49,538 100.0 19,663 41.1 20,784 43.4 944 2.0 199 0.4 2,206 4.6 3,819 8.0 230 0.5 47,845 100.0 20,365 43.0 20,639 43.6 1,567 3.3 154 0.3 1,884 4.0 2,638 5.6 141 0.3 47,388 100.0 21,872 47.9 17,184 37.7 2,223 4.9 81 0.2 1,661 3.6 2,573 5.6 46 0.1 45,640 100.0 14,561 45.0 13,125 40.5 116 0.4 4,502 13.9 75 0.2 32,380 100.0 13,295 100.0 7,987 60.1 3,099 23.3 1,833 13.8 2.8 376 1,093 8.2 113 0.8 231 1.7 62 0.5 12 0.1 15 0.1 164 1.2 1,910 14.4 35 0.3 1,875 14.1 15,434 100.0 9,877 64.0 3,397 22.0 1,507 9.8 4.2 654 1,372 8.9 30 0.2 64 0.4 12 0.1 59 0.4 5 0.0 8 0.1 (356) (2.3) 108 0.7 2,533 16.4 720 4.7 1,813 11.7 13,806 100.0 8,386 60.7 3,324 24.1 1,280 9.3 5.9 816 1,285 9.3 7 0.1 95 0.7 73 0.5 6 0.0 41 0.3 79 0.6 2,174 15.7 935 6.8 1,239 9.0 11,535 100.0 7,434 64.4 2,576 22.3 1,090 9.4 (122) (1.1) 4.8 557 1,494 13.0 9 0.1 96 0.8 44 0.4 5 0.0 63 0.5 67 0.6 2,121 18.4 900 7.8 1,221 10.6 9,615 100.0 6,210 64.6 1,615 16.8 763 7.9 (50) (0.5) 1,078 11.2 3,502 36.4 6 0.1 178 1.9 630 6.6 (2) (0.0) 83 0.9 4 0.0 4,054 42.2 561 5.8 3,493 36.3 7,747 100.0 5,223 67.4 1,556 20.1 558 7.2 169 2.2 3.1 242 2,404 31.0 6 0.1 185 2.4 571 7.4 6 0.1 58 0.7 2,214 28.6 272 3.5 1,942 25.1 Profit and Loss Account Revenue Account Net Premium Revenue Net Claims Underwriting Expenses Net Commission Unexpired risk reserve Underwriting Result Investment Income Rental Income Other income Change in fair value of investment property General And Administration Expenses Exchange Gain / (Loss) Finance Charges on Lease Liabilities Workers' welfare fund charge / (reversal) Profit before tax from WTO-OP Profit Before Tax Provision for Taxation Profit After Tax ANNUAL REPORT 2020 109
  111. Six Years Financial Performance (2015 - 2020) Financial Ratios 2020 2019 2018 2017 2016 2015 (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) (%) 10.4 14.4 10.3 14.1 97.2 17.3 23.8 2.8 60.1 8.2 2.1 12.8 12.6 13.8 11.3 16.4 8.1 11.7 95.8 13.8 20.1 4.2 64.0 8.9 2.9 14.9 10.6 9.8 10.7 15.7 6.1 9.0 94.1 16.9 24.9 5.9 60.7 9.3 4.0 14.4 8.2 9.3 11.5 18.4 6.6 10.6 95.2 14.5 23.3 4.8 64.4 12.9 3.0 16.1 9.3 9.4 24.9 42.2 21.5 36.3 88.8 14.3 24.2 11.2 64.6 36.4 6.6 30.5 26.3 7.9 16.2 28.6 14.2 25.1 96.9 16.0 28.1 3.1 67.4 31.0 1.8 21.4 18.8 7.2 (%) (%) (Rs.) (Times) (%) (%) (%) (Times) (%) (%) 8.6 8.4 5.36 7.3 8.6 7.0 51.3 1.9 3.8 3.5 11.8 8.5 5.18 8.1 11.8 5.9 48.3 2.1 3.7 46.3 11.1 6.3 3.54 11.9 11.1 4.8 56.5 1.8 2.6 1.4 10.4 6.0 3.49 14.9 10.4 7.7 114.7 0.9 2.6 (65.0) 18.5 16.0 9.98 7.4 18.5 4.0 30.1 3.3 7.7 79.8 15.2 13.3 5.55 10.2 15.2 5.3 54.1 1.9 6.0 2.8 (Times) (%) (%) (Times) (%) (Times) (Times) (%) (%) (%) 1.7 6.0 56.9 1.3 66.5 0.3 2.9 122.7 7.1 44.9 1.7 4.8 55.3 1.2 66.7 0.3 3.6 131.7 7.1 43.2 1.6 8.2 50.4 1.1 48.5 0.3 3.8 143.3 7.3 41.1 1.8 9.0 50.1 0.9 44.2 0.2 4.4 132.7 7.4 43.0 1.7 20.2 53.3 1.0 46.4 0.2 7.7 108.7 7.7 47.9 1.8 16.4 50.1 1.0 56.5 0.2 6.0 122.4 10.8 45.0 Profitability Ratios Profit / (Loss) Before Tax / Gross Premium Profit / (Loss) Before Tax / Net Premium Profit After Tax / Gross Premium Profit After Tax / Net Premium Combined Ratio Expenses / Gross Premium Expenses / Net Premium Underwriting Result / Net Premium Net Claims / Net Premium Investment Income / Net Premium Underwriting Result / Written Premium Profit / (Loss) Before Tax / Total Income Profit / (Loss) After Tax / Total Income Net Commission / Net Premium Return To Shareholders Ratios Return On Equity - PBT Return On Equity - PAT Earnings Per Share P/E Ratio Return On Capital Employed Dividend Yield Dividend Payout Dividend Cover Return On Total Assets Earnings Growth Liquidity / Leverage Ratios Current Ratio Cash / Current Liabilities Earning Assets / Total Assets Liquid Ratio Liquid Assets / Total Assets Total Assets Turnover Fixed Assets Turnover Total Liabilities / Equity Paid Up Capital / Total Assets Equity / Total Assets 110 ANNUAL REPORT 2020
  112. Six Years Graphical Summary (2015 - 2020) Equity 25,000 20,000 (Rupees in million) 15,000 10,000 5,000 2015 2016 2017 2018 2019 2020 Total Assets & Liabilities 60,000 (Rupees in million) 50,000 40,000 30,000 20,000 10,000 2015 2016 2017 Total Assets 2018 2019 2020 2019 2020 Total Liabilities Investments 30,000 (Rupees in million) 25,000 20,000 15,000 10,000 5,000 2015 2016 2017 Investments (Book Value) 2018 Investments (Market Value) ANNUAL REPORT 2020 111
  113. Six Years Graphical Summary (2015 - 2020) Gross Premium 25,000 (Rupees in million) 20,000 15,000 10,000 5,000 2015 2016 2017 Gross Premium - Conventional 2018 2019 2020 Gross Contribution Written - WTO Underwriting Results 1,200 (Rupees in million) 1,000 800 600 400 200 2015 2016 2017 2018 2019 2020 2019 2020 Underwriting Result Investment Income 4,000 3,500 (Rupees in million) 3,000 2,500 2,000 1,500 1,000 500 2015 2016 2017 2018 Investment Income 112 ANNUAL REPORT 2020
  114. Six Years Graphical Summary (2015 - 2020) Profit 4,500 4,000 (Rupees in million) 3,500 3,000 2,500 2,000 1,500 1,000 500 2015 2016 2017 Profit Before Tax 2018 2019 2020 Profit After Tax Earnings Per Share (Rs.) 12 10 (Rupees) 8 6 4 2 0 2015 2016 2017 2018 2019 2020 2019 2020 Earnings Per Share Dividend Distribution 1,600 1,400 (Rupees in million) 1,200 1,000 800 600 400 200 2015 2016 2017 2018 Dividend Distribution ANNUAL REPORT 2020 113
  115. Six Years Graphical Summary of Ratios (2015 - 2020) Dividend Yield (%) 9 8 (Percentage) 7 6 5 4 3 2 1 2015 2016 2017 2018 2019 2020 Dividend Yield P/E Ratio (Times) 16 14 12 10 8 6 4 2 2015 2016 2017 2018 2019 2020 2019 2020 P/E Ratio (Times) Current Ratio (Times) 1.80 1.75 1.70 1.65 1.60 1.55 2015 2016 2017 2018 Current Ratio (Times) 114 ANNUAL REPORT 2020
  116. Six Years Graphical Summary of Ratios (2015 - 2020) Liquid Ratio (Times) 1.40 1.20 1.00 0.80 0.60 0.40 0.20 2015 2016 2017 2018 2019 2020 2019 2020 Liquid Ratio (Times) Equity / Total Assets (%) 50.00 48.00 46.00 44.00 42.00 40.00 38.00 36.00 2015 2016 2017 2018 Equity / Total Assets (%) ANNUAL REPORT 2020 115
  117. Comments on Horizontal and Vertical Analysis Profit & Loss Account Over the years 2015 to 2019, the Company continued to grow its business at a healthy rate. However, owing to the unforeseen circumstances caused by the Covid-19 pandemic, the gross written premium of the Company's conventional business witnessed a 19% decrease from last year. Major decrease was witnessed in Outside Pakistan Operation where gross written premium decreased by 37% year on year. This contraction in top line resulted in 14% decline in Net Premium Revenue over last year. Net claims expense decreased by 19% during the year resulting in 'Claim ratio' to reduce to 60% in current year as against 64% in last year. Management / underwriting expenses also decreased by 9% in current year as compared to year 2019. Underwriting profit of the Company decreased by 42.5% in the current year, while Investment income of the Company also witnessed a decline of 20%, year on year. On the other hand, The Window Takaful Operations (WTO) of the Company, showed significant increase in gross contribution which increased to Rs. 1.5 billion in 2020 as against Rs. 1.2 billion in 2019. WTO operator's fund contributed Rs. 164 million towards the profit before tax to the overall profits of the Company. Profit after tax for the year 2020 has increased by 3% amounting to Rs. 1,875 million as against Rs. 1,813 million in 2019 resulting in Earning per Share (EPS) of Rs. 5.38 in current year as against Rs. 5.18 in last year. Balance Sheet The Company has the largest paid up capital in the industry amounting to Rs. 3,500 million. Overall asset base of the Company declined by 0.04% (Rs. 18 million) reaching at Rs. 49,520 million as compared to Rs. 49,538 million in 2019. Investments are the biggest asset which constitute approximately 54% of the total assets of the Company. With an increase of 2.7%, investments of the Company stood at Rs. 26,596 million as against Rs. 25,888 million in 2019. The Company's Investments have shown continues growth over the last six years, except for 2017 where a slight decline was witnessed, due to adverse market conditions. Cash and Bank balance of the Company increased by 12% approximately amounting to Rs. 1,312 million in current year as against Rs. 1,177 million in 2019 (excluding cash and bank balance of Window Takaful Operations). Equity & Reserves increased by 4% amounting to Rs. 22,235 million in current year as against Rs. 21,380 million which reflects the improving strength of the Company. Underwriting liabilities decreased by 7% amounting to Rs. 19,380 million in current year as against Rs. 20,848 million in 2019. Net Assets of the Company's 'Window Takaful Operations - Operator's Fund' increased significantly from Rs.230 million to Rs. 346 million registering a growth of 50% year on year. 116 ANNUAL REPORT 2020
  118. Comments on Ratios Profitability Ratios Profitability Ratios during the year depicted downward trends . Underwriting results stood at 2.58% of net premium in current year as against 4.2% in last year. Investment income decreased to 4% in current year as against 5% in last year. Profit after tax ratio, however, improved to 12.6% in current year as against 10.6% in last year. This is mainly related to reversal of tax charge amounting to Rs. 579 million as explained in note 35.2 to the unconsolidated financial statements of the Company. Return to Shareholders Ratios Return to shareholders / investors' Ratios depicted mixed trends during the year. ‘Return on equity’ slightly decreased to 8.4% in current year as against 8.5% in last year. While ‘Return on total assets’ increased to 3.8% in current year as against 3.7% in last year. During the year, the Company has distributed Rs. 2.75 per share as dividend (Rs. 1.5/- per share as final dividend relating to year 2019 and Rs. 1.25/- per share as interim dividend relating to year 2020). Total dividend distribution amounted to Rs. 962.5 million. Liquidity Ratios Liquidity Ratios of the Company improved from last year which reflects a better working capital and cash flow management of the Company. The Company was able to maintain current ratio at 1.7 times while cash and bank balance to current liabilities ratio improved to 6% in current year as against 4.8% last year. The proportion of ‘Earning assets’ to ‘Total assets’ also improved to 56.9% as against 55.3% while the proportion of ‘Liquid assets’ to ‘Total assets’, however, slightly declined to 66.5% in current year as against 66.7% last year. ANNUAL REPORT 2020 117
  119. DuPont Analysis Rupees in Million Revenue Pro fit After Tax Net Profit Margin Return on Assets x Return on Equity / Total Expense Revenue 0.30 Times / 0.34 Times / / 44.9% / 43.2% / 44,143 / 44,463 Non Current Assets _ 5,377 / 5,075 22,235 / 21,380 49,520 / 49,538 2019 + 49,520 / 49,538 Current Liabilities Total Liabilities Total Assets 2020 Current Assets Total Assets Owners' Equity 13,030 / 15,212 14,906 / 17,025 8.5% / 8.3% Ownership Ratio _ 12.6% / 10.6% Assets Turnover 3.8% / 3.6% 1,876 / 1,813 14,906 / 17,025 27,285 / 28,158 + Owners' Equity + 25,550 / 26,527 Non Current Liabilities 1,735 / 1,631 22,235 / 21,380 Analysis - The Net Profit Margin has increased by 2% in year 2020 due to decrease in net claims ratio and decrease in management expenses from last year. - Return on assets and return on equity have marginally increased from last year by 0.2% showing Company`s improved profitability despite slow economic growth. - Owners` equity and ownership ratio have also improved from last year despite higher dividend distribution of 27.5% during current year as compared with 25% of last year. - The Company has shown growth in profitability despite negative growth in top line revenues brought in by economic down-turn and uncertainty caused by Covid-19 pandemic. 118 ANNUAL REPORT 2020
  120. Free Cash flows to the Company 2020 2019 Rupees in Million Profit before Tax & Finance Cost Less: Taxation 1,925 (35) 1,890 2,541 (720) 1,821 Add: Depreciation Add: Amortisation Add: Other Non-Cash Items Changes in Working Capital Less: Fixed Capital Expenditure 264 23 85 (657) (521) (806) 226 25 411 (963) (1,168) (1,469) Free Cash flow to the Company 1,084 352 2,000 1,000 - (1,000) Free Cash Flow FY 2019 Profit before Tax & Finance Cost Taxation Depreciation Amortisation Other Non-Cash Items Changes in Working Capital Fixed Capital Expenditure Free Cash Flow FY 2020 ANNUAL REPORT 2020 119
  121. Six Years ’ Summary of Cashflow Statements 2020 2019 2018 2017 2016 2015 Rupees in Million Cashflow Summary Cash inflow / (outflow) from operating activities 648 (93) 1,892 1,060 222 838 Cash inflow / (outflow) from investing activities 280 3 (1,275) (1,210) 2,225 254 Cash outflow from financing activities (793) (944) (685) (1,382) (1,035) (1,071) Net cash inflow / (outflow) from all activities 135 (1,034) (68) (1,532) 1,412 21 1,177 2,211 2,279 3,811 2,889 2,868 Cash and cash equivalent at beginning of the year Cash and cash equivalent at end of the year 1,312 1,177 2,211 2,279 4,301 2,889 Analysis Analysis of the last 6 years cashflow statements reveals that the Company has been able to maintain sufficient liquidity in the form of cash and highly liquid assets ensuring Company`s strong ability to timely discharge its short term obligations mainly involving claims, reinsurance cessions and commission payments in addition to maintaining cash reserves for CAPEX, additional investments and dividend payout requirements as they arise. 120 ANNUAL REPORT 2020
  122. Graphical Presentation of Financial Statements Gross Premium 2020 Fire and property damage 37 % Marine, aviation and transport 5% Motor 40% 2019 Accident & Health 11% Miscellaneous 7% Fire and property damage 33% Marine, aviation and transport 4% Motor 46% Accident & Health 8% Miscellaneous 9% Net Claims 2020 Fire and property damage 9% Marine, aviation and transport 4% Motor 62% 2019 Accident & Health 20% Miscellaneous 5% Fire and property damage 4% Marine, aviation and transport 4% Motor 73% Accident & Health 16% Miscellaneous 3% Analysis of Income 2020 2019 Total Equity and Liabilities 2020 Equity 45% Liabilities 55% 2019 Equity 43% Liabilities 57% ANNUAL REPORT 2020 121
  123. Graphical Presentation of Financial Statements Net Premium Revenue 2020 Fire and property damage 6 % Marine, aviation and transport 5% Motor 68% 2019 Accident & Health 14% Miscellaneous 7% Fire and property damage 5% Marine, aviation and transport 5% Motor 72% Accident & Health 12% Miscellaneous 6% Combined Expenses 2020 Net claims 62% 2019 Expenses 24% Net commission 14% Net claims 67% Expenses 23% Net commission 10% Total Assets 2020 Investments 54% Fixed assets 9% Other Assets 33% 2019 Investment Property 1% Cash and bank deposits 3% Investments 52% Fixed assets 9% Other As sets 36% Investment Property 1% Cash and bank deposits 2% Investment Income 2020 Dividend Income 80% Capital Gains 3% 122 ANNUAL REPORT 2020 Income from Govt. Securi es 3% Income from Term Deposits 14% 2019 Dividend Income 84% Capital Gains 3% Income from Govt. Securi es 3% Income from Term Deposits 10%
  124. Quarterly Performance Analysis 2020 6000 (Rupees in Million) 5000 4000 3000 2000 1000 0 -1000 First Quarter Gross Premium Second Quarter Underwriting Results Third Quarter Investment Income Fourth Quarter Profit After Tax Gross Premium The gross premium written at entity level decreased by 19% from last year due to economic slowdown and uncertainty brought about by Covid-19 pandemic. In contrast to last year trend, fourth quarter only contributed 21% to overall gross premium written compared with 37% contribution of corresponding period of last year. Investment Income Current year witnessed 20% decline in investment income mainly due to decrease in dividend income of Rs. 406 million. This is largely because of the lower dividend payout from the banking segment of the equity portfolio due to temporary restrictions on dividend distribution imposed by the State Bank of Pakistan for two quarters (2nd & 3rd) during Covid-19 situation. Profitability Analysis Quarter wise profitability remained volatile during the year with fourth quarter being the major contributor towards annual profit after tax of Rs. 1,876 million as compared to Rs. 1,813 million of last year showing growth of 3% from last year. This increase is largely contributed to tax charge reversal of Rs. 579 million during the current year which pertains to tax assessments of prior years. ANNUAL REPORT 2020 123
  125. Methods and Assumptions in Compiling Indicators The Company takes into account both internal and external performance measuring tools and sector specific KPIs in opting for indicators that objectively evaluate Company 's performance against standard benchmarks. Financial Operating Performance For evaluating the Company's operating performance, the management analyses for each line of business and its subsidiary classes the premium growth trends, loss ratio, commission ratio, combined ratio, operating profitability ratio and net margin ratio across the sector to gauge its own standing and identify the possible areas of improvement. Investor KPIs To analyze the Company's performance with regards to return to shareholders, the indicators mainly used involve return on equity, P/E ratio, price to book value, dividend yield, return on assets and earnings growth. Liquidity Strength Company's liquidity strength is measured by KPIs such as current ratio, quick ratio, liquid ratio, assets turnover and equity to total assets ratio. Non-Financial Underwriting The management realizes the importance of customer satisfaction and measures its performance by client reviews, client retention rate and client turnover ratio. Claims The Company closely monitors the claim turn around time to ensure claims are timely processed once they are intimated to the Company. These turn around time are set for each class of business. Human Resource The Company is keen to engage and develop Human Resource that adds value to the Company and to ensure the overall corporate objectives are achieved. The Company periodically evaluates employee turnover and employee satisfaction for each department whilst investing in employee training and development drills to facilitate job rotation, job enrichment and succession planning. Change in Indicators and Performance Measures The performance measures are subject to periodic reviews and are regularly updated to help management scale the competitive environment. Revised KPIs are agreed with functional managers to ensure management/employee have their buy-in. 124 ANNUAL REPORT 2020
  126. Market Statistics of AICL Share AICL 's share price along with daily trading volume from Pakistan Stock Exchange (PSX) on key dates during the year 2020 are given below: High Low Daily TradingVolume Closing Rupees December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 39.74 41.95 33.49 27.00 38.56 40.00 32.80 25.25 No of shares 39.32 40.10 33.11 26.63 154,500 356,500 245,000 652,500 Share Price in 2020 50 45 40 35 30 25 20 15 10 5 Dec Nov Oct Sep Aug- Jul Jun May Apr Mar Feb Jan 0 Trading Volume in 2020 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 Dec Nov Oct Sep Aug- Jul Jun May Apr Mar Feb Jan - ANNUAL REPORT 2020 125
  127. Share price sensitivity analysis The Company 's share price is affected by various internal and external factors as below: a. b. c. d. e. f. g. h. Operating performance of the Company Performance of entities in which Company has invested (impacts investment income of the Company) Announcement of dividends Political stability Law & Order situation General economic conditions Changes in regulatory environment Stock market sentiment Sensitivity analysis of change in market capitalization Market capitalization is the aggregate value of a company based on its share price and total number of outstanding shares. It simply refers to how much a company is worth as determined by its share price. Below is market capitalization of AICL along with sensitivity analysis with change in market share price: Share price on December 31, 2020 (PSX) Market capitalization on December 31, 2020 Rs. 39.32 Rs. 13,762 million 10% change in share price would have the following impact on the market capitalization of AICL: 10% increase 10% decrease Rs. 1,376 million Rs. (1,376) million Sensitivity to Foreign Currency Fluctuations The Operations of the Company within Pakistan, at present are not materially exposed to fluctuations in foreign currency exchange rates as all transactions within Pakistan are carried out and financial statements prepared in Pak Rupees (PKR). The amount of asset, liabilities, revenues and expenditures are also not sensitive to the fluctuation in exchange rates of foreign currencies. The branches at United Arab Emirates (UAE) and Export Processing Zone (EPZ) are however considered as “exchange translation reserve”, because these branches operate in foreign currencies, i.e. United Arab Emirates Dirham (AED) and US Dollar respectively. Transactions in foreign currencies (other than the results of foreign branches) are accounted for in Pak Rupees at the rates prevailing on the date of the transaction and exchange differences are taken to the profit and loss account. The assets and liabilities of foreign branches are translated into Pak Rupees at exchange rates prevailing at the reporting date. The results of the foreign branches are translated into Pak Rupees at the average rate of exchange for the year. Translation gains and losses arising on the translation of the Company's net investments in foreign branches are taken to the capital reserves 'Exchange Translation Reserve'. 126 ANNUAL REPORT 2020
  128. Major Capital Expenditures : During the year, the Company has incurred Rs. 521 million (2019: Rs. 1,168 million) on capital items relating to both tangible and intangible infrastructure. Major portion of this expenditure was incurred on the construction of Adamjee House Lahore Building and renovation of Adamjee House Karachi Building along with office furniture and equipments. Before construction of Adamjee House Lahore Building, the Company was operating in Lahore through rented premises at different locations. Both the buildings have enabled the Company to consolidate all offices in one place to save operational cost, all rental income from spare office space and to improve coordination among the staff. The Company has planned capital expenditure for the year 2021. This expenditure would primarily be relating to IT related projects and routine replacements of tangible capital nature items. Major Events during the year Financial Results Announcement Date Dividend Declared/Proposed First Quarter Ended 31 March 2020 22 May 2020 Nil Half Year Ended 30 June 2020 24 August 2020 @ 12.5% (Rs. 1.25 per share) Third Quarter Ended 30 September 2020 28 October 2020 Nil Year Ended 31 December 2020 23 February 2021 @ 12.5% (Rs. 1.25 per share) Investor Relations Events Corporate Briefing Session Month/Year 03 December 2020 60th Annual General Meeting Scheduled on 27 April 2021 Company Events Month/Year Farmers Meetings at Vehari, Multan & Muzaffargarh for Agriculture Insurance Development January 2020 Farmers Awareness Campaign with Partner Banks February 2020 Livestock Insurance Awareness Sessions with Farms Managements in Lahore, Faisalabad and Chiniot March 2020 Webinar on Sales Development Program by Head of Window Takaful Operations on Takaful Market Development July 2020 Webinar on Management Development Program July 2020 Webinar Training Session for Employees on Cyber Security Awareness Webinar Training Session on Motor Insurance Portal with Automobile Industry Cyber Security Insurance Awareness Session in Collaboration with Partner Banks September 2020 October 2020 December 2020 ANNUAL REPORT 2020 127
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  131. Forward Looking Statement Adamjee Insurance ’s forward-looking statement sets out its financial outlook, past information and future expectations and uncertainties. This statement shows that certain factors can cause the actual performance to be quite different from the future projections. The statement is based on the assumptions of the Company’s management; hence, these changes may not happen as it is hard to predict the future with absolute accuracy. Being one of the largest general insurance companies of Pakistan, our management possesses the required experience and skills to develop business plans based on current and past trends. Overview on Economic Outlook of Pakistan Despite, the challenges of the Covid-19 pandemic, the economy has started to recover but there are many challenges ahead. With the availability of Covid-19 vaccine in sight, Pakistan has the potential to recover its economy from the grip of the pandemic at a much faster pace. Inflation is one of the major challenges that Pakistan’s economy faces. Amid lockdowns imposed by the Government due to the Covid-19 pandemic, the economic activities slowed down. However, the consumer price inflation rose from 6.8% in FY19 to 10.7% in FY20. Major factors which contributed towards higher inflation included rising Food & Energy prices and depreciation of Pak Rupee by 13.8% against U.S. Dollar. Various measures were taken by the Government as well as the State Bank of Pakistan to stabilize the worsening situation. On the other hand, the current account deficit decreased to 1.1% of the GDP in FY20 due to falling net imports and increase in remittances, which ease off pressure on our currency. The economic situation is expected to recover; however, the duration of the pandemic will define the pace of recovery and growth rate, which for now is expected to be on the lower side with uncertainties surrounding the general economic and political environment. Overview on Economic Outlook of United Arab Emirates According to the published report of IMF on Economic Prospects and Policy Changes in GCC Countries; the Covid19 pandemic is having far-reaching consequences for the global economy. Measures to contain the spread of the virus have led to sharp declines in economic activity across the globe, particularly in second and third quarters of the year 2020. The hardest hit sectors have been those requiring intensive human contact, such as tourism, transportation, services, and construction, while, in general, IT-intensive activities have performed better. The economic contraction is most significant in advanced economies. The GCC countries faced dual pressure on their economies caused be the coronavirus and lower oil prices. GCC authorities have implemented a range of measures to mitigate the economic damage, including fiscal packages, relaxation of monetary and macroprudential rules, and the injection of liquidity into the banking system, and there are recent signs of improvement. Low oil prices have caused a sharp deterioration of external and fiscal balances, and fiscal strains are evident in countries with higher debt levels. Adamjee Insurance - Year 2020 The year 2020 has been the most challenging year for all the businesses across the globe as the world economy faced unprecedented pressures and restrictions on businesses which were never experienced in the recent history. Pakistan’s economy was no exception. The Company’s performance was also affected by these restrictions; the top line suffered a substantial decline over the previous year. Major decrease in top line revenues was witnessed in Outside Pakistan operations which experienced a 37% decline, while Inside Pakistan business also reported a decrease in revenues of about 10% year-on-year. Despite, the challenging times, the Company was able to report improved operating profits due to a strict check on its operational costs and a sharp reduction in its claims expense during Covid-19 lockdown period, especially in Motor and Health lines of business. During the lockdown periods, the Company managed all its operations from home. This was possible due to the effective planning, efficient human resource, robust IT infrastructure and support, and an effective Business Continuity Plan. The Company’s ability to 130 ANNUAL REPORT 2020
  132. continue its operations and meet the needs of its customers among unprecedented circumstances helped greatly towards mitigating the adverse effects faced by many other businesses . The Company foresees that its strategy of sustainable growth will be achieved by focusing on rapidly changing customer needs, experiences and consumption patterns, whilst adhering to its underwriting philosophy. Adamjee Insurance’s Future Outlook Use of digital technologies supported by an appropriate infrastructure is the future of the insurance industry and embracing digital technologies is the way forward. Adamjee Insurance has always been at the forefront when it comes to enhancing and upgrading its processes to encourage innovation. By Product adopting the latest and advanced digital technologies such as Artificial Innovation Future Outlook Intelligence (AI) and Chatbots, the Company has redefined customer of Adamjee experience by providing a superior interface with convenience. In Insurance addition to improving the customer experience, AICL has visibly Future Outlook improved the efficiency of its business processes by employing of Adamjee advanced digital technologies such as, Robotic Process Automation Expanding Increase in Insurance (RPA), which simplifies operations and facilitates sustainable long-term Digital Premium and Distribution Technical growth. Profits With the advanced digital infrastructure, improved customer services and better stakeholder relations, the Company is committed to meet its targets in terms of premiums growth. Furthermore, the Company will continue to expand its distribution network to maintain its leadership position. Development of Human Capital To achieve the objective of providing customers the unparalleled service, the Company invests towards empowering employees through performance-based rewards, employee training and engagement activities. AICL will continue to hire and retain the best talent in the industry. Uncertainties that could affect Company’s performance: Uncertainties can always cause the actual performance to differ from the budgeted or projected performance. These uncertainties stem from various factors including political stability, law and order situation, geopolitical developments in the region, general economic conditions and regulatory requirements, etc. Largely, these risks relate to the general macroeconomic environment in which the Company operates and are considered to be beyond the management’s control. Hence, any adverse change in these risks or uncertainties may affect the performance of the Company which may positively or negatively differ from the projected performance. Moreover, discovery of the new variants of Covid19 virus may pose further uncertainties surrounding the duration and ultimate end of the pandemic may adversely impact the businesses to suffer. The performance of the Company may also be affected by factors such as rise in inflation, increase in healthcare costs, increase in energy prices and changes in other general indicators of the economy as these may result in reduced demand and increased pressure on already competitive prices of insurance products. The Company’s performance may be affected by the performance of the stock market as a major portion of the Company’s investment portfolio is based on equity stocks. Stable outlook of stock market contributes towards better performance of the Company while risk of volatility in the equity market may adversely affect the Company’s investment returns and hence, its operating performance. Natural disasters and environmental changes may also affect the performance of the Company as these may result in high claims ratios causing the performance of the Company to vary as against projected trends of losses for each line of business. In order to minimize the impact of such volatilities in the claim ratios, appropriate protection and coverages are in place supported by world’s leading reinsurers. ANNUAL REPORT 2020 131
  133. Project Status in Year 2020 : Project details Status New Branding design implementation across all branches In Process UAE Website – Online Selling Module Integration with ERP System To be launched in 2nd Qtr of 2021 Creating Awareness of Cyber Security among all users of Company In Process Motor Insurance Portal – Advance Version for Underwriting In Process Quantitative Projections Targets Associated Risks Premium growth to recover in 2021 after decline in 2020 Cut throat competition in market to retain existing and acquire new business Claim ratio to remain around last 3 years’ average Risk management to evaluate high risk businesses whilst following the Company’s underwriting philosophy Operational expenses percentage growth to remain in single digit Inflation may pose minor risk in meeting the operational cost target Improvement in Investment income is expected to be achieved Stock market volatility would be associated risk to achieve the target the key IFRS 17 Implementation Status The Insurance businesses are subject to face major changes in reporting environment as IFRS 17 ‘Insurance Contracts’, a new accounting and reporting standard, is applicable from 1 January 2023. The standard was initially applicable from 1 January 2021. However, the date of initial application was extended to 1 January 2022 and then again to 1 January 2023. The said new standard is set to bring major structural changes to reporting of insurance revenues, assets and liabilities. IFRS 17 has a major bearing on the life insurance business. Insurance Association of Pakistan (IAP) has formed a working committee which is evaluating the accounting, reporting and structural changes to be introduced by the standard. The Company is part of this working committee. IAP has hired services of a consultant firm at industry level to assist the industry towards adoption and implementation of IFRS 17. The purpose of uniting under the platform of IAP is to adopt a unanimous approach across the industry. Following implementation phases have been identified: Ÿ Gap analysis Ÿ Assessment of Financial Impact Ÿ Design and Methodology Ÿ Implementation and testing In UAE, the Gap Analysis stage has been completed and reported to the local regulator. Financial Impact Assessment is due to be completed and submitted to the regulator by 31 March 2021. The Company is confident of successful implementation of IFRS 17 by the applicable date. 132 ANNUAL REPORT 2020
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  135. Stakeholder Relationship and Engagement Healthy and sustained relationship with the stakeholder is important for any organization to perform well in short term and achieve its strategic objectives in the long term . The table below highlights the various types of stakeholders who are generally engaged with the Company along with their expectations, role in achieving strategic objectives of the Company and frequency of their engagements: Stakeholder · Shareholders, Investors and Analysts · · · Customers Employees Regulator Reasons to engage them Availability of transparent They are the providers of capital and expect information on timely sustainable growth basis and return on Efficient management Clear business objectives their investment. They perform independent and strategies Enhanced business value analysis of the and positive image of the Company's financial position and performance. Company What matters to them · Customized solutions · Customer satisfaction and protection · Convenience · Innovative products to fulfil their emerging needs · Simple and smooth process · Efficient claim processing · Career growth · Continuous professional development through trainings · Work life balance · Recognition of their efforts · Flexible culture · Performance based rewards · Statutory and legal Compliance · Development of the insurance sector · Transparent information and disclosures · Timely reporting · Guidance Media · · Supplier & Service Providers · · · Quarterly, half yearly and annual reports. Board meetings, Annual General Meeting, Extraordinary General Meetings, Corporate Briefing Session, press releases and regular investor calls. Frequency of engagement Quarterly, half yearly and annually. As and when required. Customers are the center of our attention as they are the buyers of our policies through which the Company generates its revenue. Connecting with our customers using physical channels i.e. meetings, direct relationship through our branches as well as digital channels i.e. website, social media, call center, etc. Continuous as well as on specific requirements. Employees are one of the most important pillars on which the Company stands and help us to achieve our overall objectives. Employee engagement modes include team building sessions, meetings with management, appraisals, employee recreational events, newsletters, website and social media. Daily, annually, quarterly, continuous availability Submission of regulatory information required under the applicable laws and responding to the specific queries requiring certain information Specific timeless and as and when required Marketing campaigns, interaction through social media and press releases As and when required Interaction is maintained through direct relationship, meetings, provision of information, Company's website and social media. On regular basis They develop laws and policies to regulate the business environment ensuring transparency in business operations and securing the interest of public at large. Ability to create brand awareness and Fair advertisement influence public Providing true information perception towards specific products or services. Suppliers and service providers including reinsurers & Business opportunity reinsurance brokers are Fair dealing our business partners Sustained business who provide us with relationship goods and services necessary to achieve our goals and strategic objectives. 134 ANNUAL REPORT 2020 Engagement method
  136. Steps to encourage minority shareholders to attend the general meetings General meeting of an organization provides a platform to decide the important matters as well as solicit the viewpoints of shareholders , especially minority shareholders, regarding performance of the organization. The Company takes immense interest in encouraging minority shareholders to participate in the general meetings of the Company. Below are the steps taken by the Company for this purpose: Ÿ To ensure they know: Notice of the general meetings specifying time and place of the meeting is forwarded to each shareholder and published in Urdu as well as English newspapers at least 21 days before the date of the meeting. Further, the notice of general meetings is also made available on the Company’s website. Ÿ To ensure they attend: All shareholders are entitled to attend, speak and vote at the meetings of the Company and are entitled to appoint proxy to attend the meeting on their behalf. Annual Report of the Company is provided to all shareholders before Annual General Meeting (AGM) so that they can review performance of the Company. Further, a detailed briefing on Company’s performance is provided in AGM and all shareholders, including minority shareholders, are encouraged to raise their queries and provide suggestion relating to performance of the Company. Ÿ Covid-19: During the Covid-19 pandemic and even to date, the general meeting are being conducted virtually through video link which enables and increases participation of shareholders from all over country and globe. Investors' Relations section on the Company’s website As one of the leading insurance companies, AICL is committed to providing the best service to its investors / shareholders and creating long term value for them. We ensure consistent and transparent reporting. The Company strives to provide the investors/shareholders with accurate financial information and this information is disseminated through various channels such as Annual and Quarterly reports, press releases, and the Company’s official website. The information on the website is always kept up to date. The website contains section for investors which covers all the areas that an investor might be interested in. Furthermore, a complaint form is also available on the website and the Company’s management ensures efficient handling of any grievance or query. Issues raised in last AGM, decisions taken and their implementation status The Company takes keen interest in soliciting viewpoints of the shareholders regarding its performance. However, at the last Annual General Meeting (AGM) held on 22 May 2020, no specific issues were raised and all agenda items were unanimously adopted by the shareholders. Stakeholder engagement policy, Corporate Briefing Session and Analyst briefing The Company engages wide range of stakeholders for the purpose of its business as detailed above as well and believes in maintaining effective, transparent and frequent interaction with them to share financial performance of the Company, significant changes in regulatory environment, future outlook and Company’s view on implications of the general economic conditions on the operations of the Company. As mandated by the Pakistan Stock Exchange, the Company conducted its annual ‘Corporate Briefing Session’ on 3 December, 2020 using video-link facility. The session was conducted by the Company’s Chief Executive Officer and the Chief Financial Officer and was attended by a large number of shareholders and analysts. The Management presented an analysis of the Company’s performance, plans, outlook and answered the queries raised by the attendants, in detail. The Company also interacts with local as well as international credit rating agencies for the purpose of securing IFS ratings. Local credit rating agency ‘PACRA’ has assigned the Company with ‘AA+’ rating, while one of the most renowned international agency AM Best (UK) assigned the Company with IFS rating of ‘B’. ANNUAL REPORT 2020 135
  137. Statement of Value Addition and its Distribution 2020 WEALTH GENERATED (Rupees In '000') Gross premium earned Investment and all other income Management and other expenses 2019 % (Rupees In '000') 20,308,335 1,599,533 21,907,868 22,860,092 1,586,343 24,446,435 (17,932,153) (19,847,506) % 3,975,715 100.00 4,598,929 100.00 1,743,361 34,680 1,778,041 43.85 0.87 44.72 1,797,252 720,019 2,517,271 39.08 15.66 54.74 962,500 24.21 875,000 19.03 To providers of financial capital as finance cost 15,044 0.38 8,352 0.18 To society as donation 10,400 0.26 1,150 0.03 286,818 922,912 1,209,730 7.21 23.21 30.43 251,313 945,843 1,197,156 5.46 20.57 26.03 3,975,715 100.00 4,598,929 100.00 WEALTH DISTRIBUTED To employees To government To share holders Cash dividend Retained in business Depreciation and amortization Retained profit / (Loss) 2020 To employees To Government Cash Dividend Finance cost Dona ons Deprecia on / amor za on Retained Profit 136 ANNUAL REPORT 2020 2019 To employees To Government Cash Dividend Deprecia on / amor za on Retained Profit
  138. ANNUAL REPORT 2020 137
  139. Sustainability and Corporate Social Responsibility Adamjee Insurance ’s Corporate Social Responsibility (CSR) Program aims to address key concerns in society such as health and education. The Company also stresses on reassuring its chief stakeholders of overall sustainability through compliance, ethics and corporate citizenship. These elements combined together, form the basis of AICL’s corporate philosophy and CSR. Our policy revolves around taking an array of initiatives, including contributing to the society and an environment compliant with rules and regulations in all our practices, conduct business activities in line with our organizational values, promoting a culture of inclusion and diversity, extensive training and employee engagement activities. AICL’s CSR is primarily focused on achieving compliance, upholding ethical standards, actively participating in corporate citizenship and maintaining overall sustainability. AICL has undertaken an array of initiatives, including improved communication and extensive training, to cultivate these aspects of its operations. AICL recognizes its responsibility in reducing the impact of Covid-19 on its employees, customers and society at large. AICL too measures to ensure that employees and customers can operate in a safe environment. AICL was well equipped with the digital infrastructure which enabled it to serve its customers efficiently while ensuring the safety of customers and employees. All the directed SOPs were implemented efficiently and effectively and all social distancing measures were taken very seriously when the offices started operations after lockdown. Community Involvement SUSTAINABLE GROWTH Environmental Impact Economic Growth Health, Safety & Environment Health, Safety and Environmental (HSE) responsibilities constitute an essential part of Adamjee Insurance’s operations. These become the core of the Company’s activities. AICL’s management and employees share the belief that good HSE contributes positively and productively to business development and ultimate success. It is this belief that urges Adamjee Insurance to take measures to safeguard its employees’ health and minimize the environmental impact of their jobs. AICL’s HSE policy observes all existing laws, regulations and amendments. 138 ANNUAL REPORT 2020
  140. AICL believes in setting the benchmark in the industry when it comes to serving the community and lighting in meeting its environmental regulations . At AICL, we promote Green Office Environment conservation by using LED inverter at all our offices, efficient water usage, paperless operations to reduce carbon footprint. We aim to take more initiatives technology for maintaining appropriate temperature in future to make sure we are always adopting the best practices. Commitment to Excellence In an era of intense hectic competition, AICL stays afloat with its unwavering commitment to operational and financial discipline in producing unparalleled results; keeping its promises and continually fulfilling its customers’ needs. During the year, Adamjee Insurance was engaged in various activities with organizations including Rehman Keyani Memorial Foundation, Saleem Memorial Trust Hospital, Hussaini Hematology and Oncology Trust, SAFCO Support Foundation, Sindh Rural Support Organization and others. Adamjee Insurance Re-creational Club organized extra-curricular activities including cricket tournaments, badminton, and table tennis competition for the promotion of healthy activities among employees and also have active participation in the insurance association events. Certifications Acquired for Best Sustainability and CSR Practices Adamjee insurance has been awarded various certifications for its robust approach towards environmental sustainability and social responsibility. These include: Ÿ Certification of Green Office by WWF – ‘To Reduce Ecological Footprint’ Ÿ Environment, Health, Safety & Security Award 2016. Ÿ CSR Award 2013 to 2015, Environmental and Quality Standard Award 2015 Investing in Communities Community Development Health Care Combat Covid-19 Pandemic ANNUAL REPORT 2020 139
  141. 140 ANNUAL REPORT 2020
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  143. Independent Auditor ’s Report To the members of Adamjee Insurance Company Limited Report on the Audit of the Unconsolidated Financial Statements Opinion We have audited the annexed unconsolidated financial statements of Adamjee Insurance Company Limited (the Company), which comprise the unconsolidated statement of financial position as at December 31, 2020, and the unconsolidated profit and loss account, the unconsolidated statement of comprehensive income, the unconsolidated statement of changes in equity, and the unconsolidated statement of cash flows for the year then ended, and notes to the unconsolidated financial statements, including a summary of significant accounting policies and other explanatory information and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of the audit. In our opinion and to the best of our information and according to the explanations given to us, the unconsolidated statement of financial position, unconsolidated of profit and loss account, unconsolidated statement of comprehensive income, unconsolidated the statement of changes in equity and the unconsolidated statement of cash flows together with the notes forming part thereof, conform with the accounting and reporting standards as applicable in Pakistan and give the information required by the Insurance Ordinance, 2000 and the Companies Act, 2017 (XIX of 2017), in the manner so required and respectively give a true and fair view of the state of the Company's affairs as at December 31, 2020 and of the profit, total comprehensive income, the changes in equity and its cash flows for the year then ended. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Unconsolidated Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants as adopted by the Institute of Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the unconsolidated financial statements of the current period. These matters were addressed in the context of our audit of the unconsolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Following are the Key audit matter(s): Sr No. 1. Key audit matter(s) Revenue Recognition Risk Refer note 3.13 and 27 to the unconsolidated financial statements relating to revenue recognition and details in respect of net insurance premium respectively. The Company receives its revenue primarily from two main sources namely; premiums and investments income. Premiums from insurance policies comprise of 92.41% of the total revenue. 142 ANNUAL REPORT 2020 How the matter was addressed in our audit Our audit procedures in respect of this matter included the following: Ÿ Obtained the understanding, evaluated the design and tested the controls over the process of capturing, processing and recording of premiums; Ÿ Assessed the appropriateness of the Company’s accounting policy for recording of premiums and that it is in line with the requirements of applicable law, accounting and reporting standards; Ÿ Traced the premium recorded on sample basis from the underlying policies issued to insurance contract holders;
  144. Sr No . 2. Key audit matter(s) How the matter was addressed in our audit We identified revenue recognition from premium income as a key audit matter because it is one of the key performance indicators of the Company and because of the potential risk that revenue transactions may not be recognized in the appropriate period. Ÿ Tested the policies on sample basis where premium was Valuation of Claim Liabilities Refer note 3.18 and 28 to the unconsolidated financial statements for accounting policies and details in respect of claim liabilities. The Company’s claim liabilities represent 21.74% of its total liabilities. Valuation of these claim liabilities involves significant management judgment regarding uncertainty in the estimation of claims payments and assessment of frequency and severity of claims. Claim liabilities are recognized on intimation of the insured event based on management judgment and estimate. The Company maintains provision for claims incurred but not reported (IBNR) based on the advice of an independent actuary. The actuarial valuation process involves significant judgment and the use of actuarial assumptions. Therefore, we have identified the valuation of claim liabilities as key audit matter. recorded close to year end and subsequent to year end, and evaluated that these were recorded in the appropriate accounting period; and Ÿ Recalculated the unearned portion of premium income and ensured that appropriate amount has been recorded as provision for unearned premium in liabilities. Our audit procedures in respect of this matter included the following: Ÿ Assessed the appropriateness of the Company’s accounting policy for recording of claims in line with requirements of applicable accounting and reporting standards; Ÿ Tested claims transactions on a sample basis with underlying documentation to evaluate whether the claims reported during the year are recorded in accordance with the requirements of the Company's policy and insurance regulations; Ÿ Inspected significant arrangements with reinsurer to obtain an understanding of contracts terms and assessed on a sample basis that recoveries from reinsurance on account of claims reported have been accounted for based on agreed terms and conditions; Ÿ Used an external actuarial specialist to assist us in evaluation of general principles, actuarial assumptions and methods adopted for actuarial valuations by the actuary of the Company for determination of IBNR; Ÿ Assessed competence, capability and objectivity of management’s expert; Ÿ Assessed the data provided by the Company to its actuary for completeness and accuracy and ensured that the same has been provided to us; and Ÿ Considered the adequacy of Company’s disclosures about the estimates used and the sensitivity to key assumptions. Information Other than the Financial Statements and Auditor’s Report Thereon Management is responsible for the other information. The other information comprises the information included in the company’s annual report, but does not include the unconsolidated financial statements and our auditor’s report thereon. Our opinion on the unconsolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. ANNUAL REPORT 2020 143
  145. In connection with our audit of the unconsolidated financial statements , our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the unconsolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information when available, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Board of Directors for the Unconsolidated Financial Statements Management is responsible for the preparation and fair presentation of the unconsolidated financial statements in accordance with the accounting and reporting standards as applicable in Pakistan and the requirements of Insurance Ordinance, 2000, Insurance Rules, 2017, Insurance Accounting Regulations, 2017 and, Companies Act, 2017 (XIX of 2017) and for such internal control as management determines is necessary to enable the preparation of unconsolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the unconsolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Board of Directors are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Unconsolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the unconsolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs as applicable in Pakistan will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these unconsolidated financial statements. As part of an audit, in accordance with ISAs as applicable in Pakistan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Ÿ Identify and assess the risks of material misstatement of the unconsolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Ÿ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Ÿ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Ÿ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the unconsolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Ÿ Evaluate the overall presentation, structure and content of the unconsolidated financial statements, including the disclosures, and whether the unconsolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the board of directors regarding, among other matters, the planned scope and timing of audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 144 ANNUAL REPORT 2020
  146. We also provide the board of directors with a statement that we have complied with relevant ethical requirements regarding independence , and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the board of directors, we determine those matters that were of most significance in the audit of the unconsolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements Based on our audit, we further report that in our opinion: a) proper books of account have been kept by the Company as required by the Insurance Ordinance, 2000 and the Companies Act, 2017 (XIX of 2017); b) the unconsolidated statement of financial position, the unconsolidated profit and loss account, the unconsolidated statement of comprehensive income, the statement of changes in equity and the statement of cash flows together with the notes thereon have been drawn up in conformity with Insurance Ordinance, 2000 and the Companies Act, 2017 (XIX of 2017) and are in agreement with the books of account; c) investments made, expenditure incurred and guarantees extended during the year were for the purpose of the Company’s business; and d) zakat deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980), was deducted by the Company and deposited in the Central Zakat Fund established under section 7 of that Ordinance. The engagement partner on the audit resulting in this independent auditor’s report is Rana M. Usman Khan. Chartered Accountants Lahore : February 23, 2021 ANNUAL REPORT 2020 145
  147. Unconsolidated Statement of Financial Position As at 31 December 2020 Note 2020 2019 Rupees in thousand ASSETS Property and equipment Intangible assets Investment properties Investment in subsidiary Investments Equity securities Debt securities Term deposits Loans and other receivables Insurance / reinsurance receivables Reinsurance recoveries against outstanding claims Salvage recoveries accrued Deferred commission expense / acquisition cost Taxation - payment less provisions Prepayments Cash and bank 5 6 7 8 4,467,919 88,187 401,896 1,097,900 4,232,130 68,927 401,896 694,895 9 10 11 12 13 19,194,460 374,331 5,929,062 582,896 4,759,151 5,922,296 270,275 731,319 376,484 3,422,781 1,312,044 48,931,001 18,843,017 465,868 5,883,892 477,264 5,810,164 5,931,928 301,420 1,190,146 3,633,739 1,176,685 49,111,971 Total assets of Window Takaful Operations - Operator's Fund 16 589,148 426,291 49,520,149 49,538,262 17 18 3,500,000 4,486,946 14,247,913 22,234,859 3,500,000 4,555,491 13,325,001 21,380,492 28 27 29 19 20 21 22 10,768,040 8,366,434 245,318 197,232 1,375,394 166,367 14,767 399,494 3,030,884 1,806,196 672,367 27,042,493 10,367,347 10,242,348 237,751 225,177 1,329,898 363,002 2,701,164 1,719,334 723,618 52,259 27,961,898 242,797 195,872 49,520,149 49,538,262 29 14 15 Total Assets EQUITY AND LIABILITIES Capital and reserves attributable to the Company's equity holders Ordinary share capital Reserves Unappropriated profit Total Equity LIABILITIES Underwriting provisions Outstanding claims including IBNR Unearned premium reserves Unearned reinsurance commission Retirement benefit obligations Deferred taxation Borrowings Deferred grant income Premium received in advance Insurance / reinsurance payables Other creditors and accruals Deposits and other liabilities Taxation - provision less payments 23 24 25 Total liabilities of Window Takaful Operations - Operator's Fund 16 Total Equity and Liabilities 26 Contingencies and commitments The annexed notes 1 to 49 form an integral part of these unconslidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 146 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  148. Unconsolidated Pro fit and Loss Account For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand Net insurance premium 27 13,294,626 15,433,989 Net insurance claims 28 (7,986,856) (9,876,537) Net commission and other acquisition costs 29 (1,833,190) (1,507,205) (9,820,046) (11,383,742) (3,098,880) (3,396,625) 375,700 653,622 1,092,506 1,372,373 Insurance claims and acquisition expenses Management expenses 30 Underwriting results Investment income 31 Rental income 32 112,717 30,040 Other income 33 242,866 68,551 Fair value adjustment to investment property 7 - 12,298 34 (62,333) (58,992) - 355,761 1,761,456 2,433,653 Other expenses Workers' welfare fund reversal / (charge) 24.1 Results of operating activities Finance cost Profit from Window Takaful Operations - Operator's fund 16 Profit before taxation Income tax expense 35 Profit after taxation (15,044) (8,352) 163,774 107,693 1,910,186 2,532,994 (34,680) (720,019) 1,875,506 1,812,975 Rupees Earnings (after tax) per share - basic and diluted 36 5.36 5.18 The annexed notes 1 to 49 form an integral part of these unconslidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 147
  149. Unconsolidated Statement of Comprehensive Income For the year ended 31 December 2020 2020 2019 Rupees in thousand Pro fit after taxation Items that will not be subsequently reclassified to profit and loss account - Re-measurement of retirement benefit obligations Items that may be subsequently reclassified to profit and loss account - Unrealized ( loss) / gain on 'available-for-sale' investments - net of tax - Reclassification adjustment relating to 'available for sale' investments disposed of in the year - net of tax - Unrealized (loss) / gain on 'available for sale' investment from Window Takaful Operations - net of tax - Net effect of translation of foreign branches Other comprehensive (loss) / income for the year Total comprehensive income for the year 1,875,506 1,812,975 9,906 7,868 (145,278) 490,824 73,704 218,255 (473) 1,338 3,502 60,874 (58,639) 779,159 1,816,867 2,592,134 The annexed notes 1 to 49 form an integral part of these unconslidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 148 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  150. Unconsolidated Cash Flow Statement For the year ended 31 December 2020 2020 2019 Rupees in thousand Cash flows from operating activities Underwriting activities Insurance premiums received Reinsurance premiums paid Claims paid Surrenders paid Reinsurance and other recoveries received Commissions paid Commissions received Other underwriting payments Net cash inflow from underwriting activities 19,452,743 (6,488,542) (11,973,346) (55,690) 4,326,300 (1,952,076) 532,528 (2,873,666) 968,251 23,936,602 (8,174,534) (14,686,699) (68,640) 4,599,404 (2,539,507) 622,744 (3,192,498) 496,872 (341,322) (7,373) (30,192) (45,178) 49,691 53,910 (320,464) (549,667) (8,352) (58,993) (69,345) 65,832 30,300 (590,225) 647,787 (93,353) 280,219 10,221 24,641 997,266 121,113 (11,103,896) 10,367,467 (495,237) (25,837) 104,134 280,091 151,655 383 36,740 1,406,649 27,180 (9,561,029) 9,065,908 (1,158,726) (8,933) 42,948 2,775 (44,092) (926,576) 178,609 (460) (792,519) (73,660) (870,521) (944,181) 135,359 1,176,685 1,312,044 (1,034,759) 2,211,444 1,176,685 Other operating activities Income tax paid Finance cost paid on lease liability Other operating payments Loans advanced Loans repayments received Other operating receipts Net cash outflow from other operating activities Total cash inflow / (outflow) from operating activities Cash flows from investing activities Profit received on bank deposits Income received from Pakistan Investment Bonds Income from Treasury Bills Dividends received Rentals received Payments made for investments Proceeds from disposal of investments Fixed capital expenditure - operating assets Fixed capital expenditure - intangible assets Proceeds from disposal of operating assets Total cash inflow from investing activities Cash flows from financing activities Payments against lease liability Dividends paid Loan obtained Interest expense against loan paid Net cash outflows from financing activities Net cash inflow / (outflow) from all activities Cash and cash equivalent at beginning of the year Cash and cash equivalent at end of the year ANNUAL REPORT 2020 149
  151. Unconsolidated Cash Flow Statement For the year ended 31 December 2020 2020 2019 Rupees in thousand Reconciliation to pro fit and loss account Operating cash flows Depreciation expense Provision for retirement benefit obligations Finance cost on borrowing Provision for doubtful balances against insurance / reinsurance receivables Other income - bank & term deposits Gain / (loss) on disposal of operating assets Rental income Fair value adjustment to investment property Decrease in assets other than cash (Increase) / decrease in liabilities Gain on disposal of investments Amortization expense Decrease / (increase) in unearned premium (Decrease) / increase in loans Income tax paid Increase in tax liabilities Provision for impairment of 'available-for-sale' investments Dividend and other income Income from Treasury Bills Income from Pakistan Investment Bonds Income against deferred grant Profit for the year from Window Takaful Operations - Operator's fund Profit after taxation 647,787 (263,522) (50,016) (7,671) (44,062) 280,987 74,944 114,576 (1,486,218) (635,352) 41,112 (23,296) 1,875,914 (4,513) 341,322 (34,680) (158,641) 1,000,315 27,218 11,284 4,243 163,774 (93,353) (226,400) (48,934) (187,764) 215,103 (6,763) 35,503 12,298 (35,331) 1,171,838 41,668 (24,913) (141,447) 3,513 549,667 (720,019) (294,179) 1,406,649 46,263 1,883 107,693 1,875,505 1,812,975 2020 2019 Rupees in thousand Cash and bank for the purposes of the cash flow statement consists of: Cash and cash equivalents Current and saving accounts 5,141 1,306,903 10,413 1,166,272 Total cash and cash equivalents 1,312,044 1,176,685 The annexed notes 1 to 49 form an integral part of these unconslidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 150 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  152. Unconsolidated Statement of Changes in Equity For the year ended 31 December 2020 Share capital Issued , subscribed and paid up Capital reserve Reserve for exceptional losses Investment fluctuation reserve Revenue reserve Exchange translation reserve Fair Value Reserve General reserve Unappropriated Profit Total Rupees in thousand Balance as at January 01, 2019 3,500,000 Profit after taxation Other comprehensive income Total comprehensive income for the year ended December 31, 2019 22,859 3,764 614,062 2,207,015 936,500 12,379,158 19,663,358 - - - 60,874 60,874 710,417 710,417 - 1,812,975 7,868 1,820,843 1,812,975 779,159 2,592,134 - - - - - - (525,000) (350,000) (875,000) (525,000) (350,000) (875,000) 22,859 3,764 674,936 2,917,432 - - - 3,502 3,502 (72,047) (72,047) - 1,875,506 9,906 1,885,412 1,875,506 (58,639) 1,816,867 - - - - - - (525,000) (437,500) (962,500) (525,000) (437,500) (962,500) 22,859 3,764 678,438 Transactions with owners of the company Final cash dividend at Rs. 1.5 per share - December 31, 2018 Interim cash dividend at Rs. 1.0 per share - June 30, 2019 3,500,000 Balance as at December 31, 2019 Profit after taxation Other comprehensive income Total comprehensive income for the year ended December 31, 2020 936,500 13,325,001 21,380,492 Transactions with owners of the Company Final cash dividend at Rs. 1.5 per share - December 31, 2019 Interim cash dividend at Rs. 1.25 per share - June 30, 2020 3,500,000 Balance as at December 31, 2020 2,845,385 936,500 14,247,913 22,234,859 The annexed notes 1 to 49 form an integral part of these unconslidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 151
  153. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 1 Legal status and nature of business Adamjee Insurance Company Limited ('the Company') is a public limited Company incorporated in Pakistan on September 28, 1960 under the repealed Companies Act, 1913 (now the Companies Act, 2017). The Company is listed on Pakistan Stock Exchange limited and is principally engaged in the general insurance business. The registered office of the Company is situated at Adamjee House Building, 80/A Block E-1, Main Boulevard Gulberg-III, Lahore. The Company operates 60 (2019: 91) branches within Pakistan. The Company also operates 3 (2019: 3) branches in the United Arab Emirates (UAE) and 1 (2019: 1) branch in the Export Processing Zone, Karachi (EPZ). The Company was granted authorization on December 23, 2015 under Rule 6 of the Takaful Rules, 2012 to undertake Window Takaful Operations in respect of general takaful products by the Securities and Exchange Commission of Pakistan (SECP) and commenced Window Takaful Operations on January 01, 2016. 2 Basis of preparation and statement of compliance 2.1 These unconsolidated financial statements have been prepared in accordance with accounting and reporting standards as applicable in Pakistan. The accounting and reporting standards comprise of: - International Financial Reporting Standards 'IFRS' issued by the International Accounting Standards Board 'IASB' as are notified under the Companies Act, 2017; and - Provision of and directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, the Takaful Rules, 2012 and Takaful Accounting Regulation, 2019. In case requirements differ, the provisions of or the directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, the Takaful Rules, 2012 and Takaful accounting regulations, 2019, shall prevail. These financial statements represent separate unconsolidated financial statements of the Company, prepared in accordance with the format of financial statements prescribed under Insurance Rules, 2017 and Accounting Regulations, 2017. The consolidated financial statements of the group are issued separately. As per the requirements of the Takaful Rules, 2012 and SECP Circular No. 25 of 2015 dated July 09, 2015, the assets, liabilities and profit and loss account of the Operator's Fund of the Window Takaful Operations of the Company have been presented as a single line item in the statement of financial position and profit and loss account of the Company respectively. A separate set of financial statements of the Window Takaful Operations has been annexed to these unconsolidated financial statements as per the requirements of the Takaful Rules, 2012. 2.2 Basis of measurement These unconsolidated financial statements have been prepared under historical cost convention except for certain foreign currency translation adjustments, certain financial instruments carried at fair value, and retirement benefit obligations under employees benefits carried at present value. All transactions reflected in these financial statements are on accrual basis except for those reflected in cash flow statement. 2.3 Functional and presentation currency Items included in the unconsolidated financial statements are measured using the currency of the primary economic environment in which the Company operates ('the functional currency'). The financial statements are presented in Pak Rupees, which is the Company's functional and presentation currency. All the financial information presented in Rupees has been rounded off to the nearest thousand rupees, except otherwise stated. 152 ANNUAL REPORT 2020
  154. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 2 .4 Standards, interpretations and amendments to accounting and reporting standards as applicable in Pakistan that are effective in current year The following standards, amendments and interpretations of accounting and reporting standards that will be effective for accounting periods beginning on or after January 01, 2020: Standards or Interpretations Effective from annual period beginning on or after: IFRS 14 'Regulatory Deferral Accounts’ 2.5 July 01, 2019 Amendments to IFRS 3 'Business Combinations' - Amendments regarding the definition of business. January 01, 2020 Amendments to the Conceptual Framework for Financial Reporting, including amendments to references to the Conceptual Framework in IFRS Standards. January 01, 2020 Amendments to IAS 39, IFRS 7 and IFRS 9 – The amendments will affect entities that apply the hedge accounting requirements of IFRS 9 or IAS 39 to hedging relationships directly affected by the interest rate benchmark reform. January 01, 2020 Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' - Amendments regarding the definition of material. January 01, 2020 Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' - Sale or contribution of assets between an investor and its associate or joint venture. January 01, 2020 New accounting standards / amendments and IFRS interpretations that are not yet effective The following International Financial Reporting Standards (IFRS Standards) as notified under the Companies Act, 2017 and the amendments and interpretations thereto will be effective for accounting periods beginning on or after January 01, 2021: Standards or Interpretations Effective from annual period beginning on or after: Amendments to IFRS 16 ' Leases' - Provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification. June 01, 2020 IBOR 2 'Interest Rate Benchmark Reform — Phase 2' Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)' with amendments that address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. January 01, 2021 Amendments to IAS 16 'Property, Plant and Equipment', prohibiting the Company from deducting from the cost of property plant and equipment, amount received from selling items produce while the Company is preparing the asset for its intended use. January 01, 2022 Amendments to IFRS 3 'Business Combinations' that updated an outdated reference in IFRS 3 without significantly changing its requirements. January 01, 2022 Amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' regarding the costs of fulfilling the contract to include when assessing whether a contract is Onerous. January 01, 2022 ANNUAL REPORT 2020 153
  155. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Effective from annual period beginning on or after : Standards or Interpretations January 01, 2023 Amendments to IAS 1 'Presentation of Financial Statements' - Classification of liabilities as current or non-current. Effective from accountingperiod beginning on or after a date to be determined.Earlier application is permitted. Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' - Sale or contribution of assets between an investor and its associate or joint venture. Certain annual improvements have also been made to a number of IFRSs. Other than the aforesaid standards, interpretations and amendments, the International Accounting Standards Board (IASB) has also issued the following standards which have not been adopted locally by the Securities and Exchange Commission of Pakistan: - IFRS 1 – First Time Adoption of International Financial Reporting Standards - IFRS 17 – Insurance Contracts There are certain other new and amended standards and interpretations that are mandatory for the insurance accounting periods beginning on or after January 01, 2021 but are considered either not to be relevant or do not have any significant impact on these financial statements. IFRS 9 - Financial Instruments IFRS 9 'Financial Instruments' has become applicable, however as an insurance company, the management has opted temporary exemption from the application of IFRS 9 as allowed by International Accounting Standards Board (IASB) for entities whose activities are predominantly connected with insurance. Additional disclosures, as required by the IASB, for being eligible to apply the temporary exemption from the application of IFRS 9 are given below: The tables below set out the fair values as at the end of reporting period and the amount of change in the fair value during that period for the following two groups of financial assets separately: (a) Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding, excluding any financial asset that meets the definition of held for trading in IFRS 9, or that is managed and whose performance is evaluated on a fair value basis, and (b) All other financial assets Financial assets Cash and Bank* Investment in subsidiary* Investments in equity securities - available-forsale Investment in debt securities held to maturity Term deposits* Loans and other receivables* Total AS at December 31, 2020 Fail the SPPI test Pass the SPPI test Change in Change in unrealized Carrying Cost less unrealized gain / Fair value gain / (loss) Value Impairment (loss) during the during the period period Rupees in thousand 1,312,044 1,097,900 - 19,194,460 (100,811) 579,411 22,183,815 (100,811) - - - - - - 374,331 5,929,062 3,485 6,306,878 - - * The carrying amount of these financial assets measured applying IAS 39 are a reasonable approximation of their fair values. 154 ANNUAL REPORT 2020
  156. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 3 Summary of significant accounting policies The significant accounting policies adopted in preparation of these financial statements are set out below . Accounting policies relating to Window Takaful Operations are disclosed in a separate financial statements of Window Takaful Operations which have been annexed to these financial statements. These accounting policies have been consistently applied to all the years presented. 3.1 Property and equipment Owned operating assets, other than freehold land which is not depreciated are stated at cost, signifying historical cost, less accumulated depreciation and any provision for accumulated impairment. Freehold land and capital work-in-progress are carried at cost less accumulated impairment losses, if any. Depreciation is charged to profit and loss account applying reducing balance method depending upon the nature of the asset, at the rates specified for calculation of depreciation after taking into account residual value, if any. The useful lives, residual values and depreciation method are reviewed, and adjusted if appropriate, at each reporting date. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future benefits associated with the asset will flow to the Company and the cost of the asset can be measured reliably. All other repairs and maintenance costs are charged to profit and loss account as and when incurred. Depreciation on additions is charged from the month the assets are available for use while on disposals, no depreciation is charged in the month in which the assets are disposed off. The carrying values of operating assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount of the assets disposed off. These are taken to profit and loss account. 3.2 Capital work in progress Capital work in progress is stated at cost less any identified impairment loss. All expenditure including borrowing costs connected with specific assets incurred during installation and construction period are carried under capital work-inprogress. These are transferred to operating assets as and when these are available for use. 3.3 Intangible assets These are stated at cost less accumulated amortization and provision for accumulated impairment, if any. Amortization is calculated from the month the assets are available for use using the straight-line method, whereby the cost of the intangible asset is amortized over its estimated useful life over which economic benefits are expected to flow to the Company. The useful life and amortization methods are reviewed, and adjusted if appropriate, at each reporting date. Software development costs are only capitalized to the extent that future economic benefits are expected to be derived by the Company. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. 3.4 Investment properties Investment property is measured at purchase cost on initial recognition including directly attributable to the acquisition of the investment property and subsequently at fair value with any change therein recognized in profit and loss account. ANNUAL REPORT 2020 155
  157. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Subsequent costs are included in the carrying amount of the investment property , only when it is probable that the future economic benefits associated with the items will flow to the Company and the cost of the item can be measured reliably. Other repair and maintenance costs are charged to profit and loss account as and when incurred. 3.5 Insurance contracts Insurance contracts are those contracts where the Company (the insurer) has accepted significant insurance risk from another party (the policy holders) by agreeing to compensate the policy holders on the occurrence of a specified uncertain future event i.e. insured event that adversely affects the policy holders. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its contract period, even if the insurance risk reduces significantly during this period, unless all rights and liabilities are extinguished or expired. Insurance contracts issued by the Company are generally classified in five basic categories i.e. Fire & property, Marine, aviation & transport, Motor, Accident & health and Miscellaneous, and are issued to multiple types of clients with businesses in engineering, automobiles, cement, power, textiles, paper, agriculture, services and trading sectors etc. and individuals as well. The tenure of these insurance contracts depends upon terms of the policies written and vary accordingly. - Fire and property insurance contracts generally cover the assets of the policy holders against damages by fire, earthquake, riots and strike, explosion, atmospheric disturbance, flood, electric fluctuation and impact, burglary, loss of profit followed by the incident of fire, contractor's all risk, erection all risk, machinery breakdown and boiler damage, etc. according to the terms and conditions of the policy. - Marine, aviation and transport insurance contracts generally provide cover against damages by cargo risk and damages occurring during transit between the points of origin and final destination including loss of or damage to carrying vessel etc. according to the terms and conditions of the policy. - Motor insurance contracts provide indemnity for accidental damage to or total loss of insured vehicle including loss of or damage to third party and other comprehensive car coverage etc. according to term and conditions of the policy. - Accident and health insurance contracts mainly compensate hospitalization and out patient medical coverage to the insured according to term and conditions of the policy. - Miscellaneous insurance contracts provide variety of coverage including cover against burglary, loss of cash in safe, cash in transit and cash on counter, fidelity guarantee, personal accident, workmen compensation, travel and crop, mobilization and performance bond etc. according to term and conditions of the policy. In addition to direct insurance, the Company also participates in risks under co-insurance contracts from other companies and also accepts risks through re-insurance inward by way of facultative acceptance on case to case basis provided such risks are within the underwriting policies of the company. The nature of the risks undertaken under such arrangement are consistent with the risks in each class of business as stated above in direct and other lead insurance contracts. 3.6 Deferred commission expense / acquisition cost Commission expense incurred in obtaining and recording policies is deferred and recognized as an expense in accordance with pattern of recognition of premium revenue. Other acquisition costs are charged to profit and loss account at the time the policies are accepted. 3.7 Unearned premium The unearned premium represents the portion of premium written relating to the unexpired period of insurance coverage at the reporting date. It is recognized as a liability. Such liability is calculated as a the ratio of the unexpired period of the policy and the total policy period, both measured to the nearest day except: 156 ANNUAL REPORT 2020
  158. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 - for marine cargo , as a ratio of the unexpired shipment period to the total expected shipment period, both measured to the nearest day. - for crop business, as a ratio of the unexpired crop period to the total expected crop period, both measured to the nearest day. Policy for recognition of premium revenue is disclosed in detail in note 3.13 to these financial statements. Unearned premium reserve calculated by the Company is also confirmed by an independent actuary. 3.8 Premium deficiency In order to comply with the requirements of section 34(2)(d) of the Insurance Ordinance, 2000, a premium deficiency reserve is maintained for each class of business, where the unearned premium liability for any class of business is not adequate to meet the expected future liability, after re-insurance, for claims and other expenses, including reinsurance expense, commissions, and other underwriting expenses, expected to be incurred after the reporting date in respect of the policies in force at the reporting date, in that class of business. For this purpose, premium deficiency reserve is determined by independent actuaries. The actuary determines the prospective loss ratios for each class of business and applies factors of unearned and earned premiums and uses assumptions appropriate to arrive at the expected claims settlement cost which when compared with unearned premium reserve (UPR) shows whether UPR is adequate to cover the unexpired risks. If these ratios are adverse, premium deficiency is determined. Based on actuary's advice the management creates a reserve for the same in these unconsolidated financial statements. The movement in the premium deficiency reserve on net basis is recorded as an expense / income in profit and loss account for the year. 3.9 Reinsurance contracts held The Company enters into reinsurance contracts in the normal course of business in order to limit the potential for losses arising from certain exposures. Reinsurance contracts includes treaty reinsurance, whereby certain agreed proportion of risks are shared with the participating companies, hence higher underwriting capacity with larger spread becomes available. Depending upon the nature and / or size of the risk at times reinsurance of excess of capacity is also placed on case to case basis under facultative reinsurance arrangement. The Company also accepts facultative reinsurance from other local insurance companies provided the risk meets the underwriting requirements of the Company. Outward reinsurance premiums are accounted for in the same period as the related premiums for the direct or accepted reinsurance business being reinsured. The risks undertaken by the Company under these contracts for each class of business are stated in note 3.5 to the financial statements. Reinsurance liabilities represents the balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the related reinsurance contract. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the provision for outstanding claims or settled claims associated with the reinsurance policies and are in accordance with the related reinsurance contract. Reinsurance assets or liabilities are derecognized when the contractual rights or obligations are extinguished or expired. Furthermore, reinsurance assets are not offset against related insurance liabilities. Income or expenses from reinsurance contract are not off set against income or expenses from related insurance assets. The Company assesses its reinsurance assets for impairment on reporting date. If there is an objective evidence that the reinsurance asset is impaired, the Company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognizes the impairment loss in the profit and loss account. ANNUAL REPORT 2020 157
  159. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 The portion of reinsurance premium not recognized as an expense is shown as a prepayment . Prepayment (i.e. premium ceded to reinsurers) is recognized as follows: - for reinsurance contracts operating on a proportional basis, a liability to the reinsurer is recognized on attachment of the underlying policies reinsured, while an asset is recognized for the unexpired period of reinsurance coverage at the reporting date as prepaid reinsurance premium ceded and the same is expensed over the period of underlying policies. Commission income from reinsurers is recognized at the time of issuance of the underlying insurance policy by the Company. This income is deferred and brought to profit and loss account as commission income in accordance with the pattern of recognition of the reinsurance premium to which it relates. Profit commission and no claim bonus (if any), which the Company may be entitled to under the terms of reinsurance, is recognized on accrual basis. 3.10 Receivables and payables related to insurance contracts Insurance / reinsurance receivable and payable including premium due but unpaid, relating to insurance contracts are recognized when due and carried at cost less provision for impairment (if any) . The cost is the fair value of the consideration to be received / paid in the future for services rendered / received. These amounts also include due to and from other insurance companies and brokers. Premium received in advance is recognized as liability till the time of issuance of insurance contract there against. An assessment is made at each reporting date to determine whether there is an objective evidence from external as well as internal sources of information that a financial asset or group of assets may be impaired i.e. recoverable amount at the reporting date is less than the earning amount of the asset. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognized, in the profit and loss account, for the difference between the recoverable amount and the carrying amount. Provisions for impairment are reviewed at each reporting date and adjusted to reflect the current best estimates. Changes in the provisions are recognized as income or expense, in the profit and loss account. 3.11 Segment reporting A business segment is a distinguishable component of the Company that is engaged in providing services that are subject to risks and returns that are different from those of other business segments. The Company accounts for segment reporting of operating results using the classes of business as specified under the Insurance Ordinance, 2000 and the Insurance Rules, 2017. The reported operating segments are also consistent with the internal reporting provided to Board of Directors which is responsible for allocating resources and assessing performance of the operating segments. The performance of segments is evaluated on the basis of underwriting results of each segment. Assets, liabilities and capital expenditures that are directly attributable to segments have been assigned to them. Those assets and liabilities which cannot be allocated to a particular segment on a reasonable basis are reported as unallocated corporate assets and liabilities. 3.12 Cash and cash equivalents Cash and cash equivalents are carried in the statement of financial position at cost. It comprises cash in hand, policy stamps and bank balances. 3.13 Revenue recognition 3.13.1 Premiums Premiums including administrative surcharge under an insurance contract are recognized as written from date of issuance to the date of attachment of risk to the policy / cover note. Where premium for a policy is payable in installments, full premium for the duration of the policy is recognized as written, where the first such installment has 158 ANNUAL REPORT 2020
  160. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 been duly received by the Company , at the inception of the policy and related assets is recognized as premium receivable. Revenue from premiums is determined after taking into account the unearned portion of premiums. The unearned portion of premium income is recognized as a liability as explained in note 3.7. Reinsurance premium is recognized as expense after taking into account the proportion of prepaid reinsurance premium which is recognized as a proportion of the gross reinsurance premium of each policy, determined as the ratio of the unexpired period of the policy and the total period, both measured to the nearest day. The prepaid portion of premium is recognized as a prepayment as explained in note 3.7. 3.13.2 Commission Income Commission income from other insurers / reinsurers is deferred and recognized as liability and recognized in the profit and loss account as commission income in accordance with the pattern of recognition of the reinsurance premiums. 3.13.3 Investment income Following are recognized as investment income: - Income from held to maturity investments is recognized on a time proportion basis taking into account the effective yield on the investments. The difference between the redemption value and the purchase price of the held to maturity investments is amortized and taken to the profit and loss account over the term of the investment. - Dividend income is recognized when the Company's right to receive the dividend is established. - Gain / loss on sale of available-for-sale investments is recognized in profit and loss account in the year of sale. - Return on bank deposits is recognized on a time proportion basis taking into account the effective yield. 3.14 Investment in Subsidiary Investment in subsidiary is measured at cost less any identified impairment loss in the Company’s separate financial statements. Cost represents the fair value of the consideration given, including any transaction costs paid, by the Company at the time of purchase of such equity instruments. In case of an increase in the investment in a subsidiary the accumulated cost represents the carrying value of the investment. At each statement of financial position date, the Company reviews the carrying amounts of the investments in subsidiary to assess whether there is any indication that such investments have suffered an impairment loss. If any such indication exists, the recoverable amount is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. Impairment losses are recognised as expense in the statement of profit or loss. Investment in subsidiary that suffered an impairment, are reviewed for possible reversal of impairment at each reporting date. Impairment losses recognised in the statement of profit or loss are reversed through the statement of profit or loss. The carrying amount of an investment carried at cost is derecognised when it is sold or otherwise disposed of. The difference between the fair value of any consideration received on disposal and the carrying amount of the investment is recorded in the statement of profit or loss as a gain or loss on disposal. ANNUAL REPORT 2020 159
  161. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 3 .15 Investments Investments are recognized and classified as follows: - Investment at fair value through profit or loss - Held to maturity - Available-for-sale The classification depends on the purpose for which the financial assets were acquired. The Company does not have any 'investment at fair value through profit and loss account' at the statement of financial position date. 3.15.1 Held to maturity Investments with fixed determinable payments and fixed maturity, where management has both the intent and the ability to hold to maturity, are classified as held to maturity. Subsequently, these are measured at amortized cost less provision for impairment, if any. Any premium paid or discount availed on government securities and term finance certificates is deferred and amortized over the period to maturity of investment using the effective yield. 3.15.2 Available-for-sale Investments which are not eligible to be classified as 'fair value through profit or loss' or 'held to maturity' are classified as 'available-for-sale'. These investments are intended to be held for an indefinite period of time which may be sold in response to the need for liquidity, changes in interest rates, equity prices or exchange rates. These are initially measured at cost and subsequently re-measured at fair value at each reporting date. The unrealized gains and losses arising from changes in fair values are directly recognized in equity in the year in which these arise. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the profit and loss account as gains and losses from investment securities. The Company assesses at each statement of financial position date whether there is an objective evidence that the financial asset is impaired. If any such evidence exists for an 'available for sale' asset, the accumulated loss is removed from equity and recognized in the profit and loss account. Quoted Subsequent to initial recognition, these investments are re-measured at fair value. Gains or losses on investments on re-measurement of these investments are recognized in statement of comprehensive income. Unquoted Fair value of unquoted investments is determined on the basis of appropriate valuation techniques as allowed by IAS 39 'Financial Instruments: Recognition and Measurement'. Where fair value cannot be measured reliably, these are carried at cost. The valuation of unquoted investment as at December 31, 2020 has been carried out by independent valuer for determination of fair value of these investments. 3.15.3 Fair / market value measurements For investments in Mutual funds, fair / market value is determined by reference to rates quoted by Mutual Fund Association of Pakistan (MUFAP). For investments in quoted marketable securities, other than Term Finance Certificates, fair / market value is determined by reference to Pakistan Stock Exchange quoted market price at the close of business on reporting date. The fair market value of Term Finance Certificates is as per the rates issued. 160 ANNUAL REPORT 2020
  162. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 3 .15.4 Date of recognition Regular way purchases and sales of investments that require delivery within the time frame established by regulations or market convention are recognized at the trade date. Trade date is the date on which the Company commits to purchase or sell the investment. 3.16 Off setting of financial assets and financial liabilities A financial asset and a financial liability is offset and the net amount is reported in the statement of financial position when the Company has a legally enforceable right to set-off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. 3.17 Provisions Provision are recognized when the Company has a present, legal or constructive obligation as a result of past events and, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made of the amount of obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. 3.18 Provision for outstanding claims including IBNR The Company recognizes liability in respect of all claims incurred up to the reporting date which is measured at the undiscounted value of the expected future payments. The claims are considered to be incurred at the time of the incident giving rise to the claim except as otherwise expressly indicated in the insurance contract. The liability for claims include amounts relating to unpaid reported claims, claims incurred but not reported (IBNR), expected claims settlement costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. SECP through its circular 9 of 2016 dated March 09, 2016 issued 'SEC guidelines for estimation of incurred but not reported (IBNR) claims reserve 2016' for non-life insurance Companies and required to comply with all provisions of these guidelines with effect from July 01, 2016. The Guidelines require that estimation for provision for claims incurred but not reported (IBNR) for each class of business, by using prescribed Method 'Chain Ladder Method' and other alternate method as allowed under the provisions of the Guidelines. The Chain Ladder Method involves determination of development factors or link ratios for each period. These are then subsequently combined to determine Cumulative Development Factor (CDF) which represents the extent of future development of claims to reach their ultimate level to derive an IBNR estimate. The actuarial valuation as at December 31, 2020 has been carried out by independent firm of actuaries for determination of IBNR for each class of business. The actuarial valuation is based on a range of standard actuarial claim projection techniques, based on empirical data and current assumptions as explained in preceding paragraph that may include a margin for adverse deviation as required / allowed by the circular 9 of 2016. The methods used, and the estimates made, are reviewed regularly. 3.19 Taxation Income tax comprises current and deferred tax. Income tax is recognized in the profit and loss account except to the extent that relates to items recognized directly in equity or other comprehensive income, in which case it is recognized directly in equity or other comprehensive income. Current Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for current tax is calculated using prevailing tax rates or tax rates expected to apply to the profit for the year, if enacted. The charge for current tax also include adjustments, where considered necessary, to provision for tax made in previous years arising from assessments finalized during the current year for such years. ANNUAL REPORT 2020 161
  163. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Deferred Deferred taxation is accounted for using the statement of financial position liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the unconsolidated financial statements and the corresponding tax bases used in the computation of the taxable profit . Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is charged or credited in the profit and loss account, except in the case of items credited or charged to statement of comprehensive income in which case it is included in statement of comprehensive income. 3.20 Retirement benefit obligations The main feature of the scheme operated by the company for its employees are as follows: 3.20.1 Defined contribution plan The Company operates an approved contributory provident fund scheme for all its eligible employees. Equal monthly contributions to the fund are made by the Company and the employees at the rate of 8.33% of basic salary. Contributions made by the company are recognized as expense. The Company has no further payment obligations once the contributions have been paid. Obligation for contributions to defined contribution plan is recognized as an expense in the profit and loss account as and when incurred. 3.20.2 Defined benefit plans The Company operates the following defined benefit plans: (a) an approved funded gratuity scheme for all its permanent employees in Pakistan. Annual contribution are made to this scheme on the basis of actuarial recommendations. The Company recognizes expense in accordance with IAS 19 'Employee Benefits'. The contributions have been made to gratuity fund in accordance with the actuary’s recommendations based on the actuarial valuation of these funds as at December 31, 2020. (b) unfunded gratuity scheme covering the employees in the UAE branches as per the requirements of the applicable regulations. Provision is made in these unconsolidated financial statements on the basis of the actuarial valuation carried out by an independent actuary using the projected unit credit method. The latest valuation has been carried at December 31, 2020. Past-service costs are recognized immediately in profit and loss account, unless the changes to the plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. The Company's net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Re-measurement of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit 162 ANNUAL REPORT 2020
  164. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit and loss account. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit and loss account. The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. 3.20.3 Employees' compensated absences The Company accounts for these benefits in the period in which the absences are earned. The Company provides annually for the expected cost of accumulating compensated absences on the basis of actuarial valuation. Regular employees of the Company are entitled to 30 days earned leaves in a calendar year and they can accumulate the unutilised privilege leaves upto 60 days (2019: 60). The most resent valuation is carried out as at December 31, 2020 using the LIFO method. The liabilities are presented as a current employees benefit obligations in the statement of financial position. 3.21 Impairment of assets Financial assets A financial asset is considered to be impaired if objective evidence indicate that one or more events had a negative effect on the estimated future cash flow of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as a difference between its carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of available for sale financial asset is calculated with reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Non financial assets The carrying amounts of Company's non-financial assets are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of such asset is estimated. An impairment loss is recognized wherever the carrying amount of asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss account. A previously recognized impairment loss is reversed only if there has been change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit and loss account. 3.22 Dividend distribution Dividend distribution to the Company's shareholders and other appropriations are recognized in the Company's financial statements in the period in which these are approved. Appropriations of profit are reflected in the statement of changes in equity in the period in which such appropriations are approved. 3.23 Management expenses Expenses of management both direct and indirect are allocated on the basis of activity in each class of business. Expenses not allocable to the underwriting business are charged as other expenses. ANNUAL REPORT 2020 163
  165. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 3 .24 Leases As a lessee, the Company recognizes right of use asset and lease liability at the lease commencement date. Right of use assets The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payment made at or before the commencement date, plus any initial direct cost incurred and less any lease incentives received. The right of use assets are subsequently depreciated using the straight-line method over the lease term as this method most closely reflects the expected pattern of consumption of future economic benefits. In addition, the right of use asset is periodically reduced by impairment losses, if any, and adjusted for the certain remeasurement of the lease liability. Lease liability The lease liability is initially measured at present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise of the following: - fixed payments , including in-substance fixed payments; - variable lease payments that depend on an index, or a rate, initially measured using the index or rate as at commencement date; - amount expected to be payable under a residual guarantee; and - the exercise under purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of lease unless the Company is reasonably certain not to terminate early. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change Company's estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in Profit and loss account if the carrying amount of the right of use asset has been reduced to zero. 3.25 Foreign currencies Transactions in foreign currencies (other than the result of foreign branches) are accounted for in Pak Rupees at the rates prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Pak Rupees at the rates of exchange prevailing at the reporting date. Exchange differences are taken to the profit and loss account. The assets and liabilities of foreign branches are translated to Pak Rupees at exchange rates prevailing at the reporting date. The results of the foreign branches are translated to Pak Rupees at the average rate of exchange for the year. Translation gains and losses are included in the profit and loss account, except those arising on the translation of the Company net investments in foreign branches, which are taken to the capital reserves (exchange translation reserve). 3.26 Financial instruments Financial assets and liabilities are recognized at the time when the Company becomes a party to the contractual provisions of the instrument and de-recognized when the Company loses control of contractual rights that comprise the financial assets and in the case of financial liabilities when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on the de-recognition of the financial assets and liabilities is included in the profit and loss account. 164 ANNUAL REPORT 2020
  166. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Financial instruments carried in the statement of financial position include cash and bank , loans, investments, premiums due but unpaid, amount due from other insurers / reinsurers, premium and claim reserves retained by cedants, accrued investment income, reinsurance recoveries against outstanding claims, sundry receivables, provision for outstanding claims, amounts due to other insurers / reinsurers, accrued expenses, other creditors and accruals, liabilities against asset subject to finance lease and unclaimed dividends. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. 3.27 Earnings per share The Company presents basic and diluted earnings per share (EPS) for its shareholders. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated if there is any potential dilutive effect on the Company's reported net profits. 3.28 Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of profit and loss over the period of the borrowings using the effective interest rate. Finance costs are accounted for on accrual basis and are reported under accrued markup to the extent of the amount remaining unpaid. 3.29 Government grant Government grants are transfers of resources to the Company by a government entity in return for compliance with certain past or future conditions related to the Company's operating activities - e.g. a government subsidy. The definition of 'government' refers to governments, government agencies and similar bodies, whether local, national or international. The Company recognises government grants when it is reasonably probable that grants will be received and the Company will be able to comply with conditions associated with grants. Government grants are recognized at fair value, as a deferred income, when there is reasonable assurance that the grants will be received and the Company will be able to comply with the conditions associated with the grants. Grants that compensate the Company for expenses incurred, are recognized on a systematic basis in the income for the year in which the related expenses are recognized. Grants that compensate for the cost of an asset are recognized in income on a systematic basis over the expected useful life of the related asset. Loan at subsidized rate under SBP refinancing scheme for payment of wages and salaries is initially measured at the fair value i.e. the present value of the expected future cash flows discounted at a market-related interest rate. The difference between the amount received and the fair value is recognized as a government grant. 4 Critical accounting estimates and judgments 4.1 Use of estimates and judgments The preparation of these unconsolidated financial statements in conformity with approved accounting standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. ANNUAL REPORT 2020 165
  167. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 The areas involving a higher degree of judgment and complexity , or areas where assumptions and estimates are significant to these financial statements or judgment was exercised in application of accounting policies, are as follows: Note - Premium deficiency Provision for doubtful insurance / reinsurance receivables Provision for outstanding claim including claims incurred but not reported (IBNR) Retirement benefit obligation Valuation of unquoted investments Provision for taxation including the amount relating to tax contingency Impairment of assets - Financials / Non financial assets Useful lives, pattern of economic benefits and impairments - Property and Equipment - Segment Reporting 3.8 3.10 3.18 3.20 3.15.2 3.19 3.21 3.1 3.11 Note 5 Property and Equipment Operating assets Capital work in progress Right of use asset 5.1 2020 2019 Rupees in thousand 5.1 5.2 5.3 4,356,133 11,170 100,616 4,067,536 64,020 100,574 4,467,919 4,232,130 Operating assets - owned 2020 As at Jan 01 Cost Exchange Additions / differences and Disposals other Transfers adjustments Transfer to investment property As at Dec 31 As at Jan 01 Depreciation Exchange Charge for differences and On other the year disposals adjustments Net Book value Transfer to investment property As at Dec 31 As at Dec 31 Rate % Rupees in thousand Land Buildings* Furniture and fixtures Motor vehicles Machinery and equipment Computer equipment 1,285,992 2,025,725 264,638 751,133 605,110 302,342 254,005 98,177 26,596 108,615 45,645 15,364 3,022 1,577 734 806 (4,945) (509) (59,034) (990) (1,807) - 1,285,992 2,290,149 365,328 720,272 713,469 346,986 287,589 112,434 395,857 125,929 245,595 54,421 25,039 53,300 74,678 17,633 8,615 809 1,201 423 635 (4,353) (337) (32,255) (713) (437) - Total 5,234,940 533,038 21,503 (67,285) - 5,722,196 1,167,404 225,071 11,683 (38,095) - 1,285,992 346,272 1,943,877 3.0% 137,945 227,383 15.0% 418,103 302,169 15.0% 200,317 513,152 15.0% 263,426 83,560 30.0% 1,366,063 4,356,133 2019 As at Jan 01 Cost Exchange Additions / differences and Disposals other Transfers adjustments Transfer to investment property As at Dec 31 As at Jan 01 Depreciation Exchange Charge for differences and On other the year disposals adjustments Net Book value Transfer to investment property As at Dec 31 As at Dec 31 % Rupees in thousand Land Buildings* Furniture and fixtures Motor vehicles Machinery and equipment Computer equipment 1,285,992 713,369 1,306,069 273,780 57,971 691,825 106,078 196,841 430,366 276,244 23,963 51,742 8,949 5,751 1,519 2,135 (76,062) (52,521) (23,616) - Total 3,438,051 1,924,447 70,096 (152,199) 1,285,992 (45,455) 2,025,725 264,638 751,133 605,110 302,342 237,255 143,190 372,536 123,956 228,574 42,795 20,234 52,981 16,977 14,694 (45,455) 5,234,940 1,105,511 147,681 * The Company owns 5 buildings and the resulting area of land and 8 corporate offices in Pakistan and 1 corporate office in U.A.E.. 166 ANNUAL REPORT 2020 Rate 15,428 2,988 2,398 1,447 2,327 (53,978) (32,058) (16,451) - 24,588 (102,487) (7,889) - 1,285,992 287,589 1,738,136 3.0% 112,434 152,204 15.0% 395,857 355,276 15.0% 125,929 479,181 15.0% 245,595 56,747 30.0% (7,889) 1,167,404 4,067,536
  168. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 5 .1.1 Details of tangible assets disposed off during the year are as follows: Description Accumulated Book Cost depreciation value Sale proceeds Mode of disposal Relationship Particulars of purchaser Negotiation Negotiation Negotiation Independent Third Party Independent Third Party Independent Third Party Syed Mustafa Naqvi Fawad Yousuf Gasco Engineering Pvt Ltd Auction Auction Auction Auction Auction Auction Auction Auction Auction Auction Auction Insurance claim recovery Auction Auction Auction Auction Auction Insurance claim recovery Negotiation Negotiation Negotiation Negotiation Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Related Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Independent Third Party Employee Employee Employee Employee Akhter Jamil Kamal Ahmed Asim Ali Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Shahid Pervaiz Khan Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Syed Mehmood Ali Alfalah Insurance Limited Adamjee Insurance Company Limited - WTO Muhammad Shahzad Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Security General Insurance Company Limited Awais Khalid Asif Khan Wasif Ullah Absar Azim Burney Rupees in thousand Building Japan Plaza Premises Shahwar Trade Centre Premises Amber Estate Premises 484 2,168 2,293 4,945 407 2,016 1,930 4,353 77 152 363 592 11,090 28,474 24,000 63,564 509 509 337 337 172 172 160 160 6,550 1,208 1,019 2,510 1,663 1,643 5,910 1,849 2,381 1,552 1,650 2,679 1,277 2,069 1,209 1,209 2,023 3,547 2,203 2,203 1,718 2,864 4,111 1,089 875 1,507 1,002 1,181 717 1,526 1,629 1,035 1,439 681 434 1,336 1,014 1,014 1,277 399 1,623 1,455 899 730 2,439 119 144 1,003 661 462 5,193 323 752 517 211 1,998 843 733 195 195 746 3,148 580 748 819 2,134 4,275 622 901 2,025 1,539 1,513 4,250 1,310 1,783 1,376 800 2,600 843 1,900 1,275 1,225 1,625 3,455 771 969 705 1,192 5,282 2,816 32,255 26,779 1,817 38,771 Furniture and fixtures Items having book value below Rs. 50,000 Motor vehicles MERCEDES BENZ (ASV-244) TOYOTA COROLLA GLI (AFV-732) HONDA CITI (AQY-937) HONDA CIVIC VTI ORIEL (BBW-436) HONDA CITI AUTOMATIC (BBT-637) HONDA CITI (AXU-447) HONDA ACCORD (ZU-300) HONDA CIVIC VTI ORIEL (ASU-921) HONDA CIVIC VTI (AYV-988) TOYOTA COROLLA GLI (AZV-863) KOMATSU (JS-3144) HONDA CIVIC (BNT-507) SUZUKI CULTUS (LEC-17A-2363) HONDA CIVIC VTI (LEE-14-5991) HONDA CITI (ASF-273) HONDA CITI (ASG-196) TOYOTA COROLLA GLI (LED-14-1833) TOYOTA COROLLA ALTIS 1.6 (BRC-667) TOYOTA FORTUNER (64988) TOYOTA FORTUNER (12982) TOYOTA COROLLA (41580) BMW 5X (11923) Items having book value below Rs. 50,000 8,098 59,034 Machinery and equipment Items having book value below Rs. 50,000 990 990 713 713 277 277 272 272 437 1,370 437 1,370 1,367 1,367 Computer equipment Items having book value below Rs. 50,000 Grand Total 1,807 1,807 67,285 38,095 29,190 104,134 ANNUAL REPORT 2020 167
  169. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 5 .2 Capital work in progress Building Mobilization advance Civil & electrical works Advance for ERP software's 5.3 2020 2019 Rupees in thousand 5,868 5,302 32,859 10,810 20,351 11,170 64,020 As at January 01 Effect of initial application of IFRS - 16 as at January 01 Additions during the year Depreciation charge during the year Exchange differences and other adjustments 100,574 40,955 (38,451) (2,462) 171,918 5,189 (78,719) 2,186 Closing Net Book Value 100,616 100,574 Right of use asset 5.3.1 All the right of use assets include premises obtained on rent for branch operations (inside and outside of Pakistan). 6 Intangible assets 2020 2019 Rupees in thousand Cost As at January 01 Additions during the year Exchange differences and other adjustments As at December 31 310,990 40,886 3,707 355,583 290,740 8,933 11,317 310,990 242,063 23,296 2,037 267,396 211,555 24,913 5,595 242,063 88,187 68,927 Accumulated amortization As at January 01 Amortization charged during the year Exchange differences and other adjustments As at December 31 Net book value as at December 31 Rate of amortization 7 20.00% 20.00% Investment Properties Net book value as at January 01 Additions and capital improvements Unrealized fair value gain 401,896 - 389,598 12,298 Net book value as at December 31 401,896 401,896 168 ANNUAL REPORT 2020
  170. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 These consist of the following : - 5 floor of Adamjee House, Karachi which are rented out to related parties. Rent received from these parties is disclosed in note 38. - 2 floors of Adamjee House, Lahore which are not rented out as at December 31, 2020. The Company's management intends to rent it out subsequently. Market value of these investment properties amounts to Rs. 402 million based on a valuation carried out by independent valuer, as at December 31, 2020. The fair value of investment properties was determined by external, independent property valuers having adequate qualifications and experience in the location and category of the property being valued. Investment properties of the Company are valued every year. The valuation has been carried out considering the segment and location of the property, size, utilization and current trends in price of real estate in close proximity and current market rents for similar properties including assumptions that ready buyers are available in the current market and analyzed through detailed market surveys and, the properties that have recently been sold or purchased or offered/quoted for sale into the same vicinity to determine the better estimates of the fair value. Note 8 Investment in subsidiary Adamjee Life Assurance Company Limited - At cost 8.1 2020 2019 Rupees in thousand 8.1, 8.2 & 8.3 1,097,900 694,895 1,097,900 694,895 Number of shares 2019 2020 No. of Shares 93,549,400 69,489,545 Face value Rupees 10 Company's Name Adamjee Life Assurance Company Limited 2019 2020 Rupees in thousand 1,097,900 694,895 [Equity held 100.00% (2019: 74.28%)] 8.2 The Company's interests in its subsidiary is as follow: Name Adamjee Life Assurance Company Limited Country of Incorporation Total at the end of 2019 Total liabilities Total revenues Total profit % interest held Rupees in thousand Pakistan Total at the end of 2020 Adamjee Life Assurance Company Limited Total assets Pakistan 50,839,416 49,348,801 17,100,887 191,014 100.00% 50,839,416 49,348,801 17,100,887 191,014 100.00% 40,433,668 39,114,377 12,969,421 217,106 74.28% 40,433,668 39,114,377 12,969,421 217,106 74.28% ANNUAL REPORT 2020 169
  171. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 8 .3 Adamjee Life Assurance Company Limited was incorporated in Pakistan on August 04,2008 as a public unlisted company under repealed Companies Ordinance, 1984 (now Companies Act, 2017). The registered office of the Company is located at 1st floor, Islamabad Stock Exchange Towers, 55-B, Jinnah Avenue, Blue Area, Islamabad while its principal place of business is located at Adamjee House, 3rd and 4th Floor, I.I Chundrigar Road, Karachi. 9 Investment in equity securities Available-for-sale Note Cost 2020 Impairment / Provision Carrying value 2019 Impairment / Provision Cost Carrying value Rupees in thousand Related parties Listed shares Unlisted shares 9.1 9.2 8,318,076 924,333 9,242,409 - Unrealized gain 7,962,628 698,226 8,660,854 8,318,076 924,333 9,242,409 1,307,313 - 7,962,628 698,226 8,660,854 1,853,236 10,514,090 10,549,722 Others Listed shares Unlisted shares Mutual Funds NIT Units 9.3 9.4 9.5 9.6 7,135,270 925,360 48,130 161 8,108,921 (2,163,210) (2,163,210) Unrealized gain 6,789,795 925,360 364,265 161 8,079,581 4,972,060 925,360 48,130 161 5,945,711 2,699,027 (2,004,569) (2,004,569) 8,328,927 8,644,738 Total 9.1 17,351,330 (2,163,210) 4,785,226 925,360 364,265 161 6,075,012 2,253,915 19,194,460 16,740,435 (2,004,569) 18,843,017 Related Parties - Listed shares Cost No. of Shares Face value 2020 2019 Rupees 47,827,287 47,827,287 10 Company's Name 2020 Market Value 2019 2020 Rupees in thousand 2019 Commercial Banks MCB Bank Limited 7,962,484 7,962,484 8,861,440 9,801,724 [Equity held 4.036% (2019: 4.036%)] Textile Composite 2,050 2,050 10 Nishat Mills Limited 144 144 208 218 [Equity held 0.001% (2019: 0.001%)] Power Generation & Distribution - 25,631,181 10 Pakgen Power Limited 355,448 - 504,934 - [Equity held 6.889% (2019: Nil)] 73,460,518 47,829,337 8,318,076 7,962,628 9,366,582 9,801,942 9.1.1 3,716,710 (2019 : 3,716,710) shares of MCB have been pledged against SBLC (Standby Letter of Credit) issued in favour of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited. 170 ANNUAL REPORT 2020
  172. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 9 .2 Related Parties - Unlisted shares Cost No. of Shares Face value 2020 2019 Rupees 92,360,700 69,750,000 10 9.2.1 Company's Name Automobile Assembler Hyundai Nishat Motor (Private) Limited Market Value 2019 2020 2020 Rupees in thousand 698,226 924,333 1,183,140 2019 712,148 This represents investment in the ordinary shares of Hyundai Nishat Motor (Private) Limited (HNMPL) which is principally engaged in vehicle assembling. Since HNMPL's ordinary shares are not listed, an independent valuer engaged by the Company has estimated a fair value of Rs. 12.81 per ordinary share as at December 31, 2020 ( Rs. 10.21 per ordinary share as at December 31, 2019) through a valuation technique based on discounted cash flows. Hence, it has been classified under level 3 of the fair value hierarchy as further explained in note 43 to these unconsolidated financial statements. The significant assumptions used in this valuation technique are as follows: 9.2.2 - Discount rate of 14.87% per annum. - Terminal growth rate in revenue of 2% per annum. Sensitivity analysis Sensitivity analysis of the significant assumptions used in the valuation technique are as follows: - If the discount rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 137,617 thousand lower. - If the terminal growth rate increase by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 96,055 thousand higher. 9.3 Others - listed shares Cost No. of Shares 2020 731,701 2019 731,701 Face value Rupees Company's Name 10 Automobile Assembler Millat Tractors Limited 2020 Market Value 2019 2020 Rupees in thousand 2019 591,172 591,172 800,547 515,425 116,770 116,770 80,760 120,771 434,035 77,534 434,035 77,534 384,799 22,133 249,424 16,450 148,131 148,131 10 Cable & Electrical Goods Siemens (Pakistan) Engineering Company Limited 3,358,344 645,100 3,358,344 645,100 10 10 Cement D.G. Khan Cement Company Limited Fecto Cement Limited 4,113,500 4,113,500 10 Close - End Mutual Fund HBL Investment Fund 'A' 27,235 27,235 13,040 16,865 641,638 88,086 504,670 242,721 641,638 88,086 504,670 242,721 535,910 43,692 354,031 157,325 600,129 51,996 356,833 205,625 282 20,324 46,811 - 282 20,324 46,811 91,572 2,460 8,411 27,969 - 1,013 5,542 17,367 53,200 6,277,500 330,300 8,240,950 1,250,000 6,277,500 330,300 8,240,950 1,250,000 10 10 10 10 Commercial Banks Allied Bank Limited Habib Bank Limited National Bank of Pakistan United Bank Limited 105,600 100,000 300,000 - 105,600 100,000 300,000 1,298,500 10 10 10 10 Engineering Aisha Steel Mills Limited Crescent Steel & Allied Products Limited International Steel Limited Mughal Iron & Steel Industries Limited ANNUAL REPORT 2020 171
  173. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Cost No . of Shares Company's Name 2019 Rupees 2,220,100 1,481,000 9,998,900 2,220,100 2,477,000 - 10 10 10 Fertilizer Dawood Hercules Corporation Engro Fertilizers Limited Fauji Fertilizer Company Limited 5,740 70,304 5,740 70,304 10 10 4,800 230,000 286,843 4,800 230,000 286,843 10 10 10 5,462,000 5,462,000 10 2019 2020 Rupees in thousand 2020 2019 324,933 105,935 1,050,979 324,933 177,179 - 269,831 93,644 1,084,881 342,362 181,886 - Food & Personal Care Products Nestle Pakistan Limited Rafhan Maize Products Limited 59,278 223,250 59,278 223,250 38,257 688,909 46,207 509,782 Insurance EFU General Insurance Company Limited IGI Holdings Limited Pakistan Reinsurance Company Limited 211 66,917 6,326 211 66,917 6,326 576 46,791 7,894 529 46,920 8,436 149,789 149,789 153,428 120,109 245,134 309,302 245,134 496,542 158,177 253,043 216,938 696,582 6,144 6,144 7,014 4,685 Investment Companies MCB Arif Habib Savings & Investment Limited 1,524,300 5,696,595 1,524,300 9,145,095 10 10 Oil & Gas Exploration Companies Oil & Gas Development Company Limited Sui Northern Gas Pipelines Limited 11,750 11,750 10 Paper & Board Packages Limited 369,400 369,400 10 Pharmaceuticals Abbott Laboratories Pakistan Limited 320,902 320,902 279,033 165,041 5,731,000 5,731,000 27,348,388 27,348,388 923,500 923,500 - 25,631,181 4,935,882 4,935,882 10 10 10 10 10 Power Generation & Distribution Kot Addu Power Company Limited Lalpir Power Limited Nishat Power Limited Pakgen Power Limited Saif Power Limited 491,086 371,516 42,001 163,072 491,086 371,516 42,001 355,448 163,072 155,883 350,606 21,804 71,669 180,698 396,825 25,165 469,563 103,456 37,500 506,450 10 10 Refinery Attock Refinery Limited National Refinery Limited 13,133 394,084 13,133 394,084 6,827 177,176 4,188 71,450 7,135,270 6,789,795 6,296,520 5,801,462 37,500 506,450 9.3.1 9.4 Face value 2020 Market Value 3,582,000 (2019: Nil) shares of Fauji Fertilizer Company Limited have been pledged against Standby Letter of Credit (SBLC) issued in favour of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited, a related party of the Company. Others - Unlisted shares No. of Shares Cost Face value 2020 2019 Rupees 9,681,374 9,681,374 10 172 ANNUAL REPORT 2020 Company's Name 2020 Security General Insurance 925,360 Company Limited [Equity held 14.224% (2019: 14.224%)] Market Value 2019 2020 Rupees in thousand 925,360 2,301,069 2019 2,162,335
  174. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 9 .4.1 This represents investment in the ordinary shares of Security General Insurance Company Limited ("SGI") which is principally engaged in general insurance business. Since SGI's ordinary shares are not listed, an independent valuer engaged by the Company has estimated a fair value of Rs. 237.68 per ordinary share as at December 31, 2020 ( Rs. 223.35 per ordinary share as at December 31, 2019) through a valuation technique based on discounted cash flow analysis of SGI. Hence, it has been classified under level 3 of the fair value hierarchy as further explained in note 43 to these unconsolidated financial statements. The significant assumptions used in this valuation technique are as follows: 9.4.2 - Discount rate of 15% per annum. - Terminal growth rate of 2% per annum. Sensitivity analysis Sensitivity analysis of the significant assumptions used in the valuation technique are as follows: 9.5 - If the discount rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 6,002 thousand lower. - If the terminal growth rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 3,679 thousand higher. Others-Mutual Fund Certificates Open-Ended-Mutual Funds Cost No. of Units 2019 2020 9.6 Face value Rupees 42,779 3,275,323 10 100 20,880 4,234,546 19,269 4,113,500 100 10 Fund's Name ABL Cash Fund Alfalah GHP Money Market Fund HBL Cash Fund HBL Investment Fund - Class B Market Value 2019 2020 2019 2020 Rupees in thousand 4,206 321,448 4,201 321,410 2,104 41,820 1,941 40,876 2,122 39,956 1,963 40,961 48,130 364,265 46,279 364,334 Open-Ended Equity Funds Cost No. of Units 2019 2020 12,540 12,540 2020 Fund's Name National Investment Trust Grand Total 161 Market Value 2019 2020 2019 Rupees in thousand 161 870 796 17,351,330 16,740,435 19,194,460 18,843,017 ANNUAL REPORT 2020 173
  175. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 10 2020 2019 Rupees in thousand Investment in debt securities Held to maturity Treasury Bills Pakistan Investment Bonds 275 ,631 98,700 370,491 95,377 Total 374,331 465,868 Treasury Bills Cost Face value Rupees Yield Rate% 100,000,000 100,000,000 82,000,000 382,000,000 10.67% 7.32% 7.43% 13.83% Profit Payment On maturity On maturity On maturity On maturity Type of security 12 Month Treasury Bills 12 Month Treasury Bills 12 Month Treasury Bills 6 Month Treasury Bills Maturity date 25-Mar-21 22-Apr-21 6-May-21 26-Mar-20 2019 2020 Carrying amount 2019 2020 Rupees in thousand 90,382 93,195 76,344 - 357,358 97,801 97,900 79,930 - 370,491 259,921 357,358 275,631 370,491 Pakistan Investment Bonds Cost Face value Rupees 11 Yield Rate% Profit Payment 100,000,000 11.7130% On maturity 100,000,000 11.7130% On maturity Type of security 3 Years Pakistan Investment Bonds 3 Years Pakistan Investment Bonds Maturity date 2019 2020 Carrying amount 2019 2020 Rupees in thousand 19-Sep-22 96,136 - 98,700 - 19-Sep-22 - 93,877 - 95,377 96,136 93,877 98,700 95,377 Investments in Term Deposits Held to maturity Note Deposits maturing within 12 months Inside Pakistan - related parties - others Outside Pakistan - related parties - others 2020 2019 Rupees in thousand 6,811 175,066 181,877 6,811 175,066 181,877 1,305,429 4,364,568 5,669,997 5,851,874 1,264,698 4,387,207 5,651,905 5,833,782 2,000 75,188 77,188 2,000 48,110 50,110 5,929,062 5,883,892 Deposits maturing after 12 months Inside Pakistan - related parties - others 11.1 174 ANNUAL REPORT 2020
  176. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 11 .1 These include fixed deposits amounting to Rs. 4,904,014 thousands (AED 112,698,915) [2019: Rs. 4,848,009 thousands (AED 115,000 thousands)] kept in accordance with the requirements of Insurance Regulations applicable to the United Arab Emirates (UAE) branches for the purpose of carrying on business in (UAE). These also include liens against cash deposits of Rs. 259,065 thousands (2019: Rs. 231,987 thousands) with banks in Pakistan essentially in respect of guarantees issued by the banks on behalf of the Company for claims under litigation filed against the Company, bid bond guarantees and guarantee to Meezan Bank Limited (MBL) against the loan provided by MBL to Hyundai Nishat Motor (Private) Limited, a related party. Note 12 2020 2019 Rupees in thousand Loans and other receivables - considered good Rent receivable Receivable from related parties Accrued income Security deposits Advances to employees and suppliers Advance agent commission Loans to employees Other receivables 12.1 7,776 43,135 129,361 46,713 237,051 4,478 45,336 69,046 14,313 27,523 125,544 58,399 152,012 3,003 49,484 46,986 582,896 477,264 12.1 This represents receivable from Adamjee Life Assurance Company Limited, subsidiary of the Company, in respect of cash value of life policies obtained for key management personnel of the Company. The Company is the beneficiary in respect of policies obtained for the employees. Note 13 2020 2019 Rupees in thousand Insurance / reinsurance receivables - unsecured and considered good Due from insurance contract holders Provision for impairment of receivables from insurance contract holders Due from other insurers / reinsurers Provision for impairment of due from other insurers / reinsurers 13.1 4,723,214 5,730,843 13.2 (932,384) 3,790,830 (868,586) 4,862,257 1,169,623 1,149,209 (201,302) 968,321 (201,302) 947,907 4,759,151 5,810,164 13.3 13.1 Due from insurance contact holders include an amount Rs. 192,060 thousands (2019: Rs. 212,014 thousands) held with related parties. 2020 2019 Rupees in thousand 13.2 Reconciliation of provision for impairment of receivables from insurance contract holders Balance as at January 01 Charge for the year Exchange difference Balance as at December 31 868,586 44,062 19,736 629,668 187,764 51,154 932,384 868,586 ANNUAL REPORT 2020 175
  177. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand 13 .3 Reconciliation of provision for impairment of due from other insurers / reinsurers Balance as at January 01 Charge for the year Write off against provision for the year Balance as at December 31 14 201,302 201,302 3,307,863 114,918 3,500,512 133,227 3,422,781 3,633,739 438 4,703 5,141 476 9,937 10,413 237,821 931,898 1,169,719 133,822 967,605 1,101,427 136,313 871 137,184 59,333 5,512 64,845 1,306,903 1,166,272 1,312,044 1,176,685 Prepayments Prepaid reinsurance premium ceded Prepaid miscellaneous expenses 15 201,302 201,302 Cash and bank Cash and cash equivalents Inside Pakistan Cash in hand Policy, revenue stamps and bond papers Cash at bank Inside Pakistan Current accounts Savings accounts Outside Pakistan Current accounts Savings accounts 15.1 Cash at bank includes an amount of Rs. 368,010 thousands (2019: Rs. 433,504 thousands) held with MCB Bank Limited, a related party of the Company. 15.2 Lien of Rs. 440,000 thousands (2019: Rs. 291,000 thousands) is marked on cash deposits in saving accounts against SBLC (Standby Letter of Credit) issued in favor of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited, a related party of the Company. 15.3 Saving / Profit and loss accounts carry expected profit rates ranging from 4.50% to 11.35% (2019: 6.50% to 12.50%). 176 ANNUAL REPORT 2020
  178. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 16 2020 2019 Rupees in thousand Window Takaful Operations - Operator 's Fund Assets Cash and bank deposits Qard e Hasna to Participants' Takaful Fund Investments Intangible assets Property and equipment Current assets - others 209,446 146,460 35,873 12,421 20,793 164,155 91,895 146,460 32,958 17,650 17,733 119,595 Total Assets 589,148 426,291 Total liabilities 242,797 195,872 408,608 (119,082) (143,206) 3,584 14,170 3,521 (3,821) 324,314 (99,434) (131,872) 1,345 15,856 1,323 (3,839) Profit before taxation 163,774 107,693 Taxation (47,369) (30,987) Profit after taxation 116,405 76,706 Wakala income Commission expense Management expenses Investment income Other income Mudarib's share of PTF investment income Other expenses Details of assets, liabilities and segment disclosures of Window Takaful Operations are stated in the annexed financial statements. 17 Share capital 17.1 Authorized share capital 2019 2020 No. of Shares Ordinary shares of Rs. 10 each 2020 2019 Rupees in thousand 375,000,000 375,000,000 3,750,000 3,750,000 250,000 250,000 2,500 2,500 349,750,000 349,750,000 3,497,500 3,497,500 350,000,000 350,000,000 3,500,000 3,500,000 17.2 Issued, subscribed and paid up capital Ordinary shares of Rs. 10 each fully paid in cash Ordinary shares of Rs. 10 each issued as fully paid bonus shares 17.3 As at December 31, 2020, associated undertakings MCB Bank Limited, Nishat (Aziz Avenue) Hotels & Properties Limited and Nishat Mills Limited held 70,861,241 (2019: 70,861,241), 1,083,000 (2019: Nil) and 102,809 (2019: 102,809) ordinary shares of the Company. ANNUAL REPORT 2020 177
  179. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 18 Reserves Capital reserves Reserves for exceptional losses Investment fluctuation reserves Exchange translation reserves Fair value reserves Note 2020 2019 Rupees in thousand 18.1 18.2 18.3 18.4 22,859 3,764 678,438 2,845,385 22,859 3,764 674,936 2,917,432 3,550,446 3,618,991 936,500 936,500 936,500 936,500 4,486,946 4,555,491 Revenue reserves General reserves 18.1 The reserve for exceptional losses represents the amount set aside by the Company in prior years up to December 31, 1978, in order to avail the deduction while computing the taxable income under the old Income Tax Act of 1922. Subsequent to the introduction of repealed Income Tax Ordinance, 1979, which did not permit such deduction, the Company discontinued the setting aside of reserves for exceptional losses. 18.2 This amount has been set aside by the Company in prior years for utilization against possible diminution in the value of investments. 18.3 The exchange translation reserve represents the gain resulted from the translation of foreign branches (having business in foreign currencies) of the Company into Pak Rupees. For the purpose of exchange translation reserve, the UAE and Export Processing Zone branches are treated as foreign branches since their functional currencies are AED and US Dollars, respectively. 18.4 The fair value reserve represents the net cumulative unrealized gain / (loss) on available for sale investments held by the Company as at December 31, 2020. Note 19 2020 2019 Rupees in thousand Retirement benefit obligations Unfunded gratuity scheme Funded gratuity scheme 19.1 19.2 64,359 132,873 82,708 142,469 197,232 225,177 19.1 Unfunded gratuity scheme 19.1.1 This provision relates to the Company's operations in UAE branches. The eligible employees under the scheme are 66 (2019 : 94). The latest actuarial valuation of gratuity scheme was carried out as at December 31, 2020 under the Projected Unit Credit Method as per the requirements of approved accounting standard - International Accounting Standard 19, the details of which are as follows: 178 ANNUAL REPORT 2020
  180. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 19 .1.2 Movement in the net assets / (liabilities) recognized in the statement of financial position are as follows: 2020 2019 Rupees in thousand Present value of defined benefit obligation at January 01 Charge for the year Benefits paid Remeasurement (gain) / loss on obligation Exchange loss Present value of defined benefit obligation at December 31 82,708 65,853 14,605 (20,984) (14,899) 2,929 13,689 (12,744) 8,035 7,875 64,359 82,708 2020 19.1.3 Principal actuarial assumptions used are as follows: - Valuation discount rate - Expected rate of increase in salary level (Percentages) 2019 2.20 2.00 2.20 2.00 2020 2019 Rupees in thousand 19.1.4 The amount charged in profit and loss account is as follows: Service cost Interest cost Expense for the year 12,934 1,671 12,265 1,424 14,605 13,689 (14,899) 8,035 (14,899) 8,035 19.1.5 The amounts charged to statement of comprehensive income are as follows: Remeasurement of the present value of defined benefit obligation due to: - Changes in financial assumptions - Experience adjustments 19.2 Funded gratuity scheme 19.2.1 The Company operates an approved funded gratuity scheme for all employees. The eligible employees under the scheme are 718 (2019 : 738). The latest actuarial valuation of gratuity scheme was carried out as at December 31, 2020 under the Projected Unit Credit Method as per the requirements of approved accounting standard International Accounting Standard 19, the details of which are as follows: Principal actuarial assumptions used are as follows: 2020 - Discount rate - Expected rate of increase in salary level (Percentages) 8.50 6.50 2019 12.50 10.50 ANNUAL REPORT 2020 179
  181. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand Movement in the net liabilities recognized in the statement of financial position are as follows: Net liabilities at January 01 Expenses recognized Contribution paid during the year Remeasurement loss / (gain) recognized - net 142,469 35,411 (50,000) 4,993 133,127 35,245 (10,000) (15,903) Net liabilities at December 31 132,873 142,469 20,728 40,594 (25,911) 19,550 38,373 (22,678) 35,411 35,245 (6,608) - (16,327) - The amounts recognized in the profit and loss account are as follows: - Service cost - Interest cost - Interest income on plan assets The amounts recognized in statement of comprehensive income are as follows: Remeasurement of plan obligation from: - Experience on obligation - Change in financial assumptions Remeasurement of plan assets: - Investment return 11,601 424 4,993 (15,903) (230,138) 363,011 (198,745) 341,214 132,873 142,469 Present value as at January 01 Interest income on plan assets Actual benefits paid during the year Contribution made during the year Remeasurement loss due to investment return 198,745 25,911 (32,917) 50,000 (11,601) 193,756 22,678 (27,265) 10,000 (424) Fair value of plan assets as at December 31 230,138 198,745 25,911 (11,601) 22,678 (424) 14,310 22,254 Present value of defined benefit obligation as at January 01 Current service cost Interest cost Actual benefits paid during the year Remeasurement (loss) / gain on obligation 341,214 20,728 40,594 (32,917) (6,608) 326,883 19,550 38,373 (27,265) (16,327) Present value of defined benefit obligation as at December 31 363,011 341,214 19.2.2 The amounts recognized in the statement of financial position are as follows: Fair value of plan assets Present value of defined benefit obligation 19.2.3 Movement in fair value of plan assets Actual return on plan assets Expected return on plan assets Remeasurement loss due to investment return 19.2.4 Movement in present value of defined benefit obligation 180 ANNUAL REPORT 2020
  182. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 19 .2.5 Comparison for five years Funded gratuity scheme 2020 2019 Present value of defined obligation Fair value of plan assets 363,011 230,138 341,214 198,745 Deficit 132,873 Gain / (loss) on plan assets (% age of plan assets) Gain / (loss) on obligations (% age of obligation) 2018 Rupees in thousand 2017 2016 326,883 193,756 283,925 199,482 267,714 241,970 142,469 133,127 84,443 25,744 (5.04) (0.21) (5.92) (19.27) 5.48 (1.82) (4.78) 5.54 (1.26) (4.91) 64,359 82,708 65,853 69,953 55,655 23.15 (9.71) (2.44) (3.10) (10.89) Experience adjustments Unfunded gratuity schemes Present value of defined obligation Experience adjustments Gain / (loss) on obligations (% age of obligation) 2019 2020 2019 2020 (Percentage) Rupees in thousand 19.2.6 Plan assets consist of the following: Mutual funds - Equity Mutual funds - Debt Government Bonds - Debt Shares, bank deposits & cash equivalents Others Benefits due 17.92 17.06 46.43 18.59 36.96 40.26 22.78 - - 100.00 100.00 41,252 39,255 106,842 42,789 73,459 80,024 45,262 - 230,138 198,745 19.2.7 Plan assets do not include any investment in the Company's ordinary shares as at 2020 : Nill (2019: Nil). 19.2.8 Expected cost to be recorded in the profit and loss account for the year ending December 31, 2021 is Rs. 31,497 thousands. 19.2.9 The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund, at beginning of the year. 19.2.10 The weighted average duration of the defined benefit obligation for gratuity plan is 3.2 years (2019: 3.3 years). 19.2.11 These defined benefit plans expose the Company to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk. ANNUAL REPORT 2020 181
  183. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 19 .2.12 The main features of the gratuity schemes are as follows: - All confirmed employees are eligible to the scheme and the normal retirement age for all employees is 60 years. - A member shall be entitled to gratuity on resignation, termination, retirement, early retirement, retrenchment, death and dismissal based on the Company's Service rules. - The scheme is subject to the regulations laid down under the Income Tax Rules, 2002. 19.2.13 The implicit objective is that the contribution to the gratuity schemes should remain reasonably stable as a percentage of salaries, under the actuarial cost method employed. 19.2.14 Sensitivity analysis The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is as follows: Change in assumptions Impact on Gratuity plans Unfunded Funded Increase in Decrease in Increase in Decrease in assumption assumption assumption assumption Rupees in thousand Discount rate Salary growth rate 20 1% 1% (2,524) 2,725 2,747 (2,553) (10,239) 11,016 10,911 (10,521) The above sensitivity analysis are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit obligation recognized within the statement of financial position. 2020 2019 Deferred taxation Rupees in thousand Deferred tax debits arising in respect of: Provision for gratuity Lease liability Deferred tax credits arising in respect of: Tax depreciation allowance Right of use assets Investments - Available for sale 18,664 29,461 48,125 23,986 30,473 54,459 (232,501) (29,179) (1,161,839) (1,423,519) (1,375,394) (164,116) (29,166) (1,191,075) (1,384,357) (1,329,898) 1,329,898 944,446 5,322 1,012 13 68,385 74,732 (4,888) (30,473) 29,166 102,024 95,829 (29,236) 289,623 1,375,394 1,329,898 20.1 Movement in deferred tax balances is as follows: As at January 01 Recognized in profit and loss account: - provision for gratuity - lease liability against right of use asset - right of use assets - tax depreciation allowance Recognized in statement of comprehensive income: - investments - Available for sale As at December 31 182 ANNUAL REPORT 2020
  184. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 21 2020 2019 Rupees in thousand Borrowings Loan from financial institution - MCB Bank Limited Current portion Non-current portion 166,367 - 90,310 76,057 - 166,367 - This represents long term financing facility availed from MCB Bank Limited, a related party of the company under State Bank of Pakistan's (SBP) Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns ('Refinance Scheme'), with the approval of SBP. The total facility available amounts to Rs 183 million. The interest rate applicable is SBP rate + 1.00%. 125,000 shares of Millat Tractors Limited, 690,000 shares of Dawood Hercules Corporation Limited and 850,000 shares of United Bank Limited have been pledged with security margin of 30% as security for the loan. 2020 2019 Rupees in thousand 22 Deferred grant income Deferred grant income - 14,767 Government grant has been recorded during the year which is measured as the difference between the fair value of the loan on initial recognition and the amount received, which is accounted for according to the nature of the grant. In accordance with the terms of the facility, the Company is prohibited to lay-off the employees at least during three months period from the date of first disbursement except in case of any disciplinary action. Note 23 2020 2019 Rupees in thousand Insurance / reinsurance payables Due to other insurers / reinsurers 3,030,884 2,701,164 554,372 94,242 29,854 76,485 92,945 204,872 161,753 143 591,530 630,736 50,149 33,785 76,485 92,873 170,872 125,829 2,676 535,929 1,806,196 1,719,334 432,246 (355,761) 76,485 This amount represents amount payable to other insurers and reinsurers. 24 Other creditors and accruals Agents commission payable Federal Excise Duty / Sales tax / VAT Federal Insurance Fee payable Workers' welfare fund payable Tax deducted at source Accrued expenses Unpaid and unclaimed dividend Payable to employees' provident fund Sundry creditors 24.1 24.1 Workers' welfare fund Balance as at 01 January Provision for the year Reversal during the year 24.1.1 76,485 - Balance as at 31 December 24.1.2 76,485 ANNUAL REPORT 2020 183
  185. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 24 .1.1 Based on legal advice available with the Company, the management reversed its provision of Rs. 355,761 thousands in 2019. 24.1.2 The Finance Act 2008 introduced amendments to the Workers' Welfare Fund (WWF) Ordinance, 1971 whereby the definition of industrial establishment was extended. The amendments were challenged at various levels and conflicting judgments were passed by the Honorable Lahore High Court, the Honorable Sindh High Court and the Honorable Peshawar High Court. The Honorable Supreme Court of Pakistan vide its judgment dated November 10, 2016, has upheld the view of Honorable Lahore High Court and decided that WWF is not a tax and hence the amendments introduced through Finance Act, 2008 are ultra-vires to the Constitution. The Federal Board of Revenue has filed Civil Review Petitions in respect of above judgment with the prayer that the judgment dated November 10, 2016 passed in the Civil Appeal may kindly be reviewed in the interest of justice. Note 25 Deposits and other liabilities Cash margin against performance bonds Lease liability 25.1 25.2 2020 2019 Rupees in thousand 570,776 101,591 618,540 105,078 672,367 723,618 25.1 This represents margin deposit on account of performance and other bond policies issued by the Company. 2020 2019 Rupees in thousand 25.2 Maturity analysis Not later than 1 year Later than 1 year and not later than 5 years 26 34,105 67,486 34,163 70,915 101,591 105,078 Contingencies and commitments 26.1 Contingencies The Company has filed appeals in respect of certain assessment years mainly on account of the following: Income tax (a) Deputy Commissioner Inland Revenue (DCIR) passed order u/s 161/205 of the Ordinance for tax year 2013 raising an income tax demand of Rs. 9,066 thousands. The Company agitated the order before Commissioner Inland Revenue Appeals (CIR - Appeals). CIR - Appeals decided the case in the favor of the Company. Following the said order, the learned DCIR has passed an appeal effect order in which certain directions of the learned CIR-Appeals have not been followed for which a rectification appeal under section 221 of the Ordinance has been filed before learned DCIR which is still to be processed. (b) The Company received a notice from Additional Commissioner Inland Revenue (ACIR) pertaining to the amendment of tax year 2008. Amongst others, the Additional Commissioner raised an issue with respect to the claim of exemption claimed on capital gains on listed securities by way of incorrect application of the provisions of law. The Company preferred to contest this matter by way of filing a constitutional petition before the Honorable Sindh High Court (the Court). The Court has ordered for stay of proceedings. 184 ANNUAL REPORT 2020
  186. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 (c) The Taxation Officer has passed an order in the tax years 2005 and 2006 under section 221 of the Income Tax Ordinance, 2001 (the Ordinance) levying minimum tax liability aggregating to Rs. 38,360 thousands. An appeal was filed before the CIR - Appeals who upheld the order of the Taxation Officer. The Company has filed an appeal before the Additional Tribunal Inland Revenue (ATIR) which is yet to be heard. (d) The Tax Authorities amended the assessments for tax years 2003 to 2005 on the ground that the Company has not apportioned management and general administration expenses against capital gain and dividend income. The Company filed constitutional petition in the Honorable Sindh High Court (the Court) against the amendment in the assessment order. The Company may be liable to pay Rs. 5,880 thousands in the event of decision against the Company, out of which Rs. 2,730 thousands have been provided resulting in a shortfall of Rs. 3,150 thousands. (e) Learned DCIR has passed an order under section 161/205 of the Ordinance for tax year 2017 creating a demand of Rs. 22,105 thousands on account of Non-Deduction of Income Tax while making payments. The Company has paid partial payment of Rs. 9,065 thousands under protest and agitated the order before learned CIR - Appeals I and the appeal has not yet been fixed. Pending resolution of the above-mentioned appeals filed by the Company, no provision has been made in these unconsolidated financial statements for the aggregate amount of Rs. 72,681 thousands (2019: Rs. 72,681 thousands) as the management is confident that the eventual outcome of the above matters will be in favor of the Company. Others The Company has provided a guarantee to Meezan Bank Limited (MBL) against the loan provided by MBL to Hyundai Nishat Motor (Private) Limited, a related party, amounting to Rs. 1,209,000 thousands (2019: Rs. 841,000 thousands). The Company has issued letter of guarantees of AED 251,500 amounting to Rs.10,944 thousands (2019: AED 449,000 amounting to Rs. 18,928 thousands) relating to UAE branch. 27 Net insurance premium 2020 2019 Rupees in thousand Written gross premium Unearned premium reserve - opening Unearned premium reserve - closing Currency translation effect 18,279,110 10,242,348 (8,366,434) 153,311 22,507,035 10,100,901 (10,242,348) 494,504 Premium earned 20,308,335 22,860,092 Reinsurance premium ceded Prepaid reinsurance premium - opening Prepaid reinsurance premium - closing Currency translation effect (6,818,262) (3,500,512) 3,307,863 (2,798) (8,055,014) (2,866,980) 3,500,512 (4,621) Reinsurance expense (7,013,709) (7,426,103) 13,294,626 15,433,989 Written gross premium Unearned premium reserve - opening Unearned premium reserve - closing 13,469,232 6,197,501 (6,021,464) 14,915,468 5,508,453 (6,197,501) Premium earned 13,645,269 14,226,420 Reinsurance premium ceded Prepaid reinsurance premium - opening Prepaid reinsurance premium - closing Reinsurance expense (6,583,537) (3,425,355) 3,260,277 (6,748,615) (7,716,041) (2,838,973) 3,425,355 (7,129,659) 6,896,654 7,096,761 27.1 Net insurance premium - Business underwritten inside Pakistan ANNUAL REPORT 2020 185
  187. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 27 .2 Net insurance premium - Business underwritten outside Pakistan Written gross premium Unearned premium reserve - opening Unearned premium reserve - closing Currency translation effect 4,809,878 4,044,847 (2,344,970) 153,311 7,591,567 4,592,448 (4,044,847) 494,504 6,663,066 8,633,672 (234,725) (75,157) 47,586 (2,798) (265,094) (338,973) (28,007) 75,157 (4,621) (296,444) 6,397,972 8,337,228 11,973,346 10,768,040 (10,367,347) (196,160) 14,686,699 10,367,347 (10,461,975) (594,102) Claim expense 12,177,879 13,997,969 Reinsurance and other recoveries received Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Currency translation effect Reinsurance and other recoveries revenue (4,346,714) (4,599,078) (6,192,571) (6,233,348) 6,233,348 114,914 (4,191,023) 6,397,245 313,749 (4,121,432) 7,986,856 9,876,537 5,799,654 4,920,475 (4,398,967) 6,413,550 4,398,967 (5,386,215) 6,321,162 5,426,302 (1,684,522) (2,268,805) (3,526,278) (2,948,471) 2,948,471 (2,262,329) 3,769,658 (1,447,618) 4,058,833 3,978,684 Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Currency translation effect Claim expense 6,173,692 5,847,565 (5,968,380) (196,160) 5,856,717 8,273,149 5,968,380 (5,075,760) (594,102) 8,571,667 Reinsurance and other recoveries received Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Currency translation effect Reinsurance and other recoveries revenue (2,662,192) (2,330,273) (2,666,293) (3,284,877) 3,284,877 114,914 (1,928,694) 2,627,587 313,749 (2,673,814) 3,928,023 5,897,853 Premium earned Reinsurance premium ceded Prepaid reinsurance premium - opening Prepaid reinsurance premium - closing Currency translation effect Reinsurance expense 28 2020 2019 Rupees in thousand Net insurance claims expense Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Currency translation effect 28.1 Net insurance claims expense - Business underwritten inside Pakistan Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Claim expense Reinsurance and other recoveries received Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Reinsurance and other recoveries revenue 28.2 Net insurance claims expense - Business underwritten outside Pakistan 186 ANNUAL REPORT 2020
  188. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 28 .3 Claim development table The following table shows the development of the claims over a period of time. The disclosure goes back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments. 2015 & prior At the end of accident year One year later Two years later Three years later Four years later Five years later Current estimate of cumulative claims Less: Cumulative payments to date Liability recognized in statement of financial position 2016 2017 2018 Rupees in thousand 6,857,672 11,752,724 11,307,403 13,278,246 5,059,319 7,075,979 6,362,632 6,250,676 1,255,685 2,369,539 1,978,478 1,880,335 1,791,844 1,662,339 956,949 132,679 646,905 431,043 - 2019 2020 Total 14,544,497 12,607,367 70,347,909 6,218,787 30,967,393 7,484,037 4,411,132 779,584 431,043 431,043 646,905 956,949 1,880,335 6,218,787 12,607,367 22,741,386 29,486 159,145 158,096 968,709 4,358,842 6,299,068 11,973,346 401,557 487,760 798,853 911,626 1,859,945 6,308,299 10,768,040 2020 2019 Rupees in thousand 29 Net commission and other acquisition costs Commission paid or payable 1,867,093 2,449,810 Deferred commission expense - opening 1,190,146 788,431 (731,319) (1,190,146) Deferred commission expense - closing Currency translation effect 32,239 65,731 2,358,159 2,113,826 Commission received or recoverable (532,528) (622,744) Unearned reinsurance commission - opening (237,751) (221,371) Unearned reinsurance commission - closing 245,318 237,751 Net Commission Currency translation effect Commission from reinsurance (8) (257) (524,969) (606,621) 1,833,190 1,507,205 991,010 29.1 Net commission and other acquisition costs - Business underwritten Inside Pakistan Commission paid or payable 857,203 Deferred commission expense - opening 352,673 297,403 Deferred commission expense - closing (285,324) (352,673) Net Commission 924,552 935,740 Commission received or recoverable (523,673) (597,710) Unearned reinsurance commission - opening (236,381) (218,690) Unearned reinsurance commission - closing 240,971 236,381 Commission from reinsurance (519,083) (580,019) 405,469 355,721 ANNUAL REPORT 2020 187
  189. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand 29 .2 Net commission and other acquisition costs - Business underwritten Outside Pakistan Commission paid or payable Deferred commission expense - opening Deferred commission expense - closing Currency translation effect 1,009,890 837,473 (445,995) 32,239 1,458,800 491,028 (837,473) 65,731 Net Commission 1,433,607 1,178,086 (8,855) (1,370) 4,347 (8) (5,886) (25,034) (2,681) 1,370 (257) (26,602) 1,427,721 1,151,484 1,753,267 39,015 48,223 28,155 263,522 23,296 4,665 116,822 62,191 13,128 87,135 51,612 38,739 23,574 52,768 98,373 179,587 1,805,120 71,711 64,044 32,720 226,400 24,913 17,252 111,414 58,633 25,940 110,261 50,007 39,945 37,528 61,943 87,551 216,640 Commission received or recoverable Unearned reinsurance commission - opening Unearned reinsurance commission - closing Currency translation effect Commission from reinsurance 30 Management expenses Employee benefit costs Travelling expenses Advertisement & sales promotion Printing & stationary Depreciation Amortization Rent, rates & taxes Legal & professional charges - business related Electricity, gas & water Entertainment Vehicle running expenses Office repairs & maintenance Bank charges Postages, telegrams & telephone Supervision fee IT related costs Tracking and monitoring charges Provision for doubtful balances against due from insurance contract holders Regulatory fee Miscellaneous 30.1 44,062 187,764 117,028 53,718 130,154 36,685 3,098,880 3,396,625 1,662,908 90,359 1,719,336 85,784 1,753,267 1,805,120 30.1 Employee benefit costs Salaries, allowances and other benefits Charges for post employment benefit 188 ANNUAL REPORT 2020
  190. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 31 Investment Income Business underwritten Inside Pakistan 2020 2019 Rupees in thousand Income from equity securities Available-for-sale Dividend income - related parties - others 535 ,951 462,049 998,000 768,603 583,835 1,352,438 11,284 27,218 38,502 1,883 46,263 48,146 336 14,765 15,101 9,618 9,618 40,413 40,413 34,370 34,370 1,092,016 1,444,572 (158,641) (294,179) 933,375 1,150,393 2,315 2,315 54,211 54,211 699 699 7,298 7,298 27,871 128,246 156,117 159,131 29,746 130,725 160,471 221,980 1,092,506 1,372,373 Income from debt securities Held to maturity Return on Pakistan Investment Bonds Profit on Treasury Bills Income from term deposits - related parties others Net realized gains on investments Available-for-sale Realized gains on equity securities - related parties - others Provision of impairment in value of 'available-for-sale' investments Business underwritten Outside Pakistan Income from equity securities Available-for-sale Dividend income - related parties - others Net realized gains on investments - related parties - others Return on term deposits - related parties - others Net investment income ANNUAL REPORT 2020 189
  191. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Note 32 Rental income Rental income Expenses of investment property 33 114 ,576 (1,859) 35,503 (5,463) 112,717 30,040 109,769 74,944 210 4,243 12,330 12,980 28,390 45,014 (6,763) 263 4,612 11,830 13,595 242,866 68,551 23,776 14,318 7,250 10,400 236 1,905 4,448 30,478 12,065 5,749 1,150 220 3,075 6,255 62,333 58,992 2,850 500 556 463 4,369 2,380 469 520 463 3,832 8,275 1,101 573 9,949 6,939 490 804 8,233 14,318 12,065 Other income Return on bank balances Gain / (loss) on sale of operating assets Return on loans to employee Income against deferred grant Exchange gain Shared expenses received Miscellaneous 34 2020 2019 Rupees in thousand Other expenses Legal & professional charges other than business Auditor's remuneration Subscription Fee Donations Directors` fee Central depository expense Others 34.1 34.2 34.1 Auditors' remuneration Inside Pakistan: Audit fee Interim review fee Special certifications and sundry advisory services Out-of-pocket expenses Outside Pakistan Audit fee Interim review fee Out-of-pocket expenses 34.2 The company has paid the donation amounting to Rs. 10 million (2019: Nill) to Saleem Memorial Trust Hospital and Rs. 0.4 million (2019: Rs. 0.4 million) to SAFCO Support Foundation during the current year. 190 ANNUAL REPORT 2020
  192. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Note 35 2020 2019 Rupees in thousand Taxation Current taxation For the year - General - Window Takaful Operations - Operator 's fund Prior year 35.2 491,854 47,605 (579,273) (39,814) 593,203 31,110 624,313 74,730 (236) 74,494 95,829 (123) 95,706 34,680 720,019 Deferred taxation For the year - General - Window Takaful Operations - Operator's fund (Effective tax rate) 2020 (Percentage) 2019 35.1 Tax Charge Reconciliation Tax at the applicable rate of 29% (2019: 29%) Prior year Tax effect of provision for impairment of investments Others 29.00 29.00 (30.33) 2.41 0.74 3.37 (3.94) 1.82 28.43 35.2 The income tax assessments of the company have been completed from 2016 to 2019. Further the contention of the Company, with respect to the exemption of capital gains on listed securities having completed holding period of one year upto June 30, 2015, has been accepted by Appellate Tribunal Inland Revenue. Therefore, the Company has made reversal of the tax charge of Rs. 579.27 million in these financial statements, which was already booked as current tax charge in the financial statements of previous years. 36 Earnings per share - basic and diluted 2020 2019 Rupees in thousand There is no dilutive effect on the basic earnings per share which is based on: Profit after tax for the period attributable to ordinary shareholders 1,875,506 1,812,975 Number of shares Weighted average number of ordinary shares outstanding 350,000,000 350,000,000 Rupees Earnings (after tax) per share - basic and diluted 5.36 5.18 ANNUAL REPORT 2020 191
  193. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 37 Compensation of Directors and Executives The aggregate amount charged in the accounts for remuneration , including all benefits, to the Chief Executive Officer, Directors and Executives of the Company are as follows: Chief Executive Officer 2020 Fees Managerial remuneration 2019 27,691 Leave encashment - Executives 2020 2019 Rupees in thousand - - Directors 236 2020 220 2019 - - 24,614 - - 866,120 866,422 2,188 - - 32,470 30,713 Bonus 4,360 4,000 - - 59,727 81,119 Charge of defined benefit plan 2,400 246 - - 36,094 37,553 1,384 1,231 - - 24,251 22,020 - - - - 124,277 122,499 Utilities 556 549 - - Medical - - - - 57,737 27,528 Conveyance - - - - 87,162 86,506 Contribution to defined contribution plan House rent allowance Special allowance Other allowance Number - - 1,800 1,800 - - - - 473 835 - - - - 38,664 35,463 236 220 1 1 7 7 1,287,838 1,274,360 354 381 37.1 In addition, the Chief Executive Officer (CEO) is also provided with Company maintained car (s), residence, certain household items, furniture and fixtures and equipment in accordance with the policy of the Company. 37.2 No remuneration was paid to non - executive directors of the Company except for meeting fees. 192 ANNUAL REPORT 2020
  194. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 38 Transactions with related parties The Company has related party relationships with its associates , subsidiary company, employee retirement benefit plans, key management personnel and other parties. Transactions are entered into with such related parties for the issuance of policies to and disbursements of claims incurred by them and payments of rentals for the use of premises rented from / to them. There are no transactions with key management personnel other than those specified in their terms of employment. Investments, bank deposits and borrowing arrangements with related parties have been disclosed in note 8, 9, 11, 15 & 21 to these unconsolidated financial statements. Other transactions with related parties are summarized as follows: 2020 2019 Rupees in thousand i) Transactions Relationship with the Company Premiums underwritten Premiums received Claims paid Claims received Premium paid Security deposit received Rent paid / payable Rent / service charges / expenses received Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company Subsidiary company 17,713 19,659 11,731 6,000 20,839 3,190 66,694 14,492 15,389 12,813 7,000 5,153 1,913 1,360 Premiums underwritten Premiums received Claims paid Security deposit received Security deposit paid Commission Paid Guarantee commission received Rent paid Rent received Dividends received Dividends paid Income on bank deposits Investments made Investments sold Fixed assets sold Purchases Fee / service charges paid Fee / service charges income Payments made to provident fund Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Employees' fund 1,699,869 1,573,675 665,463 115 33,537 8,460 8,067 39,247 459,884 197,582 88,763 226,107 3,538 10,931 10,485 35,124 1,412,496 1,540,424 632,467 3,050 76,623 7,676 28,887 653,313 237,695 43,682 397,500 2,347 17,262 3,982 33,368 Subsidiary company Subsidiary company Common directorship Common directorship Employees' fund 48,364 5,684 206,040 313,285 143 35,962 2,048 215,212 359,782 2,676 ii) Period end balances Balances receivable Balances payable Balances receivable Balances payable Payable to provident fund ANNUAL REPORT 2020 193
  195. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 38 .1 Following are the particulars of the related parties of the Company at the reporting date. Name of Related Party Basis of relationship Aggregate % of Shareholding in the Company AA Joyland (Private) Limited Adamjee Life Assurance Company Limited Agro Hub International (Private) Limited Cotton Web Limited D G Khan Waste Management Company Limited Dupak Developers Pakistan (Private) Limited Dupak Properties (Private) Limited Dupak Tameer Limited Export Development Funds Fortress Financials Services (Private) Limited Fortress Square Services (Private) Limited Fortress Supplies (Private) Limited Golf View Land (Private) Limited Hyundai Nishat Motor (Private) Limited Joyland (Private) Limited Mahmood Textile Mills Limited Masood Spinning Mills Limited MCB Bank Limited MCB Employees Foundation MCB Financial Services Limited                                 MCB Islamic Bank Limited Multan Waste Management Company Limited Nishat (Aziz Avenue) Hotels & Properties Limited Nishat (Gulberg) Hotels & Properties Limited Nishat (Raiwind) Hotels & Properties Limited Nishat Agriculture Farming (Private) Limited Nishat Agrotech Farms (Private) Limited Nishat Dairy (Private) Limited Nishat Developers (Private) Limited Nishat Hotels & Properties Limited Nishat Mills Limited Nishat Sutas Dairy Limited Pakgen Power Limited Pakistan Single Window Punjab Industrial Estate Development & Management Company Punjab Social Security Health Management Company Roomi Foods (Private) Limited Roomi Poultry (Private) Limited Shakarganj Limited Siddiqsons Limited Siddiqsons Tin Plate Limited Siddiqsons Energy Limited Soxlinks (Private) Limited U&S Gulberg Filling Station Common directorship Subsidiary Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Nil 100.000% Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 10.000% Nil Nil Nil 4.036% Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 0.001% Nil 6.889% Nil 194 ANNUAL REPORT 2020 Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil
  196. 39 (368,958) Management expense 6,767,220 7,633,997 Segment Assets Unallocated assets Segment Liabilities Unallocated Liabilities Profit before taxation Net investment income Rental income Other income Other expenses Finance cost Profit from Window Takaful Operations - Operator's fund Underwriting result (1,082) (2,645) 99,635 84,504 (64,413) (415,970) Commission expense 35,947 (71,810) (191,297) (642,249) Net claims (107,757) (20,701) 8,521 2,603 11,124 29,222 21,313 21,242 71 21,313 22,809 (1,448) (48) 21,313 (75,537) 1,577,406 Insurance claim recoveries from reinsurer Inside Pakistan Outside Pakistan Marine, aviation & transport Inside Pakistan Motor Outside Pakistan Inside Pakistan Outside Pakistan Accident & health 2020 Inside Pakistan Outside Pakistan Miscellaneous Inside Pakistan Total Outside Pakistan Aggregate 736,427 498,520 (101,435) (775,717) (351,320) (118,735) (305,662) 42,523 (348,185) (263,140) 672,555 1,727 674,282 935,695 960,500 937,043 415 23,042 960,500 1,093,491 (123,365) (9,626) 960,500 22,678 7,214 11,416 (8,011) (8,989) (2,465) 3,443 - 3,443 19,427 19,427 19,427 21,191 21,191 21,191 21,577 (363) (23) 21,191 (195,141) 6,374,253 6,374,253 6,569,394 4,643,149 4,635,746 7,403 4,643,149 4,874,936 (231,787) 4,643,149 1,849,868 (965,423) (1,424,474) 2,397,597 1,111,411 393,084 8,116,777 4,087,762 142,539 (2,301,406) (6,231,714) (995,497) (184,654) (1,121,255) (3,841,817) 162,184 (1,283,439) (5,691,685) (47,389) 2,690,343 4,147 2,694,490 2,737,732 2,759,184 2,654,141 215 104,828 2,759,184 3,164,282 (377,194) (27,904) 2,759,184 1,433,789 503,065 102,610 (1,771,300) (131,697) (72,073) (1,567,530) - (1,567,530) 1,873,910 1,873,910 1,873,910 1,809,254 1,806,431 2,823 1,809,254 1,843,638 (16,327) (18,057) 1,809,254 141,733 99,727 (48,920) (43,086) (19,884) (3,431) (19,771) 42,390 (62,161) (41,406) (7,739) 1,905 (5,834) 33,667 114,513 114,513 114,513 120,239 (5,726) 114,513 2,206,070 1,812,432 126,483 (810,692) (255,435) (133,120) (422,137) 480,216 (902,353) (621,776) 837,822 99,353 937,175 1,459,598 1,188,313 1,151,574 27,876 8,863 1,188,313 1,318,979 (118,270) (12,396) 1,188,313 21,468 19,049 5,633 745 (595) (592) 1,932 489 1,443 (7,846) 3,510 1,378 4,888 11,356 9,712 9,692 20 9,712 10,319 (601) (6) 9,712 (265,094) (7,013,709) 6,397,972 13,294,626 5,886 524,969 6,403,858 13,819,595 6,663,066 20,308,335 4,809,878 18,279,110 4,802,384 18,052,136 61,745 7,494 165,229 4,809,878 18,279,110 5,049,880 20,277,725 (239,925) (1,862,585) (77) (136,030) 4,809,878 18,279,110 1,928,694 4,191,023 (995,973) (3,098,880) 1,910,186 1,092,506 112,717 242,866 (62,333) (15,044) 163,774 375,700 4,298,256 14,990,904 6,594,548 34,529,245 246,247 159,131 1,983 56,725 (13,588) (4,259) - 46,255 8,402,291 22,810,171 641,246 4,475,119 9,043,537 27,285,290 14,407,880 3,833,873 18,241,753 38,627,345 10,892,804 49,520,149 10,692,648 27,934,697 1,663,939 933,375 110,734 186,141 (48,745) (10,785) 163,774 329,445 (7,086,292) (6,357,603) (13,443,895) (2,102,907) (924,552) (1,433,607) (2,358,159) (4,058,833) (3,928,023) (7,986,856) 2,262,329 (6,321,162) (5,856,717) (12,177,879) (6,748,615) 6,896,654 519,083 7,415,737 13,645,269 13,469,232 13,249,752 61,745 157,735 13,469,232 15,227,845 (1,622,660) (135,953) 13,469,232 -------------------------------------------------------------------------------------- Rupees in thousands -------------------------------------------------------------------------------------- (1,427,177) (2,219,655) Insurance claims Net insurance claims and expenses 6,638,334 (5,816,310) 822,024 413,856 1,235,880 Insurance premium ceded to reinsurers Net insurance premium Commission income Net underwriting income 6,751,981 6,700,563 33,239 18,179 6,751,981 7,807,455 (987,504) (67,970) 6,751,981 Inside Pakistan Outside Pakistan Fire & property damage Insurance premium earned Gross written premium (inclusive of administrative surcharge) Gross direct premium Facultative inward premium Administrative surcharge Premium receivable (Inclusive of federal excise duty, Federal insurance fee and Administrative surcharge) Federal excise duty / VAT Federal insurance fee Segment Information Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 ANNUAL REPORT 2020 195
  197. 196 ANNUAL REPORT 2020 (1,492,018) 1,106,292 (385,726) (435,597) (362,535) Insurance claims Insurance claim recoveries from reinsurer Net claims Commission expense Management expense Inside Pakistan Motor Outside Pakistan Inside Pakistan Outside Pakistan Accident & health Inside Pakistan Outside Pakistan Miscellaneous Inside Pakistan Total 6,992,773 7,060,540 Segment Assets Unallocated assets Segment Liabilities Unallocated Liabilities 111,211 95,788 624,861 489,767 25,552 5,187 62,849 2,600,066 (1,163,726) 2,359,101 1,062,812 153,706 9,993,415 5,552,814 20,788 (2,659,418) (8,271,917) (1,094,632) (1,230,054) (195,795) (1,368,991) (5,878,137) 1,366,492 558,513 37,895 (1,735,985) (138,262) (54,469) (1,543,254) - (1,543,254) 1,773,880 1,773,880 1,773,880 1,887,311 1,887,211 100 1,887,311 1,931,695 (25,442) (18,942) 1,887,311 40,351 33,510 (16,513) (23,662) (13,046) (800) (9,816) 39,030 (48,846) (29,297) 7,149 7,149 36,446 22,533 22,533 22,533 23,660 (1,127) 22,533 2,307,325 1,923,756 352,302 (778,246) (331,095) (129,196) (317,955) 174,789 (492,744) (781,978) 977,118 153,430 1,130,548 1,759,096 1,935,225 1,890,507 33,026 11,692 1,935,225 2,128,708 (174,476) (19,007) 1,935,225 22,763 19,249 7,274 (4,549) (737) (1,170) (2,642) 5,202 (7,844) (7,216) 8,921 2,902 11,823 16,137 17,216 17,108 108 17,216 18,125 (904) (5) 17,216 Outside Pakistan Aggregate (296,444) (7,426,103) 8,337,228 15,433,989 26,602 606,621 8,363,830 16,040,610 8,633,672 22,860,092 7,591,567 22,507,035 7,586,469 22,279,570 66,694 5,098 160,771 7,591,567 22,507,035 7,971,894 24,795,138 (380,173) (2,140,260) (154) (147,843) 7,591,567 22,507,035 2,673,814 4,121,432 622,305 5,706,548 16,734,169 6,546,138 32,804,093 2,532,994 1,372,373 30,040 68,551 12,298 (58,992) (8,352) 355,761 107,693 653,622 17,285,416 10,872,354 28,157,770 13,718,319 10,193,292 23,911,611 3,567,097 679,062 4,246,159 37,285,576 12,252,686 49,538,262 11,027,621 26,257,955 244,664 221,980 1,837 6,807 (12,585) (4,692) - 31,317 (7,054,475) (8,332,513) (15,386,988) (2,140,051) (1,256,574) (3,396,625) (935,740) (1,178,086) (2,113,826) (3,978,684) (5,897,853) (9,876,537) 1,447,618 (5,426,302) (8,571,667) (13,997,969) (7,129,659) 7,096,761 580,019 7,676,780 14,226,420 14,915,468 14,693,101 66,694 155,673 14,915,468 16,823,244 (1,760,087) (147,689) 14,915,468 2,288,330 4,160 (230,269) 8,275,999 16,706 8,292,705 8,506,268 7,488,094 7,483,357 4,737 7,488,094 7,862,923 (374,829) 7,488,094 (1,431,840) (8,478,203) (51,873) 2,808,850 4,274 2,813,124 2,860,723 2,816,156 2,714,540 101,616 2,816,156 3,229,489 (384,924) (28,409) 2,816,156 Profit before taxation 8,889 (27,926) (11,420) (5,815) (10,691) - (10,691) 32,086 32,086 32,086 23,466 23,404 62 23,466 23,862 (352) (44) 23,466 1,150,393 28,203 61,744 12,298 (46,407) (3,660) 355,761 107,693 15,608 69,513 (696,968) (213,527) (120,683) (362,758) 103,688 (466,446) (185,885) 704,400 1,457 705,857 890,285 880,438 857,397 1,009 22,032 880,438 998,598 (109,294) (8,866) 880,438 Net investment income Rental income Other income Change in fair value of investment property Other expenses Finance cost Workers' welfare fund reversal Profit from Window Takaful Operations - Operator's fund Underwriting result (4,459) (1,183,858) (1,317) (6,575) 3,433 29,516 (26,083) 42,735 (29,662) 13,073 6,994 20,067 6,942,436 40,258 40,067 191 40,258 43,324 (2,961) (105) 40,258 (6,109,923) 832,513 420,858 1,253,371 Net insurance claims and expenses Inside Pakistan Outside Pakistan Marine, aviation & transport 2019 -------------------------------------------------------------------------------------- Rupees in thousands -------------------------------------------------------------------------------------- Insurance premium ceded to reinsurers Net insurance premium Commission income Net underwriting income 7,396,338 7,343,446 32,659 20,233 7,396,338 8,534,754 (1,065,951) (72,465) 7,396,338 Inside Pakistan Outside Pakistan Fire & property damage Insurance premium earned Gross written premium (inclusive of administrative surcharge) Gross direct premium Facultative inward premium Administrative surcharge Premium receivable (Inclusive of federal excise duty, Federal insurance fee and Administrative surcharge) Federal excise duty / VAT Federal insurance fee 39.1 Segment Information Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020
  198. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 40 Movement in investments Investment in subsidiary Available for sale Held to Maturity Total Rupees in thousand As at January 01 , 2019 Additions Disposals (sales and redemptions) Fair value net gains (excluding net realized gain) Currency translation effect Unwinding of discount on debt securities Impairment losses 18,685,087 4,734,142 24,114,124 - 2,283,096 (2,829,689) 7,277,933 (6,194,544) 9,561,029 (9,024,233) 998,702 (294,179) 998,702 520,825 11,404 (294,179) 25,887,672 As at December 31, 2019 694,895 18,843,017 520,825 11,404 6,349,760 Additions Disposals (sales and redemptions) 403,005 - 1,580,251 (969,356) 9,120,640 (9,356,998) 11,103,896 (10,326,354) - (100,811) (158,641) 184,091 5,900 - (100,811) 184,091 5,900 (158,641) 19,194,460 6,303,393 26,595,753 Fair value net gains (excluding net realized gain) Currency translation effect Unwinding of discount on debt securities Impairment losses As at December 31, 2020 41 694,895 1,097,900 Management of insurance and financial risk The Company's activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including interest / mark-up rate risk, price risk and currency risk).The Company's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance. Overall risks arising from the Company's financial assets and liabilities are limited. The Company consistently manages its exposure to financial risk without any material change from previous period in the manner described in notes below. The Board of Directors (the Board) has overall responsibility for the establishment and oversight of Company's risk management framework. The Board is also responsible for developing the Company's risk management policies. The individual risk wise analysis is given below : 41.1 Insurance risk The principal risk that the Company faces under insurance contracts is that the actual claims and benefit payments or the timing thereof may differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Company is to ensure that sufficient reserves are available to cover these liabilities. The above risk exposure is mitigated by diversification across a large portfolio of insurance contracts and geographical areas. The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements. Further, strict claims review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims and similar procedures are put in place to reduce the risk exposure of the Company. The Company further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Company. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. Although the Company has reinsurance arrangements, it is not relieved of its direct obligations to its policy holders and thus ANNUAL REPORT 2020 197
  199. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 a credit exposure exists with respect to ceded insurance , to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. The Company's placement of reinsurance is diversified such that it is neither dependent on a single reinsurer nor are the operations of the Company substantially dependent upon any single reinsurance contract. Reinsurance policies are written with approved reinsurers on either a proportionate basis or non-proportionate basis. The reinsurers are carefully selected and approved and are dispersed over several geographical regions. Experience shows that larger the portfolio is in similar reinsurance contracts, smaller will be the relative variability about the expected outcome. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. The Company principally issues the general insurance contracts e.g. Fire & property, Marine, aviation & transport, Motor, Accident & health and other Miscellaneous. Risks under non-life insurance policies usually cover twelve month or lesser duration. For general insurance contracts the most significant risks arise from accidental fire, atmospheric disaster and terrorist activities . Insurance contracts at times also cover risk for single incidents that expose the Company to multiple insurance risks. 41.1.1 Geographical concentration of insurance risk To optimize benefits from the principle of average and law of large numbers, geographical spread of risk is of extreme importance. There are a number of parameters which are significant in assessing the accumulation of risks with reference to the geographical location, the most important of which is risk survey. 41.1.2 Reinsurance arrangements Keeping in view the maximum exposure in respect of key zone aggregate, a number of proportional and nonproportional reinsurance arrangements are in place to protect the net account in case of a major catastrophe. Apart from the adequate event limit which is the multiple of the treaty capacity or the primary recovery from the proportional treaty, any loss over and above limit would be recovered from the non-proportional treaty which is very much in line with the risk management philosophy of the Company. Gross sum insured 2020 2019 Fire & property damage 5,362,654,044 Marine aviation & transport 2,745,235,895 Motor 226,188,600 Accident & health 115,702,675 Miscellaneous 432,883,227 Reinsurance 2020 2019 Rupees in thousand 2020 Net 2019 5,155,573,587 2,405,075,840 273,300,696 88,346,549 537,845,680 4,603,407,292 327,249,038 5,677,579 1,188,805 340,447,752 4,452,484,421 275,255,894 5,609,902 494,075 400,087,997 759,246,752 2,417,986,857 220,511,021 114,513,870 92,435,475 703,089,166 2,129,819,946 267,690,794 87,852,474 137,757,683 8,882,664,441 8,460,142,352 5,277,970,466 5,133,932,289 3,604,693,975 3,326,210,063 41.1.3 Sources of uncertainty in estimation of future claim payments The key source of estimation uncertainty at the statement of financial position date relates to valuation of outstanding claims, whether reported or not, and includes expected claims settlement costs. Considerable judgment by management is required in the estimation of amounts due to policy holders arising from claims made under insurance contracts. Such estimates are necessary based on assumptions about several factors involving varying and possibly significant degrees of judgment and uncertainty, and actual results may differ from management's estimates resulting in future changes in estimated liabilities. Qualitative judgments are used to assess the extent to which past trends may not apply in the future, for example one-off occurrence, changes in market factors such as judicial decisions and government legislation affect the estimates. In particular, estimates have to be made both for the expected ultimate cost of claims reported at the statement of financial position date and for the expected ultimate cost of claims incurred but not reported (IBNR) at the statement of financial position date. 198 ANNUAL REPORT 2020
  200. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 41 .1.4 Key assumptions for claim estimation The process used to determine the assumptions for calculating the outstanding claim reserves is intended to result in neutral estimates of the most likely or expected outcome. The nature of the business makes it very difficult to predict with certainty the likely outcome of any particular claim and the ultimate cost of notified claims. Each notified claim is assessed in separate, case to case basis, with due regard to claim circumstances, information available from surveyors and historical evidence of the size of similar claims. Case estimates are reviewed regularly and updated as and when new information is available. The estimation of IBNR is generally subject to a greater degree of uncertainty that the estimation of the cost of settling claims already notified to the Company, in which case the information about the claim event is available. IBNR provision is initially estimated at a gross level and a separate calculation is carried out to estimate the size of the reinsurance recoveries. The estimation process takes into account the past claims reporting pattern and details of reinsurance programs. The premium liabilities have been determined such that the total premium liability provisions (unearned premium reserve and premium deficiency reserve) would be sufficient to service the future expected claims and expenses likely to occur on the unexpired policies as of reporting date. The expected future liability is determined using estimates and assumptions based on the experience during the expired period of the contracts and expectations of future events that are believed to be reasonable. 41.1.5 Sensitivity analysis The risks associated with the insurance contracts are complex and subject to a number of variables which complicate quantitative sensitivity analysis. The Company makes various assumptions and techniques based on past claims development experience. This includes indications such as average claims cost, ultimate claims numbers and expected loss ratios. The Company considers that the liability for insurance claims recognized in the statement of financial position is adequate. However, actual experience may differ from the expected outcome. As the Company enters into short term insurance contracts, it does not assume any significant impact of changes in market conditions on unexpired risks. However, some results of sensitivity testing are set out below, showing the impact on profit / (loss) before tax, net of reinsurance. Pre tax profit / (loss) 10% increase in claims liability Net: Fire & property Marine, aviation and transport Motor Accident & health Miscellaneous 10% decrease in claims liability Net: Fire & property Marine, aviation and transport Motor Accident & health Miscellaneous 2020 2019 Rupees in thousand (71,406) (30,222) (496,307) (158,730) (42,021) (38,229) (37,345) (724,713) (155,307) (32,060) (798,686) (987,654) 71,406 30,222 496,307 158,730 42,021 38,229 37,345 724,713 155,307 32,060 798,686 987,654 ANNUAL REPORT 2020 199
  201. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Statement of Age-wise breakup of unclaimed insurance bene fits Particulars 1 to 6 months Total 7 to 12 months 13 to 24 months 25 to 36 months Beyond 36 months Rupees in thousand Claims not encashed 846,364 615,401 39,276 53,984 56,872 80,831 ` 41.2 Financial Risk Maturity profile of financial assets and liabilities: 2020 Interest / markup bearing Maturity Maturity upto after one year one year Sub total Non - interest / markup bearing Maturity Maturity upto after one year one year Sub total Total Rupees in thousand Financial assets Investment Equity securities- quoted Equity securities- unquoted - - - 15,710,251 - 3,484,209 - 3,484,209 3,484,209 - - 374,331 - - - Debt securities 275,631 98,700 374,331 - Term deposits 5,851,874 77,188 5,929,062 - Investment in subsidiary - - - - Investments of Window Takaful - - - 35,873 - 15,710,251 15,710,251 - 5,929,062 1,097,900 1,097,900 - 35,873 35,873 518,611 60,800 579,411 582,896 1,097,900 Operations - Operator's Fund Loans and other receivables 521 Insurance / reinsurance receivables - - - 4,759,151 - 4,759,151 4,759,151 5,922,296 - 5,922,296 5,922,296 2,964 3,485 - unsecured and considered good Reinsurance recoveries against outstanding claims - - - Salvage recoveries accrued - - - 270,275 - 270,275 270,275 Prepayments - - - 3,422,781 - 3,422,781 3,422,781 932,769 - 932,769 379,275 - 379,275 1,312,044 - - - 520,061 - 520,061 520,061 178,852 7,239,647 35,022,783 - - - 10,768,040 Cash and bank Other Assets of Window Takaful Operations - Operator's Fund 7,060,795 1,158,700 36,181,483 43,421,130 Financial liabilities Outstanding claims Borrowings 90,310 76,057 166,367 Insurance / reinsurance payables - - - Other creditors and accruals - - - Total liabilities of Window Takaful - - - 90,310 76,057 166,367 6,970,485 200 ANNUAL REPORT 2020 102,795 - - 10,768,040 10,768,040 - - 166,367 3,030,884 - 3,030,884 3,030,884 2,176,391 - 2,176,391 2,176,391 242,797 - 242,797 242,797 16,218,112 - 7,073,280 18,804,671 1,158,700 16,218,112 16,384,479 19,963,371 27,036,651
  202. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 2019 Interest / markup bearing Maturity Maturity upto after Sub total one year one year Non - interest / markup bearing Maturity Maturity upto after Sub total one year one year Total Rupees in thousand Financial assets Investment Equity securities- quoted Equity securities- unquoted - - - 15,968,534 - 2,874,483 15,968,534 15,968,534 - - - - 2,874,483 2,874,483 Debt securities 370,491 95,377 465,868 - - - 465,868 Term deposits 5,833,782 50,110 5,883,892 - - - 5,883,892 Investment in subsidiary - - - - 694,895 694,895 694,895 Investments of Window Takaful - - - 32,958 - 32,958 32,958 Loans and other receivables 625 431,701 41,211 472,912 477,264 Insurance / reinsurance receivables - - - 5,810,164 - 5,810,164 5,810,164 5,931,928 - 5,931,928 5,931,928 3,727 4,352 Reinsurance recoveries against outstanding claims - - - Salvage recoveries accrued - - - 301,420 - 301,420 301,420 Prepayments - - - 3,633,739 - 3,633,739 3,633,739 973,117 - 973,117 203,568 - 203,568 1,176,685 357,950 357,950 Cash and bank Other Assets of Window Takaful 7,178,015 - - 149,214 7,327,229 357,950 - 35,546,445 736,106 36,282,551 43,609,780 10,367,347 10,367,347 Financial liabilities Outstanding claims - - - 10,367,347 - Insurance / reinsurance payables - - - 2,701,164 - 2,701,164 2,701,164 Other creditors and accruals - - - 2,177,455 - 2,177,455 2,177,455 Total liabilities of Window Takaful - - - 195,872 - 195,872 195,872 - - - 15,441,838 - 15,441,838 15,441,838 736,106 20,840,713 28,167,942 7,178,015 149,214 7,327,229 20,104,607 Interest / mark - up rate risk Interest / mark-up rate risk is the risk that the value of a financial instrument or future cash flows of a financial instrument will fluctuate due to changes in the market interest / mark - up rates. Sensitivity to interest / mark-up rate risk arises from mismatching of financial assets and liabilities that mature or are repaid in a given period. The Company manages this mismatch through risk management strategies where significant changes in gap position can be adjusted. At the reporting date the interest / mark-up rate profile of the Company's significant interest / mark-up bearing financial instruments was as follows: ANNUAL REPORT 2020 201
  203. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Effective interest rate (%) 2020 Carrying amounts 2019 2020 2019 Rupees in thousand Fixed rate of financial instruments Financial assets: Investments- PIBs and Treasury Bills Loans 7.32% - 11.71% 10.30% - 14.22% 5% 5% 374,331 3,485 465,868 4,352 4.50% - 11.35% 6.50% - 12.50% 6,861,831 6,857,009 Floating rate financial instruments Financial assets: Bank and term deposits Sensitivity analysis The Company does not account for any fixed rate financial assets and liabilities at fair value through profit and loss account. Therefore, a change in interest rate will not affect the fair value of any financial instruments. For cash flow sensitivity analysis of variable rate instruments, a hypothetical change of 100 basis points in interest rates at the reporting date would have decreased / (increased) profit for the year by the amounts shown below. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risk. Variation in market interest rates could produce significant changes at the time of early repayments. For these reasons, actual results might differ from those reflected in the details specified below. The analysis assumes that all other variables remain constant. Effect on profit before tax Increase Effect on equity Decrease Increase Decrease Rupees in thousand As at December 31, 2020 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 68,618 (68,618) 48,719 (48,719) As at December 31, 2019 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 68,570 (68,570) 48,685 (48,685) Currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company's principal transactions are carried out in Pak Rupees and its exposure to foreign exchange risk arises primarily with respect to AED and US dollars in respect of foreign branches. Assets and liabilities exposed to foreign exchange risk amounted to Rs. 10,892,805 thousands (2019: Rs. 12,262,552 thousands) and Rs. 9,043,537 thousands (2019: Rs. 10,882,221 thousands), respectively, at the end of the year. The following significant exchange rates were applied during the year: Rupees per US Dollar Average rate Reporting date rate Rupees per AED Average rate Reporting date rate 202 ANNUAL REPORT 2020 2020 Rupees 2019 161.8459 159.8344 149.9303 154.8476 44.0622 43.5143 40.8181 42.1566
  204. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 Price risk Price risk represents the risk that the fair value of financial instruments will fluctuate because of changes in the market prices (other than those arising from interest / mark-up rate risk or currency risk), whether those changes are caused by factors specific to individual financial instrument or its issuer, or factors affecting all or similar financial instrument traded in the market. The Company is exposed to equity price risk that arises as a result of changes in the levels of PSE - Index and the value of individual shares. The equity price risk arises from the Company's investment in equity securities for which the prices in the future are uncertain. The Company policy is to manage price risk through selection of blue chip securities. The Company's strategy is to hold its strategic equity investments on a long term basis. Thus, Company is not affected significantly by short term fluctuation in its strategic investments provided that the underlying business, economic and management characteristics of the investees remain favorable. The Company strives to maintain above average levels of shareholders' capital to provide a margin of safety against short term equity volatility. The Company manages price risk by monitoring exposure in quoted equity securities and implementing the strict discipline in internal risk management and investment policies. The Company has investments in quoted equity securities amounting to Rs. 15,710,251 thousands (2019: Rs. 15,968,534 thousands) at the reporting date. The carrying value of investments subject to equity price risk are, in almost all instances, based on quoted market prices as of the reporting date. Market prices are subject to fluctuation which may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Sensitivity analysis For the equity investment portfolio, a 10% increase / (decrease) in redemption value and share prices at year end would have increased / (decreased) impairment loss of investment recognized in profit and loss account as follows: Impact on profit before tax Impact on equity Rupees in thousand 2020 Effect of increase in share price Effect of decrease in share price 999,344 (489,780) 709,534 (347,744) 2019 Effect of increase in share price Effect of decrease in share price 783,162 (405,302) 556,045 (287,764) 41.3 Credit risk and concentration of credit risk Credit risk is the risk that arises with the possibility that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. The Company attempts to control credit risk by monitoring credit exposure by undertaking transactions with a large number of counterparties in various sectors and by continually assessing the credit worthiness of counterparties. Concentration of credit risk occurs when a number of counterparties have a similar type of business activities. As a result any change in economic, political or other conditions would affect their ability to meet contractual obligations in a similar manner. The Company's credit risk exposure is not significantly different from that reflected in these unconsolidated financial statements. The management monitors and limits the Company's exposure and makes conservative estimates of provisions for doubtful assets, if any. The management is of the view that it is not exposed to significant concentration of credit risk as its financial assets are adequately diversified in entities of sound financial standing, covering various industrial sectors. ANNUAL REPORT 2020 203
  205. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 The carrying amount of financial assets represents the maximum credit exposure , as specified below: 2020 2019 Rupees in thousand Investments Loans and other receivable Due from insurance contract holders Due from other insurers / reinsurers Reinsurance recoveries against outstanding claims Salvage recoveries accrued Bank deposits 26,595,753 582,896 3,790,830 968,321 5,922,296 270,275 1,306,903 25,887,672 477,264 4,862,257 947,907 5,931,928 301,420 1,166,272 39,437,274 39,574,720 Provision for impairment is made for doubtful receivables according to the Company's policy. The impairment provision is written off when the Company expects that it cannot recover the balance due. The movement in the provision for doubtful debt account is shown in note 13.2 and 13.3 to these unconsolidated financial statements. Age analysis of due from insurance contact holders (net of provision) is as follows: Age analysis of due from insurance contact holders (net of provision) is as follows: Upto one year Above one year 2020 2019 Rupees in thousand 3,261,295 1,461,919 4,723,214 Provision for doubtful balances (932,384) 3,790,830 4,264,249 1,466,594 5,730,843 (868,586) 4,862,257 The credit quality of Company's bank balance can be assessed with reference to external credit rating as follows: Rating Short Term Abu Dhabi Commercial Bank Allied Bank Limited Askari Bank Limited Bank Alfalah Limited Bank Al Habib Limited Habib Bank Limited Habib Metropolitan Bank FINCA Micro Finance Bank Limited Khushhali Microfinance Bank Limited MCB Bank Limited Mobilink Micro Finance Bank National Bank of Pakistan The Punjab Provincial Cooperative Bank Limited Samba Bank Limited Soneri Bank Limited United Bank Limited Zarai Taraqiati Bank Limited 204 ANNUAL REPORT 2020 Long Term A1 A A1+ AAA A1+ AA+ A1+ AA+ A1+ AA+ A1+ AAA A1+ AA+ A1 A A1 A+ A1+ AAA A1 A A1+ AAA Not available Not available A1 AA A1+ AAA1+ AAA A1+ AAA Rating Agency S&P PACRA PACRA PACRA PACRA JCR-VIS PACRA PACRA JCR-VIS PACRA PACRA PACRA Not available JCR-VIS PACRA JCR-VIS JCR-VIS 2020 2019 Rupees in thousand 141,791 5,020 46 690,417 24,757 59,015 (149) 2,369 5,706 368,010 8,781 1,703 3,425 33,710 1 (46,594) 8,895 (161,781) 3,805 46 403,391 30,862 148,360 (149) 11,963 3,679 433,504 9,631 2,141 3,425 20,950 1 129,427 127,017 1,306,903 1,166,272
  206. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 The credit quality of amount due from other insurers (gross of provisions) can be assessed with reference to external credit rating as follows: Amounts due Reinsurance and other recoveries from other 2020 2019 against insurers / outstanding reinsurers claims Rupees in thousand A or Above (including PRCL) BBB Others 1,165,736 29 3,858 4,287,911 1,053,264 581,121 5,453,647 1,053,293 584,979 4,888,920 1,839,450 352,767 Total 1,169,623 5,922,296 7,091,919 7,081,137 41.4 Capital risk management The Company's goals and objectives when managing capital are : - To be an appropriately capitalized institution in compliance with the paid-up capital requirement set by the SECP. Minimum paid-up capital requirement for non-life insurers as at December 31, 2020 is Rs. 500,000 thousands. The Company's current paid-up capital is well in excess of the limit prescribed by the SECP; - To safeguard the Company's ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for the other stakeholders; - To provide an adequate return to shareholders by pricing insurance contracts commensurately with the level of risk; - To maintain strong ratings and to protect the Company against unexpected events / losses; and - To ensure a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. 2020 42 Statement of Solvency Rupees in thousand Assets Property and equipment Intangible assets Investment properties Investment in subsidiary Investments Equity securities Debt securities Term deposits Loans and other receivables Insurance / reinsurance receivables Reinsurance recoveries against outstanding claims Salvage recoveries accrued Deferred commission expense / acquisition cost Taxation - payment less provisions Prepayments Cash and bank Total assets of Window Takaful Operations - Operator's Fund Total assets 4,467,919 88,187 401,896 1,097,900 19,194,460 374,331 5,929,062 582,896 4,759,151 5,922,296 270,275 731,319 376,484 3,422,781 1,312,044 48,931,001 589,148 49,520,149 ANNUAL REPORT 2020 205
  207. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 2020 Rupees in thousand In-admissible assets as per following clauses of Section 32 (2) of the Insurance Ordinance, 2000 Loans to employees Investment in subsidiary Premium due from insurance contract holder Due from other insurers / reinsurers Intangible assets Lien on term deposits Other prepayments and sundry receivables Bank balances subject to encumbrances Equity investment Movable properties Inadmissible assets of Window Takaful Operations - Operator's Fund Total of in-admissible assets Total admissible assets 41,852 1,097,900 1,312,634 859,958 194,105 5,603,079 206,994 570,776 9,322,311 1,132,132 39,272 (20,381,013) 29,139,136 Liabilities Underwriting provisions: Outstanding claims including IBNR Unearned premium reserve Unearned reinsurance commission Retirement benefits obligations Deferred taxation Borrowings Deferred grant income Premium received in advance Insurance / reinsurance payables Other creditors and accruals Deposits and other liabilities Taxation - provision less payment Total liabilities of Window Takaful Operations - Operator's Fund Total liabilities Total net admissible assets 5,864,026 8,366,434 245,318 197,232 1,375,394 166,367 14,767 399,494 3,030,884 1,806,196 672,367 22,138,479 242,797 22,381,276 6,757,860 Minimum solvency requirement (higher of following) - Method A - U/s 36(3)(a) - Method B - U/s 36(3)(b) - Method C - U/s 36(3)(c) 150,000 2,658,925 2,588,381 2,658,925 Excess in Net Admissible Assets over minimum requirement 4,098,935 206 ANNUAL REPORT 2020
  208. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 43 Fair value measurement of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . Underlying the definition of fair value is the presumption that the company is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. IFRS 13 'Fair Value Measurement' requires the company to classify fair value measurements and fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) - Inputs other than quoted prices included within level 1 that are observable for the asset either directly (that is, derived from prices) (Level 2) - Inputs for the asset or liability that are not based on observable market data (that is, unadjusted) inputs (Level 3) Transfer between levels of the fair value hierarchy are recognized at the end of the reporting period during which the changes have occurred. Note Receivables and other financial assets Held to maturity Available for sale Cash and cash equivalents 2020 Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets - measured at fair value Investment Equity securities- quoted Equity securities- unquoted Debt securities Investments of Window Takaful Operations Operator's Fund 9 15,710,251 9 3,484,209 10 374,331 - - - 15,710,251 15,710,251 - 3,484,209 374,331 - 15,710,251 - 3,484,209 3,484,209 374,331 - 374,331 16 35,873 - - - - 35,873 35,873 - - 35,873 12 11 8 - 5,929,062 - 582,896 1,097,900 - - 582,896 5,929,062 1,097,900 - - - - 13 14 15 - - 4,759,151 5,922,296 270,275 3,422,781 - 1,312,044 - 4,759,151 5,922,296 270,275 3,422,781 1,312,044 - - - - 16 - - 310,615 209,446 - - - - 19,230,333 6,303,393 16,365,914 1,521,490 520,061 - 43,421,130 15,746,124 - - - 166,367 166,367 - 10,768,040 10,768,040 - 3,030,884 3,030,884 - 2,176,391 2,176,391 242,797 242,797 - - - - - - - 16,384,479 16,384,479 - - - Financial assets - not measured at fair value Loans and other receivables * Investment - Term deposits* Investment in subsidiary* Insurance / reinsurance receivables - unsecured and considered good * Reinsurance recoveries against outstanding claims * Salvage recoveries accrued * Prepayments * Cash and bank * Other Assets of Window Takaful Operations Operator's Fund* 374,331 3,484,209 19,604,664 Financial liabilities - not measured at fair value Underwriting provisions: Borrowings* Outstanding claims (including IBNR)* Insurance / reinsurance payables * Other creditors and accruals* Total liabilities of Window Takaful Operations- Operator's Fund* 21 28 23 16 - * The Company has not disclosed the fair value of these items because their carrying amounts are a reasonable approximation of fair value. ANNUAL REPORT 2020 207
  209. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 43 .1 Fair value measurement of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Underlying the definition of fair value is the presumption that the company is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. IFRS 13 'Fair Value Measurement' requires the company to classify fair value measurements and fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) - Inputs other than quoted prices included within level 1 that are observable for the asset either directly (that is, derived from prices) (Level 2) - Inputs for the asset or liability that are not based on observable market data (that is, unadjusted) inputs (Level 3) Transfer between levels of the fair value hierarchy are recognized at the end of the reporting period during which the changes have occurred. Note Receivables and other financial assets Held to maturity Available for sale Cash and cash equivalents 2019 Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets - measured at fair value Investment Equity securities- quoted Equity securities- unquoted Debt securities Investments of Window Takaful Operations Operator's Fund 9 15,968,534 9 2,874,483 10 465,868 - - - 15,968,534 15,968,534 - 2,874,483 465,868 - - 15,968,534 - 2,874,483 2,874,483 465,868 465,868 16 32,958 - - - - 32,958 32,958 - - 32,958 12 11 8 - 5,883,892 - 477,264 694,895 - - 477,264 5,883,892 694,895 - - - - 13 14 15 - - 5,810,164 5,931,928 301,420 3,633,739 - 1,176,685 - 5,810,164 5,931,928 301,420 3,633,739 1,176,685 - - - - 16 - - 266,055 91,895 - 357,950 - - - - 18,875,975 6,349,760 17,115,465 1,268,580 - - - - 10,367,347 10,367,347 - 2,701,164 2,701,164 - 2,177,455 2,177,455 195,872 195,872 - - - - - - - 15,441,838 15,441,838 - - - Financial assets - not measured at fair value Loans and other receivables * Investment - Term deposits* Investment in subsidiary* Insurance / reinsurance receivables - unsecured and considered good * Reinsurance recoveries against outstanding claims * Salvage recoveries accrued * Prepayments * Cash and bank * Other Assets of Window Takaful Operations Operator's Fund* - 43,609,780 16,001,492 465,868 2,874,483 19,341,843 Financial liabilities - not measured at fair value Underwriting provisions: Outstanding claims (including IBNR)* 28 Insurance / reinsurance payables * 23 Other creditors and accruals* Total liabilities of Window Takaful Operations- Operator's Fund* 16 * The Company has not disclosed the fair value of these items because their carrying amounts are a reasonable approximation of fair value. 208 ANNUAL REPORT 2020 -
  210. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 44 Provident fund related disclosure The following information is based on unaudited financial statements for the year ended December 31 , 2020 and audited financial statements for the year ended December 31, 2019. 2020 2019 Rupees in thousand Size of fund - Total assets 1,092,815 1,080,225 Cost of investments 1,043,193 1,051,390 Fair value of investments 1,171,154 1,153,697 100.00 100.00 Investments made (Percentage) 44.1 The break-up of cost of investments is as follows: 2019 2020 (Percentage) 2020 2019 Rupees in thousand 12.14 9.38 126,672 98,645 4.47 6.85 46,599 71,997 Investment in Debt Collective Investment Schemes - 5.21 - 54,764 Investment in Listed Debt Securities 4.15 4.72 43,333 49,581 Investment in Listed Equity Securities 6.19 7.24 64,543 76,132 Investment in Government Securities Investment in Money Market Collective Investment Scheme Investment in Equity Collective Investment Schemes 63.00 60.19 657,182 632,906 Bank balances 6.59 3.05 68,729 32,058 Others 3.46 3.36 36,135 35,307 100.00 100.00 1,043,193 1,051,390 The above investments / placement of funds in special bank account has been made in accordance with the provisions of section 218 of the Companies Act, 2017 and the rules formulated for this purpose. 45 Non - Adjusting events after the statement of financial position date 45.1 The Board of Directors of the Company in their meeting held on February 23, 2021 proposed a final cash dividend for the year ended December 31, 2020 @ 12.5% i.e. Rupees 1.25/- share (2019: 15% i.e. Rupees 1.5/- share). This is in addition to the interim cash dividend @ 12.5% i.e. Rupee 1.25/- per share (2019: 10% i.e. Rupee 1/- per share) resulting in a total cash dividend for the year ended December 31, 2020 of Rupees 2.5/- per share (2019: Rupees 2.5/- share). The approval of the members for the final dividend will be obtained at the forthcoming Annual General Meeting. The financial statements for the year ended December 31, 2020 do not include the effect of final dividend which will be accounted for in the financial statements for the year ending December 31, 2021. 45.2 The Company follows the development of the Covid-19 corona virus and evaluates the extent to which this may affect the Company's operations in the short and long term. With the high levels of uncertainty surrounding the situation and potential additional initiatives by authorities and customers, it is very difficult to predict the full financial impact that the situation may have on the Company. ANNUAL REPORT 2020 209
  211. Notes to the Unconsolidated Financial Statements For the year ended 31 December 2020 46 Number of employees The average number of employees during the year and as at December 31 , 2020 and 2019, are as follows: 2020 At December 31 Average during the year 47 Numbers 900 930 2019 944 956 Corresponding figures Reclassification / rearrangement of corresponding figures have been made in these financial statements wherever necessary. 48 Date of authorization for issue These unconsolidated financial statements were authorized for issue on February 23, 2021 by the Board of Directors of the Company. 49 General Figures have been rounded off to the nearest thousand rupees unless other wise stated. Umer Mansha Chairman Ibrahim Shamsi Director 210 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  212. ANNUAL REPORT 2020 211
  213. Independent Auditors ’ Report To the Members of Adamjee Insurance Company Limited Opinion We have audited the annexed consolidated financial statements of Adamjee Insurance Company Limited and its subsidiary (the “Group”), which comprise the consolidated statement of financial position as at December 31, 2020, and the consolidated profit and loss account, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies and other explanatory information. In our opinion consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at December 31, 2020 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the accounting and reporting standards as applicable in Pakistan. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants as adopted by the Institute of Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Emphasis of Matter We draw attention to note 27.2 of the consolidated financial statements, which describes that the Group has challenged the scope and applicability of Punjab Sales Tax (PST) and Sindh Sales Tax on life insurance services. Our opinion is not modified in respect of this matter. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Following are the Key audit matter(s): Sr No. 1. Key audit matter(s) How the matter was addressed in our audit Revenue Recognition Risk Refer notes 3.3 and 28 to the consolidated financial statements relating to revenue recognition and details in respect of net insurance premium respectively. The Group receives its revenue primarily from two main sources namely; premiums and investments income. Premiums from insurance policies comprise of 85.44% of the total revenue. We identified revenue recognition from premium income as a key audit matter because it is one of the key performance indicators of the Group and because of the potential risk that revenue transactions may not be recognized in the appropriate period. 212 ANNUAL REPORT 2020 Our audit procedures in respect of this matter included the following: § Obtained the understanding, evaluated the design and tested the controls over the process of capturing, processing and recording of premiums; § Assessed the appropriateness of the Company’s accounting policy for recording of premiums and that it is in line with the requirements of applicable law, accounting and reporting standards; § Traced the premium recorded on sample basis from the underlying policies issued to insurance contract holders; § Tested the policies on sample basis where premium was record ed close to year end and subsequent to year end , and evaluated that these were recorded in the appropriate accounting period; and § Recalculated the unearned portion of premium income and ensured that appropriate amount has been recorded as provision for une arned premium in liabilities.
  214. Sr No . 2. Key audit matter(s) Valuation of Claim Liabilities Refer notes 3.2.7, 19.2 and 29 to the consolidated financial statements for accounting policies and details in respect of claim liabilities including incurred but not reported (IBNR) respectively. The Group’s claim liabilities represents 14.25% of its total liabilities. Valuation of these claim liabilities involves significant management judgment regarding uncertainty in the estimation of claims payments and assessment of frequency and severity of claims. Claim liabilities are recognized on intimation of the insured event based on management judgment and estimate. The Group maintains provision for claims IBNR based on the advice of an independent actuary. The actuarial valuation process involves significant judgment and the use of actuarial assumptions. How the matter was addressed in our audit Our audit procedures in respect of this matter included the following: § § § § § § We have identified the valuation of claim liabilities as key audit matter because estimation of claims liabilities involves a significant degree of judgment. § Assessed the appropriateness of the Company’s accounting pol icy for recording of claims in line with requirements of applicable accounting and reporting standards; Tested claims transactions on a sample basis with underlying documentation to evaluate whether the claims reported during the year are recorded in accordance with the requirements of the Company's policy and insurance regulations; Inspected significant arrangements with reinsurer to obtain an understanding of contracts terms and assessed on a sample basis that recoveries from reinsurance on account of claims reported have been accounted for based on agreed terms and conditions; Used an external actuarial specialist to assist us in evaluation of general principles, actuarial assumptions and methods adopted for actuarial valuations by the actuary of the Company for determination of IBNR; Assessed competence, capability and objectivity of management’s expert; Assessed the data provided by the Group to its actuary for completeness and accuracy and ensured that the same has been provided to us; and Considered the adequacy of Company’s disclosures about the estimates used and the sensitivity to key assumptions. Information Other than the Financial Statements and Auditors’ Report Thereon Management is responsible for the other information. The other information comprises the information included in the Group’s annual report, but does not include the consolidated financial statements and our auditor’s report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information when available, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Board of Directors for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting and reporting standards as applicable in Pakistan and Companies Act, 2017 and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a ANNUAL REPORT 2020 213
  215. going concern , disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Board of Directors is responsible for overseeing the Group’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs as applicable in Pakistan will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs as applicable in Pakistan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Ÿ Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Ÿ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Ÿ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Ÿ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Ÿ Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Ÿ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Rana M. Usman Khan. Chartered Accountants Lahore : February 23, 2021 214 ANNUAL REPORT 2020
  216. Directors ' Report to the Members on Consolidated Financial Statements For the year ended December 31, 2020 On behalf of the Board, We are pleased to present the consolidated financial statements of Adamjee Insurance Company Limited and its subsidiary, Adamjee Life Assurance Company Limited, for the year ended 31 December 2020. The following appropriation of profit has been recommended by the Board of Directors: 2020 2019 Rupees in thousand Profit before tax 2,230,566 2,814,175 (153,858) (784,094) 2,076,708 2,030,081 (2,786) (58,036) 2,073,922 1,972,045 Unappropriated profit brought forward 13,610,534 12,521,272 Profit available for appropriation 15,684,456 14,493,317 (525,000) (525,000) (437,500) (350,000) Taxation Profit after tax Less: Profit attributable to non-controlling interest Profit attributable to ordinary shareholders Final dividend for the year ended 31 December 2019 @ 15% (Rupees 1.5/- per share) [31 December 2018 @ 15% (Rupees 1.5/- per share)] Interim dividend for the half year ended 30 June 2020 @ 12.5% (Rupee 1.25/- per share) [30 June 2019 @ 10% (Rupee 1/- per share)] Acquisition of non-controlling interest Other Comprehensive Loss – remeasurement of defined benefit obligation Profit after appropriation (57,794) - (13,707) (7,783) 14,650,455 13,610,534 2020 Earnings per share - Basic and diluted 5.93 Rupees 2019 5.63 For and on behalf of the Board Lahore: 23 February 2021 Ibrahim Shamsi Director Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 215
  217. Consolidated Statement of Financial Position As at 31 December 2020 Note ASSETS Property and equipment Intangible assets Investment properties Investments Equity securities Debt securities Term deposits Loan secured against life insurance policies Loans and other receivables Insurance / reinsurance receivables Reinsurance recoveries against outstanding claims Salvage recoveries accrued Deferred commission expense / acquisition cost Taxation - payment less provisions Prepayments Cash and bank 13 14 Total assets of Window Takaful Operations - Operator's Fund (Parent Company) 15 2020 2019 Rupees in thousand 5 6 7 4,758,982 127,381 1,183,026 4,626,364 131,236 1,204,026 8 9 10 34,863,749 15,290,166 13,891,062 29,912 985,744 4,991,328 5,922,296 270,275 731,319 691,558 3,468,952 11,267,096 98,472,846 32,184,555 8,617,474 15,468,892 32,785 716,839 5,865,967 5,931,928 301,420 1,190,146 198,833 3,671,070 8,437,244 88,578,779 11 12 30 Total Assets 589,148 426,291 99,061,994 89,005,070 3,500,000 4,487,307 14,650,455 22,637,762 3,500,000 4,552,846 13,610,534 21,663,380 EQUITY AND LIABILITIES Capital and reserves attributable to Parent Company's equity holders Ordinary share capital Reserves Unappropriated profits Equity attributable to equity holders of the Parent Company Non-controlling interest 16 17 18 341,508 22,637,762 22,004,888 19 46,990,343 36,708,430 29 28 10,768,040 8,366,434 245,318 309,581 1,581,977 330,849 28,574 724,448 3,161,519 2,892,994 781,358 29,191,092 10,367,347 10,242,348 237,751 262,203 1,425,938 623,336 2,826,429 3,212,270 898,258 30,095,880 242,797 195,872 99,061,994 89,005,070 Total Equity LIABILITIES Insurance liabilities Underwriting provisions: Outstanding claims including IBNR Unearned premium reserves Premium deficiency reserve Unearned reinsurance commission Retirement benefits obligations Deferred taxation Borrowings Deferred grant income Premium received in advance Insurance / reinsurance payables Other creditors and accruals Deposits and other liabilities 30 20 21 22 23 24 25 26 Total liabilities of Window Takaful Operations - Operator's Fund (Parent Company) 15 Total Equity and Liabilities Contingencies and commitments 27 The annexed notes 1 to 49 form an integral part of these consolidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 216 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  218. Consolidated Pro fit and Loss Account For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand Net insurance premium 28 29,808,605 27,800,508 Net insurance claims Net commission and other acquisition costs Insurance claims and acquisition expenses 29 30 (14,825,487) (4,525,262) (19,350,749) (16,600,419) (4,207,683) (20,808,102) Management expenses Net change in insurance liabilities (other than outstanding claims) Underwriting results 31 (4,051,227) (9,937,066) (3,530,437) (4,422,568) (5,125,588) (2,555,750) Investment income Net fair value gain on financial assets at fair value through profit or loss Fair value adjustment to investment property Rental income Other income Other expenses Workers' welfare fund reversal/charge Results of operating activities 32 4,339,163 4,031,643 33 7 34 35 36 25 738,783 (21,000) 69,812 559,041 (68,689) 2,086,673 435,397 33,298 28,604 460,351 (67,448) 355,761 2,721,856 (19,881) (15,374) 163,774 107,693 2,230,566 2,814,175 (153,858) (784,094) 2,076,708 2,030,081 2,073,922 2,786 2,076,708 1,972,045 58,036 2,030,081 Finance cost Profit from Window Takaful Operations - Operator's Fund (Parent Company) 15 Profit before taxation Income tax expense 37 Profit after taxation Profit attributable to: Equity holders of the parent Non-controlling interest 18 Rupees Earnings per share - basic and diluted 38 5.93 5.63 The annexed notes 1 to 49 form an integral part of these consolidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 217
  219. Consolidated Statement of Comprehensive Income For the year ended 31 December 2020 2020 2019 Rupees in thousand Pro fit after taxation 2,076,708 2,030,081 (13,707) (13,202) (141,355) 495,035 73,704 214,411 (473) 1,338 3,502 60,874 (78,329) 758,456 1,998,379 2,788,537 1,994,896 2,735,826 3,483 52,711 1,998,379 2,788,537 Items that will not be subsequently reclassified to profit and loss account Re-measurement of retirement benefit obligations - net of tax Items that may be subsequently reclassified to profit and loss account Unrealized (loss) / gain on 'available-for-sale' investments - net of tax Reclassification adjustment relating to 'available for sale' investments disposed off in the year - net of tax Unrealized (loss) / gain on 'available for sale' investment from Window Takaful Operations - net of tax Net effect of translation of foreign branches Other comprehensive (loss) / income for the year Total comprehensive income for the year Total comprehensive income attributable to: Equity holders of the parent Non-controlling interest The annexed notes 1 to 49 form an integral part of these consolidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 218 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  220. Consolidated Cash Flow Statement For the year ended 31 December 2020 Cash flows from operating activities 2020 2019 Rupees in thousand Underwriting activities Insurance premiums received Reinsurance premiums paid Claims paid Reinsurance and other recoveries received Commissions paid Commissions received Other underwriting payments Net cash inflow from underwriting activities 36,589,154 (6,632,269) (19,072,381) 4,326,300 (4,021,112) 532,528 (4,973,401) 6,748,819 36,682,230 (8,188,954) (21,896,201) 4,599,404 (4,832,917) 622,744 (3,499,824) 3,486,482 (411,376) (31,483) (30,192) (45,178) 49,691 113,738 (354,800) (658,499) (16,229) (58,992) (69,345) 65,832 30,300 (706,933) 6,394,019 2,779,549 874,898 1,054,181 1,352,787 124,863 (180,332,348) (403,005) 5,998 173,248,318 (540,093) (27,247) 104,832 (4,536,816) 1,161,519 487,849 1,966,075 29,430 (142,382,975) 1,710 139,573,363 (1,224,548) (8,933) 47,807 (348,703) (80,213) 357,351 (913) (926,576) (650,351) (81,178) (870,521) (951,699) 1,206,852 18,022,244 19,229,096 1,479,147 16,543,097 18,022,244 Other operating activities Income tax paid Finance cost paid on lease liability Other operating payments Loans advanced Loans repayments received Other operating receipts Net cash outflow from other operating activities Total cash inflow from operating activities Cash flows from investing activities Profit / return received from bank deposits Income from Debt Securities Dividends received Rentals received Payments made for investments Acquisition of Non controlling interest Loan to policy holder Proceeds from disposal of investments Fixed capital expenditure - operating assets Fixed capital expenditure - intangible assets Proceeds from disposal of operating assets Total cash outflow from investing activities Cash flows from financing activities Payments against lease liability Loan obtained Interest expense against loan paid Dividends paid Total cash outflow from financing activities Net cash inflow from all activities Cash and cash equivalents at beginning of year Cash and cash equivalents at end of the year ANNUAL REPORT 2020 219
  221. Consolidated Cash Flow Statement For the year ended 31 December 2020 2020 2019 Rupees in thousand Reconciliation to pro fit and loss account Operating cash flows Depreciation and amortization expense Finance cost on borrowing Provision for retirement benefit obligations Provision for doubtful balances against insurance / reinsurance receivables Other income - bank & term deposits Gain / (loss) on disposal of operating assets Rental income Revaluation of investment Fair value adjustment to investment property Increase in assets other than cash Decrease in liabilities Gain on disposal of investments Decrease / (Increase) in unearned premium (Decrease) / Increase in loans Income tax paid Provision for impairment of 'available-for-sale' investments Dividend and other income Capital contribution from Shareholders' Fund Income from Debt Securities Profit for the year from Window Takaful Operations - Operator's fund (Parent Company) Profit after taxation 6,394,019 (367,157) (13,664) (26,403) (47,968) 934,440 72,039 71,671 738,783 (21,000) (1,032,963) (10,901,509) 700,910 1,875,914 (4,513) 411,376 (158,641) 1,362,106 1,925,494 2,779,549 (366,571) (19,840) (70,705) (187,764) 1,383,694 (19,836) 33,217 435,397 33,298 (253,291) (5,430,977) 161,320 (141,447) 3,513 658,499 (294,179) 1,927,964 (3,240) 1,293,787 163,774 107,693 2,076,708 2,030,081 11,079 11,256,017 7,962,000 25,812 8,411,432 9,585,000 19,229,096 18,022,244 Cash and bank for the purposes of the cash flow statement consists of: Cash and other equivalents Current and other accounts Term deposit maturing within three months The annexed notes 1 to 49 form an integral part of these consolidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director 220 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  222. Consolidated Statement of Changes in Equity For the year ended 31 December 2020 Share capital Issued , Reserve for subscribed exceptional and paid up losses Capital reserves Investment Exchange fluctuation translation reserve reserve Equity Unappropriated attributable to Non-controlling profits equity holders of interest General reserve Total Equity the Parent Revenue reserves Fair Value Reserve Rupees in thousand 3,500,000 Balance as at January 01, 2019 Profit after taxation Other comprehensive income Total comprehensive income for the year ended December 31, 2019 22,859 3,764 614,062 2,204,097 936,500 12,521,272 19,802,554 288,797 20,091,351 - - - 60,874 60,874 710,690 710,690 - 1,972,045 (7,783) 1,964,262 1,972,045 763,781 2,735,826 - - - - - - (525,000) (350,000) (875,000) (525,000) (350,000) (875,000) 22,859 3,764 674,936 2,914,787 936,500 - - 3,502 3,502 (68,821) (68,821) - 22,859 3,764 678,438 2,845,966 936,500 15,670,749 23,658,276 344,991 24,003,267 - - - - (57,794) (58,014) (525,000) (525,000) (437,500) (437,500) (1,020,294) (1,020,514) (344,991) (403,005) (525,000) (437,500) (344,991) (1,365,505) 22,859 3,764 678,438 936,500 14,650,455 22,637,762 58,036 2,030,081 (5,325) 758,456 52,711 2,788,537 Transactions with owners, recognized directly in equity Final cash dividend at Rs. 1.5 per share - December 31, 2018 Interim cash dividend at Rs. 1.0 per share - June 30, 2019 3,500,000 Balance as at December 31, 2019 Profit after taxation Other comprehensive income Total comprehensive income for the year ended December 31, 2019 3,500,000 13,610,534 21,663,380 2,073,922 (13,707) 2,060,215 2,073,922 (79,026) 1,994,896 - (525,000) (350,000) (875,000) 341,508 22,004,888 2,786 697 3,483 2,076,708 (78,329) 1,998,379 Transactions with owners, recognized directly in equity Acquisition of Non-controlling interest Final cash dividend at Rs. 1.5 per share - December 31, 2019 Interim cash dividend at Rs. 1.25 per share - June 30, 2020 3,500,000 Balance as at December 31, 2020 (220) (220) 2,845,746 - 22,637,762 The annexed notes 1 to 49 form an integral part of these consolidated financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 221
  223. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 1 The Group and its operations : These consolidated financials statements comprise of Adamjee Insurance Company Limited ('the Parent Company') and Adamjee Life Assurance Company Limited ('the Subsidiary Company'), together referred to as 'the Group'. Equity of the Subsidiary Company held by the Parent Company is 100.00% (2019: 74.28%). The operations of the Group are described below: Adamjee Insurance Company Limited Adamjee Insurance Company Limited ('the Parent Company') is a public limited Company incorporated in Pakistan on September 28, 1960 under the repealed Companies Act, 1913 (now the Companies Act, 2017). The Parent Company is listed on Pakistan Stock Exchange limited and is principally engaged in the general insurance business. The registered office of the Parent Company is situated at Adamjee House Building, 80/A Block E-1, Main Boulevard Gulberg-III, Lahore. The Parent Company operates 60 (2019: 91) branches within Pakistan. The Parent Company also operates 3 (2019: 3) branches in the United Arab Emirates (UAE) and 1 (2019: 1) branch in the Export Processing Zone, Karachi (EPZ). The Parent Company was granted authorization on December 23, 2015 under Rule 6 of the Takaful Rules, 2012 to undertake Window Takaful Operations in respect of general takaful products by the Securities and Exchange Commission of Pakistan (SECP) and commenced Window Takaful Operations on January 01, 2016. Adamjee Life Assurance Company Limited Adamjee Life Assurance Company Limited ("the Subsidiary Company") was incorporated in Pakistan on August 04, 2008 as a public unlisted company under the Companies Act, 2017. The Subsidiary Company started its operations from April 24, 2009. Registered office of the Subsidiary Company is at 1st floor, Islamabad Stock Exchange Towers, 55-B, Jinnah Avenue, Blue Area, Islamabad while its principal place of business is at Adamjee House, 3rd and 4th Floor, I.I Chundrigar Road, Karachi. The Subsidiary Company is a wholly owned subsidiary of Adamjee Insurance Company Limited. The shareholders of the Parent Company in their Extra Ordinary General Meeting (EOGM) held on February 25, 2019 had approved acquisition of 24,059,855 ordinary shares at par value of Rs. 10 each of Non controlling interest of the Subsidiary Company from IVM intersurer B.V. at share price of Rs.16.68 per share, for an aggregate price of Rs. 403,005 thousands including transaction processing charges. The Parent Company after obtaining the approval for payment of State Bank of Pakistan credited the sum to IVM's bank account on February 25, 2020. After the acquisition of aforementioned shares (representing 25.72%) Adamjee Life Assurance Company Limited has become a wholly owned subsidiary of the Parent Company. The Subsidiary Company is engaged in life insurance business carrying on non-participating business only. In accordance with the requirements of the Insurance Ordinance, 2000, the Subsidiary Company has established a shareholders' fund and the following statutory funds in respect of each class of its life insurance business: - Conventional Business - Accident and Health Business - Individual Life Non-unitized Investment Linked Business - Individual Life Unit Linked Business - Individual Family Takaful Business - Group Family Takaful Business The Subsidiary Company was granted authorisation on May 04, 2016 under Rule 6 of Takaful Rules, 2012 to undertake Takaful Window Operations in respect of family takaful products by Securities and Exchange Commission of Pakistan (SECP) and subsequently the Subsidiary Company commenced Window Takaful Operations from July 14, 2016. The Subsidiary Company formed a Waqf Fund namely the Adamjee Life Assurance Company Limited - Window Takaful Operations Waqf Fund (here-in-after referred to as the Participant Takaful Fund (PTF)) on December 22, 2015 under a Waqf 222 ANNUAL REPORT 2020
  224. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 deed executed by the Subsidiary Company with the cede amount of Rs . 500,000. The cede money is required to be invested in Shariah compliant investments and any profit thereon can be utilised only to pay benefits to participants or defray PTF expenses. Waqf deed also governs the relationship of the Subsidiary Company and policyholders for the management of Takaful operations, investment of policyholders' funds and shareholders' funds as approved by the Shariah Advisor appointed by the Subsidiary Company. The Subsidiary Company issued supplemental policies to the Window Takaful Operations Waqf Fund on October 29, 2019 to include Group Family Participant's Takaful Fund business in existing Window Takaful Operations Waqf Fund and the same was authorised by the Securities and Exchange Commission of Pakistan (SECP) on December 11, 2019 and the Subsidiary Company commenced its Group Family Takaful Business in the second Quarter of 2020. 2 Basis of preparation and statement of compliance 2.1 These consolidated financial statements have been prepared in accordance with accounting and reporting standards as applicable in Pakistan. The accounting and reporting standards comprise of: - International Financial Reporting Standards 'IFRS' issued by the International Accounting Standards Board 'IASB' as are notified under the Companies Act, 2017; - Islamic Financial Accounting Standards (IFAS) issued by the Institute of Chartered Accountants of Pakistan (ICAP), as are notified under the Companies Act, 2017; and - Provision of and directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, the Takaful Rules, 2012 and Takaful Accounting Regulation, 2019. In case requirements differ, the provisions of or the directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, the Takaful Rules, 2012 and Takaful accounting regulations, 2019, shall prevail. As per the requirements of the Takaful Rules, 2012 and SECP Circular No. 25 of 2015 dated July 09, 2015, the assets, liabilities and profit and loss account of the Operator's Fund of the Window Takaful Operations of the Parent Company have been presented as a single line item in the statement of financial position and profit and loss account of the Parent Company respectively. A separate set of financial statements of the Window Takaful Operations of Parent Company has been annexed to these consolidated financial statements as per the requirements of the Takaful Rules, 2012. 2.2 Consolidation 2.2.1 Subsidiary Company The Subsidiary Company is the entity in which the Parent Company directly or indirectly controls, beneficially owns or holds more than 50% of the voting securities or otherwise has power to elect and appoint more than 50% of its directors. The financial statements of the Subsidiary Company are included in the consolidated financial statements from the date the control commences until the date that control ceases. The assets and liabilities of the Subsidiary Company have been consolidated on a line by line basis and carrying value of investments held by the Parent Company is eliminated against the Parent Company's share in paid up capital of the Subsidiary Company. Intragroup balances and transactions have been eliminated. Non-controlling interests are that part of net results of the operations and of net assets of the Subsidiary Company attributable to interest which are not owned by the Parent Company. Non-controlling interests are presented as separate line item in the consolidated financial statements. 2.3 Basis of measurement These consolidated financial statements have been prepared under historical cost convention except for certain foreign currency translation adjustments, certain financial instruments carried at fair value, and retirement benefit obligations under ANNUAL REPORT 2020 223
  225. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 employees benefits carried at present value . All transactions reflected in these financial statements are on accrual basis except for those reflected in cash flow statement. 2.4 Functional and presentation currency Items included in the consolidated financial statements are measured using the currency of the primary economic environment in which the Group operates ('the functional currency'). The financial statements are presented in Pak Rupees, which is the Group's functional and presentation currency. All the financial information presented in Rupees has been rounded off to the nearest thousand rupees, except otherwise stated. 2.5 Standards, interpretations and amendments to accounting and reporting standards as applicable in Pakistan that are effective in current year The following standards, amendments and interpretations of accounting and reporting standards that will be effective for accounting periods beginning on or after January 01, 2020: Standards or Interpretations Effective from annual period beginning on or after: July 01, 2019 IFRS 14 'Regulatory Deferral Accounts’ Amendments to IFRS 3 'Business Combinations' - Amendments regarding the definition of business. January 01, 2020 Amendments to the Conceptual Framework for Financial Reporting, including amendments to references to the Conceptual Framework in IFRS Standards. January 01, 2020 Amendments to IAS 39, IFRS 7 and IFRS 9 – The amendments will affect entities that apply the hedge accounting requirements of IFRS 9 or IAS 39 to hedging relationships directly affected by the interest rate benchmark reform. 2.6 January 01, 2020 Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' - Amendments regarding the definition of material. January 01, 2020 Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' - Sale or contribution of assets between an investor and its associate or joint venture. January 01, 2020 New accounting standards / amendments and IFRS interpretations that are not yet effective The following International Financial Reporting Standards (IFRS Standards) as notified under the Companies Act, 2017 and the amendments and interpretations thereto will be effective for accounting periods beginning on or aſter January 01, 2021: Standards or Interpretations Amendments to IFRS 16 ' Leases' - Provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification. IBOR 2 'Interest Rate Benchmark Reform — Phase 2' Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)' with amendments that address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. Amendments to IAS 16 'Property, Plant and Equipment', prohibiting the Company from deducting from the cost of property plant and equipment, amount received from selling items produce while the Company is preparing the asset for its intended use. 224 ANNUAL REPORT 2020 Effective from annual period beginning on or after: June 01, 2020 January 01, 2021 January 01, 2022
  226. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Effective from annual period beginning on or after : Amendments to IFRS 3 'Business Combinations' that updated an outdated reference in IFRS 3 without significantly changing its requirements. January 01, 2022 Amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' regarding the costs of fulfilling the contract to include when assessing whether a contract is Onerous. January 01, 2022 Amendments to IAS 1 'Presentation of Financial Statements' - Classification of liabilities as current or non-current. January 01, 2023 Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures' - Sale or contribution of assets between an investor and its associate or joint venture. Effective from accounting period beginning on or after a date to be determined. Earlier application is permitted. Certain annual improvements have also been made to a number of IFRSs. Other than the aforesaid standards, interpretations and amendments, the International Accounting Standards Board (IASB) has also issued the following standards which have not been adopted locally by the Securities and Exchange Commission of Pakistan: - IFRS 1 - First Time Adoption of International Financial Reporting Standards - IFRS 17 - Insurance Contracts There are certain other new and amended standards and interpretations that are mandatory for the insurance accounting periods beginning on or after January 01, 2021 but are considered either not to be relevant or do not have any significant impact on these consolidated financial statements. IFRS 9 - Financial Instruments IFRS 9 'Financial Instruments' has become applicable, however as an insurance company, the management has opted temporary exemption from the application of IFRS 9 as allowed by International Accounting Standards Board (IASB) for entities whose activities are predominantly connected with insurance. Additional disclosures, as required by the IASB, for being eligible to apply the temporary exemption from the application of IFRS 9 are given below: The tables below set out the fair values as at the end of reporting period and the amount of change in the fair value during that period for the following two groups of financial assets separately: (a) Financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding, excluding any financial asset that meets the definition of held for trading in IFRS 9, or that is managed and whose performance is evaluated on a fair value basis, and ANNUAL REPORT 2020 225
  227. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 (b) All other financial assets as at December 31, 2020 Fail the SPPI test Pass the SPPI test Change in Change in unrealized Carrying Cost less unrealized gain / Fair value gain / (loss) Value Impairment (loss) during the during the period period ---- (Rupees in thousand) ---- Financial assets Cash and Bank* Investments in equity securities Investment in debt securities Term deposits* Loan secured against life insurance policies Loans and other receivables* Total 11,267,096 34,863,749 - 712,949 - 15,290,166 13,891,062 - - 982,259 47,113,104 712,949 29,912 3,485 29,214,625 - - * The carrying amount of these financial assets measured applying IAS 39 are a reasonable approximation of their fair values. 3 Summary of significant accounting policies The significant accounting policies adopted in preparation of these consolidated financial statements are set out below. Accounting policies relating to Window Takaful Operations of Parent Company are disclosed in a separate financial statements of Window Takaful Operations which have been annexed to these financial statements. These accounting policies have been consistently applied to all the years presented. 3.1 Insurance contracts Insurance contracts are those contracts where the Group (the insurer) has accepted significant insurance risk from another party (the policy holders) by agreeing to compensate the policy holders if a specified uncertain future event (the insured event) adversely affects the policy holders. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its life time, even if the insurance risk reduces significantly during this period, unless all rights and liabilities are extinguished or expired. Insurance contracts issued by the Group are generally classified in eleven basic categories among them five categories are covered by the Parent Company i.e. Fire & property, Marine, aviation & transport, Motor, Health and Miscellaneous and six categories i.e. Conventional Business, Accident and Health Business, Individual Life Non-unitized Investment Linked Business, Individual Life Unit Linked Business, Individual Family Takaful Business and General Family Takaful Business are covered by the Subsidiary Company. These are issued to multiple types of clients with businesses in engineering, automobiles, cement, power, textiles, paper, agriculture, services & trading sectors and individuals as well. The tenure of these insurance contracts depends upon terms of the policies written and vary accordingly. General Insurance Business The non-life general insurance consist of the following categories: - Fire and property insurance contracts generally cover the assets of the policy holders against damages by fire, earthquake, riots and strike, explosion, atmospheric disturbance, flood, electric fluctuation and impact, burglary, loss of profit followed by the incident of fire, contractor's all risk, erection all risk, machinery breakdown and boiler damage, etc. 226 ANNUAL REPORT 2020
  228. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 - Marine aviation and transport insurance contracts generally provide cover for loss or damage to cargo while in transit to and from foreign land and inland transit due to various insured perils including loss of or damage to carrying vessel , etc. - Motor insurance contracts provide indemnity for accidental damage to or loss of insured vehicle including loss of or damage to third party and other comprehensive car coverage. - Accident and health insurance contracts mainly compensate hospitalization and out patient medical coverage to the insured. - Miscellaneous insurance contracts provide variety of coverage including cover against burglary, loss of cash in safe, cash in transit and cash on counter, fidelity guarantee, personal accident, workmen compensation, travel and crop, etc. Life Insurance Business The life insurance business consist of the following categories: - Individual life business segment provides coverage to individuals against deaths and disability under conventional policies issued by the Subsidiary Company. Additional riders are included on the discretion of the policyholder. The business is written through Bancassurance, tele-sales and through website. - Group life and Group Credit life business segment provides coverage to members / employees of business enterprises and corporate entities, against death and disability under group life assurance schemes issued by the Subsidiary Company. The group credit life business segment provides coverage to a group of members or subscribers registered under a common platform against death and disability. The business is written mainly through direct sales force. - Accident and Health Business provides fixed pecuniary benefits or benefits in the nature of indemnity or a combination of both in case of accident or sickness to individuals. The risk underwritten is mainly related to medical expenses relating to hospitalisation and death by accidental means. This business is written through direct sales force. - Individual Life Non-unitised Investment Linked Business provides life assurance coverage to individuals under universal life policies issued by the Subsidiary Company. Benefits are expressed in terms of account value of the policyholder account which is related to the market value of the underlying assets of the investment fund. The risk underwritten is mainly death and disability. This business is written through bancassurance channel. - Individual Life Unit Linked Business provides life assurance coverage to individuals under unit-linked investment policies issued by the Subsidiary Company. Benefits are expressed in terms of account value of the policyholder account which is related to the market value of the underlying assets of the investment fund. Various types of riders (accidental death, family income benefits etc.) are also sold along with the basic policies. Some of these riders are charged through deductions from policyholders fund value, while others are not charged i.e. additional premium is charged there against. The risk underwritten is mainly death and disability. This business is written through bancassurance channel and Subsidiary Company's own agency distribution channel. - The Subsidiary Company offers Family Takaful contracts. Family Takaful contract is an arrangement which rests on key Shariah principles of mutual cooperation, solidarity and well being of a community, and is based on the principles of Wakalah Waqf Model. Under a Takaful arrangement, individuals come together and contribute towards the common objective of protecting each other against financial losses by sharing the risk on the basis of mutual assistance. - Group Life contracts are mainly issued to employers to insure their commitments to their employees as required under The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. The group life business segment provides coverage to members / employees of business enterprises and corporate entities, against death and disability under group life assurance schemes issued by the Company. The group credit life business segment provides coverage to a group of members or subscribers registered under a common platform against death and disability. The business is written mainly through direct sales force. ANNUAL REPORT 2020 227
  229. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 In addition to direct insurance , the Group also participates in risks under co-insurance contracts from other companies and also accepts risks through re-insurance inward by way of facultative acceptance on case to case basis provided such risks are within the underwriting policies of the Group. The nature of the risks undertaken under such arrangement is consistent with the risks in each class of business as stated above. Since, the nature of insurance contracts entered in to by the Parent Company and its Subsidiary Company are different, the respective accounting policies have separately been disclosed here under: 3.2 General Insurance Business 3.2.1 Revenue recognition 3.2.1.1 Premiums Premiums including administrative surcharge under an insurance contract are recognized as written from date of issuance to the date of attachment of risk to the policy / cover note. Where premium for a policy are payable in installments, full premium for the duration of the policy is recognized as written, where the first such installment has been duly received by the Parent Company, at the inception of the policy and related assets is recognized as premium receivable. Revenue from premiums is determined after taking into account the unearned portion of premiums. The unearned portion of premium income is recognized as a liability. Reinsurance premium is recognized as an expense after taking into account the proportion of prepaid reinsurance premium which is recognized as a proportion of the gross reinsurance premium of each policy, determined as the ratio of the unexpired period of the policy and the total period, both measured to the nearest day. The prepaid portion of premium is recognized as a prepayment. 3.2.1.2 Commission Income Commission income from other insurers / reinsurers is deferred and recognized as a liability and recognized in the profit and loss account as a commission income in accordance with the pattern of recognition of the reinsurance premiums. 3.2.2 Deferred commission expense / acquisition cost Commission expense incurred in obtaining and recording policies is deferred and recognized as an expense in accordance with pattern of recognition of the premium revenue. Other acquisition costs are charged to profit and loss account at the time the policies are accepted. 3.2.3 Unearned premium The unearned premium represents the portion of premium written relating to the unexpired period of insurance coverage at the reporting date. It is recognized as a liability. Such liability is calculated as a the ratio of the unexpired period of the policy and the total policy period, both measured to the nearest day except: - for marine cargo, as a ratio of the unexpired shipment period to the total expected shipment period, both measured to the nearest day. - for crop business, as a ratio of the unexpired crop period to the total expected crop period, both measured to the nearest day. Policy for recognition of premium revenue is disclosed in these consolidated financial statements. Unearned premium reserve calculated by the Parent Company is also confirmed by an independent actuary. 228 ANNUAL REPORT 2020
  230. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 3 .2.4 Premium deficiency In order to comply with the requirements of section 34(2)(d) of the Insurance Ordinance, 2000, a premium deficiency reserve is maintained for each class of business, where the unearned premium liability for any class of business is not adequate to meet the expected future liability, after re-insurance, for claims and other expenses, including reinsurance expense, commissions, and other underwriting expenses, expected to be incurred after the reporting date in respect of the policies in force at the reporting date, in that class of business. For this purpose, premium deficiency reserve is determined by independent actuaries. The actuary determines the prospective loss ratios for each class of business and applies factors of unearned and earned premiums and uses assumptions appropriate to arrive at the expected claims settlement cost which when compared with unearned premium reserve ('UPR') shows whether UPR is adequate to cover the unexpired risks. If these ratios are adverse, premium deficiency is determined. Based on actuary's advice the management creates a reserve for the same in these consolidated financial statements. The movement in the premium deficiency reserve on net basis is recorded as an expense / income in profit and loss account for the year. 3.2.5 Reinsurance contracts held The Parent Company enters into reinsurance contracts in the normal course of business in order to limit the potential for losses arising from certain exposures. Reinsurance contracts includes treaty reinsurance, whereby certain agreed proportion of risks are shared with the participating companies, hence higher underwriting capacity with larger spread becomes available. Depending upon the nature and / or size of the risk at times reinsurance of excess of capacity is also placed on case to case basis under facultative reinsurance arrangement. The Parent Company also accepts facultative reinsurance from other local insurance companies provided the risk meets the underwriting requirements of the Parent Company. Outward reinsurance premiums are accounted for in the same period as the related premiums for the direct or accepted reinsurance business being reinsured. The risks undertaken by the Parent Company under these contracts for each class of business are stated in note 3.1 to the consolidated financial statements. Reinsurance liabilities represent balances due to reinsurance companies. Amounts payable are estimated in a manner consistent with the related reinsurance contract. Reinsurance assets represent balances due from reinsurance companies. Amounts recoverable from reinsurers are estimated in a manner consistent with the provision for outstanding claims or settled claims associated with the reinsurance policies and are in accordance with the related reinsurance contract. Reinsurance assets or liabilities are derecognized when the contractual rights or obligations are extinguished or expired. Furthermore, reinsurance assets are not offset against related insurance liabilities. Income or expenses from reinsurance contract are not off set against income or expenses from related insurance assets. The Parent Company assesses its reinsurance assets for impairment on reporting date. If there is an objective evidence that the reinsurance asset is impaired, the Parent Company reduces the carrying amount of the reinsurance asset to its recoverable amount and recognizes the impairment loss in the profit and loss account. The portion of reinsurance premium not recognized as an expense is shown as a prepayment. Prepayment (i.e. premium ceded to reinsurers) is recognized as follows: - for reinsurance contracts operating on a proportional basis, a liability to the reinsurer is recognized on attachment of the underlying policies reinsured, while an asset is recognized for the unexpired period of reinsurance coverage at the reporting date as prepaid reinsurance premium ceded and the same is expensed over the period of underlying policies. ANNUAL REPORT 2020 229
  231. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Commission income from reinsurers is recognized at the time of issuance of the underlying insurance policy by the Parent Company . This income is deferred and brought to profit and loss account as commission income in accordance with the pattern of recognition of the reinsurance premium to which it relates. Profit commission and no claim bonus (if any), which the Parent Company may be entitled to under the terms of reinsurance, is recognized on accrual basis. 3.2.6 Receivables and payables related to insurance contracts Insurance / reinsurance receivable and payable including premium due but unpaid, relating to insurance contracts are recognized when due and carried at cost less provision for impairment (if any). The cost is the fair value of the consideration to be received / paid in the future for services rendered / received. These amounts also include due to and from other insurance companies and brokers. Premium received in advance is recognized as liability till the time of issuance of insurance contract there against. An assessment is made at each reporting date to determine whether there is objective evidence from external as well as internal sources of information that a financial asset or group of assets may be impaired i.e. recoverable amount at the reporting date is less than the carrying amount of the asset. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss is recognized, in the profit and loss account, for the difference between the recoverable amount and the carrying amount. Provisions for impairment are reviewed at each reporting date and adjusted to reflect the current best estimates. Changes in the provisions are recognized as income or expense, in the profit and loss account. 3.2.7 Provision for outstanding claims including IBNR The Parent Company recognizes liability in respect of all claims incurred up to the reporting date which is measured at the undiscounted value of the expected future payments. The claims are considered to be incurred at the time of the incident giving rise to the claim except as otherwise expressly indicated in the insurance contract. The liability for claims include amounts relating to unpaid reported claims, claims incurred but not reported ('IBNR'), expected claims settlement costs, a reduction for the value of salvage and other recoveries, and any adjustments to claims outstanding from previous years. SECP through its circular 9 of 2016 dated March 09, 2016 issued 'SEC guidelines for estimation of incurred but not reported (IBNR) claims reserve 2016' for non-life insurance companies and required to comply with all provisions of these guidelines with effect from July 01, 2016. The Guidelines require that estimation for provision for claims incurred but not reported (IBNR) for each class of business, by using prescribed Method 'Chain Ladder Method' and other alternate method as allowed under the provisions of the Guidelines. The Chain Ladder Method involves determination of development factors or link ratios for each period. These are then subsequently combined to determine Cumulative Development Factor (CDF) which represents the extent of future development of claims to reach their ultimate level to derive an IBNR estimate. The actuarial valuation as at December 31, 2020 has been carried out by independent firm of actuaries for determination of IBNR for each class of business. The actuarial valuation is based on a range of standard actuarial claim projection techniques, based on empirical data and current assumptions as explained in preceding paragraph that may include a margin for adverse deviation as required / allowed by the circular 9 of 2016. The methods used, and the estimates made, are reviewed regularly. 3.3 Life Insurance Business 3.3.1 Conventional Business The Conventional Business includes individual life, group life and group credit life assurance. 230 ANNUAL REPORT 2020
  232. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 3 .3.1.1 Individual life The individual life business segment provides coverage to individuals against deaths and disability under conventional policies issued by the Subsidiary Company. Additional riders are included on the discretion of the policy holder. The business is written through bancassurance, tele-sales and through website. Revenue recognition First year individual life premiums are recognised once the related policies have been issued and the premium is received. Renewal premiums are recognised upon receipt of premium. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expenses Claims expenses are recognized on the earlier of the policy expiry or the date when the intimation of the insured event giving rise to the claim is received. Surrender of conventional business policies is made after these have been approved in accordance with the Subsidiary Company's Policy. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported at the date of reporting. Liability for claims IBNR is included in the policy holders' liabilities in accordance with the estimates recommended by the appointed actuary. 3.3.1.2 Group life and group credit life Group Life contracts are mainly issued to employers to insure their commitments to their employees as required under The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. The group life business segment provides coverage to members / employees of business enterprises and corporate entities, against death and disability under group life assurance schemes issued by the Subsidiary Company. The group credit life business segment provides coverage to a group of members or subscribers registered under a common platform against death and disability. The business is written mainly through direct sales force and bancassurance channel. Revenue recognition Premiums are recognized as and when due. In respect of certain group policies the Subsidiary Company continues to provide insurance cover even if the premium is received after the grace period. Provision for unearned premiums is included in the policy holders’ liabilities. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expenses Claims expenses are recognized on the date the insured event is intimated. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported to the date of the reporting. ANNUAL REPORT 2020 231
  233. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Liability for claims IBNR is included in the policy holders ' liabilities in accordance with the estimates recommended by the appointed actuary. Experience refund of premium Experience refund of premium payable to policy holders' is included in policy holders' liability in accordance with the policy of the Subsidiary Company and the advice of the appointed actuary. 3.3.2 Accident and Health Business Accident and Health Business provides fixed pecuniary benefits or benefits in the nature of indemnity or a combination of both in case of accident or sickness to individuals. The risk underwritten is mainly related to medical expenses relating to hospitalization and death by accidental means. This business is written through direct sales by the head office as well as through tele-sales. Revenue recognition Premiums are recognized once the related policies have been issued and the premiums have been received. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expenses Claims expenses are recognized after the date the insured event is intimated and a reliable estimate of the claim amount can be made. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported to the date of the reporting. Liability for claims IBNR is included in the policy holders' liabilities in accordance with the estimates recommended by the appointed actuary. 3.3.3 Non-unitized Investment Linked Business Individual Life Non-unitized Investment Linked Business provides life assurance coverage to individuals under universal life policies issued by the Subsidiary Company. Benefits are expressed in terms of account value of the policyholder account which is related to the market value of the underlying assets of the investment fund. The risk underwritten is mainly death and disability. This business is written through bancassurance channel. Revenue recognition First year individual life premiums are recognised once the related policies have been issued and the premium is received. Renewal premiums are recognised upon receipt of premium. Single premiums are recognised once the related policies are issued against the receipts of premium. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expense Claim expenses are recognized on the earlier of the policy expiry or the date when the intimation of the event giving rise to the claim is received. 232 ANNUAL REPORT 2020
  234. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Surrender of non-unitized investment linked business policies is made after these have been approved in accordance with the Subsidiary Company 's Policy. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported till the date of the reporting. Liability for claims IBNR is included in the policy holders' liabilities in accordance with the estimates recommended by the appointed actuary. 3.3.4 Unit Linked Business Individual Life Unit Linked Business provides life assurance coverage to individuals under unit-linked investment policies issued by the Subsidiary Company. Benefits are expressed in terms of account value of the policyholder account which is related to the market value of the underlying assets of the investment fund. Various types of supplementary riders (Accidental death, family income benefits etc.) are also sold along with the basic policies. Some of these riders are charged through deductions from policy holders fund value, while others are not charged i.e. additional premium is charged there against. The risk underwritten is mainly death and disability. This business is written through bancassurance channels and the Subsidiary Company's own agency distribution channels. Revenue recognition First year individual life premiums are recognised once the related policies have been issued and the premium is received. Renewal premiums are recognised upon receipt of premium. Single premiums are recognised once the related policies are issued against the receipts of premium. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expenses Claim expenses are recognized on the earlier of the policy expiry or the date when the intimation of the event giving rise to the claim is received. Surrender of unit linked business policies is made after these have been approved in accordance with the Subsidiary Company's Policy. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported to the date of the reporting. Liability for claims IBNR is included in the policy holders' liabilities in accordance with the estimates recommended by the appointed actuary. 3.3.5 Individual Family Takaful Unit Linked Business The Subsidiary Company offers Family Takaful Contracts. Family Takaful Contract is an arrangement which rests on key Shariah principles of mutual cooperation, solidarity and well being of a community, and is based on the principles of Wakala Waqf Model. Under a Takaful arrangement, individuals come together and contribute towards the common objective of protecting each other against financial losses by sharing the risk on the basis of mutual assistance. The obligation of Waqf for Waqf participants' liabilities is limited to the amount available in the Waqf fund. In case there is a deficit in the Waqf Fund, the Window Takaful Operator shall grant an interest free loan (Qard-e-Hasna) to ANNUAL REPORT 2020 233
  235. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 make good the deficit . The loan shall be repayable from the future surplus generated in the Waqf Fund, without any excess of the actual amount given to it. Repayment of Qard-e-Hasna shall receive priority over surplus distribution to Participants from the Waqf Fund. The Subsidiary Company offers Unit Linked Takaful Plans which provide Shariah Compliant financial protection and investment vehicle to individual participants. These plans carry cash value, and offer investment choices to the participants to direct their investment related contributions based on their risk / return objectives. The investment risk is borne by the participants. Revenue recognition First year individual life contribution are recognised once the related policies have been issued and the contribution is received. Renewal contribution are recognised upon receipt of contribution. Single contribution are recognised once the related policies are issued against the receipts of contribution. Recognition of policy holders' liabilities Policy holders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. Claim expenses Claim expenses are recognized on the earlier of the policy expiry or the date when the intimation of the event giving rise to the claim is received. Surrender of unit linked business policies is made after these have been approved in accordance with the Subsidiary Company's Policy. Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported to the date of the reporting. Liability for claims IBNR is included in the policy holders' liabilities in accordance with the estimates recommended by the appointed actuary. 3.3.6 Group Family Takaful Business Group Life contracts are mainly issued to employers to insure their commitments to their employees as required under The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. The group life business segment provides coverage to members / employees of business enterprises and corporate entities, against death and disability under group life assurance schemes issued by the Subsidiary Company. The group credit life business segment provides coverage to a group of members or subscribers registered under a common platform against death and disability. The business is written mainly through direct sales force. Revenue recognition Contribution are recognised as and when due. In respect of certain group policies the Subsidiary Company continues to provide insurance cover even if the contribution is received after the grace period. Provision for unearned contribution is included in the policyholders’ liabilities. Recognition of policy holders' liabilities Policyholders’ liabilities included in the statutory fund are determined based on the appointed actuary’s valuation conducted as at the reporting date, in accordance with Section 50 of the Insurance Ordinance, 2000. 234 ANNUAL REPORT 2020
  236. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Claim expenses Claim expenses are recognised on the date the insured event is intimated . Liability for outstanding claims includes amounts in relation to unpaid reported claims and is stated at estimated claims settlement cost. Full provision is made for the estimated cost of claims incurred and reported till the date of reporting. Liability for claims "Incurred But Not Reported" (IBNR) is included in the policyholders' liabilities in accordance with the estimates recommended by the appointed actuary. Experience refund of contribution Experience refund of contribution payable to policyholders' is included in policyholders' liability in accordance with the policy of the Subsidiary Company and the advice of the appointed actuary. 3.3.7 Reinsurance / Retakaful contracts held Individual policies (including joint life policies underwritten as such) are reinsured under an individual life reinsurance / retakaful agreement whereas group life and group credit life policies are reinsured under group life and group credit life reinsurance agreements respectively. 3.3.7.1 Conventional Reinsurance premium Reinsurance premium deded is recognized at the same time when the related premium revenue is recognized. It is measured in line with the terms and conditions of the reinsurance treaties. Reinsurance Recoveries Reinsurance recoveries from reinsurers are recognized at the same time when the claim is intimated and giving rise to the right of recovery is recognized in the books of accounts of the Subsidiary Company. Experience Refund Experience refund receivable for re-insurance is included in the reinsurance recoveries of claims. Amount due from / to reinsurer All receivables (reinsurer's share in claims, commission from reinsurer and experience refund) and payables (reinsurance premium) under reinsurance agreements are recognized on net basis in the Subsidiary Company's financial statements, only under the circumstances that there is a clear legal right of off-set of the amounts. Amounts due from / to reinsurers are carried at cost which is the fair value of the consideration to be received / paid in the future for services rendered / received, less provision for impairment, if any. 3.3.7.2 Takaful Retakaful Contribution These contracts are entered into by the Subsidiary Company with the retakaful operator under which the retakaful operator cedes the takaful risk assumed during normal course of its business, and according to which the Waqf is compensated for losses on contracts issued by it. Retakaful contribution is recorded at the time the retakaful is ceded. Surplus from retakaful operator is recognized in the revenue account. Retakaful liabilities represent balances due to retakaful operators. Amount payable are calculated in a manner consistent with the associated retakaful treaties. ANNUAL REPORT 2020 235
  237. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Retakaful Expense Retakaful expenses are recognized as a liability . Retakaful assets represent balances due from retakaful operator. Recoverable amounts are estimated in a manner consistent with the associated retakaful treaties. Retakaful assets are not offset against related retakaful liabilities. Income or expenses from retakaful contract are not offset against expenses or income from related retakaful contracts as required by the Insurance Ordinance, 2000. Retakaful assets and liabilities are derecognized when the contractual rights are extinguished or expired. 3.3.8 Receivables and payables relating to insurance contracts These include amounts due to and from agents and policy holders' which are recognized when due. 3.3.9 Statutory funds The Subsidiary Company maintains statutory funds in respect of each class of life assurance business in which it operates. Assets, liabilities, revenues and expenses of the Subsidiary Company are referable to the respective statutory funds. However, where these are not referable to statutory funds, these are allocated to shareholders' fund on the basis of actuarial advice. Apportionment of assets, liabilities, revenues and expenses, whenever required between funds are made on the basis certified by the appointed actuary of the Subsidiary Company. Policy holders’ liabilities have been included in statutory funds on the basis of the actuarial valuation carried out by the appointed actuary of the Subsidiary Company on the reporting date as required under Section 50 of the Insurance Ordinance, 2000. 3.3.10 Policy holders' liabilities 3.3.10.1Conventional Business Individual Life Policy holders' liabilities constitute the reserves for basic plans and riders attached to the basic plans and reserves for IBNR Claims. Policy reserves pertaining to the primary plans are based on Full Preliminary Term - Net Premium method using SLIC (2001-05) Individual Life Ultimate Mortality Table and a discounting factor interest rate of 3.75% per annum. This table reflects the recent mortality experience in Pakistan and in line with the requirements of Circular No: 17 of 2013 issued by the SECP Insurance Division on September 13, 2013. The interest rate is considerably lower than the actual investment return the Subsidiary Company is managing on its conventional portfolio. The difference between the above and actual investment return is intended to be available to the Subsidiary Company for meeting administrative expense and for providing margins against adverse deviations. Policy reserves for both waiver of premium and accidental death riders are based on net unearned premiums. Incurred But Not Reported' (IBNR) reserves for riders are held as a percentage of rider premium earned in the valuation year in view of grossly insufficient claims experience. Group Life and Group Credit Life Policy reserves for these plans are based on the unearned premium method net of allowances made for acquisition expenses, unexpired reinsurance premium and profit commission. Consideration is also given to the requirement for a Premium Deficiency Reserve. The reserves also comprise allowance for "Incurred But Not Reported" (IBNR) claims. The provision for 'Incurred But Not Reported' (IBNR) claims as included in policyholders' liability is estimated as 14% and 25% of earned premium for the year of group life and group credit life respectively. Once sufficient experience of claim reporting patterns have built up in the Subsidiary Company's books, the appointed actuary of the Subsidiary Company will determine IBNR in accordance with these claim log patterns for each line of business separately. Appropriate margins will be added to ensure that the reserve set aside are resilient to changes in the experience. 236 ANNUAL REPORT 2020
  238. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 3 .3.10.2Accident and Health Business Currently there are no policy holders' liabilities to consider in this statutory fund. 3.3.10.3Non-unitized Investment Linked Business Policy holders' liabilities constitute the account value of investment linked contracts as well as non-investment or risk reserves of these contracts. Risk reserves constitute liabilities held to account for risks such as death and risk only riders (accidental death and disability, monthly income benefit, waiver of premium, etc.). Reserves for risk only contracts where premiums are level over the term of the contract are based on the Net Premium Method whereas reserves for age related risk contracts are based on net unearned premiums. IBNR reserves for riders are held as a percentage of rider premium earned in the valuation year in view of grossly insufficient claims experience. 3.3.10.4Unit Linked Business Policy holders' liabilities constitute the fund value of unit linked contracts as well as non-investment or risk reserves of these contracts. Risk reserves constitute liabilities held to account for risks such as death and risk only riders (accidental death and disability, monthly income benefit, waiver of premium, etc.). Reserves for risk only contracts where premiums are level over the term of the contract are based on the Net Premium Method whereas reserves for age related risk contracts are based on net unearned premiums. IBNR reserves for riders are held as a percentage of rider premium earned in the valuation year in view of grossly insufficient claims experience. 3.3.10.5Individual Family Takaful Unit Linked Business Policy holders' liabilities constitute the fund value of unit linked contracts as well as non-investment or risk reserves of these contracts. Risk reserves constitute liabilities held to account for risks such as death and risk only riders (accidental death and disability, monthly income benefit, waiver of contribution, etc.). Reserves for risk only contracts where contribution are level over the term of the contract are based on the net premium method whereas reserves for age related risk contracts are based on net unearned contribution. IBNR reserves for riders are held as a percentage of rider contribution earned in the valuation year in view of grossly insufficient claims experience. 3.3.10.6Group Family Takaful Business Policy reserves for these plans are based on the unearned contribution method net of allowances made for acquisition expenses, unexpired retakaful contribution and profit commission. Consideration is also given to the requirement for a Premium Deficiency Reserve. The reserves also comprise allowance for "Incurred But Not Reported" (IBNR) claims. The provision for 'Incurred But Not Reported' (IBNR) claims as included in policyholders' liability is estimated as 14% and 25% of earned contribution for the year of group life and group credit life respectively. Once sufficient experience of claim reporting patterns have built up in the Subsidiary Company's books, the appointed actuary of the Subsidiary Company will determine IBNR in accordance with these claim log patterns for each line of business separately. Appropriate margins will be added to ensure that the reserve set aside are resilient to changes in the experience. 3.4 Acquisition costs - Life Insurance Business These are costs incurred in acquiring insurance policies/ takaful contracts, maintaining such policies/ takaful contracts, and include without limitation all forms of remuneration paid to insurance agents/ takaful agents. Commission and other expenses are recognized as expense in the earlier of the financial year in which they are paid and the financial year in which they become payable, except that the commission and the other expenses which are directly referable to the acquisition or renewal of specific contracts are recognized not later than the period in which the premium to which they refer is recognized as revenue. ANNUAL REPORT 2020 237
  239. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 3 .5 Takaful operator fee - Life Insurance Business The shareholders of the Subsidiary Company manage the Window Takaful Operations for the participants. Accordingly, the Subsidiary Company is entitled to Takaful Operator's Fee for the management of Window Takaful Operations under the Waqf Fund, to meet its general and administrative expenses. The Takaful Operator's Fee, termed Wakala fee, is recognized upfront. 3.6 Investment Properties Investment property is measured at purchase cost on initial recognition including directly attributable to the acquisition of the investment property and subsequently at fair value with any change therein recognized in profit and loss account. Subsequent costs are included in the carrying amount of the investment property, only when it is probable that the future economic benefits associated with the items will flow to the Group and the cost of the item can be measured reliably. Other repair and maintenance cost are charged to profit and loss account as and when incurred. 3.7 Property and equipment Owned operating assets, other than freehold land which is not depreciated are stated at cost, signifying historical cost, less accumulated depreciation and any provision for accumulated impairment. Freehold land and capital work-in-progress are carried at cost less accumulated impairment losses, if any. Depreciation is charged to profit and loss account applying reducing balance method depending upon the nature of the asset, at the rates specified for calculation of depreciation after taking into account residual value, if any. The useful lives, residual values and depreciation method are reviewed, and adjusted if appropriate, at each reporting date. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future benefits associated with the asset will flow to the Group and the cost of the asset can be measured reliably. All other repairs and maintenance costs are charged to profit and loss account as and when incurred. Depreciation on additions is charged from the month the assets are available for use while on disposals, no depreciation is charged in the month in which the assets are disposed off. The carrying values of operating assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount of the assets disposed off. These are taken to profit and loss account. 3.8 Capital work in progress Capital work in progress is stated at cost less any identified impairment loss. All expenditure including borrowing costs connected with specific assets incurred during installation and construction period are carried under capital work-inprogress. These are transferred to operating assets as and when these are available for use. 3.9 Leases As a lessee, the Group recognizes right of use asset and lease liability at the lease commencement date. Right of use assets The right of use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payment made at or before the commencement date, plus any initial direct cost incurred and less any lease incentives received. The right of use assets are subsequently depreciated using the straight-line method over the lease term as this method most closely reflects the expected pattern of consumption of future economic benefits. In addition, the right of use asset is periodically reduced by impairment losses, if any, and adjusted for the certain remeasurement of the lease liability. 238 ANNUAL REPORT 2020
  240. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Lease liability The lease liability is initially measured at present value of the lease payments that are not paid at the commencement date , discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise of the following: - fixed payments , including in-substance fixed payments; - variable lease payments that depend on an index, or a rate, initially measured using the index or rate as at commencement date; - amount expected to be payable under a residual guarantee; and - the exercise under purchase option that the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option, and penalties for early termination of lease unless the Group is reasonably certain not to terminate early. The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change Group's estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset, or is recorded in Profit and loss account if the carrying amount of the right of use asset has been reduced to zero. 3.10 Intangible assets These are stated at cost less accumulated amortization and provision for accumulated impairment, if any. Amortization is calculated from the month the assets are available for use using the straight-line method, whereby the cost of the intangible asset is amortized over its estimated useful life over which economic benefits are expected to flow to the Group. The useful life and amortization methods are reviewed, and adjusted if appropriate, at each reporting date. Software development costs are only capitalized to the extent that future economic benefits are expected to be derived by the Group. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. 3.11 Segment reporting A business segment is a distinguishable component of the Group that is engaged in providing services that are subject to risks and returns that are different from those of other business segments. The Group accounts for segment reporting of operating results using the classes of business as specified under the Insurance Ordinance, 2000 and the Insurance Rules, 2017. The reported operating segments are also consistent with the internal reporting provided to Board of Directors which is responsible for allocating resources and assessing performance of the operating segments. The performance of segments is evaluated on the basis of underwriting results of each segment. Assets, liabilities and capital expenditures that are directly attributable to segments have been assigned to them. Those assets and liabilities which cannot be allocated to a particular segment on a reasonable basis are reported as unallocated corporate assets and liabilities. ANNUAL REPORT 2020 239
  241. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 3 .12 Cash and cash equivalents Cash and cash equivalents are carried in the statement of financial position at cost. It comprise cash in hand, policy stamps and bank balances. 3.13 Investment income Following are recognized as investment income: - Income on investments designated at fair value through profit or loss account are included in profit and loss account. - Income from held to maturity investments is recognized on a time proportion basis taking into account the effective yield on the investments. The difference between the redemption value and the purchase price of the held to maturity investments is amortized and taken to the profit and loss account over the term of the investment. - Dividend income is recognized when the Group's right to receive the dividend is established. - Gain / loss on sale of available-for-sale investments is recognized in profit and loss account in the year of sale. - Return on bank deposits is recognized on a time proportion basis taking into account the effective yield. - Return on fixed income and government securities are recognized on time proportion basis using the effective interest rate method. 3.14 Investments Investments are recognized and classified as follows: - Investment at fair value through profit or loss - Held to maturity - Available-for-sale The classification depends on the purpose for which the financial assets were acquired. 3.14.1 Investment at fair value through profit and loss account Financial assets that are designated upon initial recognition as one to be measured at fair value through profit or loss include those group of financial assets which are managed and their performance is evaluated on fair value basis and were held for active trading. 3.14.2 Held to maturity Investments with fixed determinable payments and fixed maturity, where management has both the intent and the ability to hold to maturity, are classified as held to maturity. Subsequently, these are measured at amortized cost less provision for impairment, if any. Any premium paid or discount availed on government securities and term finance certificates is deferred and amortized over the period to maturity of investment using the effective yield. 3.14.3 Available-for-sale Investments which are not eligible to be classified as 'fair value through profit or loss' or 'held to maturity' are classified as 'available-for-sale'. These investments are intended to be held for an indefinite period of time which may be sold in response to the need for liquidity, changes in interest rates, equity prices or exchange rates. These are initially measured at cost and subsequently re-measured at fair value at each reporting date. The unrealized gains and losses arising from changes in fair values are directly recognized in equity in the year in which 240 ANNUAL REPORT 2020
  242. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 these arise . When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized in equity are included in the profit and loss account as gains and losses from investment securities. The Group assesses at each statement of financial position date whether there is an objective evidence that the financial asset is impaired. If any such evidence exists for an 'available for sale' asset, the accumulated loss is removed from equity and recognized in the profit and loss account. Quoted Subsequent to initial recognition, these investments are re-measured at fair value. Gains or losses on investments on re-measurement of these investments are recognized in statement of comprehensive income. Unquoted Fair value of unquoted investments is determined on the basis of appropriate valuation techniques as allowed by IAS 39 'Financial Instruments: Recognition and Measurement'. Where fair value cannot be measured reliably, these are carried at cost. The valuation of unquoted investments as at December 31, 2020 has been carried out by independent valuer for determination of fair value of these investments. 3.14.4 Fair / market value measurements For investments in Mutual funds, fair / market value is determined by reference to rates quoted by Mutual Fund Association of Pakistan ('MUFAP'). For investments in quoted marketable securities, other than Term Finance Certificates, fair / market value is determined by reference to Stock Exchange quoted market price at the close of business on reporting date. The fair market value of Term Finance Certificates is as per the rates issued. 3.15 Date of recognition Regular way purchases and sales of investments that require delivery within the time frame established by regulations or market convention are recognized at the trade date. Trade date is the date on which the Group commits to purchase or sell the investment. 3.16 Off setting of financial assets and financial liabilities A financial asset and a financial liability is offset and the net amount is reported in the statement of financial position when the Group has a legally enforceable right to set-off the recognized amounts and it intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. 3.17 Provisions Provision are recognized when the Group has a present, legal or constructive obligation as a result of past events and, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount can be made of the amount of obligation. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate. 3.18 Taxation Income tax comprises current and deferred tax. Income tax is recognized in the profit and loss account except to the extent that relates to items recognized directly in equity or other comprehensive income, in which case it is recognized directly in equity or other comprehensive income. Current Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for current tax is calculated using prevailing tax rates or tax rates expected to apply to the profit for the year, if enacted. The charge for current tax also include adjustments, where considered necessary, to provision for tax made in previous years arising from assessments finalized during the current year for such years. ANNUAL REPORT 2020 241
  243. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Deferred Deferred taxation is accounted for using the statement of financial position liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of the taxable profit . Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred tax is calculated at the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is charged or credited in the profit and loss account, except in the case of items credited or charged to statement of comprehensive income in which case it is included in statement of comprehensive income. 3.19 Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost, any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the statement of profit and loss over the period of the borrowings using the effective interest rate. Finance costs are accounted for on accrual basis and are reported under accrued markup to the extent of the amount remaining unpaid. 3.20 Government grant Government grants are transfers of resources to the Group by a government entity in return for compliance with certain past or future conditions related to the Group's operating activities - e.g. a government subsidy. The definition of 'government' refers to governments, government agencies and similar bodies, whether local, national or international. The Group recognises government grants when it is reasonably probable that grants will be received and the Group will be able to comply with conditions associated with grants. Government grants are recognized at fair value, as a deferred income, when there is reasonable assurance that the grants will be received and the Group will be able to comply with the conditions associated with the grants. Grants that compensate the Group for expenses incurred, are recognized on a systematic basis in the income for the year in which the related expenses are recognized. Grants that compensate for the cost of an asset are recognized in income on a systematic basis over the expected useful life of the related asset. Loan at subsidized rate under SBP refinancing scheme for payment of wages and salaries is initially measured at the fair value i.e. the present value of the expected future cash flows discounted at a market-related interest rate. The difference between the amount received and the fair value is recognized as a government grant. 3.21 Retirement benefit obligations 3.21.1 General Insurance Business Defined contribution plan The Parent Company operates an approved contributory provident fund scheme for all its eligible employees. Equal monthly contributions to the fund are made by the Parent Company and the employees at the rate of 8.33% of basic salary. Contributions made by the Parent Company are recognized as expense. The Parent Company has no further payment obligations once the contributions have been paid. Obligation for contributions to defined contribution plan is recognized as an expense in the profit and loss account as and when incurred. Defined benefit plans The Parent Company operates the following defined benefit plans: - An approved funded gratuity scheme for all its permanent employees in Pakistan. Annual contribution are made to this scheme on the basis of actuarial recommendations. The Parent Company recognizes expense in accordance with IAS 19 'Employee Benefits'. The contributions have been made to gratuity fund in 242 ANNUAL REPORT 2020
  244. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 accordance with the actuary ’s recommendations based on the actuarial valuation of these funds as at December 31, 2020. - An unfunded gratuity scheme covering the employees in the UAE branches as per the requirements of the applicable regulations. Provision is made in these consolidated financial statements on the basis of the actuarial valuation carried out by an independent actuary using the projected unit credit method. The latest valuation has been carried at December 31, 2020. Past-service costs are recognized immediately in profit and loss account, unless the changes to the plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. The Parent Company's net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Parent Company, the recognized asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Re-measurement of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognized immediately in other comprehensive income. The Parent Company determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognized in profit and loss account. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in profit and loss account. The Parent Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. Employees' compensated absences The Parent Company accounts for these benefits in the period in which the absences are earned. The Parent Company provides annually for the expected cost of accumulating compensated absences on the basis of actuarial valuation. Regular employees of the Parent Company are entitled to 30 days earned leaves in a calendar year and they can accumulate the unutilized privilege leaves upto 60 days (2019: 60). The most resent valuation is carried out as at December 31, 2020 using the LIFO method. The liabilities are presented as a current employees benefit obligations in the statement of financial position. 3.21.2 Life Insurance Business Defined benefit plan The Subsidiary Company operates an approved funded gratuity scheme for all permanent, confirmed and full time employees who have completed minimum qualifying eligible service period of six months. Contribution to the fund is made and expense is recognized on the basis of actuarial valuation carried out as at each year end using the Projected Unit Credit Method. Provisions are made to cover the obligations under the scheme on the basis of actuarial assumptions. The Subsidiary Company's obligation under the gratuity schemes are determined through actuarial valuations. Actuarial valuations are conducted annually and the latest valuation was conducted as at December 31, 2020. Service costs are recognized in profit and loss in the year in which they occur. Net interest on net defined benefit liability is also recognized in profit and loss. Net of tax remeasurement comprising actuarial gain / loss , the return on plan assets excluding interest are recognized in other comprehensive income. ANNUAL REPORT 2020 243
  245. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Employees accumulated compensated absences The Subsidiary Company accounts for the liability in respect of employees accumulated compensated absences in the period in which they are earned . 3.22 Impairment of assets Financial assets A financial asset is considered to be impaired if objective evidence indicate that one or more events had a negative effect on the estimated future cash flow of that asset. An impairment loss in respect of a financial asset measured at amortized cost is calculated as a difference between its carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of available for sale financial asset is calculated with reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Non financial assets The carrying amounts of the Group's non-financial assets are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of such asset is estimated. An impairment loss is recognized wherever the carrying amount of asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss account. A previously recognized impairment loss is reversed only if there has been change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit and loss account. 3.23 Dividend distribution Dividend distribution to the Parent Company's shareholders and other appropriations are recognized in the Group's financial statements in the period in which these are approved. Appropriations of profit are reflected in the statement of changes in equity in the period in which such appropriations are approved. 3.24 Management expenses Expenses of management both direct and indirect are allocated on the basis of activity in each class of business. Expenses not allocable to the underwriting business are charged as other expenses. 3.25 Foreign currencies Transactions in foreign currencies (other than the result of foreign branches) are accounted for in Pak Rupees at the rates prevailing on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into Pak Rupees at the rates of exchange prevailing at the reporting date. Exchange differences are taken to the profit and loss account currently. The assets and liabilities of foreign branches are translated to Pak Rupees at exchange rates prevailing at the reporting date. The results of the foreign branches are translated to Pak Rupees at the average rate of exchange for the year. Translation gains and losses are included in the profit and loss account, except those arising on the translation of the Group net investments in foreign branches, which are taken to the capital reserves (exchange translation reserve). 3.26 Financial instruments Financial assets and liabilities are recognized at the time when the Group becomes a party to the contractual provisions of the instrument and de-recognized when the Group loses control of contractual rights that comprise the financial assets and in the case of financial liabilities when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on the de-recognition of the financial assets and liabilities is included in the profit and loss account. 244 ANNUAL REPORT 2020
  246. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Financial instruments carried in the statement of financial position include cash and bank , loans, investments, premiums due but unpaid, amount due from other insurers / reinsurers, premium and claim reserves retained by cedants, accrued investment income, reinsurance recoveries against outstanding claims, sundry receivables, provision for outstanding claims, amounts due to other insurers / reinsurers, accrued expenses, other creditors and accruals, liabilities against asset subject to finance lease and unclaimed dividends. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. 3.27 Earnings per share The Group presents basic and diluted earnings per share (EPS) for its shareholders. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share is calculated if there is any potential dilutive effect on the Group's reported net profits. 3.28 Window Takaful Operations - Parent Company The accounting policies followed by Window Takaful Operations of the Parent Company are stated in the annexed financial statements of Window Takaful Operations for the year ended December 31, 2020. 4 Critical accounting estimates and judgments 4.1 Use of estimates and judgments The preparation of these consolidated financial statements in conformity with approved accounting standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. The areas involving a higher degree of judgment and complexity, or areas where assumptions and estimates are significant to these financial statements or judgment was exercised in application of accounting policies, are as follows: - Provision for doubtful receivables 3.2.6 - Provision for outstanding claim including claims incurred but not reported (IBNR) 3.2.7 3.2.4 - Premium deficiency - Retirement benefit obligations - Valuation of unquoted investments - Provision for taxation including the amount relating to tax contingency - Useful lives, pattern of economic benefits and impairments - Property and Equipment - Useful lives, pattern of economic benefits and impairments - Intangible Assets - Policy holders' liabilities and underlying actuarial assumptions 3.21 3.14.3 3.18 3.7 3.10 3.3.10 - Provision for outstanding claims - Impairment of assets - financial assets 3.22 - Segment Reporting 3.11 3.3 ANNUAL REPORT 2020 245
  247. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 5 2020 2019 Rupees in thousand 5 .1 5.2 5.3 4,535,595 28,116 195,271 4,288,446 65,422 272,496 4,758,982 4,626,364 Property and equipment Operating assets Capital work in progress Right of use asset 5.1 Note Operating assets 2020 As at Jan 01 Cost Depreciation Exchange Transfer to Additions / differences Disposals / investment Transfers and other Write Offs property adjustments Exchange Transfer to Charge for differences Disposals / investment the year and other Write offs property adjustments As at Dec 31 As at Jan 01 Net Book value As at Dec 31 As at Dec 31 % Rupees in thousand Freehold: Land Building* Furniture and fixtures Motor vehicles Machinery and equipment Computer equipment Leasehold Improvements Total 1,285,992 2,102,229 254,005 320,264 107,479 771,751 26,596 642,810 116,307 434,938 52,313 60,711 5,651 5,618,695 562,351 15,364 (4,945) 3,024 (9,596) 1,577 (60,108) - (7,144) (6,453) - 1,285,992 2,366,653 421,171 739,816 752,706 481,604 (20,820) - 45,542 21,504 (109,066) - 733 806 - 291,705 128,431 404,250 56,601 33,114 57,040 146,954 346,974 80,620 40,058 11,935 8,204 6,093,484 1,330,249 275,637 Rate 8,615 (4,353) 809 (4,232) 1,201 (32,631) - 423 635 (4,461) (5,083) - 352,568 158,122 429,860 223,536 382,584 - (8,920) - 11,219 11,683 (59,680) - 1,285,992 2,014,085 3.0% 263,049 14.3% - 15.0% 309,956 15.0% - 20.0% 529,170 15.0% - 20.0% 99,020 30.0% - 33.3% 34,323 14.3% 1,557,889 4,535,595 2019 Cost As at Jan 01 Depreciation Exchange Transfer to Additions / differences Disposals / investment Transfers and other Write Offs property adjustments As at Dec 31 As at Jan 01 Net Book value Exchange Transfer to Charge for differences Disposals / investment the year and other Write offs property adjustments As at Dec 31 As at Dec 31 % Rupees in thousand Freehold: Land Building* Furniture and fixtures Motor vehicles Machinery and equipment Computer equipment Leasehold Improvements Total 1,285,992 713,369 1,364,391 349,463 78,175 710,343 113,408 51,742 8,949 (116,323) 5,751 (57,751) 233,644 437,606 401,989 30,814 1,519 (29,959) 2,135 - 43,778 27,173 3,738,578 2,051,567 - (10,240) 70,096 (214,273) (27,273) - 1,285,992 2,102,229 237,255 320,264 183,043 771,751 379,456 43,077 29,086 57,199 15,428 2,988 (86,686) 2,398 (34,803) 642,810 143,043 434,938 305,633 23,669 39,014 1,447 (21,205) 2,327 - 60,711 8,560 7,309 (27,273) 5,618,695 1,256,990 199,354 * The Group owns 5 buildings and the resulting area of land and 8 corporate offices in Pakistan and 1 corporate office in U.A.E. 246 ANNUAL REPORT 2020 Rate - (3,934) 24,588 (146,628) (4,055) - 291,705 128,431 404,250 146,954 346,974 - 11,935 1,285,992 1,810,524 3.0% 191,833 14.3% - 15.0% 367,501 15.0% - 20.0% 495,856 15.0% - 20.0% 87,964 30.0% - 33.3% 48,776 (4,055) 1,330,249 4,288,446 14.3%
  248. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 5 .1.1 Details of tangible assets disposed off during the year are as follows: Description Cost Building Accumulated Book value depreciation Rupees in thousand Sale proceeds Mode of disposal Relationship Particulars of purchaser 11,090 Negotiation Independent Third Party Syed Mustafa Naqvi 152 28,474 Negotiation Independent Third Party Fawad Yousuf 363 592 24,000 63,564 Negotiation Independent Third Party Gasco Engineering Pvt Ltd 3,991 1,201 3,991 - Negotiated Written off 337 4,232 172 5,364 160 4,151 6,550 4,111 2,439 4,275 Auction Independent Third Party Akhter Jamil Toyota Corolla GLI (AFV-732) 1,208 1,089 119 622 Auction Independent Third Party Kamal Ahmed Honda Citi (AQY-937) 1,019 875 144 901 Auction Independent Third Party Honda Civic VTI Oriel (BBW-436) 2,510 1,507 1,003 2,025 Auction Independent Third Party Honda Citi Automatic (BBT-637) 1,663 1,002 661 1,539 Auction Independent Third Party Honda Citi (AXU-447) 1,643 1,181 462 1,513 Auction Independent Third Party Honda Accord (ZU-300) 5,910 717 5,193 4,250 Auction Independent Third Party Asim Ali Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Honda Civic VTI Oriel (ASU-921) 1,849 1,526 323 1,310 Auction Independent Third Party Honda Civic VTI (AYV-988) 2,381 1,629 752 1,783 Auction Independent Third Party Auction Independent Third Party Japan Plaza Premises 484 407 Shahwar Trade Centre Premises 2,168 2,016 Amber Estate Premises 2,293 4,945 1,930 4,353 6,984 2,103 2,993 902 509 9,596 Mercedes Benz (ASV-244) 77 Furniture and fixtures Furnitures and fixtures Furnitures and fixtures Items having book value below Rs. 50,000 Related Party Nishat Properties Written off Motor vehicles (Owned) Toyota Corolla GLI (AZV-863) 1,552 1,035 517 1,376 Komatsu (JS-3144) 1,650 1,439 211 800 Honda Civic (BNT-507) 2,679 681 1,998 2,600 Auction Independent Third Party Insurance claim recovery Independent Third Party Suzuki Cultus (LEC-17A-2363) 1,277 434 843 843 Auction Honda Civic VTI (LEE-14-5991) 2,069 1,336 733 1,900 Auction Independent Third Party Related Party Honda Citi (ASF-273) 1,209 1,014 195 1,275 Auction Independent Third Party Honda Citi (ASG-196) 1,209 1,014 195 1,225 Auction Independent Third Party Toyota Corolla GLI (LED-14-1833) 2,023 1,277 746 1,625 Toyota Corolla Altis 1.6 (BRC-667) Toyota Fortuner (64988) Toyota Fortuner (12982) Toyota Corolla (41580) 3,547 2,203 2,203 1,718 399 1,623 1,455 899 3,148 580 748 819 3,455 771 969 705 BMW 5X (11923) Suzuki Wagon R (BLR-179) Items having book value below Rs. 50,000 2,864 1,074 730 376 2,134 698 1,192 698 8,098 60,108 5,282 32,631 2,816 27,477 1,817 39,469 6,104 50 3,714 34 2,390 16 2,390 - 990 7,144 713 4,461 277 2,683 272 2,662 4,646 4,646 - - 1,807 6,453 437 5,083 1,370 1,370 1,367 1,367 Miscellaneous Miscellaneous 17,865 2,955 20,820 7,653 1,267 8,920 10,212 1,688 11,900 10,212 10,212 Grand Total 109,066 59,680 49,386 121,425 Auction Independent Third Party Insurance claim recovery Independent Third Party Negotiation Employee Negotiation Employee Negotiation Employee Negotiation Negotiation Employee Employee Negotiated Written off Related Party Shahid Pervaiz Khan Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Syed Mehmood Ali Alfalah Insurance Limited Adamjee Insurance Company Limited - WTO Muhammad Shahzad Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Augmentech Business Solutions (Private) Limited Security General Insurance Company Limited Awais Khalid - employee Asif Khan - employee Wasif Ullah - employee Absar Azim Burney - employee Imran Ali - Employee Machinery & equipment Office equipment Office equipment Items having book value below Rs. 50,000 MCB Islamic Bank Written off Computer equipment Computer and related equipment Items having book value below Rs. 50,000 Leasehold improvements Written off Negotiation Written off Written off Related Party MCB Islamic Bank Written off ANNUAL REPORT 2020 247
  249. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand 5 .2 Capital work in progress Building Mobilization advance Advance for ERP softwares Leasehold improvements 5.3 5,868 5,302 16,946 32,859 10,810 20,351 1,402 28,116 65,422 272,496 (109,176) 78,114 (43,701) (2,462) 373,801 5,189 (108,680) 2,186 195,271 272,496 Right of use asset As at January 01 Effect of initial application of IFRS - 16 as at January 01 Adjustments in Agency branches Additions during the year Depreciation charge during the year Exchange difference Closing Net Book Value 5.3.1 All the right of use assets include premises obtained on rent for branch operations (inside and outside of Pakistan). 6 Intangible assets 2020 2019 Rupees in thousand Cost As at January 01 Additions during the year Exchange differences and other adjustments As at December 31 478,070 42,296 3,707 524,073 451,755 14,998 11,317 478,070 As at January 01 Amortization charged during the year Exchange differences and other adjustments As at December 31 346,834 47,821 2,037 396,692 291,153 50,086 5,595 346,834 Net book value as at December 31 127,381 131,236 Less: Accumulated amortization Rate of amortization 7 20.00% 20.00% Investment Properties Net book value as at January 01 Additions and capital improvements Unrealized fair value (loss) / gain 1,204,026 (21,000) 855,394 315,334 33,298 Net book value as at December 31 1,183,026 1,204,026 These consist of the following: - 3 floors of Adamjee House, Karachi which are rented out to related parties by Parent Company. Rent received from these parties is disclosed in Note 40. 248 ANNUAL REPORT 2020
  250. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 - 2 floors of Adamjee House , Lahore which are not rented out as at December 31, 2020. The Parent Company's management intends to rent it out subsequently. - Piece and parcel of plot no. 1-A, Main Gulberg, Jail Road, Lahore, measuring 8 Kanal 8 Marla 203 Sq. ft. of a land bought by the Subsidiary Company for the Unit Linked Investment Business. Market value of these investment properties amounts to Rs. 1,183,026 thousands (2019: 1,204,026) thousands based on a valuation carried out by independent valuers, as at December 31, 2020 and unrealized fair value loss of Rs. 21,000 thousands has been recognized in the profit and loss account. The fair value of investment properties was determined by external, independent property valuers having adequate qualifications and experience in the location and category of the property being valued. Investment properties of the Group are valued every year. The fair value of the investment properties has been categorized as a Level 3 fair value. The valuation has been carried out considering the segment and location of the property, size, utilization and current trends in price of real estate in close proximity and current market rents for similar properties including assumptions that ready buyers are available in the current market and analyzed through detailed market surveys and, the properties that have recently been sold or purchased or offered/quoted for sale into the same vicinity to determine the better estimates of the fair value. Note 8 2020 2019 Rupees in thousand Investments in equity securities Available-for-sale 8.1 19,213,873 18,866,173 Fair value through profit and loss (designated upon initial recognition) 8.2 15,649,876 13,318,382 34,863,749 32,184,555 2019 2020 Note 8.1 Cost Impairment / Unrealized Carrying provision Gain / (loss) value Cost Impairment / Unrealized Carrying provision Gain / (loss) value Rupees in thousand Available-for-sale Related parties Listed shares 8.1.1 9,104,774 (265,237) Unlisted shares 8.1.2 924,333 - 10,029,107 (265,237) 9,086,355 (290,808) 1,183,140 698,226 - 1,446,442 11,210,312 9,784,581 (290,808) 5,686,610 (1,713,761) 1,187,635 10,027,172 258,807 2,098,765 10,894,312 13,922 712,148 2,112,687 11,606,460 Others Listed shares 8.1.3 1,184,151 5,655,343 Unlisted shared 8.1.4 925,360 - 1,375,709 2,301,069 925,360 - Mutual Funds 8.1.5 48,130 - (1,851) 46,279 364,265 - 68 364,333 NIT Units 8.1.6 161 - 709 870 161 - 635 796 6,369,165 (1,897,973) 7,342,816 (1,897,973) 17,371,923 (2,163,210) 2,558,718 8,003,561 6,976,396 (1,713,761) 4,005,160 19,213,873 16,760,977 (2,004,569) 759,400 4,732,249 1,236,975 2,162,335 1,997,078 7,259,713 4,109,765 18,866,173 ANNUAL REPORT 2020 249
  251. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 8 .1.1 Related parties- Listed Shares No. of shares 2019 2020 Face value Rupees Company's Name 47,827,287 47,867,287 10 Commercial Banks MCB Bank Limited 2,050 2,050 10 Textile Composite Nishat Mills Limited 3,358,344 3,358,344 10 923,500 25,671,181 923,500 - Market Value 2019 2020 Rupees in thousand 8,861,440 9,802,814 208 218 Cement D.G. Khan Cement Company Limited 384,799 249,424 10 10 Power Generation & Distribution Nishat Power Limited Pakgen Power Limited 21,804 505,878 25,165 - 5,462,000 10 Investment Companies MCB Arif Habib Savings & Investment Limited 5,696,595 9,145,095 10 Oil & Gas Exploration Companies Sui Northern Gas Pipelines Limited 83,478,957 66,758,276 - - 120,109 253,043 696,582 10,027,172 10,894,312 8.1.1.1 3,716,710 (2019 : 3,716,710) shares of MCB have been pledged by Parent Company against SBLC (Standby Letter of Credit) issued in favour of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited. 8.1.2 Related Parties - Unlisted shares No. of shares 2019 2020 92,360,700 Face value Rupees 69,750,000 10 Company's Name Automobile Assembler Hyundai Nishat Motor (Private) Limited Market Value 2019 2020 Rupees in thousand 1,183,140 712,148 8.1.2.1 This represents investment in the ordinary shares of Hyundai Nishat Motor (Private) Limited (HNMPL) which is principally engaged in vehicle assembling. Since HNMPL's ordinary shares are not listed, an independent valuer engaged by the Parent Company has estimated a fair value of Rs. 12.81 per ordinary share as at December 31, 2020 ( Rs. 10.21 per ordinary share as at December 31, 2019) through a valuation technique based on discounted cash flows. Hence, it has been classified under level 3 of the fair value hierarchy as further explained in note 43 to these consolidated financial statements. The significant assumptions used in this valuation technique are as follows: - Discount rate of 14.87% per annum. - Terminal growth rate in revenue of 2% per annum. 8.1.2.2 Sensitivity analysis Sensitivity analysis of the significant assumptions used in the valuation technique are as follows: - If the discount rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 137,617 thousand lower. - If the terminal growth rate increase by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 96,055 thousand higher. 250 ANNUAL REPORT 2020
  252. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 8 .1.3 Others - listed shares No. of shares 2019 2020 731,701 Face value Rupees 731,701 Company's Name 10 Automobile Assembler Millat Tractors Limited Market Value 2019 2020 Rupees in thousand 800,547 515,425 80,760 120,771 148,131 148,131 10 Cable & Electrical Goods Siemens (Pakistan) Engineering Company Limited 24,000 645,100 24,000 645,100 10 10 Cement Attock Cement Fecto Cement Limited 3,601 22,133 2,481 16,450 4,113,500 4,113,500 10 Close - End Mutual Fund HBL Investment Fund 'A' 13,040 16,865 6,277,500 389,107 8,320,012 1,279,400 6,277,500 389,107 8,320,012 1,279,400 10 10 10 10 Commercial Banks Allied Bank Limited Habib Bank Limited National Bank of Pakistan United Bank Limited 535,910 49,647 357,428 161,025 600,129 61,295 360,256 210,461 109,560 100,000 300,000 - 109,560 100,000 300,000 1,298,500 10 10 10 10 Engineering Aisha Steel Mills Limited Crescent Steel & Allied Products Limited International Steel Limited Mughal Iron & Steel Industries Limited 2,574 8,411 27,969 - 1,056 5,542 17,367 53,200 2,220,100 1,481,000 9,000 9,998,900 2,220,100 2,477,000 - 10 10 10 10 Fertilizer Dawood Hercules Corporation Limited Engro Fertilizers Limited Fatima Fertilizer Company Limited Fauji Fertilizer Company Limited 269,831 93,644 262 1,084,881 342,362 181,886 - 5,740 70,304 - 5,740 70,304 9,000 10 10 10 Food & Personal Care Products Nestle Pakistan Limited Rafhan Maize Products Limited Fauji Foods Limited 38,257 688,909 - 46,207 509,782 239 4,800 230,000 286,843 4,800 230,000 286,843 10 10 10 Insurance EFU General Insurance Company Limited IGI Holdings Limited Pakistan Reinsurance Company Limited 576 46,791 7,894 529 46,920 8,436 10 Investment Companies MCB Arif Habib Savings & Investment Limited 153,428 - 158,177 239 216,938 268 7,014 4,685 279,033 165,041 5,462,000 - 1,524,300 600 1,524,300 600 10 10 Oil & Gas Exploration Companies Oil & Gas Development Company Limited Pakistan Oilfields Limited 11,750 11,750 10 Paper & Board Packages Limited 369,400 369,400 10 Pharmaceuticals Abbott Laboratories Pakistan Limited ANNUAL REPORT 2020 251
  253. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 No . of shares 2019 2020 Face value Rupees Company's Name Market Value 2019 2020 Rupees in thousand 5,743,000 130,000 27,348,388 4,960,882 5,743,000 130,000 27,348,388 25,631,181 4,960,882 10 10 10 10 10 Power Generation & Distribution Kot Addu Power Company Limited K-Electric Limited Lalpir Power Limited Pakgen Power Limited Saif Power Limited 156,209 508 350,606 72,032 181,076 568 396,825 469,564 103,980 37,500 49 506,450 37,500 49 506,450 10 10 10 Refinery Attock Refinery Limited Pakistan Petroleum Limited National Refinery Limited 6,827 4 177,176 4,188 7 71,450 82,841,037 95,305,817 5,655,343 4,732,249 8.1.3.1 3,582,000 (2019: Nil) shares of Fauji Fertilizer Company Limited have been pledged by Parent Company against Standby Letter of Credit (SBLC) issued in favour of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited, a related party of the Parent Company. 8.1.4 Others - Unlisted shares No. of shares 2019 2020 9,681,374 9,681,374 Face value Rupees 10 Company's Name Security General Insurance Company Limited Market Value 2019 2020 Rupees in thousand 2,301,069 2,162,335 8.1.4.1 This represents investment in the ordinary shares of Security General Insurance Company Limited ("SGI") which is principally engaged in general insurance business. Since SGI's ordinary shares are not listed, an independent valuer engaged by the Parent Company has estimated a fair value of Rs. 237.68 per ordinary share as at December 31, 2020 ( Rs. 223.35 per ordinary share as at December 31, 2019) through a valuation technique based on discounted cash flow analysis of SGI. Hence, it has been classified under level 3 of the fair value hierarchy as further explained in Note 43 to these consolidated financial statements. The significant assumptions used in this valuation technique are as follows: - Discount rate of 15% per annum. - Terminal growth rate of 2% per annum. 8.1.4.2 Sensitivity analysis Sensitivity analysis of the significant assumptions used in the valuation technique are as follows: - If the discount rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 6,002 thousand lower. - If the terminal growth rate increases by 1% with all other variables held constant, the impact on fair value as at December 31, 2020 would be Rs. 3,679 thousand higher. 252 ANNUAL REPORT 2020
  254. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 8 .1.5 Others-Mutual Fund Certificates Open-Ended-Mutual Funds Face value Rupees No. of units 2019 2020 8.1.6 42,779 20,880 4,234,546 3,596,733 21,232 4,154,460 4,298,205 7,772,425 Fund’s Name Alfalah GHP Money Market Fund HBL Cash Fund HBL Investment Fund - Class B Open-Ended Equity Funds Face value Rupees No. of units 2019 2020 12,540 8.2 100 100 10 Market Value 2019 2020 Rupees in thousand 13,336 4,201 2,122 39,956 321,410 1,963 40,960 46,279 364,333 Market Value 2019 2020 Rupees in thousand Fund’s Name National Investment Trust 870 796 Fair value through profit and loss Note Cost 2020 Impairment / Unrealized provision Gain / (loss) Related Party Listed shares Mutual Funds 8.2.1 8.2.2 Carrying Cost value Rupees in thousand 2019 Impairment / Unrealized provision Gain / (loss) Carrying value 1,283,897 5,517,488 - 5,319 656,652 1,289,216 6,174,140 1,913,657 4,638,276 - (279,886) 375,950 1,633,771 5,014,226 6,801,385 - 661,971 7,463,356 6,551,933 - 96,064 6,647,997 7,786,807 2,084,774 - (2,023,136) 338,075 5,763,671 2,422,849 7,672,526 934,567 - (1,843,541) (93,167) 5,828,985 841,400 9,871,581 16,672,966 - (1,685,061) 8,186,520 8,607,093 (1,023,090) 15,649,876 15,159,026 - (1,936,708) 6,670,385 (1,840,644) 13,318,382 Others Listed shares Mutual Funds 8.2.1 8.2.3 8.2.4 Related parties- Listed Shares No. of shares 2019 2020 Face value Rupees Company's Name 6,048,331 5,721,100 10 Commercial Banks MCB Bank Limited 451,900 800 10 738,300 363,900 - 1,847,000 100 5,700,100 9,085,631 11,785,900 Market Value 2019 2020 Rupees in thousand 1,120,635 1,172,482 Textile Composite Nishat Mills Limited 45,990 85 10 Cement D.G. Khan Cement Company Limited 84,594 27,027 10 Miscellaneous Siddiqsons Tin Plate Limited 37,993 - 10 Oil & Gas Exploration Companies Sui Northern Gas Pipelines Limited 4 434,177 1,289,216 1,633,771 ANNUAL REPORT 2020 253
  255. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 8 .2.2 Related parties- Mutual Fund Certificates Open-Ended-Mutual Funds No. of units 2019 2020 8.2.3 55,847 159,350,568 49,244 2,520,442 504,207 6,004,684 37,778,525 51,565 141,740,527 373,227 1,609,181 5,839,914 31,957,244 206,263,517 181,571,658 Face value Rupees 100 10 100 50 50 50 Fund’s Name Alhamra Daily Dividend Fund Alhamra Islamic Stock Fund Alhamra Islamic Income Fund Alhamra Islamic Asset Allocation Fund MCB Cash Management Optimizer Fund MCB Dynamic Allocation Fund MCB Pakistan Asset Allocation Fund MCB Pakistan Stock Market Fund Others - listed shares No. of shares 2019 2020 Face value Rupees 220,400 941 295,430 500 - 341,900 100,626 900 150 5 10 10 10 10 416,100 507,600 5 4,120,000 600 3,000 Company's Name 6,174,140 5,014,226 Market Value 2019 2020 Rupees in thousand 68,380 70,883 197 35 Automobile Part & Accessories Thal Limited 196,682 171,686 10 Leasing Companies Orix Leasing Pakistan Limited 10 Cable & Electrical Goods Pak Elektron Limited 88,101 13,500 10 10 10 7,971,500 273,556 1,000,422 500 910,100 1,454,125 600 10 10 10 10 Cement Fauji Cement Company Limited Lucky Cement Limited Maple Leaf Cement Factory Limited Pioneer Cement Limited 4,471 81,738 10 Leather & Tanneries Service Industries Limited 10 10 10 10 10 10 10 10 10 10 10 Commercial Banks Allied Bank Limited Askari Bank Limited Bank Al Habib Limited Bank Alfalah Limited Bank of Punjab Limited Faysal Bank Limited Habib Bank Limited Habib Metropolitan Bank Limited Meezan Bank Limited National Bank of Pakistan United Bank Limited 254 ANNUAL REPORT 2020 5,156 1,451,376 40,059 119,071 466,301 2,932,263 51,627 1,030 353,913 164 - 8,591 537,200 13,500 2,046,900 5,329,964 4,818,000 2,697,900 3,476,500 377,100 1,487,000 25 1,250,000 875,900 5,585 1,725,767 5,180 188,673 50,862 495,370 3,702,703 Automobile Assembler Agriauto Industries Limited Millat Tractors Limited Indus Motor Company Limited Honda Atlas Cars (Pakistan) Limited Pak Suzuki Motor Company Limited Cement Cherat Cement Company Limited Bestway Cement Limited Dewan Cement Limited 900 2,464 2,250,394 4,569,404 7,611,000 1,275 3,258,432 1,050,000 305,992 1,000,000 89,466 Market Value 2019 2020 Rupees in thousand - 16 165,336 81 1,256 86,672 140 4,674 104 172,742 190,420 45,029 52 389,887 33,648 18 3,729 63,495 77 58 156,627 161,437 70,554 22 432,849 40,940 31,958 42,960 11,260 195,684 98,818 366,939 123,294 39,389 59,363 54,052 2 54,125 144,086
  256. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 No . of shares 2019 2020 Face value Rupees Company's Name 603,500 2,500 241 377,000 200 900 300,000 74,811 200 - 10 10 10 10 10 10 10 10 Engineering Agha Steel Industries Limited Aisha Steel Mills Limited Amreli Steels Limited Crescent Steel & Allied Products Limited Descon Engineering Services & Technology Limited International Industries Limited Ittefaq Iron Industries Limited Mughal Iron & Steel Industries Limited 52,650 3,458,669 59,600 200 - 7,585,169 1,000 277,200 10 10 10 10 10 10 36,300 626,951 2,000,301 62,500 224,532 268,730 2,000,000 4,004,000 5,050 280,200 12,641 945,600 7,500 23,784 58 43 28,550 7 50 7,056 8,292 2 - Chemical Archroma Pakistan Limited Engro Polymer and Chemicals Limited ICI Pakistan Limited Ittehad Chemicals Limited Pakistan Oxygen Limited Sitara Peroxide Limited 29,394 164,321 45,301 31 - 251,903 23 9,674 10 10 10 10 10 Fertilizer Arif Habib Corporation Limited Engro Corporation Limited Engro Fertilizers Limited Fatima Fertilizer Company Limited Fauji Fertilizer Company Limited 1,454 192,700 126,479 1,819 24,362 92,779 146,860 406,132 150,000 6,974,250 1,300 1,272,980 1,210 10 10 10 10 5 10 Food & Personal Care Products At-Tahur Limited Fauji Foods Limited Murree Brewery Company Limited Nestle Pakistan Limited National Foods Limited Shezan International Limited 102 175,803 84,252 206,510 - 3,143 132,650 10,465 282,614 606 7,500 10 Insurance Pakistan Reinsurance Company Limited 206 221 662 156,271 56 344,117 509 13,199 186 38 26,064 66 108 8,053 - 1,277 18,000 2,295,735 824 7,982,300 8,774 337,824 10 10 10 Textile Composite Gul Ahmed Textile Mills Limited Interloop Limited Kohinoor Textile Mills Limited 2,000 90 8,119,500 1,000 11,500 64,790 10 1 10 10 10 Technology & Communication Avanceon Limited Hum Network Limited Netsol Technologies Limited Pakistan Telecommunication Company Limited Systems Limited 37,386 10 Investment Companies Arif Habib Limited 239,217 2,555,530 586,157 239,197 3,780,200 575,870 10 10 10 Oil & Gas Exploration Companies Mari Petroleum Company Limited Oil & Gas Development Company Limited Pakistan Oilfields Limited 70,900 23 750 262 10 10 Paper & Board Packages Limited Cherat Packaging Limited - Market Value 2019 2020 Rupees in thousand 320,508 265,187 231,772 313,372 537,998 257,253 42,322 5 299 32 ANNUAL REPORT 2020 255
  257. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 No . of shares 2019 2020 Company's Name Market Value 2019 2020 Rupees in thousand 190,350 605,000 369,400 50,000 697 151,800 6 970 10 10 10 10 10 Pharmaceuticals Abbott Laboratories Pakistan Limited AGP Limited GlaxoSmithKline Consumer Healthcare Pakistan Limited Highnoon Laboratories Limited The Searle Company Limited 143,785 68,897 70,862 29,991 174 67,821 1 183 1,809,500 16,338,000 3,871,473 1,821,000 10,169,500 2,565,061 10 10 10 Power Generation & Distribution Kot Addu Power Company Limited K-Electric Limited Hub Power Company Limited 49,218 63,882 307,124 57,416 44,441 239,448 102,500 10 Glass & Ceramics Tariq Glass Industries Limited - 8.2.4 Face value Rupees - 10,968 8,925 651 54,602 - 205,220 4,000 1,564,540 - 10 10 Miscellaneous Synthetic Products Enterprises Limited Tri-Pack Films Limited 380,950 4,200,000 179,500 986,858 100 1,704,300 7,980 10 10 10 10 Oil & Gas Marketing Companies Attock Petroleum Limited Hascol Petroleum Limited Hi-Tech Lubricants Limited Pakistan State Oil Company Limited 127,477 61,698 7,859 212,471 37 53,072 1,529 250 2,999,013 375 500 3,687,796 10 10 10 Refinery Attock Refinery Limited Byco Petroleum Pakistan Limited Pakistan Petroleum Limited 46 270,901 42 3 505,742 81,719,080 91,719,479 5,763,671 5,828,985 Others-Mutual Fund Certificates Open-Ended-Mutual Funds No. of units 2019 2020 2,059,100 14,742,274 146,456 1,476,006 2,301,661 985,010 864 3,819,347 3,263,683 535,400 6,331,208 4,172,762 22,333,717 3,404,310 3,167,048 1,134 475,513 779 3,423,470 2,029,159 261,883 119,617 508,765 10,439,355 3,789,458 - 68,738,846 21,049,133 256 ANNUAL REPORT 2020 Face value Rupees 10 10 100 100 100 100 100 100 100 100 100 10 10 10 10 100 100 Fund’s Name ABL Islamic Stock Fund ABL Stock Fund Al Ameen Islamic Asset Allocation Fund Al Ameen Shariah Stock Fund Alfalah GHP Money Market Fund Alfalah GHP Islamic Income Fund Faysal Income & Growth Fund Faysal Saving Growth Fund Faysal Money Market Fund Faysal Financial Value Fund Faysal Financial Sector Opportunity Fund Meezan Balanced Fund NAFA Islamic Stock Fund NBP Islamic Mahana Amdani Fund NBP Islamic Savings Fund UBL Financial Sector Fund UBL Stock Advantage Fund Market Value 2019 2020 Rupees in thousand 32,189 221,762 18,601 224,796 226,013 100,545 96 404,698 332,746 8,349 77,030 43,256 218,870 275,426 238,472 111 50,020 87 369,695 219,622 26,222 13,005 7,885 114,753 40,000 - 2,422,849 841,400
  258. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand 9 Investments in debt securities Held to maturity Treasury Bills Pakistan Investment Bonds 9 .1.1 9.1.2 275,631 98,700 374,331 370,491 95,377 465,868 9.2.1 9.2.2 688,532 101,736 790,268 558,153 93,684 651,837 9.3.1 1,125,156 100,000 2,155,587 464,354 6,371,663 3,908,807 14,125,567 1,348,808 50,000 1,375,161 3,828,677 897,123 7,499,769 15,290,166 8,617,474 Available for sale Treasury Bills Pakistan Investment Bonds Fair value through profit and loss Term Finance Certificate Advance against purchase of term finance certificate Corporate Sukuks Ijara Sukuks Treasury Bills Pakistan Investment Bonds 9.1 9.3.2 9.3.3 9.3.4 9.3.5 Held to maturity 9.1.1 Treasury Bills Face value Rupees Yield Rate % Profit Payment 100,000,000 100,000,000 82,000,000 382,000,000 10.67% 7.32% 7.43% 13.83% On maturity On maturity On maturity On maturity Type of Security 12 Month Treasury Bills 12 Month Treasury Bills 12 Month Treasury Bills 6 Month Treasury Bills Maturity year 2021 2021 2021 2020 9.1.2 Pakistan Investment Bonds 9.2 Face value Rupees Yield Rate % Profit Payment 100,000,000 100,000,000 11.71% 11.71% On maturity On maturity Type of Security Maturity year 3 Years Pakistan Investment Bonds 2022 3 Years Pakistan Investment Bonds 2022 Carrying amount 2019 2020 Rupees in thousand 97,801 97,900 79,930 - 370,491 275,631 370,491 Carrying amount 2019 2020 Rupees in thousand 98,700 - 95,377 98,700 95,377 Available for sale 9.2.1 Treasury Bills Face value Rupees Yield Rate % 7.12% 220,870,000 355,000,000 6.77% - 7.13% 7.08% 122,000,000 375,000,000 12.9% -13.25% 150,000,000 13.73% 45,000,000 12.95% Profit Payment On maturity On maturity On maturity On maturity On maturity On maturity Type of Security 12 Month Treasury Bills 6 Month Treasury Bills 3 Month Treasury Bills 3 Month Treasury Bills 6 Month Treasury Bills 12 Month Treasury Bills Maturity year 2021 2021 2021 2020 2020 2020 Carrying amount 2019 2020 Rupees in thousand 216,740 351,097 120,695 - 371,167 145,410 41,576 688,532 558,153 ANNUAL REPORT 2020 257
  259. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 9 .2.2 Pakistan Investment Bonds 9.3 Face value Rupees Yield Rate % 100,000,000 9.00% Profit Payment Type of Security Maturity year On maturity 3 Years Pakistan Investment Bonds 2022 Carrying amount 2019 2020 Rupees in thousand 101,736 93,684 101,736 93,684 Fair value through profit and loss 9.3.1 Term Finance Certificates Face value Rupees 1000 1000 5 5 5 96 100 100 100 5 Yield Rate % 2019 2020 No. of certificates 8.49% 8.49% 14.00% 8.03% - 14.76% 13.19% 8.35 % - 15.79% 8.60 % - 15.79% 7.71% - 15.00% 8.90% 8.23% - 14.76% 100 100 39,680 3,400 2,580 590 500 10,000 100 41,000 39,680 33,510 3,400 2,580 590 10,000 Carrying amount 2019 2020 Company's Name Rupees in thousand Askari Bank Limited Askari Bank Limited VII Askari Bank Limited V Bank Al Habib Limited Bank Alfalah Limited Bank of Punjab I Bank of Punjab II Habib Bank Limited Habib Bank Limited-ADT I Soneri Bank Limited 100,000 99,040 178,788 336,202 252,802 58,894 50,000 49,430 100,000 199,979 194,655 167,114 334,113 246,317 56,810 49,820 1,125,156 1,348,808 9.3.2 Corporate Sukuks Face value Rupees Yield Rate % 100 60 70 1000 100 50 100 5 1000 1000 5 750 8.80% - 15.69% 8.30% - 14.75% 8.30% - 14.75% 7.31% - 13.83% 8.20% - 13.89% 8.30% - 22.00% 7.79% - 24.53% 8.67% - 15.4% 7.68% - 14.63% 9.05% - 14.63% 7.25% 12.71% - 11.00% 2019 2020 No. of certificates 420 2,380 4,400 58 900 600 1,000 30,000 40 750 90,000 30 820 2,380 4,400 58 900 600 1,000 30,000 40 250 30 Carrying amount 2019 2020 Company's Name Rupees in thousand Aspin Pharma (Pvt) Limited Dawood Hercules Limited I Dawood Hercules Limited II Dubai Islamic Bank (Pakistan) Limited Engro Polymer & Chemicals Limited Ghani Glass Limited International Brands Limited JS Limited Meezan Bank Limited Meezan Bank Limited Pakistan Energy II TPL Tracker Limited 49,593 144,365 311,807 59,622 91,935 25,123 64,659 123,656 40,877 768,750 452,700 22,500 65,600 189,905 394,712 58,058 91,238 29,250 84,458 148,802 39,786 250,000 23,352 2,155,587 1,375,161 9.3.3 Ijara Sukuk Face value Rupees Yield Rate % Profit Payment 470,430,000 6.27% - 8.37% On maturity 258 ANNUAL REPORT 2020 Type of Security 5 year GOP Ijara Sukuk Maturity year 2025 Carrying amount 2019 2020 Rupees in thousand 464,354 - 464,354 -
  260. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 9 .3.4 Treasury Bills Face value Rupees Yield Rate % Profit Payment 1,332,500,000 6.74% - 10.67% On maturity 5,011,000,000 7.07% - 7.15% On maturity 115,000,000 6.47% On maturity 4,273,000,000 13.10% On maturity 9.3.5 Type of Security Maturity year 12 Month Treasury Bills 3 Month Treasury Bills 6 Month Treasury Bills 12 Month Treasury Bills 2021 2021 2021 2020 Rupees in thousand 1,310,144 4,946,806 114,713 - 3,828,677 6,371,663 3,828,677 Pakistan Investment Bond Face value Rupees Yield Rate % 50,000,000 6.85% 500,000,000 8.11% - 8.27% 500,000,000 7.16% 2,865,000,000 7.12% - 8.27% 301,000 12.00% 50,000,000 11.25% 150,000,000 9.50% 300,000,000 9.50% - 10.00% 450,000,000 9.00% Profit Payment On maturity On maturity On maturity On maturity On maturity On maturity On maturity On maturity On maturity Type of Security Maturity year 10 year Pakistan Investment Bond 10 year Pakistan Investment Bond 2 year Pakistan Investment Bond 3 year Pakistan Investment Bond 10 year Pakistan Investment Bond 10 year Pakistan Investment Bond 10 year Pakistan Investment Bond 5 year Pakistan Investment Bond 5 year Pakistan Investment Bond 2028 2030 2022 2023 2020 2028 2029 2024 2022 Note 10 Carrying amount 2019 2020 Carrying amount 2019 2020 Rupees in thousand 49,420 499,400 498,250 2,861,737 - 300 50,370 141,132 283,748 421,573 3,908,807 897,123 2020 2019 Rupees in thousand Investments in Term Deposits Deposits maturing within 12 months Inside Pakistan - related parties - others Outside Pakistan - related parties - others Deposits maturing after 12 months Inside Pakistan - related parties - others Outside Pakistan - related parties - others 10.1 448,811 7,695,066 8,143,877 156,811 9,610,066 9,766,877 1,305,429 4,364,568 5,669,997 13,813,874 1,264,698 4,387,207 5,651,905 15,418,782 2,000 75,188 77,188 2,000 48,110 50,110 77,188 13,891,062 50,110 15,468,892 ANNUAL REPORT 2020 259
  261. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 10 .1 These include fixed deposits amounting to Rs. 4,904,014 thousands (AED 112,698,915) [2019: Rs. 4,848,009 thousands (AED 115,000 thousands)] kept in accordance with the requirements of Insurance Regulations applicable to the United Arab Emirates (UAE) branches of the Parent Company for the purpose of carrying on business in (UAE). These also include liens against cash deposits of Rs. 259,065 thousands (2019: Rs. 231,987 thousands) with banks in Pakistan essentially in respect of guarantees issued by the banks on behalf of the Parent Company for claims under litigation filed against the Parent Company, bid bond guarantees and guarantee to Meezan Bank Limited (MBL) against the loan provided by MBL to Hyundai Nishat Motor (Private) Limited, a related party of the Parent Company. Note 11 Loans and other receivables - considered good Rent receivable 2020 2019 Rupees in thousand 7,776 7,295 Accrued investment income 251,749 351,017 Security deposits 102,938 92,526 Advances to employees and suppliers 237,051 152,012 Advance agent commission Loans to employees Receivable against the sale of investment Receivable from related parties 11.1 Other receivables 4,478 3,003 52,335 56,318 233,958 - 16,694 5 78,765 54,663 985,744 716,839 11.1 This represents receivable from MCB Islamic Bank & Nishat Properties for space provided. 12 Note 2020 2019 Rupees in thousand 12.1 4,753,304 Insurance / reinsurance receivables - unsecured and considered good Due from insurance contract holders 5,786,646 Provision for impairment of receivables from insurance contract holders 12.2 Due from other insurers / reinsurers (936,290) (868,586) 3,817,014 4,918,060 1,375,616 1,149,209 Provision for impairment of due from other insurers / reinsurers 12.3 (201,302) (201,302) 1,174,314 947,907 4,991,328 5,865,967 12.1 Due from insurance contact holders include an amount Rs. 201,453 thousands (2019: Rs. 221,567 thousands) held with related parties. 2020 2019 Rupees in thousand 12.2 Reconciliation of provision for impairment of receivables from insurance contract holders Balance as at 01 January Charge for the year Exchange difference Balance as at 31 December 260 ANNUAL REPORT 2020 868,586 629,668 47,968 187,764 19,736 51,154 936,290 868,586
  262. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand 12 .3 Reconciliation of provision for impairment of due from other insurers / reinsurers Balance as at 01 January Charge for the year Write off against provision for the year Balance as at 31 December 13 201,302 201,302 201,302 201,302 3,307,863 161,089 3,500,512 170,558 3,468,952 3,671,070 Cash in hand Policy and revenue stamps, bond papers 580 10,499 11,079 819 24,993 25,812 Outside Pakistan 11,079 25,812 331,680 10,787,153 11,118,833 289,356 8,057,231 8,346,587 136,313 871 137,184 59,333 5,512 64,845 11,256,017 8,411,432 11,267,096 8,437,244 Prepayments Prepaid reinsurance premium ceded Prepaid miscellaneous expenses 14 28 Cash and bank Cash and cash equivalents Inside Pakistan Cash at bank Inside Pakistan Current accounts Savings accounts Outside Pakistan Current accounts Savings accounts 14.1 Cash at bank includes an amount of Rs. 3,674,945 thousands (2019: Rs. 1,835,434 thousands) held with MCB Bank Limited and MCB Islamic Bank Limited, related parties of the Group. 14.2 Lien of Rs. 440,000 thousands (2019 : 291,000) is marked on cash deposits in saving accounts against SBLC (Standby Letter of Credit) issued in favor of Meezan Bank Limited on behalf of Hyundai Nishat Motor (Private) Limited by the Parent Company. 14.3 Saving / Profit and loss accounts carry expected profit rates ranging from 4.50% to 13.00% (2019: 6.50% to 14.00%). 2020 2019 Rupees in thousand 14.4 Cash and bank for the purposes of the cash flow statement consists of: Cash and other equivalents Current and other accounts Term deposit maturing within three months 11,079 11,256,017 7,962,000 19,229,096 25,812 8,411,432 9,585,000 18,022,244 ANNUAL REPORT 2020 261
  263. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand 15 Window Takaful Operations - Parent Company Operator 's Fund Assets: Cash and bank deposits Qard e Hasna to Participant Takaful Fund Investments Intangible assets Property and equipment Current assets - Others 209,446 146,460 35,873 12,421 20,793 164,155 91,895 146,460 32,958 17,650 17,733 119,595 Total Assets 589,148 426,291 Total Liabilities 242,797 195,872 Wakala income Commission expense Management expenses Investment income Other income Mudarib's share of PTF investment income Other expenses 408,608 (119,082) (143,206) 3,584 14,170 3,521 (3,821) 324,314 (99,434) (131,872) 1,345 15,856 1,323 (3,839) Profit before taxation 163,774 107,693 Taxation (47,369) (30,987) Profit after tax 116,405 76,706 Profit and loss account Details of assets, liabilities and segment disclosures of 'Window Takaful Operations' of the Parent Company are stated in the annexed financial statements of the 'Window Takaful Operations'. 16 Share capital 16.1 Authorized share capital 2019 2020 Number of shares Ordinary shares of Rs. 10 each 2019 2020 Rupees in thousand 375,000,000 375,000,000 3,750,000 3,750,000 250,000 250,000 2,500 2,500 349,750,000 350,000,000 349,750,000 350,000,000 3,497,500 3,500,000 3,497,500 3,500,000 16.2 Issued, subscribed and paid up capital Ordinary shares of Rs. 10 each fully paid in cash Ordinary shares of Rs. 10 each issued as fully paid bonus shares 16.3 As at December 31, 2020, associated undertakings MCB Bank Limited, Nishat (Aziz Avenue) Hotels & Properties Limited and Nishat Mills Limited held 70,861,241 (2019: 70,861,241), 1,083,000 (2019: Nil) and 102,809 (2019: 102,809) ordinary shares of the Parent Company. 262 ANNUAL REPORT 2020
  264. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 17 Note 2020 2019 Rupees in thousand 17 .1 17.2 17.3 17.4 22,859 3,764 678,438 2,845,746 3,550,807 22,859 3,764 674,936 2,914,787 3,616,346 936,500 936,500 4,487,307 4,552,846 Reserves Capital Reserves Reserves for exceptional losses Investment fluctuation reserves Exchange translation reserves Fair value reserves Revenue Reserves General reserves 17.1 The reserve for exceptional losses represents the amount set aside by the Parent Company in prior years up to December 31, 1978, in order to avail the deduction while computing the taxable income under the old Income Tax Act of 1922. Subsequent to the introduction of repealed Income Tax Ordinance, 1979, which did not permit such deduction, the Parent Company discontinued the setting aside of reserves for exceptional losses. 17.2 This amount has been set aside by the Parent Company in prior years for utilization against possible diminution in the value of investments. 17.3 The exchange translation reserve represents the gain resulted from the translation of foreign branches (having business in foreign currencies) of the Parent Company into Pak Rupees. For the purpose of exchange translation reserve, the UAE and Export Processing Zone branches are treated as foreign branches since their functional currencies are AED and US Dollars, respectively. 17.4 The fair value reserve represents the net cumulative unrealized gain / (loss) on available for sale investments held by the Group as at December 31, 2020. Note 2020 2019 Rupees in thousand 18 Non-controlling interest Share capital Total comprehensive income for the year Opening retained earnings Acquisition of Non Controlling Interest by Parent Company 18.1 240,599 3,483 100,909 (344,991) - 240,599 52,711 48,198 341,508 18.1 This represents the total comprehensive income till date of acquisition of NCI i.e. February 25, 2020 calculated proportionately on number of days basis. Note 19 2020 2019 Rupees in thousand Insurance liabilities - Life Insurance Business Reported outstanding claims (including claims in payment) Incurred but not reported claims Investment component of unit-linked and account value policies Liabilities under individual conventional insurance contracts Liabilities under group insurance contracts (other than investment linked) Other insurance liabilities Gross insurance liabilities Surplus / (deficit) of Participant Takaful Fund Total Insurance Liabilities 19.1 19.2 19.3 19.4 19.5 19.6 1,174,790 121,153 44,785,142 20,242 117,241 753,378 46,971,946 18,397 46,990,343 814,331 54,874 35,287,614 29,217 128,872 406,242 36,721,150 (12,720) 36,708,430 ANNUAL REPORT 2020 263
  265. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand 19 .1 Reported outstanding claims Gross of reinsurance Payable within one year Recoverable from reinsurers 1,326,579 (151,789) 883,486 (69,155) Net reported outstanding claims 1,174,790 814,331 Individual Life Gross of reinsurance Reinsurance recoveries Net of Reinsurance 129,220 (47,826) 81,394 42,243 (19,624) 22,619 Group Life Gross of reinsurance Reinsurance recoveries Net of Reinsurance 109,567 (69,808) 39,759 94,645 (62,390) 32,255 121,153 54,874 42,311,677 2,473,465 32,552,155 2,735,459 44,785,142 35,287,614 Gross of reinsurance Reinsurance credit 22,159 (1,917) 31,759 (2,542) Net of reinsurance 20,242 29,217 232,665 (115,424) 312,417 (183,545) 117,241 128,872 Gross of reinsurance Reinsurance credit 889,169 (135,791) 535,217 (128,975) Net of reinsurance 753,378 406,242 19.2 Incurred but not reported claims 19.3 Investment component of unit linked and account value policies Investment component of unit linked policies Investment component of account value policies 19.4 Liabilities under individual conventional insurance contracts 19.5 Liabilities under group insurance contracts (other than investment linked) Gross of reinsurance Reinsurance credit Net of reinsurance 19.6 Other insurance liabilities 20 Retirement benefit obligations Parent Company Unfunded gratuity scheme Funded gratuity scheme 20.1 20.2 64,359 132,873 82,708 142,469 Subsidiary Company Funded gratuity scheme 20.3 112,349 37,026 309,581 262,203 264 ANNUAL REPORT 2020
  266. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .1 Unfunded gratuity scheme 20.1.1 This provision relates to the Parent Company's operations in UAE branches. The eligible employees under the scheme are 66 (2019 : 94). The latest actuarial valuation of gratuity scheme was carried out as at December 31, 2020 under the Projected Unit Credit Method as per the requirements of approved accounting standard International Accounting Standard 19, the details of which are as follows: 20.1.2 Movement in the net liabilities recognized in the statement of financial position are as follows: 2020 2019 Rupees in thousand Present value of defined benefit obligation at January 01 Charge for the year Benefits paid Remeasurement (gain) / loss on obligation Exchange loss Present value of defined benefit obligation at December 31 82,708 14,605 (20,984) (14,899) 2,929 64,359 65,854 13,689 (12,745) 8,035 7,875 82,708 20.1.3 The following significant assumptions have been used for the valuation of this scheme: 2020 - Valuation discount rate - Expected rate of increase in salary level 20.1.4 The amount charged in profit and loss account is as follows: Service cost Interest cost Expense for the year Percentage 2019 2.20 2.00 2.20 2.00 2020 2019 Rupees in thousand 12,934 1,671 14,605 12,265 1,424 13,689 (14,899) (14,899) 8,035 8,035 20.1.5 The amounts charged to other comprehensive income are as follows: Remeasurement of the present value of defined benefit obligation due to: - Changes in financial assumptions - Experience adjustments 20.2 Funded gratuity scheme 20.2.1 The Parent Company operates an approved funded gratuity scheme for all employees. The eligible employees under the scheme are 718 (2019 : 738). The latest actuarial valuation of gratuity scheme was carried out as at December 31, 2020 under the Projected Unit Credit Method as per the requirements of approved accounting standard International Accounting Standard 19, the details of which are as follows: 20.2.2 The following significant assumptions have been used for valuation of this scheme: 2020 - Discount rate - Expected rate of increase in salary level Percentage 8.50 6.50 2019 12.50 10.50 ANNUAL REPORT 2020 265
  267. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .2.3 Movement in the net liabilities recognized in the statement of financial position are as follows: Note 2020 2019 Rupees in thousand Net liabilities at January 01 Expenses recognized Contribution paid during the year Remeasurement (loss) / gain recognized - net 142,469 35,411 (50,000) 4,993 133,127 35,245 (10,000) (15,903) Net liabilities at December 31 132,873 142,469 20,728 40,594 (25,911) 19,550 38,373 (22,678) 35,411 35,245 Remeasurement of plan obligation from: - Experience on obligation - Change in financial assumptions (6,608) - (16,327) - Remeasurement of plan assets: - Investment return 11,601 424 4,993 (15,903) (230,138) 363,011 (198,745) 341,214 132,873 142,469 Present value of defined benefit obligation as at January 01 Current service cost Interest cost Actual benefits paid during the year Remeasurement loss / (gain) on obligation 341,214 20,728 40,594 (32,917) (6,608) 326,883 19,550 38,373 (27,265) (16,327) Present value of defined benefit obligation as at December 31 363,011 341,214 Fair value as at January 01 Interest income on plan assets Actual benefits paid during the year Contributions made during the year Remeasurement loss due to investment return 198,745 25,911 (32,917) 50,000 (11,601) 193,756 22,678 (27,265) 10,000 (424) Fair value of plan assets as at December 31 230,138 198,745 25,911 (11,601) 14,310 22,678 (424) 22,254 20.2.4 The amounts recognized in the profit and loss account are as follows: - Service cost - Interest cost - Interest income on plan assets 20.2.5 The amounts recognized in statement of comprehensive income are as follows: 20.2.6 The amounts recognized in the statement of financial position are as follows: Fair value of plan assets Present value of the obligation Net asset 20.2.7 Movement in present value of defined benefit obligation 20.2.8 Movement in fair value of plan assets 20.2.9 Actual return on plan assets Expected return on plan assets Net return on plan assets over interest income 266 ANNUAL REPORT 2020
  268. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .2.10 Comparison for five years Funded gratuity scheme 2019 2020 2018 2017 2016 Rupees in thousand Present value of defined obligation Fair value of plan assets 363,011 230,138 341,214 198,745 326,883 193,756 283,925 199,482 267,714 241,970 Deficit 132,873 142,469 133,127 84,443 25,744 Gain / (loss) on plan assets (% age of plan assets) (5.04) (0.21) (5.92) (19.27) 5.48 Gain / (loss) on obligations (% age of obligation) (1.82) (4.78) 5.54 (1.26) (4.91) Experience adjustments Unfunded gratuity schemes Present value of defined obligation 2019 2020 2018 2017 2016 Rupees in thousand 64,359 82,708 65,854 69,953 55,655 23.15 (9.71) (2.44) (3.10) (10.89) Experience adjustments Gain / (loss) on obligations (% age of obligation) 2019 2020 20.2.11 Plan assets consist of the following: Percentage Mutual funds - Equity Mutual funds - Debt Government Bonds - Debt Shares, bank deposits & cash equivalents Others Benefits due 2020 2019 Rupees in thousand 17.92 17.06 46.43 36.96 40.26 41,252 39,255 106,842 73,459 18.59 - 22.78 - 42,789 - 45,262 - 100.00 100.00 230,138 198,745 80,024 20.2.12 Plan assets do not include any investment in the Parent Company's ordinary shares as at 2020 : Nill (2019: Nil). 20.2.13 Expected cost to be recorded in the profit and loss account for the year ending December 31, 2021 is Rs. 31,497 thousands. 20.2.14 The expected return on plan assets is based on the market expectations and depends upon the asset portfolio of the fund, at beginning of the year. 20.2.15 The weighted average duration of the defined benefit obligation for gratuity plan is 3.2 years (2019: 3.3 years). These defined benefit plans expose the Parent Company to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk. 20.2.16 The main features of the gratuity schemes are as follows: - All confirmed employees are eligible to the scheme and the normal retirement age for all employees is 60 years. - A member shall be entitled to gratuity on resignation, termination, retirement, early retirement, retrenchment, death and dismissal based on the Parent Company's Service rules. - The scheme is subject to the regulations laid down under the Income Tax Rules, 2002. ANNUAL REPORT 2020 267
  269. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .2.17 The implicit objective is that the contribution to the gratuity schemes should remain reasonably stable as a percentage of salaries, under the actuarial cost method employed. 20.2.18 Sensitivity analysis The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is as follows: Impact on Gratuity plans Unfunded Funded Change in assumptions Discount rate Salary growth rate Increase in assumption 1% 1% (2,524) 2,725 Decrease in assumption 2,747 (2,553) Increase in assumption Decrease in assumption (10,239) 11,016 10,911 (10,521) The above sensitivity analysis are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the defined benefit obligation recognized within the statement of financial position. 20.3 Funded gratuity scheme- Subsidiary Company 20.3.1 The Subsidiary Company operates a funded gratuity scheme covering eligible employees who have completed the minimum qualifying eligible service period of six months. The employees are entitled to gratuity on the basis of last drawn monthly gross salary on normal retirement or on death in service on the number of years of services with the Subsidiary Company. Contribution to the fund is made and expense is recognized on the basis of actuarial valuations carried out at each year end using the projected unit credit method. 20.3.2 Responsibility for the governance of the plans, including investment decisions and contribution schedules, lies with the Board of Trustees. The Subsidiary Company appoints the Trustees and all trustees are employees of the Subsidiary Company. Details of the Subsidiary Company's obligation under the staff gratuity scheme determined on the basis of an actuarial valuation carried out by an independent actuary as at December 31, 2020 under the Projected Unit Credit Method are as follows: Note Present value of defined benefit obligations at December 31 Fair value of plan assets at December 31 20.3.3 20.3.4 2020 2019 Rupees in thousand 178,021 (65,672) 107,094 (70,068) 112,349 37,026 20.3.5 20.3.5 107,094 35,925 15,892 (12,217) 65,465 23,330 10,579 (14,106) 20.3.5 31,327 21,826 178,021 107,094 Net liability at end of the year 20.3.3 Movement in present value of defined benefit obligations Present value of defined benefit obligations at Jan 01 Current service cost Interest cost on defined benefit obligation Benefits paid during the year Remeasurement loss / (gain) on obligation: - due to changes in financial assumptions Present value of defined benefit obligations at Dec 31 268 ANNUAL REPORT 2020
  270. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 2020 2019 Rupees in thousand 20 .3.4 Movement in fair value of plan assets Fair value of plan assets at Jan 01 Contributions made to the Fund Interest income on plan assets Benefits paid during the year Remeasurement gain on plan assets Fair value of plan assets at Dec 31 70,068 9,752 (12,217) (1,931) 65,672 79,886 12,138 (14,106) (7,850) 70,068 35,925 15,892 (9,752) 23,330 10,579 (12,138) 42,065 21,771 31,327 1,931 33,258 21,826 7,850 29,676 37,026 42,065 33,258 112,349 (14,421) 21,771 29,676 37,026 20.3.5 Expense recognized in profit and loss Current service cost Net interest cost Interest income on plan assets Expense for the year recognized in the profit and loss account 20.3.6 Expense recognized in other comprehensive income Remeasurement losses on defined benefit obligation Remeasurement gain on fair value of plan assets Amount recognized in the statement of other comprehensive income 20.3.7 Net recognized liability Net liability at Jan 01 Expense recognized in profit and loss account Expense recognized in other comprehensive income Contributions made to the fund during the year Net liability at Dec 31 20.3.8 Estimated Gratuity Cost for the year ending December 31, 2021, is as follows: 2021 Rupees in thousand Current service cost Net interest cost Total expense to be recognized in profit and loss account 49,035 13,856 62,891 20.3.9 Plan assets comprise of following: 2020 Note Bank balance Mutual Funds Fair value of plan assets at end of the year 20.3.10 20.3.10 (Rupees in thousands) %age 2019 (Rupees in thousands) %age 40,975 24,697 62.39 37.61 46,604 23,463 66.51 33.49 65,672 100.00 70,067 100.00 20.3.10 The assets are represented by cash in the scheme’s bank deposit account with Standard Chartered Bank and mutual funds with MCB Arif Habib Savings and Investments Limited, Al Meezan Investment Management Limited and ABL Asset Management Limited. ANNUAL REPORT 2020 269
  271. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .3.11 The principal assumptions used in the actuarial valuations carried out as of December 31, 2020, using the ‘Projected Unit Credit’ method, are as follows: 2019 2020 Gratuity fund Percentage Discount rate per annum Expected per annum rate of return on plan assets Expected per annum rate of increase in salary level Expected mortality rate Expected withdrawal rate 10.25 11.75 10.25 11.75 11.00 11.00 LIC 94-96 Mortality table for LIC 94-96 Mortality table for males (rated down by 3 years for males (rated down by 3 years for females) females) Age dependent Age dependent 20.3.12 The plans expose the Subsidiary Company to actuarial risks such as: Salary risks The risks that the final salary at the time of cessation of service is higher than what was assumed. Since the benefit is calculated on the final salary, the benefit amount increases similarly. Discount risks The risk of volatile discount rates over the funding life of the scheme. The final effect could go either way depending on the relative of salary increases, timing of contributions, performance of investments and outgo of benefits. Mortality / withdrawal risks The risks that the actual mortality / withdrawal experience is different from expected. The effect depends upon the beneficiaries' service / age distribution and the benefit. Investment risks The risk of the investment underperforming and not being sufficient to meet the liabilities. This is managed by formulating an investment policy and guidelines based on which investments are made after obtaining approval of trustees of funds. In case of the funded plans, the investment positions are managed within an Asset-Liability Matching (ALM) framework to ensure that long-term investments are in line with the obligation under the retirement benefit plan. The Subsidiary Company actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the retirement benefit plan obligations. The Subsidiary Company has not changed the process used to manage its risks from previous periods. Investments are well diversified. The expected return on plan assets is assumed to be the same as the discount rate (as required by International Accounting Standard IAS 19). The actual return depends on the assets underlying the current investment policy and their performance. Expected yields on fixed interest investments are based on gross redemption yields as at the date of financial statement . Expected return on equity investments reflect long-term real rates of return experienced in the market. 270 ANNUAL REPORT 2020
  272. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 20 .3.13 Sensitivity analysis - Subsidiary Company Sensitivity analysis for actuarial assumptions The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is: 2020 2019 Rupees in thousand (9,817) 11,674 12,445 (10,597) (18,161) 21,745 22,769 (19,290) Discount rate (1% increase) Discount rate (1% decrease) Future salary increase rate (1% increase) Future salary increase rate (1% decrease) The impact on defined benefit obligation due to increase in life expectancy by 1 year would be Rs. 77,935 (2019: Rs.335,000). The above sensitivity analysis are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant assumptions, same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the gratuity liability. The weighted average duration of the defined benefit obligation is 13.04 years. Besides the number of employees covered in the scheme at December 31, 2020 were 1,110 (2019: 1,083). The expected maturity analysis of undiscounted retirement benefit plan is between 3-4 & 4-5 years and the amount involved is Nil and Rs. 27.276 million respectively. 20.3.14 Historical Information Present value of defined benefit obligation Fair value of plan assets (Surplus) / deficit 2020 2019 2018 2017 Rupees in thousand 178,021 (65,672) 112,349 107,094 (70,068) 37,026 2020 2019 65,465 (79,886) (14,421) 2016 90,586 (59,079) 31,507 61,604 (47,057) 14,547 2017 2016 20.3.15 Experience adjustment 2018 Percentage Experience adjustments on obligation 18.00 20.00 (36.00) 8.00 18.00 Experience adjustments on asset (3.00) (11.00) (10.00) (18.00) 4.00 20.3.16 Gratuity cost to be recognised in the statement of profit or loss in the next financial year is not necessarily the amount of the contribution for that year. Decision about the contribution is made by the Subsidiary Company based on the allowability under the Insurance Tax Rules, 2002 and the availability of surplus funds, etc. ANNUAL REPORT 2020 271
  273. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 21 Deferred taxation Deferred tax debits arising in respect of : Provision for gratuity Fixed assets and intangibles Lease liability Unused tax losses Accelerated accounting amortization 2020 2019 Rupees in thousand 18,664 27 29,461 8,348 56,500 23,986 30,473 17,743 275 72,477 Deferred tax credits arising in respect of: Tax depreciation allowance Right of use assets Provision for leave encashment & bonus Business attributable to shareholders (Ledger Account D) Investments - Available for sale (232,501) (29,179) (214,810) (1,161,987) (1,638,477) (1,581,977) (166,282) (29,166) 21,080 (132,965) (1,191,082) (1,498,415) (1,425,938) 1,425,938 985,157 5,322 1,012 13 21,080 9,165 90,259 (1,974) 68,440 193,317 (4,888) (30,473) 29,166 (21,080) (10,087) 96,754 (208) 100,428 159,612 (27,633) (9,645) (37,278) 289,773 (8,604) 281,169 1,581,977 1,425,938 21.1 Movement in deferred tax balances is as follows: At beginning of the year Recognized in profit and loss account: - provision for gratuity - lease liability against right of use asset - right of use assets - Provision for leave encashment & bonus - Unused tax losses - Business attributable to shareholders (Ledger Account D) - Accelerated accounting amortization - tax depreciation allowance Recognized in other comprehensive income: - investments - Available for sale - Remeasurement of post retirement defined benefits 22 Borrowings Loan from financial institution - MCB Bank Limited 330,849 - This represents long term financing facility availed from MCB Bank Limited, a related party of the Group under State Bank of Pakistan's (SBP) Refinance Scheme for Payment of Wages and Salaries to the Workers and Employees of Business Concerns ('Refinance Scheme'), with the approval of SBP. The interest rate applicable is SBP rate + 1.00%. 2020 2019 Rupees in thousand 23 Deferred grant income Deferred grant income 28,574 - Government grant has been recorded during the year which is measured as the difference between the fair value of the loan on initial recognition and the amount received, which is accounted for according to the nature of the grant. In accordance with the terms of the facility, the Group is prohibited to lay-off the employees at least during three months period from the date of first disbursement except in case of any disciplinary action. 272 ANNUAL REPORT 2020
  274. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 24 2020 2019 Rupees in thousand 24 .1 3,161,519 2,826,429 1,077,695 237,167 94,242 29,854 4,801 76,485 107,570 510,725 161,753 143 592,559 2,892,994 1,039,000 847,474 50,149 33,785 7,131 76,485 104,056 386,051 125,829 2,676 539,634 3,212,270 Insurance/reinsurance payables Due to other insurers / reinsurers 24.1 This amount represents amount payable to other insurers and reinsurers. 25 Note Other creditors and accruals Agents commission payable Payable against the purchase of investment Federal Excise Duty / Sales tax / VAT Federal Insurance Fee payable Payable to related parties Workers' welfare fund Tax deducted at source Accrued expenses Unpaid and unclaimed dividend Payable to employees' provident fund Sundry creditors 25.1 25.2 25.1 This represents charges payable to MCB Arif Habib Savings & Investment Limited and MCB Financial Services Limited for providing services related to management of fund and for acting discretionary portfolio's trustees of the Subsidiary Company. Note 25.2 Workers' welfare fund Balance as at 01 January Reversal during the year Balance as at 31 December 25.2.1 25.2.2 2020 2019 Rupees in thousand 76,485 76,485 432,246 (355,761) 76,485 25.2.1 Due to enaction of Punjab worker welfare act and legal advice available with the Parent Company, the management reversed its provision of Rs. 355,761 thousands in 2019. 25.2.2 The Finance Act 2008 introduced amendments to the Workers' Welfare Fund (WWF) Ordinance, 1971 whereby the definition of industrial establishment was extended. The amendments were challenged at various levels and conflicting judgments were passed by the Honorable Lahore High Court, the Honorable Sindh High Court and the Honorable Peshawar High Court. The Honorable Supreme Court of Pakistan vide its judgment dated November 10, 2016, has upheld the view of Honorable Lahore High Court and decided that WWF is not a tax and hence the amendments introduced through Finance Act, 2008 are ultra-vires to the Constitution. The Federal Board of Revenue has filed Civil Review Petitions in respect of above judgment with the prayer that the judgment dated November 10, 2016 passed in the Civil Appeal may kindly be reviewed in the interest of justice. Note 26 Deposits and other liabilities Cash margin against performance bonds Lease liability 26.1 2020 2019 Rupees in thousand 570,776 210,582 618,540 279,718 781,358 898,258 26.1 This represents margin deposit on account of performance and other bond policies issued by the Parent Company. ANNUAL REPORT 2020 273
  275. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 27 Contingencies and commitments 27 .1 Contingencies The Group has filed appeals in respect of certain assessment years mainly on account of the following: Income tax (a) Deputy Commissioner Inland Revenue (DCIR) passed order u/s 161/205 of the Ordinance for tax year 2013 raising an income tax demand of Rs. 9,066 thousands. The Parent Company agitated the order before Commissioner Inland Revenue -Appeals (CIR - Appeals). CIR - Appeals decided the case in the favor of the Parent Company. Following the said order, the learned DCIR has passed an appeal effect order in which certain directions of the learned CIR-Appeals have not been followed for which a rectification appeal under section 221 of the Ordinance has been filed before learned DCIR which is still to be processed. (b) The Parent Company received a notice from Additional Commissioner Inland Revenue (ACIR) pertaining to the amendment of tax year 2008. Amongst others, the Additional Commissioner raised an issue with respect to the claim of exemption claimed on capital gains on listed securities by way of incorrect application of the provisions of law. The Parent Company preferred to contest this matter by way of filing a constitutional petition before the Honorable Sindh High Court (the Court). The Court has ordered for stay of proceedings. (c) The Taxation Officer has passed an order in the tax years 2005 and 2006 under section 221 of the Income Tax Ordinance, 2001 (the Ordinance) levying minimum tax liability aggregating to Rs. 38,360 thousands. An appeal was filed before the CIR - Appeals who upheld the order of the Taxation Officer. The Parent Company has filed an appeal before the Additional Tribunal Inland Revenue (ATIR) which is yet to be heard. (d) The Tax Authorities amended the assessments for tax years 2003 to 2005 on the ground that the Parent Company has not apportioned management and general administration expenses against capital gain and dividend income. The Parent Company filed constitutional petition in the Honorable Sindh High Court (the Court) against the amendment in the assessment order. The Parent Company may be liable to pay Rs. 5,880 thousands in the event of decision against the Parent Company, out of which Rs. 2,730 thousands have been provided resulting in a shortfall of Rs. 3,150 thousands. (e) Learned DCIR has passed an order under section 161/205 of the Ordinance for tax year 2017 creating a demand of Rs. 22,105 thousands on account of Non-Deduction of Income Tax while making payments. The Parent Company has paid partial payment of Rs. 9,065 thousands under protest and agitated the order before learned CIR - Appeals I and the appeal has not yet been fixed. Pending resolution of the above-mentioned appeals filed by the Parent Company, no provision has been made in these consolidated financial statements for the aggregate amount of Rs. 72,681 thousands (2019: Rs. 72,681 thousands) as the management is confident that the eventual outcome of the above matters will be in favor of the Parent Company. 27.2 Sales tax on life insurance premium Last year, Sindh Revenue Board (SRB) vide notification no. SRB 3-4/5/2019 dated May 8, 2019 extended the exemption on life insurance till June 30, 2019. Subsequent to it, life insurance was made taxable from July 1, 2019 at the rate of 3% and group life insurance at the rate of 13%. Further, SRB extended exemption on health insurance till June 30, 2020. With effect from November 1, 2018, the Punjab Revenue Authority (PRA) withdrew its exemption on life and health insurance and made the same subject to Punjab Sales Tax (PST). The Subsidiary Company collectively through the forum of Insurance Association of Pakistan (“IAP”) had filed a constitutive petition in the Lahore High Court (LHC) and in the High Court of Sindh at Karachi on September 28, 2019 and November 28, 2019 against PRA and SRB respectively. According to the grounds of the petition and legal opinion obtained by the Subsidiary Company the Insurance premium does not fall under the definition of service rather an insurance policy is a financial arrangement, which is in the nature of a contingent contract, and not a service upon which sales tax can be levied (and that an insurance company is not rendering a service). The opinion also mentions that vast majority of premium received from a policy holder, during the life of the policy, is in fact channeled it to the policy holder's investment account and as such this is critically important in exposing the legal fallacies embodied in the Rules. In view of the above the Subsidiary Company has not started billing sales tax to its customers. The amount of sales tax involved is around Rs. 347.54 million computed on the basis of risk based premium, as per the advice of legal advisor, which nonetheless the Subsidiary Company maintains, based on the legal view, cannot be levied as the insurance is not a service. Further subsequent to filing petition, all the provincial tax authorities i.e. SRB, PRA and BRA have called a meeting of the industry representatives on January 11, 2020 in Karachi to discuss the matters relating to sales tax on premium. The matter was discussed in details and it was agreed to form a joint committee of the industry representatives as well as from all the provincial tax authorities and agreed in the meeting that the sales tax on Life and Health be kept exempt till June 30, 2020 however a formal notification in this regard has not yet been issued. Further, the committee formed met on February 5, 2020 in Lahore at PRA office to work out the way forward. Based on the legal opinion obtained the Subsidiary Company considers that it has a reasonably strong case on the merits in the constitution petition and the writ petition filed in the High Courts. The petition is still pending for hearing. 274 ANNUAL REPORT 2020
  276. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 27 .3 Commitments 2020 2019 Rupees in thousand Life Insurance Business: Commitments represent ljarah rentals for vehicles payable in future period. Not later than one year Later than one year and not later than five years 37,844 22,543 102,066 139,910 58,045 80,588 27.4 Others The Parent Company has provided a guarantee to Meezan Bank Limited (MBL) against the loan provided by MBL to Hyundai Nishat Motor (Private) Limited, a related party, amounting to Rs. 1,209,000 thousands (2019: Rs. 841,000 thousands). The Parent Company has issued letter of guarantees of AED 251,500 amounting to Rs.10,944 thousands (2019: AED 449,000 amounting to Rs. 18,928 thousands) relating to UAE branch of the Parent Company. Note 28 Net insurance premium 2020 2019 Rupees in thousand General Insurance Business: Written gross premium Unearned premium reserve - opening Unearned premium reserve - closing Currency translation effect Premium earned 18,261,397 10,242,348 (8,366,434) 153,311 20,290,622 22,492,543 10,100,901 (10,242,348) 494,504 22,845,600 Reinsurance premium ceded Prepaid reinsurance premium - opening Prepaid reinsurance premium - closing Currency translation effect Reinsurance expense Net insurance premium - General Insurance Business (6,818,262) (3,500,512) 3,307,863 (2,798) (7,013,709) 13,276,913 (8,055,014) (2,866,980) 3,500,512 (4,621) (7,426,103) 15,419,497 3,169,929 2,743,961 5,271,022 3,638,303 2,195,775 4,898,480 5,330,905 1,599,794 626,616 (46,774) 17,095,659 665,362 (33,432) 12,964,282 (33,523) (25,742) (45,530) (46,577) (131,383) (5,083) (381,266) 13,030 (563,967) 16,531,692 (114,825) (412,104) 35,765 (583,271) 12,381,011 29,808,605 27,800,508 13 28.1 & 28.2 Life Insurance Business: Regular premium / contributions individual policies - first year - second year renewal - subsequent years renewal Single premium / contributions individual policies Group policies without cash values Experience refund Total gross premiums / contributions 28.3 28.3 Reinsurance premiums / retakaful contributions ceded On individual life first year business On individual life second year business On individual life subsequent renewal business On single premium individual policies On group policies Profit commission on reinsurance Net premiums / contributions - Life Insurance Business ANNUAL REPORT 2020 275
  277. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand 28 .1 Net insurance premium - Business underwritten inside Pakistan Written gross premium 13,451,519 14,900,976 Unearned premium reserve - opening 6,197,501 5,508,453 Unearned premium reserve - closing (6,021,464) (6,197,501) Premium earned 13,627,556 14,211,928 Reinsurance premium ceded (6,583,537) (7,716,041) Prepaid reinsurance premium - opening (3,425,355) (2,838,973) Prepaid reinsurance premium - closing 3,260,277 3,425,355 Reinsurance expense (6,748,615) (7,129,659) 6,878,941 7,082,269 Written gross premium 4,809,878 7,591,567 Unearned premium reserve - opening 4,044,847 4,592,448 Unearned premium reserve - closing (2,344,970) (4,044,847) 28.2 Net insurance premium - Business underwritten outside Pakistan Currency translation effect Premium earned Reinsurance premium ceded 153,311 494,504 6,663,066 8,633,672 (234,725) (338,973) Prepaid reinsurance premium - opening (75,157) (28,007) Prepaid reinsurance premium - closing 47,586 75,157 Currency translation effect (2,798) (4,621) (265,094) (296,444) 6,397,972 8,337,228 Reinsurance expense 28.3 Individual policies are those underwritten on an individual basis. 276 ANNUAL REPORT 2020
  278. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 29 2020 2019 Rupees in thousand Net insurance claims expense General Insurance Business : Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Currency translation effect Claim expense 11,973,346 10,768,040 (10,367,347) (196,160) 12,177,879 14,686,699 10,367,347 (10,461,975) (594,102) 13,997,969 (4,346,714) (6,192,571) 6,233,348 114,914 (4,191,023) (4,599,078) (6,233,348) 6,397,245 313,749 (4,121,432) 7,986,856 9,876,537 Gross claims Claims under individual policies - by death - by insured event other than death - by maturity - by surrender Total gross individual policy claims 435,106 (606) 1,679,897 4,676,523 6,790,920 296,294 2,924 1,347,025 4,986,784 6,633,027 Claims under group policies - by death - by insured event other than death Total gross group policy claims 651,184 10,316 661,500 451,369 (18,914) 432,455 7,074 7,708 7,459,494 7,073,190 (143,365) (477,498) (620,863) (71,781) (277,527) (349,308) 6,838,631 6,723,882 14,825,487 16,600,419 Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Claims expense 5,799,654 4,920,475 (4,398,967) 6,321,162 6,413,550 4,398,967 (5,386,215) 5,426,302 Reinsurance and other recoveries received / receivable Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Reinsurance and other recoveries revenue (1,684,522) (3,526,278) 2,948,471 (2,262,329) (2,268,805) (2,948,471) 3,769,658 (1,447,618) 4,058,833 3,978,684 29.3 Reinsurance and other recoveries received / receivable Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Currency translation effect Reinsurance and other recoveries revenue Net insurance claims expense - General Insurance Business 29.1 & 29.2 Life Insurance Business: Claim related expenses Total gross claims Reinsurance recoveries - on individual claims - on group claims Net insurance claims expense - Life Insurance Business 29.1 Net insurance claims expense - Business underwritten inside Pakistan ANNUAL REPORT 2020 277
  279. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 29 .2 Net insurance claims expense - Business underwritten outside Pakistan 2020 2019 Rupees in thousand Claim paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Currency translation effect Claims expense 6,173,692 5,847,565 (5,968,380) (196,160) 5,856,717 8,273,149 5,968,380 (5,075,760) (594,102) 8,571,667 Reinsurance and other recoveries received / receivable Reinsurance and other recoveries in respect of outstanding claims - closing Reinsurance and other recoveries in respect of outstanding claims - opening Currency translation effect Reinsurance and other recoveries revenue (2,662,192) (2,666,293) 3,284,877 114,914 (1,928,694) 3,928,023 (2,330,273) (3,284,877) 2,627,587 313,749 (2,673,814) 5,897,853 29.3 Claims development tables The following tables show the development of the claims over a period of time of the Group. The disclosure goes back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments. 29.3.1 General Insurance Business: 2015 & prior Accident year 2017 2018 2019 Rupees in thousand 2016 Estimate of the ultimate claim cost: At the end of accident year One year later Two years later Three years later Four years later Five years later 6,857,672 5,059,319 1,255,685 1,791,844 132,679 431,043 Current estimate of cumulative claims 29.3.2 Total 11,752,724 11,307,403 13,278,246 14,544,497 12,607,367 70,347,909 7,075,979 6,362,632 6,250,676 6,218,787 - 30,967,393 2,369,539 1,978,478 1,880,335 - 7,484,037 1,662,339 956,949 - 4,411,132 646,905 779,584 431,043 431,043 646,905 956,949 1,880,335 6,218,787 12,607,367 22,741,386 29,486 159,145 158,096 968,709 4,358,842 6,299,068 11,973,346 401,557 487,760 798,853 911,626 1,859,945 6,308,299 10,768,040 Less: Cumulative payments to date Liability recognized in statement of financial position 2020 Life Insurance Business: 29.3.2.1 Individual life claims Estimate of the ultimate claim cost: At the end of accident year One year later Two years later Three years later Four years later 132,526 202,373 208,599 210,263 211,577 181,455 283,617 294,168 294,668 - 173,067 249,642 256,334 - 241,150 353,594 - 315,805 - 1,044,003 1,089,226 759,101 504,931 211,577 Current estimate of cumulative claims 211,577 294,668 256,334 353,594 315,805 1,431,978 Less: Cumulative payments to date 205,329 282,693 250,155 307,576 217,651 1,263,404 6,248 11,975 6,179 46,018 98,154 168,574 At the end of accident year One year later Two years later Three years later Four years later 283,306 325,000 325,487 325,487 325,487 413,991 549,012 556,060 557,251 - 419,307 531,015 532,315 - 342,820 453,118 - 563,981 - 2,023,405 1,858,145 1,413,862 882,738 325,487 Current estimate of cumulative claims 325,487 557,251 532,315 453,118 563,981 2,432,152 Less: Cumulative payments to date 325,487 557,251 532,315 443,533 498,705 2,357,291 - - - 9,585 65,276 74,861 Liability recognized in statement of financial position 29.3.2.2 Group life claims Estimate of the ultimate claim cost: Liability recognized in statement of financial position 278 ANNUAL REPORT 2020
  280. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 30 2020 2019 Rupees in thousand Net commission and other acquisition costs General Insurance Business : Commission paid or payable Deferred commission expense - opening Deferred commission expense - closing Currency translation effect Net commission Commission received or recoverable Unearned reinsurance commission - opening Unearned reinsurance commission - closing Currency translation effect Commission from reinsurance Net commission and other acquisition costs - General Insurance Business 30.1 & 30.2 1,867,093 1,190,146 (731,319) 32,239 2,358,159 2,449,810 788,431 (1,190,146) 65,731 2,113,826 (532,528) (237,751) 245,318 (8) (524,969) (622,744) (221,371) 237,751 (257) (606,621) 1,833,190 1,507,205 1,379,956 1,627,575 147,256 123,105 122,821 114,036 357,106 2,121,175 118,629 33,735 373,272 2,276,316 21,908 3,344 25,252 36,345 4,423 40,768 315,913 1,691 3,620 3,257 23,378 193 40,442 336 25,874 4,717 9,018 23,331 6,509 1,466 38,129 1,156 608 44,260 1,747 545,645 2,692,072 179,504 1,366 4,449 1,400 39,294 193 8,560 292 23,632 3,978 7,594 19,800 4,907 4,988 24,382 11,963 403 176 44,759 1,754 383,394 2,700,478 4,525,262 4,207,683 Life Insurance Business: Remuneration to insurance / takaful intermediaries on individual policies: Commission on first year contribution / premium Commission on second year contribution / premium Commission on subsequent years renewal contribution / premium Commission on single contribution premium Other benefits to insurance intermediaries Remuneration to insurance intermediaries on group policies: Commission Other benefits to insurance intermediaries Other acquisition costs: Employee benefit cost Traveling expenses Information technology expense Printing & stationary Depreciation Amortization Rent, rates and taxes Insurance cost Car fuel & maintenance Postage Electricity, gas and water Office maintenance Entertainment Training & development Marketing cost Financial charges Brokerage charges Legal & professional charges Stamp duty Medical examination fee Net commission and other acquisition costs - Life Insurance Business ANNUAL REPORT 2020 279
  281. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 30 .1 Net commission and other acquisition costs Business underwritten inside Pakistan Note 2020 2019 Rupees in thousand Commission paid or payable Deferred commission expense - opening Deferred commission expense - closing Net commission 857,203 352,673 (285,324) 924,552 991,010 297,403 (352,673) 935,740 Commission received or recoverable Unearned reinsurance commission - opening Unearned reinsurance commission - closing Commission from reinsurance (523,673) (236,381) 240,971 (519,083) 405,469 (597,710) (218,690) 236,381 (580,019) 355,721 1,009,890 837,473 (445,995) 32,239 1,433,607 1,458,800 491,028 (837,473) 65,731 1,178,086 (8,855) (1,370) 4,347 (8) (5,886) (25,034) (2,681) 1,370 (257) (26,602) 1,427,721 1,151,484 2,263,570 48,209 166,148 48,662 295,958 47,628 10,301 157,677 74,643 18,314 121,272 73,353 41,840 42,165 79,416 161,652 179,587 2,257,945 84,299 234,889 53,752 268,740 49,893 78,866 145,225 72,390 31,783 146,289 71,166 42,896 61,976 89,507 138,687 216,640 47,968 117,028 55,836 187,764 130,154 59,707 4,051,227 4,422,568 30.2 Net commission and other acquisition costs Business underwritten outside Pakistan Commission paid or payable Deferred commission expense - opening Deferred commission expense - closing Currency translation effect Net commission Commission received or recoverable Unearned reinsurance commission - opening Unearned reinsurance commission - closing Currency translation effect Commission from reinsurance 31 Management expenses Employees benefit cost Travelling expenses Advertisement & sales promotion Printing & stationary Depreciation Amortization Rent, rates & taxes Legal & professional charges - business related Electricity, gas & water Entertainment Vehicle running expenses Office repairs & maintenance Bank charges Postages, telegrams & telephone Supervision fee IT related costs Tracking and monitoring charges Provision for doubtful balances against due from insurance contract holders Regulatory fee Miscellaneous 280 ANNUAL REPORT 2020 31.1
  282. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 31 .1 Employee benefit cost Salaries, allowances and other benefits Charges for post employment benefit 32 Investment income 2020 2019 Rupees in thousand 2,140,506 123,064 2,155,529 102,416 2,263,570 2,257,945 998,602 366,669 1,365,271 1,353,173 559,167 1,912,340 380,360 380,360 385,510 385,510 45,106 1,461,526 38,502 1,545,134 35,462 824,669 48,146 908,277 353,177 353,177 782,280 782,280 (5,480) (5,480) (38,587) (38,587) 40,413 40,413 34,370 81 34,451 381,804 (1,240) 279,234 6,833 112,738 659,798 119,571 Business underwritten Inside Pakistan Income from equity securities Dividend Income - Available for sale - Fair value through profit or loss Income from debt securities Return on debt securities - Fair value through profit or loss Return on government securities - Available for Sale - Fair value through profit or loss - Held to maturity Income from term deposit receipts - Held to maturity Tax on dividend under final tax regime Net realized fair value gains on investments Available for sale - Equity securities - Government securities Fair value through profit or loss - Equity securities - Debt securities - Government securities Provision for impairment in value of 'available-for-sale' investments (158,641) (294,179) 4,180,032 3,809,663 2,315 2,315 54,211 54,211 699 699 7,298 7,298 156,117 156,117 160,471 160,471 159,131 4,339,163 221,980 4,031,643 Business underwritten Outside Pakistan Income from equity securities Dividend income - Available for Sale Net realized gains on investments - Available for Sale Return on term deposits - Held to maturity Total investment income ANNUAL REPORT 2020 281
  283. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Note 33 Net fair value gain on financial assets at fair value through profit or loss 2020 2019 Rupees in thousand Held for trading Net unrealized gains / (losses) on: - Mutual Funds - Listed equities - Fixed income securities - Government securities Investment related expenses 34 71,671 (1,859) 69,812 33,217 (4,613) 28,604 425,146 3,125 72,039 210 4,243 12,330 12,980 28,968 440,943 3,028 (19,836) 263 4,612 11,830 19,511 559,041 460,351 23,776 18,459 8,462 12,211 236 1,905 3,640 30,478 16,255 9,406 1,759 220 3,075 6,255 68,689 67,448 4,427 1,041 2,416 626 8,510 3,882 984 2,468 688 8,022 8,275 1,101 573 9,949 18,459 6,939 490 804 8,233 16,255 Other income Return on bank balances Mark-up on policy loans Gain / (loss) on sale of operating assets Return on loans to employees Income against deferred grant Exchange gain Shared expenses received Miscellaneous 36 405,471 152,924 (50,242) (147) (72,609) 435,397 Rental income Rental income Expenses of investment property 35 711,944 105,610 32,079 (8,540) (102,310) 738,783 Other expenses Legal & professional charges other than business Auditors' remuneration Subscription fee Donations Directors' fee Central depository expense Others 36.1 36.2 36.1 Auditors' remuneration Inside Pakistan: Audit fee Interim review fee Special certifications and sundry advisory services Out-of-pocket expenses Outside Pakistan: Audit fee Interim review fee Out-of-pocket expenses 282 ANNUAL REPORT 2020
  284. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 36 .2 The Group has paid the donation amounting to Rs. 10 million (2019: Nil) to Saleem Memorial Trust Hospital and Rs. 0.4 million (2019: Rs. 0.4 million) to SAFCO Support Foundation during the current year. 37 Taxation - net Note Current tax 2020 2019 Rupees in thousand For the year - Group - Window Takaful Operations 492,446 47,605 593,495 31,110 (579,273) (39,222) 624,605 193,316 (236) 193,080 159,612 (123) 159,489 153,858 784,094 Prior year - Group 37.2 Deferred tax For the year - Group - Window Takaful Operations (Effective tax rate) 2019 2020 37.1 Tax charge reconciliation Tax at the applicable rate of 29 (2019: 29) Prior year Tax effect of provision for impairment of investments Others Percentage 29.00 (30.33) 2.41 5.82 29.00 3.37 (4.51) 6.90 27.86 37.2 The income tax assessments of the Parent Company have been completed from 2016 to 2019. Further the contention of the Parent Company, with respect to the exemption of capital gains on listed securities having completed holding period of one year upto June 30, 2015, has been accepted by Appellate Tribunal Inland Revenue. Therefore, the Parent Company has made reversal of the tax charge of Rs. 579.27 million in these consolidated financial statements, which was already booked as current tax charge in the financial statements of previous years. 38 Earnings per share 2019 2020 Rupees in thousand There is no dilutive effect on the basic earnings per share which is based on: Net profit after tax for the year attributable to owners of the parent 2,073,922 1,972,045 2019 2020 Number of shares Weighted average number of ordinary shares 350,000,000 350,000,000 2019 2020 Rupees Earning per share - basic and diluted 5.93 5.63 ANNUAL REPORT 2020 283
  285. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 39 Compensation of Directors and Executives The aggregate amount charged in the accounts for remuneration , including all benefits, to the Chief Executives, Directors and Executives of the Group are as follows: Chief Executive Officer 2019 2020 Directors Executives 2019 2020 2019 2020 Rupees in thousand Fees Managerial remuneration Leave encashment Bonus Charge of defined benefit plan Contribution to defined contribution plan House rent allowance Utilities Medical Conveyance Special allowance Other allowance 27,691 4,360 2,400 24,614 2,188 4,000 246 516 - 220 - 1,030,353 41,956 92,950 36,094 992,556 37,078 101,165 35,000 1,384 556 1,800 473 38,664 1,231 549 1,800 835 35,463 516 220 24,251 189,970 16,423 71,597 156,633 1,660,227 35,633 172,953 12,613 38,242 138,755 1,563,995 Number 2 2 13 13 493 494 39.1 In addition, the Chief Executive Officer (CEO) of the Parent Company is also provided with Company maintained car (s), residence, certain household items, furniture and fixtures and equipment in accordance with the policy of the Parent Company. Whereas, no remuneration was paid to CEO of the Subsidiary Company. 39.2 No remuneration was paid to Non - Executive Directors of the Group except for meeting fees. 40 Transactions with related parties The Group has related party relationships with its associates, employee retirement benefit plans, key management personnel and other parties. Transactions are entered into with such related parties for the issuance of policies to and disbursements of claims incurred by them and payments of rentals for the use of premises rented from them. There are no transactions with key management personnel other than those specified in their terms of employment. Investments and bank deposits with related parties have been disclosed in note 8, 10, 14 and 22 to the consolidated financial statements. Other transactions with related parties are summarized as follows: 284 ANNUAL REPORT 2020
  286. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand Parent Company i ) Transactions Basis of relationship Premiums underwritten Common directorship 1,699,869 1,412,496 Premiums received Common directorship 1,573,675 1,540,424 Claims paid Common directorship 665,463 632,467 Security deposit received Common directorship - Security deposit paid Common directorship 115 Commission Paid Common directorship 33,537 76,623 Guarantee commission received Common directorship 8,460 - Rent paid Common directorship 8,067 7,676 Rent received Common directorship 39,247 28,887 Dividends received Common directorship 459,884 653,313 Dividends paid Common directorship 197,582 237,695 Income on bank deposits Common directorship 88,763 43,682 Investments made Common directorship 226,107 397,500 Fixed assets sold Common directorship 3,538 2,347 Fee / service charges paid Common directorship 10,931 17,262 Fee / service charges income Common directorship 10,485 3,982 Payments made to provident fund Employees' fund 35,124 33,368 3,050 - ii) Period end balances Balances receivable Common directorship 206,040 215,212 Balances payable Common directorship 313,285 359,782 Payable to provident fund Employees' fund 143 2,676 Common directorship Common directorship 238,335 186,146 247,682 75,763 Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Employees' fund 1,536,137 105,228 1,832 5,608,773 4,936,058 25,317 91,535 9,450 75,323 1,770,676 269,079 1,646 5,669,281 4,667,827 16,477 159,273 10,680 1,906 9,530 51,447 Subsidiary Company i) Transactions Premium written Claims expense Commission and other incentives in respect of Bancassurance Profit on bank deposits Bank charges Investments purchased Investments sold Investment advisor fee Dividend income Reinsurance claim recoveries Reinsurance premium ceded Trustee fee Expense in relation to gratuity fund ANNUAL REPORT 2020 285
  287. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2020 2019 Rupees in thousand ii ) Period end balances Premium due but unpaid Premium received in advance Bank deposits Investments held Dividend receivables Accrued Income Commission payable Claims payable Reinsurance receivable Remuneration payable for the management of discretionary investment portfolio Remuneration payable to Trustee Other payable/(receivables) Retirement Benefit Obligation Plan (Gratuity Fund) (Payable to)/ receivable from Gratuity fund Basis of relationship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship 8,130 3,306,935 7,868,307 593 453,358 33,107 - 9,553 1,475,870 6,799,087 22,814 101 337,441 2,370 1,874 Common directorship Common directorship Common directorship 1,849 968 16,694 3,792 486 (892) (112,349) (37,026) Employees' fund 40.1 Following are the particulars of the related parties of the Group at the reporting date. Name of Related Party Basis of relationship Aggregate % of Shareholding in the Group AA Joyland (Private) Limited Agro Hub International (Private) Limited Cotton Web Limited D.G. Khan Cement Company Limited D G Khan Waste Management Company Limited Dupak Developers Pakistan (Private) Limited Dupak Properties (Private) Limited Dupak Tameer Limited Export Development Funds Fortress Financials Services (Private) Limited Fortress Square Services (Private) Limited Fortress Supplies (Private) Limited Golf View Land (Private) Limited Hyundai Nishat Motor (Private) Limited Joyland (Private) Limited Mahmood Textile Mills Limited Masood Spinning Mills Limited MCB Bank Limited Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Common directorship Nil Nil Nil 0.935% Nil Nil Nil Nil Nil Nil Nil Nil Nil 10.00% Nil Nil Nil 4.546% 286 ANNUAL REPORT 2020
  288. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Name of Related Party Basis of relationship Aggregate % of Shareholding in the Group MCB Employees Foundation Common directorship Nil MCB Financial Services Limited                                 Common directorship Nil MCB Islamic Bank Limited Common directorship Nil Multan Waste Management Company Limited Common directorship Nil Nishat (Aziz Avenue) Hotels & Properties Limited Common directorship Nil Nishat (Gulberg) Hotels & Properties Limited Common directorship Nil Nishat (Raiwind) Hotels & Properties Limited Common directorship Nil Nishat Agriculture Farming (Private) Limited Common directorship Nil Nishat Agrotech Farms (Private) Limited Common directorship Nil Nishat Dairy (Private) Limited Common directorship Nil Nishat Developers (Private) Limited Common directorship Nil Nishat Hotels & Properties Limited Common directorship Nil Nishat Mills Limited Common directorship 0.129% Nishat Power Limited Common directorship 0.261% Nishat Sutas Dairy Limited Common directorship Nil Pakgen Power Limited Common directorship 6.889% Pakistan Single Window Common directorship Nil & Management Company Common directorship Nil Punjab Social Security Health Management Company Common directorship Nil Roomi Foods (Private) Limited Common directorship Nil Roomi Poultry (Private) Limited Common directorship Nil Shakarganj Limited Common directorship Nil Siddiqsons Limited Common directorship Nil Siddiqsons Tin Plate Limited Common directorship 0.806% Siddiqsons Energy Limited Common directorship Nil Soxlinks (Private) Limited Common directorship Nil Sui Northern Gas Pipelines Limited Common directorship 0.898% U&S Gulberg Filling Station Common directorship Nil Punjab Industrial Estate Development ANNUAL REPORT 2020 287
  289. 288 ANNUAL REPORT 2020 Net change in insurance liabilities (other than outstanding claims) 6,767,220 7,633,997 Segment Liabilities Unallocated Liabilities 99,635 84,504 - Segment Assets Unallocated assets Profit before taxation Net investment income Net fair value unrealized gain on financial assets at fair value through profit or loss Net unrealized gains on investment property Rental income Other income Other expenses Workers' welfare fund reversal Finance cost Profit from Window Takaful Operations - Operators Fund (Parent Company) Underwriting result (1,082) (2,645) (64,413) (368,958) Management expense - (415,970) Commission expense (71,810) (192,670) (642,249) Net claims 35,947 (107,757) (75,537) 1,577,406 Insurance claim recoveries from reinsurer (20,701) 8,521 2,603 11,124 29,222 21,313 21,242 71 21,313 22,809 (1,448) (48) 21,313 Outside Pakistan (1,427,177) (2,219,655) Insurance claims Net insurance claims and expenses 6,636,961 (5,816,310) 820,651 413,856 1,234,507 Insurance premium ceded to reinsurers Net insurance premium Commission income Net underwriting income 6,750,608 6,699,190 33,239 18,179 6,750,608 7,806,082 (987,504) (67,970) 6,750,608 Insurance premium earned Gross written premium (inclusive of administrative surcharge) Gross direct premium Facultative inward premium Administrative surcharge Premium receivable (Inclusive of federal excise duty, Federal insurance fee and Administrative surcharge) Federal excise duty / VAT Federal insurance fee Inside Pakistan Fire and property damage 736,427 498,520 (101,435) - (775,717) (351,320) (118,735) (305,662) 42,523 (348,185) (263,140) 672,555 1,727 674,282 935,695 960,500 937,043 415 23,042 960,500 1,093,491 (123,365) (9,626) 960,500 Inside Pakistan 22,678 7,214 11,416 - (8,011) (8,989) (2,465) 3,443 - 3,443 19,427 19,427 19,427 21,191 21,191 21,191 21,577 (363) (23) 21,191 Outside Pakistan Marine, aviation and transport 2,397,597 1,111,411 392,744 - (2,301,406) (995,497) (184,654) (1,121,255) 162,184 (1,283,439) (47,389) 2,690,003 4,147 2,694,150 2,737,392 2,758,844 2,653,801 215 104,828 2,758,844 3,163,942 (377,194) (27,904) 2,758,844 Inside Pakistan Motor 8,116,777 4,087,762 142,539 - (6,231,714) (965,423) (1,424,474) (3,841,817) 1,849,868 (5,691,685) (195,141) 6,374,253 6,374,253 6,569,394 4,643,149 4,635,746 7,403 4,643,149 4,874,936 (231,787) 4,643,149 Outside Pakistan 2020 (1,567,530) 1,858,133 1,858,133 1,858,133 1,793,477 1,790,654 2,823 1,793,477 1,433,789 503,065 86,833 - (1,771,300) (131,697) (72,073) (1,567,530) - Outside Pakistan 141,733 99,727 (48,920) - (43,086) (19,884) (3,431) (19,771) 42,390 (62,161) (41,406) (7,739) 1,905 (5,834) 33,667 114,513 114,513 114,513 120,239 (5,726) 114,513 Rupees in thousand 1,827,861 (16,327) (18,057) 1,793,477 Inside Pakistan Accident & health General Insurance 2,206,070 1,812,432 132,172 - (804,780) (249,523) (133,120) (422,137) 480,216 (902,353) (621,776) 837,599 99,353 936,952 1,459,375 1,188,090 1,151,351 27,876 8,863 1,188,090 1,318,756 (118,270) (12,396) 1,188,090 Inside Pakistan 21,468 19,049 5,633 - 745 (595) (592) 1,932 489 1,443 (7,846) 3,510 1,378 4,888 11,356 9,712 9,692 20 9,712 10,319 (601) (6) 9,712 Outside Pakistan Miscellaneous 8,402,291 641,246 9,043,537 18,231,873 10,892,804 14,407,880 3,823,993 37,470,345 246,247 1,609,090 4,298,256 6,594,548 1,983 56,725 (13,588) (4,259) - 67,829 185,333 (48,745) (10,120) 163,774 10,692,648 26,777,697 159,131 46,255 - (6,357,603) (995,973) (1,433,607) (3,928,023) 1,928,694 (5,856,717) (265,094) 6,397,972 5,886 6,403,858 6,663,066 4,809,878 4,802,384 7,494 4,809,878 5,049,880 (239,925) (77) 4,809,878 Outside Pakistan 933,375 317,644 - (7,080,380) (2,096,995) (924,552) (4,058,833) 2,262,329 (6,321,162) (6,748,615) 6,878,941 519,083 7,398,024 13,627,556 13,451,519 13,232,039 61,745 157,735 13,451,519 15,210,132 (1,622,660) (135,953) 13,451,519 Inside Pakistan Total 27,275,410 22,810,171 4,465,239 48,363,149 14,990,904 33,372,245 1,855,337 69,812 242,058 (62,333) (14,379) 163,774 1,092,506 363,899 - (13,437,983) (3,092,968) (2,358,159) (7,986,856) 4,191,023 (12,177,879) (7,013,709) 13,276,913 524,969 13,801,882 20,290,622 18,261,397 18,034,423 61,745 165,229 18,261,397 20,260,012 (1,862,585) (136,030) 18,261,397 Aggregate General Insurance The Group conducts general insurance business both inside and outside Pakistan while life assurance is conducted only in Pakistan. 41 Segment Information 49,148,822 48,555,896 592,926 50,698,845 49,580,853 1,117,992 375,229 738,783 (21,000) 316,983 (6,356) (5,502) - 3,246,657 (3,894,336) (9,937,066) (10,488,962) (958,259) (2,692,072) (6,838,631) 620,863 (7,459,494) (563,967) 16,531,692 16,531,692 17,095,659 17,095,659 17,095,659 17,095,659 17,095,659 17,095,659 Life Insurance 76,424,232 71,366,067 5,058,165 99,061,994 64,571,757 34,490,237 2,230,566 738,783 (21,000) 69,812 559,041 (68,689) (19,881) 163,774 4,339,163 (3,530,437) (9,937,066) (23,926,945) (4,051,227) (5,050,231) (14,825,487) 4,811,886 (19,637,373) (7,577,676) 29,808,605 524,969 30,333,574 37,386,281 35,357,056 35,130,082 61,745 165,229 35,357,056 37,355,671 (1,862,585) (136,030) 35,357,056 Aggregate Notes to the Consolidated Financial Statements For the year ended 31 December 2020
  290. 1 ,106,292 (385,726) (435,597) (362,535) Insurance claim recoveries from reinsurer Net claims Commission expense Management expense 6,992,773 7,060,540 Segment Assets Unallocated assets Segment Liabilities Unallocated Liabilities Profit before tax 69,513 Net investment income Net fair value unrealized gain on financial assets at fair value through profit or loss Net unrealized gains on investment property Rental income Other income Other expenses Workers' welfare fund expense Finance cost Profit from Window Takaful Operations - Operators Fund (Parent Company) Underwriting result Net change in insurance liabilities (other than outstanding claims) (1,183,858) (1,492,018) Insurance claims Net insurance claims and expenses 6,942,436 (6,109,923) 832,513 420,858 1,253,371 Insurance premium ceded to reinsurers Net insurance premium Commission income Net underwriting income 7,396,338 7,343,446 32,659 20,233 7,396,338 8,534,754 (1,065,951) (72,465) 7,396,338 Insurance premium earned Gross written premium (inclusive of administrative surcharge) Gross direct premium Facultative inward premium Administrative surcharge Premium receivable (Inclusive of federal excise duty, Federal insurance fee and Administrative surcharge) Federal excise duty / VAT Federal insurance fee Inside Pakistan 111,211 95,788 15,608 - (4,459) (1,317) (6,575) 3,433 29,516 (26,083) (29,662) 13,073 6,994 20,067 42,735 40,258 40,067 191 40,258 43,324 (2,961) (105) 40,258 Outside Pakistan Fire and property damage 624,861 489,767 8,889 - (696,968) (213,527) (120,683) (362,758) 103,688 (466,446) (185,885) 704,400 1,457 705,857 890,285 880,438 857,397 1,009 22,032 880,438 998,598 (109,294) (8,866) 880,438 Inside Pakistan 25,552 5,187 4,160 - (27,926) (11,420) (5,815) (10,691) - (10,691) 32,086 32,086 32,086 23,466 23,404 62 23,466 23,862 (352) (44) 23,466 Outside Pakistan Marine, aviation and transport 2,359,101 1,062,812 153,706 - (2,659,418) (1,094,632) (195,795) (1,368,991) 62,849 (1,431,840) (51,873) 2,808,850 4,274 2,813,124 2,860,723 2,816,156 2,714,540 101,616 2,816,156 3,229,489 (384,924) (28,409) 2,816,156 Inside Pakistan Motor 9,993,415 5,552,814 20,788 - (8,271,917) (1,230,054) (1,163,726) (5,878,137) 2,600,066 (8,478,203) (230,269) 8,275,999 16,706 8,292,705 8,506,268 7,488,094 7,483,357 4,737 7,488,094 7,862,923 (374,829) 7,488,094 Outside Pakistan 2019 (1,543,254) 1,759,388 1,759,388 1,759,388 1,872,819 1,872,719 100 1,872,819 1,366,492 558,513 23,403 - (1,735,985) (138,262) (54,469) (1,543,254) - Outside Pakistan 40,351 33,510 (16,513) - (23,662) (13,046) (800) (9,816) 39,030 (48,846) (29,297) 7,149 7,149 36,446 22,533 22,533 22,533 23,660 (1,127) 22,533 Rupees in thousand 1,917,203 (25,442) (18,942) 1,872,819 Inside Pakistan Accident & health General Insurance 2,307,325 1,923,756 358,836 - (771,712) (324,561) (129,196) (317,955) 174,789 (492,744) (781,978) 977,118 153,430 1,130,548 1,759,096 1,935,225 1,890,507 33,026 11,692 1,935,225 2,128,708 (174,476) (19,007) 1,935,225 Inside Pakistan 22,763 19,249 7,274 - (4,549) (737) (1,170) (2,642) 5,202 (7,844) (7,216) 8,921 2,902 11,823 16,137 17,216 17,108 108 17,216 18,125 (904) (5) 17,216 Outside Pakistan Miscellaneous Total 10,193,292 679,062 10,872,354 17,227,577 12,252,686 36,491,039 13,718,319 3,509,258 5,706,548 6,546,138 11,027,621 25,463,418 244,664 1,837 6,807 (12,585) (4,692) - 12,298 26,767 61,744 (46,407) 355,761 (2,805) 107,693 2,279,791 221,980 31,317 - (8,332,513) (1,256,574) (1,178,086) (5,897,853) 2,673,814 (8,571,667) (296,444) 8,337,228 26,602 8,363,830 8,633,672 7,591,567 7,586,469 5,098 7,591,567 7,971,894 (380,173) (154) 7,591,567 Outside Pakistan 1,150,393 614,347 - (7,047,941) (2,133,517) (935,740) (3,978,684) 1,447,618 (5,426,302) (7,129,659) 7,082,269 580,019 7,662,288 14,211,928 14,900,976 14,678,609 66,694 155,673 14,900,976 16,808,752 (1,760,087) (147,689) 14,900,976 Inside Pakistan 41.1 Segment Information The Group conducts general insurance business both inside and outside Pakistan while life assurance is conducted only in Pakistan. 28,099,931 23,911,611 4,188,320 48,743,725 16,734,169 32,009,556 2,524,455 12,298 28,604 68,551 (58,992) 355,761 (7,497) 107,693 1,372,373 645,664 - (15,380,454) (3,390,091) (2,113,826) (9,876,537) 4,121,432 (13,997,969) (7,426,103) 15,419,497 606,621 16,026,118 22,845,600 22,492,543 22,265,078 66,694 160,771 22,492,543 24,780,646 (2,140,260) (147,843) 22,492,543 Aggregate General Insurance 38,900,251 37,970,494 929,757 40,261,345 39,189,702 1,071,643 289,720 435,397 21,000 391,800 (8,456) (7,877) - 2,659,270 (3,201,414) (5,125,588) (10,456,837) (1,032,477) (2,700,478) (6,723,882) 349,308 (7,073,190) (583,271) 12,381,011 12,381,011 12,964,282 12,964,282 12,964,282 12,964,282 12,964,282 12,964,282 Life Insurance 67,000,182 61,882,105 5,118,077 89,005,070 55,923,871 33,081,199 2,814,175 435,397 33,298 28,604 460,351 (67,448) 355,761 (15,374) 107,693 4,031,643 (2,555,750) (5,125,588) (25,837,291) (4,422,568) (4,814,304) (16,600,419) 4,470,740 (21,071,159) (8,009,374) 27,800,508 606,621 28,407,129 35,809,882 35,456,825 35,229,360 66,694 160,771 35,456,825 37,744,928 (2,140,260) (147,843) 35,456,825 Aggregate Notes to the Consolidated Financial Statements For the year ended 31 December 2020 ANNUAL REPORT 2020 289
  291. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 42 Movement in investments Available for sale Held to Maturity Fair value through pro fit or loss Total Rupees in thousand 43 As at January 01, 2019 19,132,807 15,804,142 17,265,376 52,202,325 Additions Disposals (sales and redemptions) Fair value net gains (excluding net realized gain) Currency translation effect Unwinding of discount on debt securities Impairment losses 3,742,112 (4,061,948) 999,218 (294,179) 106,125,409 (106,527,020) 520,825 11,404 - 132,200,278 (129,155,509) 508,006 - 242,067,799 (239,744,477) 1,507,224 520,825 11,404 (294,179) As at December 31, 2019 19,518,010 15,934,760 20,818,151 56,270,921 Additions Disposals (sales and redemptions) Fair value net gains (excluding net realized gain) Currency translation effect Unwinding of discount on debt securities Impairment losses 4,021,717 (3,281,660) (95,285) (158,641) 63,571,640 (65,430,998) 184,091 5,900 - 167,134,793 (159,018,594) 841,093 - 234,728,150 (227,731,252) 745,808 184,091 5,900 (158,641) As at December 31, 2020 20,004,141 14,265,393 29,775,443 64,044,977 Management of insurance and financial risk The Group's activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including interest / mark-up rate risk, price risk and currency risk).The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance. Overall risks arising from the Group's financial assets and liabilities are limited. The Group consistently manages its exposure to financial risk without any material change from previous period in the manner described in notes below. The Board of Directors (the Board) has overall responsibility for the establishment and oversight of Group's risk management framework. The Board is also responsible for developing the Group's risk management policies. The individual risk wise analysis is given below : Parent Company 43.1 Insurance risk The principal risk that the Parent Company faces under insurance contracts is that the actual claims and benefit payments or the timing thereof may differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Parent Company is to ensure that sufficient reserves are available to cover these liabilities. The above risk exposure is mitigated by diversification across a large portfolio of insurance contracts and geographical areas. The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of reinsurance arrangements. Further, strict claims review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims and similar procedures are put in place to reduce the risk exposure of the Parent Company. The Parent Company further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Parent Company. Amounts recoverable from reinsurers are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contracts. 290 ANNUAL REPORT 2020
  292. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Although the Parent Company has reinsurance arrangements , it is not relieved of its direct obligations to its policy holders and thus a credit exposure exists with respect to ceded insurance, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. The Parent Company's placement of reinsurance is diversified such that it is neither dependent on a single reinsurer nor are the operations of the Parent Company substantially dependent upon any single reinsurance contract. Reinsurance policies are written with approved reinsurers on either a proportionate basis or non-proportionate basis. The reinsurers are carefully selected and approved and are dispersed over several geographical regions. Experience shows that larger the portfolio is in similar reinsurance contracts, smaller will be the relative variability about the expected outcome. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Parent Company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. The Parent Company principally issues the general insurance contracts e.g. Fire & property, Marine, aviation & transport, Motor, Accident & health and other Miscellaneous. Risks under non-life insurance policies usually cover twelve month or lesser duration. For general insurance contracts the most significant risks arise from accidental fire, atmospheric disaster and terrorist activities. Insurance contracts at times also cover risk for single incidents that expose the Parent Company to multiple insurance risks. 43.1.1 Geographical concentration of insurance risk To optimize benefits from the principle of average and law of large numbers, geographical spread of risk is of extreme importance. There are a number of parameters which are significant in assessing the accumulation of risks with reference to the geographical location, the most important of which is risk survey. 43.1.2 Reinsurance arrangements Keeping in view the maximum exposure in respect of key zone aggregate, a number of proportional and nonproportional reinsurance arrangements are in place to protect the net account in case of a major catastrophe. Apart from the adequate event limit which is the multiple of the treaty capacity or the primary recovery from the proportional treaty, any loss over and above limit would be recovered from the non-proportional treaty which is very much in line with the risk management philosophy of the Parent Company. Gross sum insured 2019 2020 Reinsurance 2019 2020 Net 2020 2019 Rupees in thousand Fire & property damage Marine aviation & transport Motor Accident & health Miscellaneous 5,362,654,044 2,745,235,895 226,188,600 115,702,675 432,883,227 5,155,573,587 4,603,407,292 2,405,075,840 327,249,038 273,300,696 5,677,579 88,346,549 1,188,805 537,845,680 340,447,752 4,452,484,421 759,246,752 275,255,894 2,417,986,857 5,609,902 220,511,021 494,075 114,513,870 400,087,997 92,435,475 703,089,166 2,129,819,946 267,690,794 87,852,474 137,757,683 8,882,664,441 8,460,142,352 5,277,970,466 5,133,932,289 3,604,693,975 3,326,210,063 43.1.3 Sources of uncertainty in estimation of future claim payments The key source of estimation uncertainty at the statement of financial position date relates to valuation of outstanding claims, whether reported or not, and includes expected claims settlement costs. Considerable judgment by management is required in the estimation of amounts due to policy holders arising from claims made under insurance contracts. Such estimates are necessary based on assumptions about several factors involving varying and possibly significant degrees of judgment and uncertainty, and actual results may differ from management's estimates resulting in future changes in estimated liabilities. Qualitative judgments are used to assess the extent to which past trends may not apply in the future, for example one-off occurrence, changes in market factors such as judicial decisions and government legislation affect the estimates. ANNUAL REPORT 2020 291
  293. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 In particular , estimates have to be made both for the expected ultimate cost of claims reported at the statement of financial position date and for the expected ultimate cost of claims incurred but not reported (IBNR) at the statement of financial position date. 43.1.4 Key assumptions for claim estimation The process used to determine the assumptions for calculating the outstanding claim reserves is intended to result in neutral estimates of the most likely or expected outcome. The nature of the business makes it very difficult to predict with certainty the likely outcome of any particular claim and the ultimate cost of notified claims. Each notified claim is assessed in separate, case to case basis, with due regard to claim circumstances, information available from surveyors and historical evidence of the size of similar claims. Case estimates are reviewed regularly and updated as and when new information is available. The estimation of IBNR is generally subject to a greater degree of uncertainty that the estimation of the cost of settling claims already notified to the Parent Company, in which case the information about the claim event is available. IBNR provision is initially estimated at a gross level and a separate calculation is carried out to estimate the size of the reinsurance recoveries. The estimation process takes into account the past claims reporting pattern and details of reinsurance programs. The premium liabilities have been determined such that the total premium liability provisions (unearned premium reserve and premium deficiency reserve) would be sufficient to service the future expected claims and expenses likely to occur on the unexpired policies as of reporting date. The expected future liability is determined using estimates and assumptions based on the experience during the expired period of the contracts and expectations of future events that are believed to be reasonable. 43.1.5 Sensitivity analysis The risks associated with the insurance contracts are complex and subject to a number of variables which complicate quantitative sensitivity analysis. The Parent Company makes various assumptions and techniques based on past claims development experience. This includes indications such as average claims cost, ultimate claims numbers and expected loss ratios. The Parent Company considers that the liability for insurance claims recognized in the statement of financial position is adequate. However, actual experience may differ from the expected outcome. As the Parent Company enters into short term insurance contracts, it does not assume any significant impact of changes in market conditions on unexpired risks. However, some results of sensitivity testing are set out below, showing the impact on profit / (loss) before tax, net of reinsurance. 10% increase in claims liability Net: Fire & property Marine, aviation and transport Motor Accident & health Miscellaneous 10% decrease in claims liability Net: Fire & property Marine, aviation and transport Motor Accident & health Miscellaneous 292 ANNUAL REPORT 2020 Pre tax profit / (loss) 2019 2020 Rupees in thousand (71,406) (30,222) (496,307) (158,730) (42,021) (38,229) (37,345) (724,713) (155,307) (32,060) (798,686) (987,654) 71,406 30,222 496,307 158,730 42,021 38,229 37,345 724,713 155,307 32,060 798,686 987,654
  294. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Statement of Age-wise breakup of unclaimed insurance bene fits Particulars Total 1 to 6 months 7 to 12 months 13 to 24 months 25 to 36 months Beyond 36 months Rupees in thousand Claims not encashed 846,364 615,401 39,276 53,984 56,872 80,831 Subsidiary Company 43.2 Conventional business 43.2.1 Individual Life The risk underwritten is mainly death and sometimes disability. The risk of death and disability will vary in degree by age, gender, occupation, income group and geographical location of the assured person. The Subsidiary Company's exposure to poor risks may lead to unexpectedly high severity and frequency in claims' experience. This can be a result of anti-selection, fraudulent claims, a catastrophe or poor persistency. The Subsidiary Company may also face the risk of poor investment return, inflation of business expenses and liquidity issues on amount invested in the fund. The Subsidiary Company faces the risk of underpricing particularly due to the fact that majority of these contracts are long term. Additionally, the risk of poor persistency may result in the Subsidiary Company being unable to recover expenses incurred at policy acquisition. The Subsidiary Company manages these risks through its underwriting, reinsurance, claims handling policy and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids selling policies to high risk individuals. This puts a check on anti-selection. The need for profit testing is reviewed on an annual basis to ensure reasonableness of premiums charged. Reinsurance contracts have been purchased by the Subsidiary Company to limit the maximum exposure on any one insured person. The Subsidiary Company is developing and intends to eventually have a good spread of business throughout the country thereby ensuring diversification of geographical risks. To avoid poor persistency the Subsidiary Company applies quality controls on the standard of service provided to policyholders and has placed checks to control mis-selling and to track improvements in the standard of service provided to policyholders. For this, a regular monitoring of lapsation rates is conducted. On the claims handling side, the Subsidiary Company has procedures in place to ensure that payment of any fraudulent claims is avoided. For this, Claims Committee with variable materiality limits review all claims for verification and specific and detailed investigation of all apparently doubtful claims (particularly of high amounts) is conducted. Further, all payments on account of claims are made after necessary approval of relevant authority as per policy of the Subsidiary Company. The Subsidiary Company maintains adequate liquidity in its fund to cater for a potentially sudden and high cash requirement. a) Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. However, undue concentration by amounts could have an impact on the severity of benefit payments on a portfolio basis. The table below presents the concentration of insured benefits across five bands of insured benefits per individual life assured. The benefit insured figures are shown gross and net of the reinsurance contracts described above. The amounts presented are showing total exposure of the Subsidiary Company including exposure in respect of riders attached to the main policies. ANNUAL REPORT 2020 293
  295. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Bene fits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total Benefits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total b) Sum assured at the end of 2020 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 3,862 4,918 5,980 6,158 16,576 37,494 10.30% 13.12% 15.95% 16.42% 44.21% 100.00% 3,244 2,920 2,771 4,472 5,106 18,513 17.52% 15.77% 14.97% 24.16% 27.58% 100.00% Sum assured at the end of 2019 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 14,013 5,605 4,841 510 10,446 35,415 39.57% 15.83% 13.66% 1.44% 29.50% 100.00% 3,807 1,523 1,315 138 2,838 9,621 39.57% 15.83% 13.66% 1.44% 29.50% 100.00% Factors impacting future benefit payments and premium receipts are as follows: The Subsidiary Company assumes the expected mortality to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. Morbidity incidence rates are taken as a percentage of reinsurer's risk premium rate. Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. c) Process used to decide on assumptions For long-term conventional assurance contracts, long-term assumptions are made at the inception of the contract. Keeping the statutory minimum reserving basis in view, the Subsidiary Company determines assumptions on future mortality, morbidity, persistency, administrative expenses and investment returns. At regular intervals, profit testing is conducted on main policies. Assumptions used for profit testing of the main policies are as follows: - Mortality: The Subsidiary Company assumes the expected mortality to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. - Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. - Expense levels and inflation: A periodic study is conducted on the Subsidiary Company’s current business expenses and future projections to calculate per policy expenses. Expense inflation is assumed in line with assumed investment return. 294 ANNUAL REPORT 2020
  296. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 - Investment returns : The investment returns are based on the historic performance of the assets and asset types underlying the fund. d) Changes in assumptions There are no changes in assumptions. e) Sensitivity analysis After reinsurance, the overall liability for individual life conventional business stands at less than 1% of the total policyholder liability held in respect of individual life business. Due to its immateriality, sensitivity analysis has not been conducted. 43.2.2 Group Life The main risk written by the Subsidiary Company is mortality. The Subsidiary Company may be exposed to the risk of unexpected claim severity or frequency. This can be a result of writing business with higher than expected mortality (such as mining or other hazardous industries), writing high cover amounts without adequate underwriting, difficulty of verification of claims, fraudulent claims or a catastrophe. The Subsidiary Company also faces risk such as that of underpricing to acquire business in a competitive environment and of non-receipt of premium in due time. There also exists a potential risk of asset liability term mismatch due to liabilities being very short term in nature. The Subsidiary Company manages these risks through underwriting, reinsurance, effective claims handling and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids writing business for groups with overly hazardous exposure. Pricing is done in line with the actual experience of the Subsidiary Company. The premium charged takes into account the actual experience of the client and the nature of mortality exposure the group faces. The Management undertakes to write business in line with the limits set by the appointed actuary, especially for large groups having a group assurance policy with annual premium of Rs 2 million or above in accordance with the requirements of Circular 11 of 2013 dated June 14, 2013. The Subsidiary Company also maintains a Management Information System (MIS) to track the adequacy of the premium charged. Reinsurance contracts have been purchased by the Subsidiary Company to limit the maximum exposure to any one life. The Subsidiary Company ensures writing business with good geographical spread and tries to maintain a controlled exposure to large groups which generally have poor experience. Writing business of known hazardous groups is also avoided. On the claims handling side, the Subsidiary Company ensures that payment of any fraudulent claims is avoided. For this, Claims Committee with variable materiality limits review all claims for verification and specific and detailed investigation of all apparently doubtful claims (particularly of high amounts) is conducted. Strict monitoring is in place at the Board of Directors level in order to keep the outstanding balances of premium at a minimum, especially the ones that are due for more than 90 days. The bulk of the assets held against liabilities of this line of business are cash to money market with short durations and high liquidity, thus mitigating the risk of asset value deterioration and liability mismatch. a) Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. The table below presents the concentration of insured benefits across five bands of insured benefits per individual life assured. The benefit insured figures are shown gross and net of the reinsurance contracts described above. The amounts presented are showing total exposure of the Subsidiary Company including exposure in respect of riders attached to the main policies. ANNUAL REPORT 2020 295
  297. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Bene fits assured per client Rupees Sum assured at the end of 2020 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 0-500,000 500,001-1,000,000 1,000,001-1,500,000 1,500,001-2,000,000 More than 2,000,000 Total Benefits assured per client Rupees 50,628,936 39,602,826 26,208,190 31,649,728 336,844,640 484,934,320 31,519,652 22,742,636 11,812,300 10,347,750 51,844,196 128,266,534 24.57% 17.73% 9.21% 8.07% 40.42% 100.00% Sum assured at the end of 2019 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 0-500,000 500,001-1,000,000 1,000,001-1,500,000 1,500,001-2,000,000 More than 2,000,000 Total b) 10.44% 8.17% 5.40% 6.53% 69.46% 100.00% 592,761,889 592,761,889 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% 204,301,760 204,301,760 0.00% 0.00% 0.00% 0.00% 100.00% 100.00% Sources of uncertainty in the estimation of future benefit payments and premium receipts Other than conducting a liability adequacy for Unexpired Risk Reserves (URR), there is no need to estimate mortality for future years because of the short duration of the contracts. c) Process used to decide on assumptions Industry experience, the insured group's own past experience and reinsurer risk rates are used to determine the expected level of risk in relation to the SLIC (2001-05) Individual Life Ultimate Mortality Table. d) Changes in assumptions There are no changes in assumptions. e) Sensitivity analysis After reinsurance, the net unearned premium reserve for this business stands at less than 1% of the total policyholders liability. This liability will be on the Subsidiary Company's books for under a year. Due to its immateriality, a sensitivity analysis has not been conducted. 43.2.3 Non unitized Investment Linked Business The risk underwritten is mainly death and sometimes disability and/or critical illness. The risk of death and disability will vary in degree by age, gender, occupation, income group and geographical location of the insured person. The Subsidiary Company's exposure to poor risks may lead to unexpectedly high severity and frequency in claims' experience. This can be a result of anti-selection, fraudulent claims, a catastrophe or poor persistency. The Subsidiary Company may also face the risk of poor investment return, inflation of business expenses and liquidity issues on monies invested in the fund. The Subsidiary Company faces the risk of underpricing particularly due to the fact that these contracts are long term. Additionally, the risk of poor persistency may result in the Subsidiary Company being unable to recover expenses incurred at policy acquisition. 296 ANNUAL REPORT 2020
  298. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 The Subsidiary Company manages these risks through its underwriting , reinsurance, claims handling policy and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids selling policies to high risk individuals. This puts a check on anti-selection. The need for profit testing is reviewed on an annual basis to ensure reasonableness of premiums charged. Reinsurance contracts have been purchased by the Subsidiary Company to limit the maximum exposure on any one insured person. The Subsidiary Company is developing and intends to eventually have a good spread of business throughout the country thereby ensuring diversification of geographical risks. To avoid poor persistency the Subsidiary Company applies quality controls on the standard of service provided to policyholders and has placed checks to control mis-selling and to track improvements in the standard of service provided to policyholders. For this, a regular monitoring of lapsation rates is conducted. On the claims handling side, the Subsidiary Company has procedures in place to ensure that payment of any fraudulent claims is avoided. For this, Claims Committee with variable materiality limits review all claims for verification and specific and detailed investigation of all apparently doubtful claims (particularly of high amounts) is conducted. The Subsidiary Company maintains adequate liquidity in its fund to cater for a potentially sudden and high cash requirement. Further, all payments on account of claims are made after necessary approval of relevant authority as per policy of the Subsidiary Company. The Subsidiary Company reserves the right to review the charges deductible under the contracts, thus limiting the risk of under pricing. a) Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. However, undue concentration by amounts could have an impact on the severity of benefit payments on a portfolio basis. The Subsidiary Company charges for mortality risk on a monthly basis for all insurance contracts. It has the right to alter these charges based on its mortality experience and hence minimises its exposure to mortality risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may hinder its mitigating effect. The Subsidiary Company manages these risks through its underwriting strategy and reinsurance arrangements. The table below presents the concentration of insured benefits across five bands of insured benefits per individual life assured. The benefit insured figures are shown gross and net of the reinsurance contracts described above. The amounts presented are showing total exposure of the Subsidiary Company including exposure in respect of riders attached to the main policies. Benefits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total Benefits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total Sum assured at the end of 2020 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 72,699 246,330 549,367 505,842 322,245 1,696,483 4.29% 14.52% 32.38% 29.82% 18.99% 100.00% 22,174 76,304 168,241 153,503 55,766 475,988 4.66% 16.03% 35.35% 32.25% 11.71% 100.00% Sum assured at the end of 2019 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 227,510 297,182 718,533 740,372 569,440 2,553,037 8.91% 11.64% 28.14% 29.00% 22.31% 100,00% 69,243 91,405 217,492 223,161 82,441 683,742 10.13% 13.37% 31.81% 32.64% 12.05% 100.00% ANNUAL REPORT 2020 297
  299. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 b ) Sources of uncertainty in the estimation of future benefit payments and premium receipts Uncertainty in the estimation of future benefit payments and premium receipts for long-term non-unitised investment linked assurance contracts arises from the unpredictability of long-term changes in overall levels of mortality and morbidity of the insured population and variability in policyholders' behaviour. Factors impacting future benefit payments and premium receipts are as follows: - Mortality: The expected mortality is assumed to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. - Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. c) Process used to decide on assumptions For long-term non-unitised investment linked assurance contracts, assumptions are made in two stages. At inception of the contract, the Subsidiary Company determines assumptions on future mortality, morbidity, persistency, administrative expenses and investment returns. At regular intervals, profit testing is conducted on main policies. Assumptions used for profit testing of the main policies are as follows: - Mortality: The Subsidiary Company assumes the expected mortality to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. - Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. - Expense levels and inflation: A periodic study is conducted on the Subsidiary Company’s current business expenses and future projections to calculate per policy expenses. Expense inflation is assumed in line with assumed investment return. - Investment returns: The investment returns are based on the historic performance of the assets and asset types underlying the fund. d) Changes in assumptions There are no changes in assumptions. e) Sensitivity analysis Periodic sensitivity analyses of the Subsidiary Company's in-force business determine whether any reserve needs to be created or product prices for new business need to be revised in light of changing or anticipated changes in experience from that expected when pricing the existing book of business. The current nature, volume and age of in-force business does not require a detailed sensitivity analysis at this stage. 43.2.4 Unit Linked Business The risk underwritten is mainly death and sometimes disability and/or critical illness. The risk of death and disability will vary from region to region. The Subsidiary Company may get exposed to poor risks due to unexpected experience in terms of claim severity or frequency. This can be a result of anti-selection, fraudulent claims, a catastrophe or poor persistency. The Subsidiary Company may also face the risk of poor investment return, inflation of business expenses and liquidity issues on monies invested in the fund. The Subsidiary Company faces the risk of 298 ANNUAL REPORT 2020
  300. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 underpricing particularly due to the fact that these contracts are long term . Additionally, the risk of poor persistency may result in the Subsidiary Company being unable to recover expenses incurred at policy acquisition. The Subsidiary Company manages these risks through its underwriting, reinsurance, claims handling policy and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids selling policies to high risk individuals. This puts a check on anti-selection. The need for profit testing is reviewed on an annual basis to ensure reasonableness of premiums charged. Reinsurance contracts have been purchased by the Subsidiary Company to limit the maximum exposure on any one policyholder. The Subsidiary Company has a good spread of business throughout the country thereby ensuring diversification of geographical risks. To avoid poor persistency the Subsidiary Company applies quality controls on the standard of service provided to policyholders and has placed checks to curb mis-selling and improvement in standard of service provided to the policyholders. For this, a regular branch wise monitoring of lapsation rates is conducted. On the claims handling side, the Subsidiary Company has procedures in place to ensure that payment of any fraudulent claims is avoided. For this, Claims Committee with variable materiality limits review all claims for verification and specific and detailed investigation of all apparently doubtful claims (particularly of high amounts) is conducted. The Subsidiary Company maintains adequate liquidity in each unit fund to cater for potentially sudden and high cash requirement. Further, all payments on account of claims are made after necessary approval of relevant authority as per policy of the Subsidiary Company. The Subsidiary Company reserves the right to review the charges deductible under the contracts, thus limiting the risk of under pricing. Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. However, undue concentration by amounts could have an impact on the severity of benefit payments on a portfolio basis. The Subsidiary Company charges for mortality risk on a monthly basis for all insurance contracts. It has the right to alter these charges based on its mortality experience and hence minimises its exposure to mortality risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may hinder its mitigating effect. The Subsidiary Company manages these risks through its underwriting strategy and reinsurance arrangements. The table below presents the concentration of insured benefits across five bands of insured benefits per individual life assured. The benefit insured figures are shown gross and net of the reinsurance contracts described above. The amounts presented are showing total exposure of the Subsidiary Company including exposure in respect of riders attached to the main policies. Benefits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total Sum assured at the end of 2020 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 2,897,364 14,087,312 29,372,875 27,231,334 36,900,887 110,489,772 2.62% 12.75% 26.58% 24.65% 33.40% 100.00% 2,248,696 11,201,286 22,386,891 15,180,826 9,893,933 60,911,632 3.69% 18.39% 36.75% 24.92% 16.25% 100.00% ANNUAL REPORT 2020 299
  301. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Bene fits assured per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total a) Sum assured at the end of 2019 Total benefits assured Before reinsurance After reinsurance Rupees in thousand Percentage Rupees in thousand Percentage 9,153,325 12,522,371 27,073,353 27,210,735 34,506,808 110,466,592 8.29% 11.34% 24.51% 24.63% 31.23% 100.00% 5,636,878 9,121,989 18,911,051 14,001,825 8,560,398 56,232,141 10.02% 16.22% 33.63% 24.90% 15.23% 100.00% Sources of uncertainty in the estimation of future benefit payments and premium receipts Uncertainty in the estimation of future benefit payments and premium receipts for long–term unit linked insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality and variability in policyholder’s behaviour. b) Factors impacting future benefit payments and premium receipts are as follows: Mortality: The expected mortality is assumed to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. c) Process used to decide on assumptions For long-term unit linked insurance contracts, assumptions are made in two stages. At inception of the contract, the Subsidiary Company determines assumptions on future mortality, persistency, administrative expenses and investment returns. At regular intervals, profit testing is conducted on main policies. Assumptions used for profit testing of the main policies are as follows: Mortality: The Subsidiary Company assumes the expected mortality to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. Expense levels and inflation: As the business is new, estimates from business projections have been used. Once established, a periodic study will be conducted on the Subsidiary Company’s current business expenses and future projections to calculate per policy expenses. Expense inflation is assumed in line with assumed investment return. Investment returns: The investment returns are based on the historic performance of the assets and asset types underlying the fund. d) Changes in assumptions There are no changes in assumptions. 300 ANNUAL REPORT 2020
  302. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 e ) Sensitivity analysis Periodic sensitivity analyses of the Subsidiary Company's in-force business determine whether any reserve needs to be created or product prices for new business need to be revised in light of changing or anticipated changes in experience from that expected when pricing the existing book of business. The current nature, volume and age of in-force business does not require a detailed sensitivity analysis at this stage. 43.2.5 Individual Family Takaful Unit Linked Business The risk covered is mainly death and sometimes disability and / or critical illness. The risk of death and disability will vary from region to region. The PTF may get exposed to poor risks due to unexpected experience in terms of claim severity or frequency. This can be a result of anti-selection, fraudulent claims, a catastrophe or poor persistency. The PTF may also face the risk of poor investment return, and liquidity issues on monies invested in the fund. The PTF faces the risk of inadequacy of the Mortality Charge (Takaful Contribution) particularly due to the fact that these contracts are long term. Additionally, the risk of poor persistency can lead to an impact on the size of the PTF. A larger PTF may allow for a greater degree of cross subsidization of Mortality Risk, increasing the probability of convergence between actual and expected Mortality experience. The Subsidiary Company manages these risks through its underwriting, retakaful, claims handling policy and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids issuing cover to high risk individuals. This puts a check on anti-selection. The need for profit testing is reviewed on an annual basis to ensure reasonableness of contribution charged for risk underwritten by the PTF. Retakaful contracts have been purchased by the Subsidiary Company to limit the maximum exposure on any one participant. The Subsidiary Company has a good spread of business throughout the country thereby ensuring diversification of geographical risks. To avoid poor persistency, the Subsidiary Company applies quality controls on the standard of service provided to Participants of the PTF and has placed checks to curb mis-selling and improvement in the standard of customer service. For this, a regular branch wise monitoring of lapsation rates is conducted. On the claims handling side, the Subsidiary Company has procedures in place to ensure that payment of any fraudulent claims is avoided. For this, a Claims Committee with variable materiality limits review all claims for verification and specific and detailed investigation of all apparently doubtful claims (particularly of high amounts) is conducted. The Subsidiary Company maintains adequate liquidity in each unit fund to cater for potentially sudden and high cash requirement. Further, all payments on account of claims are made after necessary approval of relevant authority as per policy of the Subsidiary Company. The Subsidiary Company reserves the right to review the Takaful Contributions deductible under the contracts, thus limiting the risk of under pricing. a) Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. However, undue concentration by amounts could have an impact on the severity of benefit payments on a portfolio basis. The Subsidiary Company charges for mortality risk on a monthly basis for all Takaful contracts. It has the right to alter these charges based on its mortality experience and hence minimises its exposure to mortality risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may hinder its mitigating effect. The Subsidiary Company manages these risks through its underwriting strategy and retakaful arrangements. The table below presents the concentration of covered benefits across five bands of covered benefits per participant. The benefit covered figures are shown gross and net of the retakaful contracts described above. The amounts presented are showing total exposure of the PTF including exposure in respect of riders attached to the main policies. ANNUAL REPORT 2020 301
  303. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Bene fits covered per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total Benefits covered per life Rupees 0-200,000 200,000 - 400,000 400,001 - 800,000 800,001 - 1,000,000 More than 1,000,000 Total b) Sum cover at the end of 2020 Total benefits covered Before retakaful After retakaful Rupees in thousand Percentage Rupees in thousand Percentage 681,908 3,311,104 7,733,473 7,905,473 11,409,907 31,041,865 2.20% 10.67% 24.91% 25.47% 36.75% 100.00% 674,493 3,276,141 7,439,941 5,366,875 3,454,945 20,212,395 3.34% 16.21% 36.81% 26.55% 17.09% 100.00% Sum assured at the end of 2019 Total benefits covered Before retakaful After retakaful Rupees in thousand Percentage Rupees in thousand Percentage 1,517,959 2,072,722 4,998,950 5,431,737 6,606,294 20,627,662 7.36% 10.05% 24.23% 26.33% 32.03% 100.00% 1,143,889 1,967,329 4,725,553 3,616,272 1,964,029 13,417,072 8.53% 14.66% 35.22% 26.95% 14.64% 100.00% Sources of uncertainty in the estimation of future benefit payments and contribution receipts Uncertainty in the estimation of future benefit payments and contribution receipts for long–term unit linked takaful contracts arises from the unpredictability of long-term changes in overall levels of mortality and variability in participant’s behaviour. c) Factors impacting future benefit payments and contribution receipts are as follows: Mortality: The expected mortality is assumed to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. d) Process used to decide on assumptions For long-term unit linked takaful contracts, assumptions are made in two stages. At inception of the contract, the Subsidiary Company determines assumptions on future mortality, persistency, administrative expenses and investment returns. At regular intervals, profit testing is conducted on main policies. Assumptions used for profit testing of the main policies are as follows: Mortality: The Subsidiary Company assumes the expected mortality to vary between 80% and 120% of SLIC (2001-05) since the current experience for this line of business is not credible. Persistency: The Subsidiary Company exercises a periodic analysis on recent and historic experience and persistency is calculated by applying statistical methods. Persistency rates vary by products and more importantly the sales distribution channel. An allowance is then made for any trend in the data to arrive at best estimate of future persistency rates for each sales distribution channel. Expense levels and inflation: A periodic study is conducted on the Subsidiary Company’s current business 302 ANNUAL REPORT 2020
  304. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 expenses and future projections to calculate per policy expenses . Expense inflation is assumed in line with assumed investment return. Investment returns: The investment returns are based on the historic performance of the assets and asset types underlying the fund. e) Changes in assumptions There are no changes in assumptions. f) Sensitivity analysis Periodic sensitivity analyses of the Subsidiary Company's in-force business determine whether any reserve needs to be created or product prices for new business need to be revised in light of changing or anticipated changes in experience from that expected when pricing the existing book of business. The current nature, volume and age of in-force business does not require a detailed sensitivity analysis at this stage. 43.2.6 Group Life Family Takaful The main exposure of the PTF is to mortality risk. The PTF may be exposed to the risk of unexpected claim severity or frequency. This can be a result of writing business with higher than expected mortality, writing high cover amounts without adequate underwriting, difficulty of verification of claims, fraudulent claims or a catastrophe. The PTF also faces risk such as that of underpricing to acquire business in a competitive environment and of non-receipt of takaful contributions in due time. There also exists a potential risk of asset liability term mismatch due to liabilities being very short term in nature. The Subsidiary Company manages these risks through underwriting, retakaful, effective claims handling and other related controls. The Subsidiary Company has a well defined medical underwriting policy and avoids writing business for groups with overly hazardous exposure. Pricing is done using the retakaful rates. The contribution charged takes into account the actual experience of the client and the nature of mortality exposure the group faces. The rates are certified by the appointed actuary for large groups. The Subsidiary Company also maintains an MIS to track the adequacy of the takaful contribution charged. Retakaful contracts have been purchased by the Subsidiary Company to limit the maximum mortality exposure of any one covered person. The Subsidiary Company ensures writing business with good geographical spread and tries to maintain a controlled exposure to large groups which generally have poor experience. Writing business of known hazardous groups is also avoided. On the claims handling side, the Subsidiary Company ensures that payment of any fraudulent claims is avoided. Strict monitoring is in place in order to keep the outstanding balances of contribution at a minimum, especially the ones that are due for more than 90 days. The bulk of the assets held against liabilities of this line of business are cash to money market with short durations and high liquidity, thus mitigating the risk of asset value deterioration and liability mismatch. a) Frequency and severity of claims The Subsidiary Company measures concentration of risk by geographical area. Concentration of risk is not currently a factor of concern as the business is developing and aims to achieve a spread of risks across various parts of the country. The table below presents the concentration of covered benefits across five bands of covered benefits per participant. The benefit covered figures are shown gross and net of the retakaful contracts described above. The amounts presented are showing total exposure of the PTF including exposure in respect of riders attached to the main policies. ANNUAL REPORT 2020 303
  305. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 Bene fits covered per life Rupees 0 - 500,000 500,001-1,000,000 1,000,001-1,500,000 1,500,001-2,000,000 More than 2,000,000 Total Sum cover at the end of 2020 Total benefits covered Before retakaful After retakaful Rupees in thousand Percentage Rupees in thousand Percentage 5,252,290 7,540,050 2,173,100 4,760,845 27,934,683 47,660,968 11.02% 15.82% 4.56% 9.99% 58.61% 100.00% 3,389,030 4,477,095 489,900 814,800 2,312,400 11,483,225 29.51% 38.99% 4.27% 7.10% 20.13% 100.00% The Group Life Family Takaful business started during the year. b) Sources of uncertainty in the estimation of future benefit payments and contribution receipts Other than conducting a liability adequacy for Unexpired Risk Reserves (URR), there is no need to estimate mortality for future years because of the short duration of the contracts. c) Process used to decide on assumptions The business is too new for any meaningful investigation into the group’s past experience. However, industry experience, the insured group's own past experience and retakaful risk rates are used to determine the expected level of risk in relation to the SLIC (2001-05) Individual Life Ultimate Mortality Table. d) Changes in assumptions Not applicable, since this is a first year of Group Life Family Takaful operations. e) Sensitivity analysis After retakaful, the net unearned contribution reserve for this business stands at less than 1% of the total policyholder liability. This liability will be on the Subsidiary Company's books for under a year. Due to its immateriality, a sensitivity analysis has not been conducted. 43.3 Liability Adequacy Test Liability adequacy test is applied to all long term contracts. Liability adequacy test is carried out using current best estimates of assumptions and future net cash flows, including premiums receivable, benefits payable and investment income from related assets. To determine the adequacy of liabilities, assumptions must be based on realistic best estimates. We have compared our valuation mortality assumption (SLIC mortality table) with the mortality of developing Asian countries, namely: India and Malaysia. The comparison suggests that the best estimate assumption is better than the experience reflected in SLIC mortality table. The investment return assumed for valuation is 3.75% per annum. This rate is prescribed by law. We have valued our liabilities based on the 10-Year PIB rate of 10% to determine adequacy. The table below compares total policyholder liabilities under existing valuation basis with policyholder liabilities calculated using best estimate assumptions: Assumptions Mortality Investment Returns Policyholder Policyholder liabilities on liabilities using existing best estimate valuation basis assumptions Rupees in thousand 45,874,473 45,874,473 45,840,744 45,863,927 The liabilities evaluated under the assumptions suggest the recognized liabilities are adequate and no further provision is required. 304 ANNUAL REPORT 2020
  306. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 43 .4 Financial Risk Maturity profile of financial assets and liabilities: 2020 Interest / markup bearing Maturity Maturity upto after one year one year Sub total Non - interest / markup bearing Maturity Maturity upto after one year one year Sub total Total Rupees in thousand Financial assets Investment Equity securities- quoted - - - 31,379,540 - 31,379,540 31,379,540 Equity securities- unquoted - - - 3,484,209 - 3,484,209 3,484,209 Debt securities 7,335,826 7,954,340 15,290,166 - - - 15,290,166 Term deposits 13,813,874 77,188 13,891,062 - - - 13,891,062 Investments of Window Takaful Operations - Operator's Fund Loans and other receivables Loan secured against life insurance policies 521 29,912 2,964 - - 35,873 60,800 35,873 35,873 982,259 985,744 29,912 3,485 921,459 29,912 - - - Insurance / reinsurance receivables - unsecured and considered good - - - 4,991,328 - 4,991,328 4,991,328 claims - - - 5,922,296 - 5,922,296 5,922,296 Salvage recoveries accrued - - - 270,275 - 270,275 270,275 Prepayments - - - 3,468,952 - 3,468,952 3,468,952 10,788,024 - 10,788,024 479,072 - 479,072 11,267,096 - - - 520,061 - 520,061 520,061 31,968,157 8,034,492 40,002,649 51,473,065 51,533,865 91,536,514 - - - 10,768,040 - 10,768,040 10,768,040 - - - 3,161,519 - 3,161,519 3,161,519 179,452 151,397 330,849 - - - 330,849 - - - 3,155,619 - 3,155,619 3,155,619 - - - 242,797 - 242,797 242,797 179,452 151,397 330,849 17,327,975 - 17,327,975 17,658,824 31,788,705 7,883,095 39,671,800 34,145,090 34,205,890 73,877,690 Reinsurance recoveries against outstanding Cash and bank Other Assets of Window Takaful Operations - Operator's Fund 60,800 Financial liabilities Outstanding claims (including IBNR) Insurance / reinsurance payables Borrowings Other creditors and accruals Total liabilities of Window Takaful Operations- Operator's Fund 60,800 ANNUAL REPORT 2020 305
  307. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 2019 Interest / markup bearing Maturity Maturity upto after Sub total one year one year Non - interest / markup bearing Maturity Maturity upto after Sub total one year one year Total Rupees in thousand Financial assets Investment Equity securities- quoted - - - 29,310,072 - 29,310,072 29,310,072 Equity securities- unquoted - - - 2,874,483 - 2,874,483 2,874,483 Debt securities 7,625,274 992,200 8,617,474 - - - 8,617,474 Term deposits 15,418,782 50,110 15,468,892 - - - 15,468,892 Investments of Window Takaful Operations - Operator's Fund Loans and other receivables Loan secured against life insurance policies 625 32,785 3,727 - - 32,958 41,211 32,958 32,958 712,487 716,839 32,785 4,352 671,276 32,785 - - - Insurance / reinsurance receivables - unsecured and considered good - - - 5,865,967 - 5,865,967 5,865,967 claims - - - 5,931,928 - 5,931,928 5,931,928 Salvage recoveries accrued - - - 301,420 - 301,420 301,420 Prepayments - - - 3,671,070 - 3,671,070 3,671,070 8,062,743 - 8,062,743 374,501 - 374,501 8,437,244 - - - 357,950 - 357,950 357,950 31,140,209 1,046,037 32,186,246 49,391,625 49,432,836 81,619,082 Outstanding claims - - - 10,367,347 - 10,367,347 10,367,347 Insurance / reinsurance payables - - - 2,826,429 - 2,826,429 2,826,429 Borrowings - - - - - - - Other creditors and accruals - - - 3,566,335 - 3,566,335 3,566,335 - - - 195,872 - 195,872 195,872 - - - 16,955,983 - 16,955,983 16,955,983 31,140,209 1,046,037 32,186,246 32,435,642 32,476,853 64,663,099 Reinsurance recoveries against outstanding Cash and bank Other Assets of Window Takaful Operations - Operator's Fund 41,211 Financial liabilities Total liabilities of Window Takaful Operations- Operator's Fund 306 ANNUAL REPORT 2020 41,211
  308. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 43 .4.1 Interest / mark - up rate risk Interest / mark-up rate risk is the risk that the value of a financial instrument or future cash flows of a financial instrument will fluctuate due to changes in the market interest / mark - up rates. Sensitivity to interest / mark-up rate risk arises from mismatching of financial assets and liabilities that mature or repaid in a given period. The Group manages this mismatch through risk management strategies where significant changes in gap position can be adjusted. At the reporting date the interest / mark-up rate profile of the Group's significant interest / mark-up bearing financial instruments was as follows: Effective interest rate (%) 2020 Percentage Fixed rate of financial instruments Financial assets: Investments- PIBs and Treasury Bills Loans Carrying amounts 2019 2020 2019 Rupees in thousand 6.47 - 13.83 5.00 9.00 - 14.22 5.00 11,445,069 3,485 5,843,505 4,352 4.50 - 11.35 6.27 - 24.53 8.00 - 14.50 11.00 - 22.00 24,679,086 3,845,097 23,531,635 2,773,969 Floating rate of financial instruments Financial assets: Bank and term deposits Investments - TFCs & Sukuks Sensitivity analysis The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore, a change in interest rate will not affect the fair value of any financial instruments. For cash flow sensitivity analysis of variable rate instruments, a hypothetical change of 100 basis points in interest rates at the reporting date would have decreased / (increased) profit for the year by the amounts shown below. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risk. Variation in market interest rates could produce significant changes at the time of early repayments. For these reasons, actual results might differ from those reflected in the details specified below. The analysis assumes that all other variables remain constant. Effect on profit before tax Increase Decrease Effect on equity Increase Decrease Rupees in thousand As at December 31, 2020 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 246,791 (246,791) 175,222 (175,222) As at December 31, 2019 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 235,316 (235,316) 167,074 (167,074) Currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group's principal transactions are carried out in Pak Rupees and its exposure to foreign exchange risk arises primarily with respect to AED and US dollars in respect of foreign branches. Assets and liabilities exposed to foreign exchange risk amounted to Rs. 10,892,805 thousands (2019: Rs. 12,262,552 thousands) and Rs. 9,043,537 thousands (2019: Rs. 10,882,221 thousands), respectively, at the end of the year. ANNUAL REPORT 2020 307
  309. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 The following signi ficant exchange rates were applied during the year: 2020 2019 Rupees in thousand Rupees per US Dollar Average rate Reporting date rate Rupees per AED Average rate Reporting date rate 161.8459 159.8344 149.9303 154.8476 44.0622 43.5143 40.8181 42.1566 Price risk Price risk represents the risk that the fair value of financial instruments will fluctuate because of changes in the market prices (other than those arising from interest / mark-up rate risk or currency risk), whether those changes are caused by factors specific to individual financial instrument or its issuer, or factors affecting all or similar financial instrument traded in the market. The Group is exposed to equity price risk that arises as a result of changes in the levels of PSE - Index and the value of individual shares. The equity price risk arises from the Group's investment in equity securities for which the prices in the future are uncertain. The Group policy is to manage price risk through selection of blue chip securities. The Group's strategy is to hold its strategic equity investments on a long term basis. Thus, Group is not affected significantly by short term fluctuation in its strategic investments provided that the underlying business, economic and management characteristics of the investees remain favorable. The Group strives to maintain above average levels of shareholders' capital to provide a margin of safety against short term equity volatility. The Group manages price risk by monitoring exposure in quoted equity securities and implementing the strict discipline in internal risk management and investment policies. The Group has investments in quoted equity securities amounting to Rs. 31,379,540 thousands (2018: Rs. 29,310,072 thousands) at the reporting date. The carrying value of investments subject to equity price risk are, in almost all instances, based on quoted market prices as of the reporting date. Market prices are subject to fluctuation which may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Sensitivity analysis For the equity investment portfolio, a 10% increase / (decrease) in redemption value and share prices at year end would have increased / (decreased) impairment loss of investment recognized in profit and loss account as follows: Impact on profit Impact on equity before tax Rupees in thousand 2020 Effect of increase in share price Effect of decrease in share price 1,001,285 (491,721) 710,912 (349,122) 2019 Effect of increase in share price Effect of decrease in share price 785,478 (407,618) 557,689 (289,409) 308 ANNUAL REPORT 2020
  310. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 43 .5 Credit risk and concentration of credit risk Credit risk is the risk that arises with the possibility that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. The Group attempts to control credit risk by monitoring credit exposure by undertaking transactions with a large number of counterparties in various sectors and by continually assessing the credit worthiness of counterparties. Concentration of credit risk occurs when a number of counterparties have a similar type of business activities. As a result any change in economic, political or other conditions would affect their ability to meet contractual obligations in a similar manner. The Group's credit risk exposure is not significantly different from that reflected in those consolidated financial statements. The management monitors and limits the Group's exposure and makes conservative estimates of provisions for doubtful assets, if any. The management is of the view that it is not exposed to significant concentration of credit risk as its financial assets are adequately diversified in entities of sound financial standing, covering various industrial sectors. The carrying amount of financial assets represents the maximum credit exposure, as specified below: 2020 2019 Rupees in thousand Investments Loan secured against life insurance policies Loans and other receivable Due from insurance contract holders Due from other insurers / other reinsurers Reinsurance recoveries against outstanding claims Salvage recoveries accrued Bank deposits 64,044,977 29,912 985,744 3,817,014 1,174,314 5,922,296 270,275 11,267,096 56,270,921 32,785 716,839 4,918,060 947,907 5,931,928 301,420 8,437,244 87,511,628 77,557,104 Provision for impairment is made for doubtful receivables according to the Group's policy. The impairment provision is written off when the Group expects that it cannot recover the balance due. The movement in the provision for doubtful debt account is shown in note 12.2 and 12.3 to these consolidated financial statements. 2020 2019 Rupees in thousand Age analysis of due from insurance contact holders (net of provision) is as follows: Upto one year Above one year Less: provision for doubtful balances 3,291,385 1,461,919 4,753,304 4,316,502 1,470,144 5,786,646 (936,290) (868,586) 3,817,014 4,918,060 ANNUAL REPORT 2020 309
  311. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 The credit quality of Group 's bank balance can be assessed with reference to external credit rating as follows: Rating Short Term Abu Dhabi Commercial Bank A1 Al Baraka Limited A1 Allied Bank Limited A1+ Askari Bank Limited A1+ Bank Al Habib Limited A1+ Bank Al Habib Limited - Islamic Not available Bank Alfalah Limited A1+ Bank Islami Pakistan Limited A1 Dubai Islamic Bank Pakistan Limited A1+ Faysal Bank Limited A1+ FINCA Micro Finance Bank Limited A1 Habib Bank Limited A1+ Habib Metropolitan Bank A1+ Khushhali Microfinance Bank Limited A1 MCB Bank Limited A1+ MCB Islamic Bank Limited A1 Mobilink Microfinance Bank A1 National Bank of Pakistan A1+ NRSP Microfinance Bank Limited A1 Samba Bank Limited A1 Silk Bank Limited A2 Soneri Bank Limited A1+ Standard Chartered Bank A1+ Telenor Microfinance Bank Limited A1 The Punjab Provincial Cooperative Bank Limited Not available United Bank Limited A1+ U Microfinance Bank Limited Not available Zarai Taraqiati Bank Limited A1+ 310 ANNUAL REPORT 2020 Long Term A A AAA AA+ AA+ Not available AA+ A+ AA AA A AAA AA+ A+ AAA A A AAA A AA AAAAAA A+ Not available AAA Not available AAA Rating Agency S&P 2020 2019 Rupees in thousand PACRA PACRA PACRA Not available PACRA PACRA JCR-VIS PACRA PACRA JCR-VIS PACRA JCR-VIS PACRA PACRA PACRA PACRA PACRA JCR-VIS JCR-VIS PACRA PACRA PACRA 141,791 16,799 5,020 18,993 24,757 727,222 413,196 12,256 60,687 2,759 5,733,316 (149) 19,518 3,465,069 209,876 16,565 7,818 2,059 34,263 21,486 1 52,669 7,176 (161,781) 13,682 3,805 3,574 30,862 726,662 340,223 3,131 769,161 12,353 4,032,240 (149) 6,390 1,835,435 73,939 11,997 2,141 76,021 21,196 878 1 71,250 1,755 Not available JCR-VIS Not available JCR-VIS 3,425 (42,845) 293,395 8,895 3,425 132,599 273,625 127,017 11,256,017 8,411,432
  312. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 The credit quality of amount due from other insurers (gross of provisions) can be assessed with reference to external credit rating as follows: Amounts due Reinsurance and other recoveries from other 2020 against insurers / outstanding reinsurers claims Rupees in thousand 2019 A or Above (including PRCL) BBB Others 1,371,729 29 3,858 4,287,911 1,053,264 581,121 5,659,640 1,053,293 584,979 4,888,920 1,839,450 352,767 Total 1,375,616 5,922,296 7,297,912 7,081,137 43.6 Capital risk management The Group's goals and objectives when managing capital are : - To be an appropriately capitalized institution in compliance with the paid-up capital requirement set by the SECP. Minimum paid-up capital requirement for non-life insurers as at 31 December 2020 is Rs. 500,000 thousands whereas for life insurers as at 31 December 2020 is Rs. 700,000 thousands. The Group's current paid-up capital is well in excess of the limit prescribed by the SECP; - To safeguard the Group's ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for the other stakeholders; - To provide an adequate return to shareholders by pricing insurance contracts commensurately with the level of risk; - To maintain strong ratings and to protect the Group against unexpected events / losses; and - To ensure a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. 43.7 Expense risk The risk that the Group faces is that future expenses may be higher than those used in pricing of products causing an expense overrun. The Group mitigates this risk by incorporating a certain level of acceptable conservatism in building future policy expense factors in pricing and expects to maintain its actual expenses within these limits. Regular monitoring of expenses allows the Group to adjust its pricing in time to account for higher than expected expenses. The Group closely monitors its expenses by regularly carrying out an expense analysis for its business. The assumptions for future policy expense levels are determined from the Group’s most recent annual expense analysis, with an extra margin built-in to account for variability in future expenses. A review of product pricing is carried out each year based on the latest available expense factors. Constant monitoring of expenses enables the Group to take corrective actions in time. Based on the results of expense analysis, the Group apportions its management expenses to different lines of business. ANNUAL REPORT 2020 311
  313. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 44 Fair value measurement of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . Underlying the definition of fair value is the presumption that the Group is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. IFRS 13 'Fair Value Measurement' requires the Group to classify fair value measurements and fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) - Inputs other than quoted prices included within level 1 that are observable for the asset either directly (that is, derived from prices) (Level 2) - Inputs for the asset or liability that are not based on observable market data (that is, unadjusted) inputs (Level 3) Transfer between levels of the fair value hierarchy are recognized at the end of the reporting period during which the changes have occurred. Held to maturity Available for sale Fair value through P&L Receivables and other financial assets Cash and cash equivalents 2020 Other financial liabilities Total Level 1 Level 2 Level 3 Total Note Financial assets - measured at fair value Investment Equity securities- quoted Equity securities- unquoted Debt securities Investments of Window Takaful Operations Operator's Fund 8 8 9 15,729,664 3,484,209 790,268 374,331 15,649,876 14,125,567 - - - 31,379,540 3,484,209 15,290,166 31,379,540 - 15,290,166 3,484,209 - 31,379,540 3,484,209 15,290,166 15 35,873 - - - - - 35,873 35,873 - - 35,873 11 - 13,891,062 - 985,744 29,912 - - - 985,744 29,912 13,891,062 - - - - 13 14 - - - 4,991,328 5,922,296 270,275 3,468,952 - 11,267,096 - 4,991,328 5,922,296 270,275 3,468,952 11,267,096 - - - - 15 - - - 310,615 209,446 - 520,061 - - - - 20,040,014 14,265,393 29,775,443 15,979,122 11,476,542 - 91,536,514 31,415,413 15,290,166 3,484,209 50,189,788 22 25 - - - - - 10,768,040 3,161,519 330,849 3,155,619 10,768,040 3,161,519 330,849 3,155,619 - - - - 15 - - - - - 242,797 242,797 - - - - - - - - - 17,658,824 17,658,824 - - - - Financial assets - not measured at fair value Loans and other receivables * Loan secured against life insurance policies* Investment - Term deposits* Insurance / reinsurance receivables - unsecured and considered good * Reinsurance recoveries against outstanding claims * Salvage recoveries accrued * Prepayments * Cash and bank * Other Assets of Window Takaful Operations Operator's Fund* 10 12 Financial liabilities - not measured at fair value Underwriting provisions: Outstanding claims (including IBNR)* Insurance / reinsurance payables * Borrowing* Other creditors and accruals* Total liabilities of Window Takaful OperationsOperator's Fund* 29 * The Group has not disclosed the fair value of these items because their carrying amounts are a reasonable approximation of fair value. 312 ANNUAL REPORT 2020
  314. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 44 .1 Fair value measurement of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Underlying the definition of fair value is the presumption that the Group is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. IFRS 13 'Fair Value Measurement' requires the Group to classify fair value measurements and fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) - Inputs other than quoted prices included within level 1 that are observable for the asset either directly (that is, derived from prices) (Level 2) - Inputs for the asset or liability that are not based on observable market data (that is, unadjusted) inputs (Level 3) Transfer between levels of the fair value hierarchy are recognized at the end of the reporting period during which the changes have occurred. Held to maturity Available for sale Fair value through P&L Receivables and other financial assets 2019 Other financial liabilities Cash and cash equivalents Total Level 1 Level 2 Level 3 Total Note Financial assets - measured at fair value Investment Equity securities- quoted Equity securities- unquoted Debt securities Investments of Window Takaful Operations Operator's Fund 8 8 9 15,991,690 2,874,483 651,837 465,868 13,318,382 7,499,769 - - - 29,310,072 2,874,483 8,617,474 29,310,072 - 8,617,474 2,874,483 - 29,310,072 2,874,483 8,617,474 15 32,958 - - - - - 32,958 32,958 - - 32,958 11 - 15,468,892 - 716,839 32,785 - - - 716,839 32,785 15,468,892 - - - - 13 14 - - - 5,865,967 5,931,928 301,420 3,671,070 - 8,437,244 - 5,865,967 5,931,928 301,420 3,671,070 8,437,244 - - - - 15 - - - 266,055 91,895 - 357,950 - - - - 19,550,968 15,934,760 20,818,151 16,786,064 8,529,139 - 81,619,082 29,343,030 8,617,474 2,874,483 40,834,987 22 25 - - - - - 10,367,347 2,826,429 3,566,335 10,367,347 2,826,429 3,566,335 - - - - 15 - - - - 195,872 - 195,872 - - - - - - - - 195,872 16,760,111 16,955,983 - - - - Financial assets - not measured at fair value Loans and other receivables * Loan secured against life insurance policies* Investment - Term deposits* Insurance / reinsurance receivables - unsecured and considered good * Reinsurance recoveries against outstanding claims * Salvage recoveries accrued * Prepayments * Cash and bank * Other Assets of Window Takaful Operations - Operator's Fund 10 12 Financial liabilities - not measured at fair value Underwriting provisions: Outstanding claims (including IBNR)* Insurance / reinsurance payables * Borrowing* Other creditors and accruals* Other Assets of Window Takaful Operations Operator's Fund* 29 * The Group has not disclosed the fair value of these items because their carrying amounts are a reasonable approximation of fair value. ANNUAL REPORT 2020 313
  315. Notes to the Consolidated Financial Statements For the year ended 31 December 2020 45 Non-adjusting subsequent events The Board of Directors of the Parent Company in their meeting held on February 23 , 2021 proposed a final cash dividend for the year ended December 31, 2020 @ 12.5% i.e. Rupees 1.25/- share (2019: 15% i.e. Rupees 1.5/- share). This is in addition to the interim cash dividend @ 12.5% i.e. Rupee 1.25/- per share (2019: 10% i.e. Rupee 1/- per share) resulting in a total cash dividend for the year ended December 31, 2020 of Rupees 2.5/- per share (2019: Rupees 2.5/- share). The approval of the members for the final dividend will be obtained at the forthcoming Annual General Meeting. The financial statements for the year ended December 31, 2020 do not include the effect of final dividend which will be accounted for in the financial statements for the year ending December 31, 2021. 46 Number of employees The total average number of employees during the year and as at December 31, 2020 and 2019, are as follows: 2020 2019 Rupees in thousand 47 As at 31 December Parent Company Subsidiary Company 900 1,810 944 1,144 Average during the year Parent Company Subsidiary Company 930 1,477 956 909 Corresponding figures Reclassification / rearrangement of corresponding figures have been made in these financial statements wherever necessary. 48 Date of authorization for issue These consolidated financial statements were authorized for issue on February 23, 2021 by the Board of Directors of the Group. 49 General Figures have been rounded off to the nearest thousand rupees unless other wise stated. Umer Mansha Chairman Ibrahim Shamsi Director 314 ANNUAL REPORT 2020 Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  316. ANNUAL REPORT 2020 315
  317. Shariah Advisor Pro file Mufti Muhammad Hassaan Kaleem Mufti Muhammad Hassaan Kaleem is a renowned figure in the field of Islamic Finance. He is considered as one of the most revered Shariah scholor in the Islamic Finance industry, who sits on the Shariah Advisory Boards of numerous financial institutions, Islamic investment Funds and Takaful Companies, including Al-Ameen UBL Funds, Adamjee Takaful, State Life-Window Takaful Operations, Pak Qatar Family Takaful LtdPakistan, Hanover Re Takaful –Bahrain and Takaful Emirate-UAE etc. In addition, Mufti Hassaan is a Shariah Consultant of Deloitte (Global Islamic Finance Team),Trainer of Shariah Standard, a member of subcommittee of Shariah Standards at AAOIFI-Bahrain, Visiting faculty member of National Institute of Banking and Finance (State Bank of Pakistan) and Center for Excellence in Islamic Finance (CEIF)-IBA and a permanent faculty member of Center for Islamic Economics Karachi. Furthermore, he was former Shariah Advisor of Bank Al Baraka and Chairman Shariah board of SECP. 316 ANNUAL REPORT 2020
  318. Statement of Compliance with the Shariah Principles The financial arrangements , contracts and transactions, entered into by Window Takaful Operations of the Adamjee Insurance Company Limited (`the Company’) for the year ended 31 December 2020 are in compliance with the Takaful Rules, 2012. Further, we confirm that: - The Company has developed and implemented all the policies and procedures in accordance with the Takaful Rules, 2012 and rulings of the Shariah Advisor along with a comprehensive mechanism to ensure compliance with such rulings and Takaful Rules, 2012 in their overall operations. Further, the governance arrangements including the reporting of events and status to those charged with relevant responsibilities, such as the Audit Committee / Shariah Advisor and the Board of Directors have been implemented; - The Company has imparted trainings / orientations and ensured availability of all manuals / agreements approved by Shariah Advisor / Board of Directors to maintain the adequate level of awareness, capacity and sensitization of the staff and management; - All the products and policies have been approved by Shariah Advisor and the financial arrangements including investments made, policies, contracts and transactions entered into by Window Takaful Operations are in accordance with the polices approved by Shariah Advisor; and - The assets and liabilities of Window Takaful Operations (Participants’ Takaful Fund and Operator’s fund) are segregated from its other assets and liabilities, at all times in accordance with the provisions of the Takaful Rules, 2012. This has been duly confirmed by the Shariah Advisor of the Company. Lahore: 23 February, 2021 Ibrahim Shamsi Director Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 317
  319. Independent Reasonable Assurance Report to the Board of Directors on the Statement of Compliance with the Shariah Principles We were engaged by the Board of Directors of Adamjee Insurance Company Limited (‘the Company’) to report on the management's assessment of compliance of the Window Takaful Operations (‘Takaful Operations’) of the Company, as set out in the annexed statement prepared by the management for the year ended December 31, 2020, with the Takaful Rules, 2012, in the form of an independent reasonable assurance conclusion about whether the annexed statement presents fairly the status of compliance of the Takaful Operations with the Takaful Rules, 2012, in all material respects. Applicable Criteria The criteria against which the subject matter information (the Statement) is assessed comprise of the provisions of Takaful Rules, 2012. Responsibilities of the management The Board of Directors / management of the Company are responsible for designing, implementing and maintaining internal controls relevant to the preparation of the annexed statement that is free from material misstatement, whether due to fraud or error. It also includes ensuring the overall compliance of the Takaful Operations with the Takaful Rules, 2012. The Board of Directors / management of the Company are also responsible for preventing and detecting fraud and for identifying and ensuring that the Takaful Operations comply with laws and regulations applicable to its activities. They are also responsible for ensuring that the management, where appropriate, the Board of Directors, and personnel involved with the Takaful Operations compliance with the Takaful Rules, 2012 are properly trained, systems are properly updated and that any changes in reporting encompass all significant business units. Our Independence and Quality Control We have complied with the independence and other ethical requirements of the Code of Ethics for Chartered Accountants issued by the Institute of Chartered Accountants of Pakistan, which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behavior. The firm applies International Standard on Quality Control 1 “Quality Control for Firms That Perform Audit and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements” and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. Our responsibilities Our responsibility is to examine the annexed statement and to report thereon in the form of an independent reasonable assurance conclusion based on the evidence obtained. We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3000, “Assurance Engagements Other Than Audits or Reviews of Historical Financial Information” issued by the International Auditing and Assurance Standards Board. That standard requires that we plan and perform our procedures to obtain reasonable assurance about whether the annexed statement presents fairly the status of compliance of the Takaful Operations with the Takaful Rules, 2012, in all material respects. The procedures selected depend on our judgment, including the assessment of the risks of material non-compliances with the Takaful Rules, 2012, whether due to fraud or error. In making those risk assessments, we have considered internal control relevant to the Takaful Operations compliance with the Takaful Rules, 2012, in order to design assurance procedures that are appropriate in the circumstances, but not for the purposes of expressing a conclusion 318 ANNUAL REPORT 2020
  320. as to the effectiveness of the Company 's internal control over the Takaful Operations' compliance with the Takaful Rules, 2012. Reasonable assurance is less than absolute assurance. A system of internal control, because of its nature, may not prevent or detect all instances of non-compliance with Takaful Rules, 2012, and consequently cannot provide absolute assurance that the objective of compliance with Takaful Rules, 2012, will be met. Also, projection of any evaluation of effectiveness to future periods is subject to the risk that the controls may become inadequate or fail. The procedures performed included: - Evaluating the systems, procedures and practices in place with respect to the Takaful operations against the Takaful Rules, 2012 and Shariah advisor's guidelines; - Evaluating the governance arrangements including the reporting of events and status to those charged with relevant responsibilities, such as the Audit Committee/ Shariah Advisor and the board of directors; - Testing for a sample of transactions relating to Takaful operations to ensure that these are carried out in accordance with the laid down procedures and practices including the regulations relating to Takaful operations as laid down in Takaful Rules, 2012; and - Review the statement of management's assessment of compliance of the Takaful transactions during the year ended December 31, 2020 with the Takaful Rules, 2012. Conclusion Our conclusion has been formed on the basis of, and is subject to, the matters outlined in this report. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. In our opinion, the annexed statement, for the year ended December 31, 2020, presents fairly the status of compliance of the Takaful Operations with the Takaful Rules, 2012, in all material respects. Chartered Accountants Lahore: 23 February 2021 ANNUAL REPORT 2020 319
  321. Shariah Advisor 's Report to the Board of Directors For the Year Ended December 31, 2020 ! ‫اﻟﺤﻤﺪ ﷲ رب اﻟﻌﺎﻟﻤﲔ واﻟﺼﻠﻮة واﻟﺴﻼم ﻋ ﺳﻴﺪ اﻻﻧ ﻴﺎء واﻟﻤﺮﺳﻠﲔ وﺑﻌﺪ‬ I have reviewed Takaful products, details of underwriting and other related documents, as well as, the Participant Takaful Fund (PTF) Policy, PTF pool position, Investment Policy, Re-Takaful arrangements, claims details and the related transactions of Adamjee Insurance – Window Takaful Operations (hereafter referred to as “Takaful Operator”). I acknowledge that as Shariah Advisor of Takaful Operator, it is my responsibility to approve the above mentioned document and ensure that the financial arrangements, contracts and transactions entered into by the Takaful Operator with its participants and stakeholders are in compliance with the requirements of Shariah rules and principles. It is the responsibility of the Takaful Operator to ensure that the rules, principles and guidelines set by the Shariah Advisor are complied with, and that all policies and services being offered are duly approved by the Shariah Advisor. The Takaful Operator’s activities, operations are periodically checked and monitored by Shariah Advisor. In my opinion and to the best of my understanding based on the provided information and explanations: i. Transactions undertaken by the Takaful Operator were in accordance with guidelines issued by Shariah Advisor as well as requirements of Takaful Rules 2012 and General Takaful Accounting Regulations 2019; ii. The investments have been done from the Participant’s Takaful Fund and Operator’s Fund into Shariah Compliant avenues with Shariah Approval. Further, all bank accounts related to Window Takaful Operations have been opened in Islamic Banking Institutions (IBIs) with Shariah Approval; and iii. The transactions and activities of Window Takaful Operations are in accordance with the Shariah principles in respect of the Participant’s Takaful Fund (Waqf Fund) and Operator’s Fund. And Allah knows best Mufti Muhammad Hassaan Kaleem Shariah Advisor Date: 23 February 2021 320 ANNUAL REPORT 2020
  322. Independent Auditors ’ Report To the members of Adamjee Insurance Company Limited (the Company) Report on the Audit of the Window Takaful Operations Opinion We have audited the annexed financial statements of Adamjee Insurance Company Limited – Window Takaful Operations (the ‘Operator’), which comprise the statement of financial position as at December 31, 2020, and the profit and loss account, the statement of comprehensive income, the statement of changes in funds, and the statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information and we state that we have obtained all the information and explanations which, to the best of our knowledge and belief, were necessary for the purposes of the audit. In our opinion and to the best of our information and according to the explanations given to us, the statement of financial position, the profit or loss account, statement of comprehensive income, the statement of changes in funds and the statement of cash flows together with the notes forming part thereof, conform with the accounting and reporting standards as applicable in Pakistan and give the information required by the Insurance Ordinance, 2000 and the Companies Act, 2017 (XIX of 2017), in the manner so required and respectively give a true and fair view of the state of the Operator's affairs as at December 31, 2020 and of the profit, total comprehensive income, the changes in funds and its cash flows for the year then ended. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) as applicable in Pakistan. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Operator in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants as adopted by the Institute of Chartered Accountants of Pakistan (the Code) and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Information Other than the Financial Statements and Auditor’s Report Thereon Management is responsible for the other information. The other information comprises the information included in the Operator’s annual report but does not include the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information when available, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Board of Directors for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting and reporting standards as applicable in Pakistan and the requirements of Insurance Ordinance 2000 and, Companies Act, 2017 (XIX of 2017) and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. ANNUAL REPORT 2020 321
  323. In preparing the financial statements , management is responsible for assessing the Operator’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Operation or to cease operations, or has no realistic alternative but to do so. Board of Directors are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs as applicable in Pakistan will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit, in accordance with ISAs as applicable in Pakistan, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Ÿ Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Ÿ Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Operator’s internal control. Ÿ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Ÿ Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Operator’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to date of our auditor’s report. However, future events or conditions may cause the Operator to cease to continue as a going concern. Ÿ Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with the board of directors regarding, among other matters, the planned scope and timing of audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 322 ANNUAL REPORT 2020
  324. Report on Other Legal and Regulatory Requirements Based on our audit , we further report that in our opinion: a) proper books of account have been kept by the Operator as required by the Insurance Ordinance, 2000, the Takaful Rules, 2012, the General Accounting Regulations, 2019 and the Companies Act, 2017 (XIX of 2017); b) the statement of financial position, the profit and loss account, the statement of comprehensive income, the statement of changes in funds and the statement of cash flows together with the notes thereon have been drawn up in conformity with the Insurance Ordinance 2000, the Takaful Rules, 2012, the General Accounting Regulations, 2019 and the Companies Act, 2017 (XIX of 2017) and are in agreement with the books of account; c) investments made, expenditure incurred and guarantees extended during the year were for the purpose of the Company’s business; and d) no zakat was deductible at source under the Zakat and Ushr Ordinance, 1980 (XVIII of 1980). The engagement partner on the audit resulting in this independent auditor’s report is Rana M. Usman Khan. Chartered Accountants Lahore: 23 February, 2021 ANNUAL REPORT 2020 323
  325. Window Takaful Operations Statement of Financial Position As at 31 December 2020 Note Operator 's Takaful Fund December 31, December 31, 2020 2019 Participants' Takaful Fund December 31, December 31, 2020 2019 Rupees in thousand Rupees in thousand ASSETS Qard-e-Hasna to Participants' Takaful Fund 9 146,460 146,460 - - Property and equipment Intangible assets Investments Equity securities Debt securities Loans and other receivables Takaful / re - takaful receivables Re - takaful recoveries against outstanding claims Salvage recoveries accrued Wakala and mudarib fee receivable Deferred commission expense Prepayments Cash and bank 5 6 20,793 12,421 17,733 17,650 - - 7 8 10 11 35,873 7,411 116,783 39,961 209,446 442,688 32,958 6,731 70,933 41,931 91,895 279,831 50,614 125,000 27,650 384,445 279,132 35,986 104,047 552,900 1,559,774 125,000 21,655 261,580 88,706 13,631 105,379 434,658 1,050,609 589,148 426,291 1,559,774 1,050,609 50,000 883 295,468 346,351 50,000 1,356 179,063 230,419 21 12 13 TOTAL ASSETS FUNDS AND LIABILITIES Funds attributable to Operator's and Participants' Operator's Takaful Fund Statutory fund Reserves Unappropriated profit Waqf / Participants' Takaful Fund Ceded money Reserves Accumulated surplus Qard-e-Hasna from Operator's Takaful Fund Liabilities Underwriting provisions Outstanding claims including IBNR Unearned contribution reserve Unearned retakaful rebate Contribution deficiency reserve Retirement benefit obligations Deferred taxation Contribution received in advance Takaful / re - takaful payables Wakala and mudarib fee payable Unearned wakala fee Other creditors and accruals Taxation - provision less payments Total Liabilities TOTAL FUNDS AND LIABILITIES 19 17 18 14 22 15 - - - - - ` - 500 436 172,580 173,516 500 80,786 81,286 146,460 146,460 3,878 527 178,766 54,168 5,458 242,797 3,878 987 139,979 51,028 195,872 558,082 421,449 17,183 178 11,037 79,436 116,783 35,650 1,239,798 257,810 377,586 15,979 30,071 13,109 38,513 70,933 18,862 822,863 589,148 426,291 1,559,774 1,050,609 16 Contingencies and commitments The annexed notes from 1 to 38 form an integral part of these financial statements. Umer Mansha Chairman 324 ANNUAL REPORT 2020 Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  326. Window Takaful Operations Pro fit and Loss Account For the Year Ended 31 December 2020 Note 2020 2019 Rupees in thousand PARTICIPANTS' TAKAFUL FUND - REVENUE ACCOUNT Contributions earned Contributions ceded to re - takaful Net contribution revenue 17 1,034,305 (288,826) 745,479 870,755 (254,089) 616,666 Re - takaful rebate earned Net underwriting income 18 53,995 799,474 44,350 661,016 Net takaful claims - reported / settled Reversal / (charge) of contribution deficiency reserve 19 Other direct expenses Surplus before investment income 20 (721,657) 30,071 (691,586) (62,132) 45,756 (525,191) (5,969) (531,160) (57,808) 72,048 Investment income Other income Mudarib's share of investment income Surplus transferred to accumulated 24 25 17,156 32,403 (3,521) 91,794 7,065 31,845 (1,323) 109,635 Wakala fee Commission expense General, administrative and management expenses 22 21 23 408,608 (119,082) (143,206) 146,320 324,314 (99,434) (131,872) 93,008 Other income Mudarib's share of PTF investment income Investment income Direct expenses Profit before taxation 25 14,170 3,521 3,584 (3,821) 163,774 15,856 1,323 1,345 (3,839) 107,693 Provision for taxation 27 (47,369) (30,987) 116,405 76,706 OPERATOR'S TAKAFUL FUND - REVENUE ACCOUNT 24 26 Profit after taxation The annexed notes from 1 to 38 form an integral part of these financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 325
  327. Window Takaful Operations Statement of Comprehensive Income For the Year Ended 31 December 2020 Note 2020 2019 Rupees in thousand PARTICIPANTS ' TAKAFUL FUND Surplus for the year 109,635 91,794 Other comprehensive income for the year - 436 Total comprehensive income for the year 92,230 109,635 116,405 76,706 (473) 1,338 115,932 78,044 OPERATOR`S TAKAFUL FUND Profit after taxation Other comprehensive income: Unrealized (loss) / gain on available-for-sale investment - Net of tax Total comprehensive income for the year The annexed notes from 1 to 38 form an integral part of these financial statements. Umer Mansha Chairman 326 ANNUAL REPORT 2020 Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  328. Window Takaful Operations Statement of Changes in OPF and PTF For the Year Ended 31 December 2020 Operator 's Takaful Fund Unappropriated Fair value profit reserve Rupees in thousand Statutory fund Balance as at December 31, 2018 Profit after taxation Other comprehensive income for the year Total comprehensive income for the year Balance as at December 31, 2019 Profit after taxation Other comprehensive income for the year Total comprehensive income for the year Balance as at December 31, 2020 50,000 50,000 50,000 102,357 18 152,375 76,706 76,706 1,338 1,338 76,706 1,338 78,044 179,063 1,356 230,419 116,405 116,405 (473) (473) 116,405 (473) 115,932 295,468 883 346,351 Participants' Takaful Fund Accumulated Fair value Ceded money (deficit) / surplus reserve Rupees in thousand Balance as at December 31, 2018 (28,849) - (28,349) - 109,635 109,635 - 109,635 109,635 500 80,786 - 81,286 - 91,794 91,794 436 436 91,794 436 92,230 500 172,580 436 173,516 Surplus for the year Other comprehensive surplus for the year Total comprehensive surplus for the year Balance as at December 31, 2020 Total 500 Surplus for the year Other comprehensive surplus for the year Total comprehensive surplus for the year Balance as at December 31, 2019 Total The annexed notes from 1 to 38 form an integral part of these financial statements. Umer Mansha Chairman Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 327
  329. Window Takaful Operations Cash Flow Statement For the Year Ended 31 December 2020 Operator 's Takaful Fund December 31, December 31, 2020 2019 Operating cash flows Participants' Takaful Fund December 31, December 31, 2020 2019 Rupees in thousand (a) Takaful activities Contributions received Wakala fee received / (paid) Re - takaful / co-takaful received / (paid) Claims paid Re - takaful and other recoveries received Commissions paid Commissions received Management expenses paid Other underwriting payments Net cash inflows / (outflows) from takaful activities 405,067 (104,624) (151,367) 149,076 283,304 (101,306) (168,176) 13,822 1,449,511 (405,067) 46,751 (1,036,469) 56,617 55,199 (53,172) 113,370 1,193,624 (283,304) (202,365) (649,201) 57,396 47,594 (58,732) 105,012 (b) Other operating activities Income tax paid Other payments / (receipts) Net cash (outflows) / inflows from other operating activities (39,745) (39,745) (33,510) (33,510) 6,013 6,013 (16,416) (16,416) Total cash inflows / (outflows) from operating activities 109,331 (19,688) 119,383 88,596 13,962 (34,627) 34,627 (5,742) 17,686 (1,144) (6,998) 48,859 (50,000) - 38,573 (125,000) - 8,220 9,544 (1,141) (86,427) - - - - - - - - (c) Investment activities Profit received on bank deposits and investments Payment for investments Proceeds from disposal of investments Capital expenditures Total cash inflows / (outflows) from investing activities (d) Financing activities Contribution to Operator's fund Ceded money Total cash inflows from financing activities Net cash inflows / (outflows) from all activities Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 117,551 (10,144) 118,242 2,169 91,895 102,039 434,658 432,489 209,446 91,895 552,900 434,658 Reconciliation to profit and loss account Operating cash flows Depreciation expense Amortization expense Provision for retirement benefits (Decrease) / increase in assets other than cash (Increase) / decrease in liabilities Investment income Other Income 109,331 (2,934) (4,977) 44,351 (47,120) 3,584 14,170 (19,688) (2,451) (5,983) (1,995) 53,133 36,489 1,345 15,856 119,383 341,681 (418,829) 17,156 32,403 88,596 108,153 (126,024) 38,910 Net profit / surplus for the period 116,405 76,706 91,794 109,635 Operator's Takaful Fund Participants' Takaful Fund 116,405 - 76,706 - 91,794 109,635 116,405 76,706 91,794 109,635 The annexed notes from 1 to 38 form an integral part of these financial statements. Umer Mansha Chairman 328 ANNUAL REPORT 2020 Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  330. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 1 Legal status and nature of business Adamjee Insurance Company Limited ('the Operator') is a public limited company incorporated in Pakistan on September 28, 1960 under the Companies Act, 1913 (now the Companies Act, 2017). The Operator is listed on Pakistan Stock Exchange Limited and is engaged in general takaful business comprising fire & property, marine aviation & transport, motor, accident & health and miscellaneous. The registered office of the Operator is situated at Adamjee House, 80/A, Block E-1, Main Boulevard, Gulberg-III, Lahore. The Operator was granted authorization on December 23, 2015 under Rule 6 of the Takaful Rules, 2012 to undertake Window Takaful Operations ('WTO') in respect of general takaful products by the Securities and Exchange Commission of Pakistan ('SECP'). For the purpose of carrying on the Takaful business, the Operator has formed a Waqf (Participants’ Takaful Fund (PTF)) on January 01, 2016 under the Waqf deed with a ceded money of Rs.500,000. The Waqf deed govern the relationship of Operator and Participants' for management of Takaful operations. 2 Basis of preparation and statement of compliance These financial statements have been prepared in accordance with accounting and reporting standards as applicable in Pakistan. The accounting and reporting standards comprise of: - International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as are notified under the Companies Act, 2017; and - Provision of and directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, Insurance Accounting Regulations, 2017, the Takaful Rules 2012, and General Takaful Accounting Regulations 2019. In case requirements differ, the provisions of or the directives issued under the Companies Act, 2017, the Insurance Ordinance, 2000, the Insurance Rules, 2017, the Insurance Accounting Regulations, 2017, the Takaful Rules, 2012 and Takaful accounting regulations, 2019, shall prevail. These financial statements reflect the financial position and results of operations of both the company and PTF in a manner that the assets, liabilities, income and expenses of the company and PTF remain seperately identifiable. Takaful accounting regulations 2019 are effective from annual period beginning on or after January 01, 2020. Reclassified from Reclassified to Deferred Wakala Expense Unearned Contribution Reserve Rs. (In 000) 139,979 The Operator followed the development of the Covid-19 corona virus and evaluated the extent to which this affected the Operator's operations in the short and long term. The Operator has concluded that they had no significant implications of the pandemic over the operations of the entity. 2.1 Basis of measurement These financial statements have been prepared under historical cost convention except for available for sale investments carried at fair value and retirement benefit obligation under employees' benefits carried at present value. All transaction reflected in these financial statements are on accrual basis except for those reflected in cash flow statements. 2.2 Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the Operator operates ("the functional currency"). The financial statements are presented in Pak Rupees, which is the Operator's functional and presentation currency. All the financial information presented in Rupees has been rounded off to the nearest thousand in rupee, unless otherwise stated. ANNUAL REPORT 2020 329
  331. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 2 .3 Standards, interpretations and amendments to accounting and reporting standards as applicable in Pakistan that are effective in current year The following standards, amendments and interpretations of accounting and reporting standards that will be effective for accounting periods beginning on or after January 01, 2020: Standards or Interpretations Effective from annual period beginning on or after: IFRS 14 'Regulatory Deferral Accounts' 2.4 July 01, 2019 Amendments to IFRS 3 'Business Combinations' - Amendments regarding the definition of business. January 01, 2020 Amendments to the Conceptual Framework for Financial Reporting, including amendments to references to the Conceptual Framework in IFRS Standards. January 01, 2020 Amendments to IAS 39, IFRS 7 and IFRS 9 – The amendments will affect entities that apply the hedge accounting requirementsof IFRS 9 or IAS 39 to hedging relationships directly affected by the interest rate benchmark reform. January 01, 2020 Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' - Amendments regarding the definition of material. January 01, 2020 Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates andJoint Ventures' - Sale or contribution of assets between an investor and its associate or joint venture. January 01, 2020 New accounting standards / amendments and IFRS interpretations that are not yet effective The following International Financial Reporting Standards (IFRS Standards) as notified under the Companies Act, 2017 and the amendments and interpretations thereto will be effective for accounting periods beginning on or aſter January 01, 2021: Standards or Interpretations Effective from annual period beginning on or after: Amendments to IFRS 16 ' Leases'- Provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification. June 01, 2020 IBOR 2 'Interest Rate Benchmark Reform — Phase 2' Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)' with amendments that address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. January 01, 2021 Amendments to IAS 16 'Property, Plant and Equipment',prohibiting the Company from deducting from the cost of property plant and equipment, amount received from selling items produce while the Company is preparing the asset for its intended use. January 01, 2022 Amendments to IFRS 3 'Business Combinations' that updated an outdated reference in IFRS 3 without significantly changing its requirements. January 01, 2022 Amendments to IAS 37 'Provisions, Contingent Liabilities and Contingent Assets' regarding the costs of fulfilling the contract to include when assessing whether a contract is Onerous. January 01, 2022 Amendments to IAS 1 'Presentation of Financial Statements' - Classification of liabilities as current or non-current. January 01, 2023 Amendments to IFRS 10 'Consolidated Financial Statements' and IAS 28 'Investments in Associates and Joint Ventures'- Sale or contribution of assets betweenan investor and its associate or joint venture. Effective from accounting period beginning on or after a date to be determined. Earlier application is permitted. 330 ANNUAL REPORT 2020
  332. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Certain annual improvements have also been made to a number of IFRSs . Other than the aforesaid standards, interpretations and amendments, the International Accounting Standards Board (IASB) has also issued the following standards which have not been adopted locally by the Securities and Exchange Commission of Pakistan: - IFRS 1 – First Time Adoption of International Financial Reporting Standards - IFRS 17 Insurance Contracts There are certain other new and amended standards and interpretations that are mandatory for the insurance accounting periods beginning on or after January 01, 2021 but are considered either not to be relevant or do not have any significant impact on these financial statements. 3 Summary of significant accounting policies The significant accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented in these financial statements except for change in accounting policies as disclosed in below mentioned note 3.1 of these financial statements. Change in accounting policies The operator has changed its rate for wakala fee for motor takaful policies from 27.5% to 32.5% of gross contribution underwritten including administrative surcharge during the year. 3.1 Property and equipment Owned operating assets, other than freehold land which is not depreciated and capital work-in-progress, are stated at cost, signifying historical cost, less accumulated depreciation and any provision for accumulated impairment. Cost comprises of purchase price including import duties and non-refundable purchase taxes after deducting trade discounts, rebates and includes other costs directly attributable to the acquisition or construction including expenditures on the material, labor and overheads directly relating to constructions, and installation of operating assets. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future benefits associated with the item will flow to the Operator and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to profit and loss account as and when incurred. Depreciation is charged to profit and loss applying reducing balance method depending upon the nature of the asset, at the rates specified for calculation of depreciation after taking into account residual value, if any. The useful lives, residual values and depreciation method are reviewed, and adjusted if appropriate, at each statement of financial position date. Depreciation on additions is charged from the month the assets are available for use while on disposals, no depreciation is charged in the month in which the assets are disposed off. The carrying values of tangible operating assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. An item of equipment is derecognized upon disposals when no future economic benefits are expected from its use or disposals. Gains and losses on disposals are determined by comparing proceeds with the carrying amount of the assets disposed off. These are taken to profit and loss account. ANNUAL REPORT 2020 331
  333. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 3 .2 Intangible assets These are stated at cost less accumulated amortization and any provision for accumulated impairment, if any. Amortization is calculated from the month the assets are available for use using the straight-line method, whereby the cost of the intangible asset is amortized over its estimated useful life over which economic benefits are expected to flow to the Operator. The useful life and amortization methods are reviewed, and adjusted if appropriate, at each statement of financial position date. Software development costs are only capitalized to the extent that future economic benefits are expected to be derived by the Operator. The carrying values of intangible assets are reviewed for impairment when events or changes in circumstances indicate that this carrying value may not be recoverable. If any such indications exist and where the carrying values exceed the estimated recoverable amounts, the assets are written down to their recoverable amount. 3.3 Takaful contracts Takaful contracts are based on the principles of Wakala. Takaful contracts so agreed usually inspire concept of tabarru (to donate benefits to others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty. Takaful contracts are those contracts whereby the PTF has accepted significant takaful risk from the participants' by agreeing to compensate the participants' if a specified uncertain future event (the takaful event) adversely affects the participants'. Once a contract has been classified as a takaful contract, it remains a Takaful contract for the remainder of its lifetime, even if takaful risk reduces significantly during this period, unless all rights and obligations are extinguished or expired. These contracts are provided to all types of customers based on assessment of takaful risk by the Operator. Normally personal Takaful contracts e.g. vehicle, personal accident, etc. are provided to individual customers, whereas, Takaful contracts of Fire & property, marine aviation & transport, accident & health and other commercial line products are provided to commercial organizations. Takaful contracts issued by the PTF are generally classified in five basic categories i.e. Fire & property, Marine aviation and transport, Motor, Accident & health and Miscellaneous. - Fire & property Takaful contracts generally cover the assets of the participants against damages by fire, earthquake, riots and strike, explosion, atmospheric disturbance, flood, electric fluctuation and impact, burglary, loss of profit followed by the incident of fire, contractor’s all risk, erection all risk, machinery breakdown and boiler damage, etc. Customers who undertake commercial activities on their premises could also receive compensation for the loss of earnings caused by the inability to use the takaful properties in their business activities. - Marine aviation and transport Takaful contracts generally provide cover for loss or damage to cargo while in transit to and from foreign land and inland transit due to various insured perils including loss of or damage to carrying vessel, etc. - Motor Takaful contracts provide indemnity for accidental damage to or loss of insured vehicle including loss of or damage to third party and other comprehensive car coverage. - Accident & health Takaful contracts mainly compensate hospitalization and out-patient medical coverage to the participant. - Miscellaneous Takaful contracts provide variety of coverage including cover against burglary, loss of cash in safe, cash in transit and cash on counter, fidelity guarantee, personal accident, workmen compensation, travel and crop, etc. In addition to direct takaful, the PTF also participates in risks under co-takaful contracts from other takaful funds and also accepts risks through re-takaful inward by way of facultative acceptance on case to case basis provided such risks are within 332 ANNUAL REPORT 2020
  334. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 the underwriting policies of the Operator . The nature of the risks undertaken under such arrangement is consistent with the risks in each class of business as stated above. 3.4 Deferred commission expense/ acquisition cost Deferred commission expense represents the portion of commission expense relating to the unexpired period of Takaful contract and is recognized as an asset. It is calculated in accordance with the pattern of its related provision for unearned contribution. 3.5 Unearned contributions Unearned contribution is determined as the ratio of the unexpired period of the policy and the total period, both measured to the nearest day except for marine cargo, where unearned contribution is determined as a ratio of the unexpired shipment period to the total expected shipment period, both measured to the nearest day. Administrative surcharge is recognized as a contribution at the time the policies are written and is included in above mentioned calculations. 3.6 Contribution deficiency reserve The Operator maintains a provision in respect of contribution deficiency (also called unexpired risk reserve) for the class of business where the unearned contribution liability is not adequate to meet the expected future liability, after re-takaful, from claims and other supplementary expenses expected to be incurred after the date of financial statements in respect of the unexpired takaful policies in that class of business at the statement of financial position date. For this purpose, contribution deficiency reserve is determined by independent actuary. The actuary determines the prospective loss ratios for each class of business and applies factors of unearned and earned contributions and uses assumptions appropriate to arrive at the expected claims settlement cost which when compared with Unearned Contribution Reserve (UCR) shows whether UCR is adequate to cover the unexpired risks. If these ratios are adverse, contribution deficiency is determined. Based on actuary's advice, the management has created a reserve for the same in these financial statements. The movement in the contribution deficiency reserve is recorded as an expense / income in profit and loss account for the year. 3.7 Re-Takaful contracts held These are contracts entered into by the Operator with re-takaful operators for compensation of losses suffered on Takaful contracts issued. These Re-Takaful contracts include both facultative and treaty arrangement contracts and are classified in same categories of Takaful contracts for the purpose of these financial statements. The Operator recognizes the entitled benefits under the contracts as various re-takaful assets and liabilities. Re-takaful Contribution is recognized as an expense at the time the re-takaful is ceded. Rebate from re-takaful is recognized in accordance with the policy of recognizing contribution revenue. The portion of re-takaful contribution not recognized as an expense is shown as a prepayment. Re-takaful assets represent balances due from re-takaful operators and re-takaful recoveries against outstanding claims. Due from re-takaful operators are carried at cost less any provision for impairment (if any). Cost represents the fair value of the consideration to be received. Re-takaful recoveries against outstanding claims are measured at the amount expected to be received. Re-takaful liabilities represent balances due to re-takaful operators and are primarily re-takaful contributions payable for ReTakaful contracts and are recognized at the same time when re-takaful contributions are recognized as an expense. Re-takaful assets are not offset against related takaful liabilities. Income or expense from Re-Takaful contracts are not offset against expenses or income from related Takaful contracts. ANNUAL REPORT 2020 333
  335. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Re-takaful assets /liabilities are derecognized when the contractual rights are extinguished or expired. An impairment review of re-takaful assets is performed at each statement of financial position date. If there is an objective evidence that the asset is impaired, the Operator reduces the carrying amount of that re-takaful asset to its receivable amount and recognize the impairment loss in profit and loss account. 3.8 Receivables and payables related to Takaful contracts Receivables and payables, other than claim payables, relating to Takaful contracts are recognized when due. The claim payable is recorded when an intimation is received. These include contributions due but unpaid, contribution received in advance, contributions due and claims payable to participants. These are recognized at cost, which is the fair value of the consideration given less provision for impairment, if any. If there is an objective evidence that any contribution due but unpaid is impaired, the Operator reduces the carrying amount of that contribution receivable and recognize the loss in profit and loss account. 3.9 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker who is responsible for allocating resources and assessing performance of the operating segments. A business segment is a distinguishable component of the Operator that is engaged in providing services that are subject to risks and returns that are different from those of other business segments. The Operator accounts for segment reporting of operating results using the classes of business as specified under the Insurance Ordinance, 2000, the Insurance Rules, 2017, Insurance Accounting Regulations, 2017 and Takaful Rules, 2012. The reported operating segments are also consistent with the internal reporting framework provided to Board of Directors who are responsible for allocating resources and assessing performance of the operating segments. The performance of segments is evaluated on the basis of underwriting results of each segment. Based on its classification of takaful contracts issued, the Operator has five primary business segments for reporting purposes namely Fire & property, marine aviation & transport, motor, accident & health and others including miscellaneous. The nature and business activities of these segments are disclosed in note 3.3 of these financial statements. Since the operation of the Operator are predominantly carried out in Pakistan, information relating to geographical segment is not considered relevant. The accounting policies of operating segment are the same as those described in the summary of significant accounting policies. Assets, liabilities and capital expenditure that are directly attributable to segments have been assigned to them while the carrying amount of certain assets used jointly by two or more segments have been allocated to segments on a reasonable basis. Those assets and liabilities which cannot be allocated to a particular segment on a reasonable basis are reported as unallocated corporate assets and liabilities. 3.10 Cash and cash equivalents Cash and cash equivalents are carried in the statement of financial position at cost. For the purpose of Cash Flow Statement, cash and cash equivalents comprise of cash in hand, policy stamps and bank balances. 3.11 Revenue recognition 3.11.1 Contribution Contribution including administrative surcharge under a Takaful contracts are recognized as written from date of issuance to the date of attachment of risk to the policy / cover note. Where contributions for a policy are payable in installments, full contribution for the duration of the policy is recognized as written, where the first such installment has been duly received by the Takaful operator, at the inception of the policy and related assets is recognized for contribution receivable. 334 ANNUAL REPORT 2020
  336. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Revenue from contribution (s) is determined after taking into account the unearned portion of contributions. The unearned portion of contribution income is recognized as a liability. Re-takaful contribution is recognized as expense after taking into account the proportion of deferred contribution expense which is recognized as a proportion of the gross re-takaful contribution of each policy, determined as the ratio of the unexpired period of the policy and the total period, both measured to the nearest day. The deferred portion of contribution expense is recognized as a prepayment. 3.11.2 Rebate from re-takaful operators Rebate from re-takaful operators is deferred and recognized as revenue in accordance with the pattern of recognition of the re-takaful contribution ceded to which it relates. 3.11.3 Investment income - Gain / loss on sale of available-for-sale investments is recognized in profit and loss account in the year of sale. - Dividend income is recognized when the Operator's right to receive the dividend is established. - Profit on saving accounts is recognized on accrual basis. 3.12 Investments All investments are initially recognized at cost, being the fair value of the consideration given and include transaction costs. These are recognized and classified as follows: - Investment at fair value through profit and loss account - Held to maturity - Available-for-sale The classification depends on the purpose for which the financial assets were acquired. The Operator does not have any 'investment at fair value through profit and loss account' at the statement of financial position date. 3.12.1 Available-for-sale Investments which are not eligible to be classified as 'fair value through profit and loss account' or 'held to maturity' are classified as 'available-for-sale'. These investments are intended to be held for an indefinite period of time which may be sold in response to the need for liquidity, changes in interest rates, equity prices or exchange rates are classified as available-for-sale. Quoted Subsequent to initial recognition, these investments are re-measured at fair value. Gains or losses on investments on remeasurement of these investments are recognized in statement of comprehensive income. Unquoted Fair value of unquoted investments is determined on the basis of appropriate valuation techniques as allowed by IAS 39 'Financial Instruments: Recognition and Measurement'. Where fair value cannot be measured reliably, these are carried at cost. 3.12.2 Fair / market value measurements For investments in Mutual funds fair / market value is determined by reference to rates quoted by Mutual Fund Association of Pakistan (MUFAP). For investments in quoted marketable securities, other than Term Finance ANNUAL REPORT 2020 335
  337. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Certificates , fair / market value is determined by reference to the Pakistan Stock Exchange limited quoted market price at the close of business on reporting date. The fair market value of Term Finance Certificates is as per the rates issued by the MUFAP. 3.12.3 Date of recognition Regular way purchases and sales of investments that require delivery within the time frame established by regulations or market convention are recognized at the trade date. Trade date is the date on which the Operator commits to purchase or sell the investment. 3.13 Offsetting of financial assets and financial liabilities A financial asset and a financial liability is offset and the net amount is reported in the statement of financial position if the Operator has legal enforceable right to set off the recognized amount and intends either to settle on a net basis or to realize the assets and settle the liability simultaneously. 3.14 Creditors, accruals, provisions and contingencies Liabilities for creditors and other amounts payable are carried at cost which is the fair value of the consideration to be paid in the future for the goods and / or services received, whether or not billed to the Operator. Provisions are recognized when the Operator has a legal or constructive obligation as a result of a past events and it is probable that outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of obligation. The provisions are reviewed at statement of financial position date and adjusted to reflect current best estimates. Where outflow of resources embodying economic benefits is not probable, a contingent liability is disclosed, unless the possibility of outflow is remote. 3.15 Provision for outstanding claims including incurred but not reported (IBNR) The Operator recognizes liability in respect of all claims incurred up to the statement of financial position date which is measured at the undiscounted value of the expected future payments. The claims are considered to be incurred at the time of the incident giving rise to the claim except as otherwise expressly indicated in the Takaful contract(s). The liability for claims include amounts relating to unpaid reported claims, claims incurred but not reported (IBNR), expected claims settlement costs, and any adjustments to claims outstanding from previous years. SECP through its circular 9 of 2016, dated March 09, 2016, issued 'SEC guidelines for estimation of incurred but not reported (IBNR) claims reserve 2016' ('Guidelines') and the Operator is required to comply with all provisions of these guidelines with effect from July 01, 2016. The Guidelines require that estimation for provision for claims incurred but not reported for each class of business, by using prescribed method “Chain Ladder Method (CLM)” and other alternate method as allowed under the provisions of the Guidelines. The CLM involves determination of development factors or link ratios for each period. These are then subsequently combined to determine Cumulative Development Factor (CDF) which represents the extent of future development of claims to reach their ultimate level to derive an IBNR estimate. As required under the guidelines, the Operator uses CLM by involving an actuary for determination of provision against IBNR. Accordingly, the actuarial valuation as at December 31, 2020 has been carried out by independent firm of actuaries for determination of IBNR for each class of business. The actuarial valuation is based on a range of standard actuarial claim projection techniques, based on empirical data and current assumptions (as explained in preceding paragraph) that may include a margin for adverse deviation as required / allowed by the circular 9 of 2016. The methods used, and the estimates made, are reviewed regularly. 336 ANNUAL REPORT 2020
  338. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 3 .16 Taxation Current Provision for current taxation is based on taxable income for the year determined in accordance with the prevailing law for taxation of income. The charge for current tax is calculated using prevailing tax rates or tax rates expected to apply to the profit for the year, if enacted. The charge for current tax also include adjustments, where considered necessary, to provision for tax made in previous years arising from assessments finalized during the current year for such years. Deferred Deferred taxation is accounted for using the statement of financial position liability method in respect of all temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of the taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, unused tax losses and tax credits can be utilized. Deferred taxation is calculated at the rates that are expected to apply to the period when the differences reverse based on tax rates that have been enacted or substantively enacted by the Statement of Financial Position date. Deferred tax is charged or credited in the profit and loss account, except in the case of items credited or charged to Statement of Comprehensive Income in which case it is included in Statement of Comprehensive Income. 3.17 Employees' benefit Salaries, wages and benefits are accrued in the period in which the associated services are rendered by employees of the Operator and measured on an undiscounted basis. The accounting policy for employees retirement benefits is described below: 3.17.1 Defined contribution plan The Operator operates an approved contributory provident fund scheme for all its eligible employees at entity level. Equal monthly contributions to the fund are made by the WTO and its employees at the rate of 8.33% of basic salary. 3.17.2 Defined benefit plans The Operator operates a funded gratuity scheme for its employees at end of service benefits. The entitlement to these benefits is based upon the employees' final salary and length of service, subject to completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. 3.17.3 Employees' compensated absences The Operator accounts for these benefits in the period in which the absences are earned. Employees are entitled to 30 days earned leave in a calendar year. They can accumulate up to 60 days leave. At the end of each calendar year, excess of leave balance over 60 days lapse. Employee must take 1 period of annual leave of at least 10 days in one stretch each calendar year. Encashment of leave is allowed at 1/30 of monthly gross salary per day. Serving employee can encash leave accumulated over 20 days. Minimum encashment is 16 calendar days and the ratio of en-cash leave can not exceed 4:1. Separating employees can encash 100% of their accumulated leave. 3.18 Impairment of assets Financial assets A financial asset is considered to be impaired if objective evidence indicate that one or more events had a negative effect on the estimated future cash flow of that asset. ANNUAL REPORT 2020 337
  339. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 An impairment loss in respect of a financial asset measured at amortized cost is calculated as a difference between its carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate . An impairment loss in respect of available for sale financial asset is calculated with reference to its current fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. Non-financial assets The carrying amounts of Operator's non-financial assets are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of such asset is estimated. An impairment loss is recognized wherever the carrying amount of asset exceeds its recoverable amount. Impairment losses are recognized in profit and loss account. A previously recognized impairment loss is reversed only if there has been change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in profit and loss account. 3.19 Claims expense Claims are charged against PTF income as incurred based on estimated liability for compensation owed under the Takaful contracts. It includes claims handling costs that are directly related to the processing and settlement of claims, a reduction for the value of salvage and other recoveries and any adjustments to claims outstanding from previous years. 3.20 Takaful surplus Takaful surplus attributable to the participants is calculated after charging all direct cost and setting aside various reserves. Allocation to participants, if applicable, is made after adjustment of claims paid to them during the period. 3.21 Management expenses Expenses of management allocated to the underwriting business represent directly attributable expenses and indirect expenses allocated to the various classes of business on the basis of gross contribution written. Expenses not allocable to the underwriting business are charged as other expenses. Management expense of the Operator are charged to the Operator's Takaful Fund. 3.22 Financial instruments Financial assets and liabilities are recognized at the time when the Operator becomes a party to the contractual provisions of the instrument and de-recognized when the Operator loses control of contractual rights that comprise the financial assets and in the case of financial liabilities when the obligation specified in the contract is discharged, cancelled or expired. Any gain or loss on the de-recognition of the financial assets and liabilities is included in the profit and loss account. Financial instruments carried in the statement of financial position include cash and bank, loans, investments, contribution due but unpaid, amount due from other takaful / re-takaful, contribution and claim reserves retained by cedants, accrued investment income, re-takaful recoveries against outstanding claims, sundry receivables, provision for outstanding claims, amounts due to other takaful / re-takaful, accrued expenses, other creditors and accruals. The particular recognition methods adopted are disclosed in the individual policy statements associated with each item. 3.23 Commission expense / acquisition cost Commission expenses incurred in obtaining and recording takaful policies is deferred and recognized in Operator's Takaful Fund as an expense in accordance with pattern of recognition of contribution revenue. 338 ANNUAL REPORT 2020
  340. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 3 .24 Wakala fee The Operator manages the general takaful operations for the participants and charge wakala fee to PTF on gross contribution written including administrative surcharge to meet the general and administrative expenses of the operator including commission to agents at following rates: 2020 Class Fire & property Marine aviation & transport Motor Accident & health Miscellaneous Percentage 2019 28.0% 35.0% 27.5% 25.0% 25.0% 28.0% 35.0% 32.5% 25.0% 25.0% Wakala fee is recognized on issuance of takaful contract. Wakala fee is recognized as income in OTF on the same basis on which the related contribution revenue is recognized in PTF. Unearned portion of Wakala fee is recognized as a liability in OTF and an asset in PTF. 3.25 Qard-e-Hasna If there is a deficit of admissible assets over liabilities in PTF, the Operator from the Operators Fund may provide Qard-eHasna to PTF so that PTF may become solvent as per Takaful Rules, 2012. Qard-e-Hasna from PTF can be recovered by the Operator over any period of time without charging any profit. 3.26 Mudarib's fee The Operator manages the participants' investment as Mudarib and charges 20% of the investment income earned by the PTF as Mudarib's fee. It is recognized on the same basis on which related revenue is recognized. 4 Critical accounting estimates and judgements 4.1 Use of estimates and judgments The preparation of financial statements in conformity with approved accounting standards requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The areas involving a higher degree of judgment and complexity, or areas where assumptions and estimates are significant to these financial statements or judgment was exercised in application of accounting policies, are as follows: Note - Employee benefit Provision for outstanding claims (including IBNR) and re-takaful recoveries there against Residual values and useful lives of property and equipment Residual values and useful lives of intangible assets Taxation Segment reporting 3.17 3.15 3.1 3.2 3.16 3.9 ANNUAL REPORT 2020 339
  341. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Note 5 Property and Equipment 18 ,793 2,000 20,793 5.1 5.2 Operating assets - owned Capital work in progress 5.1 2020 2019 Rupees in thousand 16,433 1,300 17,733 Operating assets - owned December 31, 2020 Cost As at Jan 01, Transfers 2020 Motor vehicles Office equipment Computer and related accessories Furniture and Fixture 19,318 393 1,492 632 Total 21,835 Additions 1,277 1,277 Disposals Depreciation As at Dec 31, As at Jan 01, Acc. Dep on Charge for the On disposal 2020 2020 Transfers year Rupees in thousand Book value As at Dec 31, As at Dec 31, Rate 2020 2020 3,705 298 448 - - 24,300 691 1,940 632 4,456 72 772 102 434 - 2,493 74 287 80 - 7,383 146 1,059 182 16,917 545 881 450 4,451 - 27,563 5,402 434 2,934 - 8,770 18,793 15% 15% 30% 15% December 31, 2019 Cost Additions / Transfers As at Jan 01, Transfers 2019 Motor vehicles Office equipment Computer and related accessories Furniture and Fixture 13,026 965 1,359 337 Total 15,687 - Disposals Depreciation As at Dec 31, As at Jan 01, Acc. Dep on Charge for the On disposal 2019 2019 Transfers year Rupees in thousand Book value As at Dec 31, As at Dec 31, Rate 2019 2019 6,292 260 133 534 (832) (239) 19,318 393 1,492 632 2,456 199 489 37 - 2,000 50 283 118 (177) (53) 4,456 72 772 102 14,862 321 720 530 7,219 (1,071) 21,835 3,181 - 2,451 (230) 5,402 16,433 15% 15% 30% 15% Operator's Takaful Fund 2020 2019 Rupees in thousand 5.2 Capital work in progress Opening balance Additions during the year Transfer to property and equipment Transfer to intangibles Closing balance 1,300 700 2,000 This represent amount advanced to Analytics (Private) Limited for development of Web portal for Takaful Operations. 340 ANNUAL REPORT 2020 3,679 750 (2,379) (750) 1,300
  342. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Note 6 Operator 's Takaful Fund December 31, December 31, 2020 2019 Rupees in thousand Intangible assets 6.1 Intangible assets 6.1 Movement Opening balance - net book value Transfer from Capital work - in - progress Addition during the year Book value of disposal during the year Amortization charged during the year Closing balance - net book value December 31, 2020 Impairment/ Carrying value provision Cost 12,421 17,650 17,650 1,060 20,633 750 2,250 (1,312) (4,977) (6,289) 12,421 (5,983) (5,983) 17,650 December 31, 2019 Impairment/ Carrying value provision Cost Rupees in thousand 7 Investments in equity securities Operator's Takaful Fund Available for sale Mutual fund Meezan Islamic Income Fund [604,139 units (2019: 604,139 units)] 34,628 - 34,628 31,048 - 1,245 35,873 Unrealized gain on revaluation 31,048 1,910 32,958 Participants' Takaful Fund Available for sale Mutual fund Al Hamra Islamic Income Fund [481,118 units (2019: Nil units)] 50,000 - Unrealized gain on revaluation 50,000 - - - 614 - 50,614 - Participants' Takaful Fund No. of Certificates Value of Certificates December 31, December 31, December 31, December 31, 2020 2019 2020 2019 Numbers Face Value Rupees in thousand 8 Investments in debt securities Held - to - maturity Sukuk certificates Engro Polymer & Chemicals Limited The Hub Power Company Limited (HUBCO) 500 750 500 750 100,000 100,000 50,000 75,000 125,000 50,000 75,000 125,000 ANNUAL REPORT 2020 341
  343. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 2020 2019 Rupees in thousand 9 Qard-e-Hasna Opening balance Qard-e-Hasna transferred from OPF during the year Qard-e-Hasna returned by PTF during the year Closing balance 146 ,460 146,460 Operator's Takaful Fund 2020 2019 146,460 146,460 Participants' Takaful Fund 2020 2019 Rupees in thousand 10 11 12 Loans and other receivables - Considered good Sales tax recoverable Advance taxes Federal excise duty Accrued income Loan to employees Security deposits Bid money for tenders Advances 14 1,339 1,160 366 4,532 7,411 Takaful / Re - takaful receivables - Unsecured and considered good 2,432 1,131 1,555 525 1,088 6,731 14,770 3,548 9,332 27,650 1,750 2,848 17,057 21,655 Participants' Takaful Fund 2020 2019 Rupees in thousand Due from takaful participants' holders Less: provision for impairment of takaful participants' holder 304,220 304,220 230,238 230,238 Due from other takaful / re - takaful operator's Less: provision for impairment of due from other takaful / re - takaful operator's 80,225 80,225 384,445 31,342 31,342 261,580 83,834 20,213 104,047 81,686 23,693 105,379 Prepayments Prepaid re - takaful contribution ceded Prepaid monitoring charges (Tracking device) 342 ANNUAL REPORT 2020
  344. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Note 13 Operator 's Takaful Fund 2020 2019 Participants' Takaful Fund 2020 2019 Rupees in thousand Cash and bank Cash and cash equivalents: Policy stamps in hand Cash in hand - 150 68 - - Current and other accounts: Profit or loss accounts 13.1 209,296 209,446 91,895 91,895 552,900 552,900 434,590 434,658 13.1 Saving accounts carry expected profit rates ranging from 3% to 8% per annum (2019: 5% to 11% per annum) 14 Participant’s Takaful Fund 2020 2019 Rupees in thousand Takaful / re - takaful payables Due to takaful participants' holders Due to other takaful / re - takaful operator's 11,059 68,377 79,436 Operator's Takaful Fund 2020 2019 3,311 35,202 38,513 Participants' Takaful Fund 2020 2019 Rupees in thousand 15 Other creditors and accruals Agents commission payable Federal insurance fee Sales tax payable Income tax deducted at source Accrued expenses Others 16 39,299 2,066 7,423 5,380 54,168 26,812 937 5,427 7,186 10,666 51,028 3,522 21,711 10,417 35,650 2,570 11,355 4,937 18,862 Contingencies and commitments There has been no contingencies and commitments as at December 31, 2020. ANNUAL REPORT 2020 343
  345. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 17 Participant ’s Takaful Fund 2020 2019 Rupees in thousand Net contribution revenue Gross contribution written Wakala fee Contribution net of wakala fee Unearned contribution reserve - opening Unearned contribution reserve - closing Contribution earned Less: Re - takaful contribution ceded Prepaid re - takaful contribution ceded - opening Prepaid re - takaful contribution ceded - closing Re - takaful expense Net contribution revenue Note 18 Re - takaful rebate Re - takaful rebate received Unearned re - takaful rebate - opening Unearned re - takaful rebate - closing Net re-takaful rebate 19 1,525,564 (447,396) 1,078,168 377,586 (421,449) 1,034,305 1,212,523 (329,572) 882,951 365,389 (377,586) 870,755 290,974 81,686 (83,834) 288,826 745,479 271,282 64,493 (81,686) 254,089 616,666 Participant’s Takaful Fund 2020 2019 Rupees in thousand 55,199 15,979 (17,183) 53,995 47,594 12,735 (15,979) 44,350 1,036,469 558,082 (257,810) 1,336,741 649,201 257,810 (220,606) 686,405 402,302 121,411 315,118 102,337 (102,336) (62,534) 615,084 721,657 161,214 525,191 Net takaful claims Claims paid Outstanding claims including IBNR - closing Outstanding claims including IBNR - opening Claim expense Less: Re - takaful and other recoveries received Re - takaful and other recoveries in respect of outstanding claims - closing Re - takaful and other recoveries in respect of outstanding claims - opening Re-takaful and other recoveries revenue Net Takaful Claims 19.1 19.1 Net Takaful Claims The following table shows the development of fire, marine and others including miscellaneous claims over a period of time. The disclosure goes back to the period when the earliest material claim arose for which there is still uncertainty about the amount and timing of the claims payments. For other classes of business the uncertainty about the amount and timings of claims payment is usually resolved within a year. Further, claims with significant uncertainties are not outstanding as at December 31, 2020. 344 ANNUAL REPORT 2020
  346. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Accident year 2016 2017 2018 2019 2020 Total Rupees in thousand Estimate of ultimate claims cost At end of accident year with IBNR One year later Two years later Three years later Four years later Current estimate of cumulative claims Less : Cumulative payments to date Liability recognized in the statement of financial position 40,025 27,080 4,843 645 3,319 3,319 352,789 114,902 4,268 2,171 2,171 510,467 141,659 9,750 9,750 760,439 209,695 209,695 1,369,784 1,369,784 3,033,504 493,336 18,861 2,816 3,319 1,594,719 (38) (166) (6,846) (162,672) (866,915) (1,036,637) 3,281 2,005 2,904 47,023 502,869 558,082 Participants' Takaful Fund 2020 2019 Rupees in thousand 20 Other direct expenses Monitoring charges Non refundable taxes Inspection charges Bank charges Others 21 Commission Expense Commission paid or payable Deferred commission - opening Deferred commission - closing Net commission 22 49,872 8,124 2,749 146 1,241 62,132 49,718 4,003 2,568 264 1,255 57,808 Operator's Fund 2020 2019 Rupees in thousand 117,112 41,931 (39,961) 119,082 102,217 39,148 (41,931) 99,434 447,396 139,978 (178,766) 408,608 329,572 134,721 (139,979) 324,314 Wakala Fee Gross Wakala fee Unearned Wakala fee - Opening Unearned Wakala fee - Closing Net wakala fee The Operator manages the general takaful operations for the participants' and charges 28 % (2019: 28 %) for Fire & Property, 35 % (2019: 35 %) for Marine, Aviation & Transport, 32.5 % (2019: 27.5 %) for Motor, 25 % (2019: 25%) for Health and 25 % (2019: 25 %) for Miscellaneous classes, of gross contribution written including administrative surcharge as wakala fee against the services. ANNUAL REPORT 2020 345
  347. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Operator 's Fund 2020 2019 Rupees in thousand 23 General, administrative and management expenses 92,658 2,934 4,977 651 4,061 1,595 900 2,359 17,731 1,397 562 2,202 34 2,740 8,405 143,206 Employee benefit cost Depreciation Amortization Advertisement and sales promotion Rent, rates and taxes Communication Legal and professional charges - business related Travelling and conveyance expenses Shared expenses Entertainment Printing, stationery and postage Annual supervision fee - SECP Bank charges Repairs and maintenance Others 24 Investment income Profit on Mutual funds - dividend income Mutual funds - Capital Gain Sukuks 25 Operator's Takaful Fund 2020 2019 78,226 2,450 5,983 8,215 2,539 1,472 900 2,066 17,999 1,948 706 1,483 41 703 7,141 131,872 Participants' Takaful Fund 2020 2019 Rupees in thousand 24 3,560 3,584 1,345 1,345 17,156 17,156 7,065 7,065 14,091 79 14,170 14,274 1,582 15,856 32,403 32,403 31,845 31,845 Other income Profit on bank deposits Other Income 346 ANNUAL REPORT 2020
  348. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Note 26 Operator 's Fund 2020 2019 Rupees in thousand Direct expenses Auditors' remuneration Shariah audit fee Subscription 26.1 740 3,081 3,821 740 3,080 19 3,839 385 152 165 38 740 385 152 165 38 740 47,605 31,110 (236) 47,369 (123) 30,987 34,961 818 3,326 9,049 2,011 4,170 1,431 6,607 62,373 18,627 624 2,180 6,533 1,452 3,674 1,108 1,386 35,584 26.1 Auditors' remuneration Annual audit fee Half year review fee Shariah compliance report Out of pocket expense 27 Taxation Current tax: - for the year Deferred tax: - for the year 28 Executives remuneration Managerial remuneration Leave encashment Bonus Rent and house maintenance Medical Conveyance Contribution to defined contribution plan Other perquisites and allowances Number of persons 18 13 There has been no payments made to the directors / chief executive officer during the year 2020 (2019 : Nil) from OPF. 29 Number of employees Total number of employees at the end and average number of employees during the year ended 2020 and 2019 are as follows: 30 As at December, 31 68 61 Average during the year 68 55 Transactions with related parties The Operator has related party relationships with its associates, subsidiary company, entities with common directorship, employee retirement benefit plans, key management personnel and other parties. Transactions are entered into with such related parties for the issuance of policies to and disbursements of claims incurred by them and payments of rentals for the use of premises rented from them. There are no transactions with key management personnel other than those specified in their terms of employment. Contributions and accruals in respect of staff retirement benefits and other benefit plans are made in accordance with the actuarial valuations / terms of the contribution plan. ANNUAL REPORT 2020 347
  349. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 2020 2019 Rupees in thousand i ) Transactions Subsidiary company Contribution underwritten Contribution received Claims paid 1,631 1,553 1,561 1,187 1,260 302 183,688 180,868 63,718 13,329 148,061 160,919 58,617 2,944 579 80 104 1 17,679 31,773 243,357 350 14,896 18,594 108,591 343 Other related parties Contribution underwritten Contribution received Claims paid Income on bank deposits ii) Period end balances Subsidiary company Balances payable Balances receivable Other related parties Balances receivable Balances payable Cash and bank balances Contribution received in advance 348 ANNUAL REPORT 2020
  350. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 31 Segment Information 31 .1 Each class of business has been identified as reportable segment. Class of business wise revenue and results have been disclosed in the profit and loss account prepared in accordance with the requirements of the Insurance Ordinance, 2000. The following is a schedule of class of business wise assets and liabilities. Participants' Takaful Fund December 31, 2020 Fire & Property Damage Marine, Aviation & Transport Motor Accident & Health Miscellaneous Total Rupees in thousand Contribution receivable (inclusive of Federal Excise Duty, Federal Insurance Fee and Administrative Surcharge) Less : Federal Excise Duty Federal Insurance Fee Gross Direct Written Contribution (inclusive of Administrative Surcharge) Facultative inward contribution Gross Contribution Written Wakala fee Contribution net of wakala fee Contribution earned Takaful contribution ceded to retakaful Net takaful contribution Re-takaful rebate Net underwriting income 224,964 (28,774) (1,949) 58,311 (7,397) (505) 843,293 (101,829) (6,942) 465,540 (1,801) (4,591) 92,259 (11,627) (798) 1,684,367 (151,428) (14,785) 194,241 1,446 195,687 (54,792) 140,895 131,434 (149,403) (17,969) 30,013 12,044 50,409 42 50,451 (17,658) 32,793 32,805 (39,147) (6,342) 8,358 2,016 734,522 734,522 (238,720) 495,802 471,707 (24,615) 447,092 447,092 459,148 459,148 (114,787) 344,361 326,210 326,210 326,210 79,834 5,922 85,756 (21,439) 64,317 72,149 (75,661) (3,512) 15,624 12,112 1,518,154 7,410 1,525,564 (447,396) 1,078,168 1,034,305 (288,826) 745,479 53,995 799,474 Takaful claims Re - takaful and other recoveries Net claims Contribution deficiency reserve Direct expense Net takaful claims and expenses (522,059) 515,467 (6,592) (1,250) (7,842) (9,729) 16,556 6,827 (300) 6,527 (340,708) 80,007 (260,701) (57,163) (317,864) (460,751) (460,751) 30,071 (2,755) (433,435) (3,494) 3,054 (440) (664) (1,104) (1,336,741) 615,084 (721,657) 30,071 (62,132) (753,718) 4,202 8,543 129,228 (107,225) 11,008 45,756 Surplus / (deficit) before investment income Other income Investment income Mudarib fee Surplus transferred to Balance of PTF 17,156 32,403 (3,521) 91,794 Corporate segment assets Corporate unallocated assets Total assets 363,536 363,536 23,880 23,880 229,113 229,113 115,706 115,706 51,162 51,162 783,397 776,377 1,559,774 Corporate segment liabilities Corporate unallocated liabilities Total liabilities 388,928 388,928 20,481 20,481 501,097 501,097 253,059 253,059 40,405 40,405 1,203,970 182,288 1,386,258 ANNUAL REPORT 2020 349
  351. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Participants ' Takaful Fund December 31, 2019 Fire & Property Damage Marine, Aviation & Transport Motor Accident & Health Miscellaneous Total Rupees in thousand Contribution receivable (inclusive of Federal Excise Duty, Federal Insurance Fee and Administrative Surcharge) Less : Federal Excise Duty Federal Insurance Fee Gross Direct Written Contribution (inclusive of Administrative Surcharge) Facultative inward contribution Gross Contribution Written Wakala fee Contribution net of wakala fee 202,470 (25,535) (1,766) 38,372 (4,962) (328) 815,604 (96,939) (7,146) 207,411 (2,735) (2,028) 100,083 (12,201) (940) 1,363,940 (142,372) (12,208) 175,169 2,627 177,796 (49,783) 128,013 33,082 116 33,198 (11,619) 21,579 711,519 711,519 (195,668) 515,851 202,648 202,648 (50,662) 151,986 86,942 420 87,362 (21,840) 65,522 1,209,360 3,163 1,212,523 (329,572) 882,951 Contribution earned Retakaful expense Net contribution revenue Net rebate on re - takaful Net underwriting income 116,233 (132,551) (16,318) 26,400 10,082 21,058 (25,314) (4,256) 5,383 1,127 506,511 (22,168) 484,343 484,343 164,164 164,164 164,164 62,789 (74,056) (11,267) 12,567 1,300 870,755 (254,089) 616,666 44,350 661,016 (81,687) 71,558 (10,129) (1,257) (11,386) (16,791) 13,445 (3,346) (135) (3,481) (365,599) 49,438 (316,161) (54,930) (371,091) (192,443) (192,443) (5,969) (751) (199,163) (29,885) 26,773 (3,112) (735) (3,847) (686,405) 161,214 (525,191) (5,969) (57,808) (588,968) (1,304) (2,354) 113,252 (34,999) (2,547) 72,048 Takaful claims Re - takaful and other recoveries Net claims Contribution deficiency reserve Direct expense Net takaful claims and expenses (Deficit) / surplus / before investment income Other income Investment income Mudarib fee Surplus transferred to Balance of PTF 31,845 7,065 (1,323) 109,635 Corporate segment assets Corporate unallocated assets Total assets 168,093 168,093 14,798 14,798 259,075 259,075 65,903 65,903 77,713 77,713 585,582 605,006 1,190,588 Corporate segment liabilities Corporate unallocated liabilities Total liabilities 160,639 160,639 12,411 12,411 526,003 526,003 172,859 172,859 72,068 72,068 943,980 165,322 1,109,302 350 ANNUAL REPORT 2020
  352. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Operator 's Takaful Fund December 31, 2020 31.2 Fire & Property Damage Marine, Aviation & Transport Motor Accident & Health Miscellaneous Total Rupees in thousand Wakala fee income Less : Commission expense Management expenses 51,112 (27,127) (32,623) (8,638) 17,664 (7,702) (9,262) 700 207,046 (51,201) (61,573) 94,272 108,737 (22,505) (27,064) 59,168 24,049 (10,547) (12,684) 818 408,608 (119,082) (143,206) 146,320 3,521 3,584 (3,821) 14,170 163,774 Corporate segment assets Corporate unallocated assets Total assets 27,126 27,126 4,132 4,132 77,960 77,960 39,368 39,368 8,158 8,158 156,744 432,404 589,148 Corporate segment liabilities Corporate unallocated liabilities Total liabilities 23,564 23,564 614 614 122,753 122,753 28,235 28,235 3,600 3,600 178,766 64,031 242,797 Mudarib's share of PTF investment income Investment income Direct expenses Other income Profit before tax Operator's Takaful Fund December 31, 2019 Fire and Property Damage Marine, Aviation and Transport Motor Accident & Health Miscellaneous Total Rupees in thousand Wakala fee income Less : Commission expense Management expenses 45,202 (23,558) (31,243) (9,599) 11,337 (5,324) (7,061) (1,048) 192,125 (50,124) (66,476) 75,525 54,721 (13,141) (17,428) 24,152 20,929 (7,287) (9,664) 3,978 324,314 (99,434) (131,872) 93,008 1,323 1,345 (3,839) 15,856 107,693 Corporate segment assets Corporate unallocated assets Total assets 21,854 21,854 2,216 2,216 63,741 63,741 16,738 16,738 8,315 8,315 112,864 313,427 426,291 Corporate segment liabilities Corporate unallocated liabilities Total liabilities 19,884 19,884 620 620 91,079 91,079 22,185 22,185 6,211 6,211 139,979 55,893 195,872 Mudarib's share of PTF investment income Investment income Other expenses Other income Profit before tax ANNUAL REPORT 2020 351
  353. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 32 Management of takaful and financial risk The Operator 's activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (including price risk and currency risk).The Operator's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance. Overall risks arising from the Operator's financial assets and liabilities are limited. The Operator consistently manages its exposure to financial risk without any material change from previous period in the manner described in notes below. The Board of Directors has overall responsibility for the establishment and oversight of Operator's risk management framework. The Board is also responsible for developing the Operator's risk management policies. The individual risk wise analysis is given below : 32.1 Takaful risk The principal risk that the Operator faces under takaful contracts is that the actual claims and benefit payments or the timing thereof may differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of long-term claims. Therefore, the objective of the Operator is to ensure that sufficient reserves are available to cover these liabilities. The above risk exposure is mitigated by diversification across a large portfolio of takaful contracts and geographical areas. The variability of risks is also improved by careful selection and implementation of underwriting strategy guidelines, as well as the use of retakaful arrangements. Further, strict claims review policies to assess all new and ongoing claims, regular detailed review of claims handling procedures and frequent investigation of possible fraudulent claims and similar procedures are put in place to reduce the risk exposure of the Operator. The Operator further enforces a policy of actively managing and prompt pursuing of claims, in order to reduce its exposure to unpredictable future developments that can negatively impact the Operator. Amounts recoverable from re-takaful are estimated in a manner consistent with the outstanding claims provision and are in accordance with the re-takaful contracts. Although the Operator has re-takaful arrangements, it is not relieved of its direct obligations to its policy holders and thus a credit exposure exists with respect to ceded takaful, to the extent that any re-takaful operator is unable to meet its obligations assumed under such re-takaful agreements. The Operator's placement of re-takaful is diversified such that it is neither dependent on a single re-takaful operator nor are the operations of the Operator substantially dependent upon any single re-takaful contract. Re-takaful contracts are written with approved re-takaful operators on either a proportionate basis or non-proportionate basis. The re-takaful operators are carefully selected and approved and are dispersed over several geographical regions. Experience shows that larger the portfolio is in similar re-takaful contracts, smaller will be the relative variability about the expected outcome. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Operator has developed its takaful underwriting strategy to diversify the type of takaful risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome. The Operator principally issues the general takaful contracts e.g. fire and property damage, marine,aviation and transport, motor, accident & health and other miscellaneous. Risks under non-life takaful contracts usually cover twelve month or lesser duration. For general takaful contracts the most significant risks arise from accidental fire, atmospheric disaster and terrorist activities . Takaful contracts at times also cover risk for single incidents that expose the Operator to multiple takaful risks. 32.1.1 Geographical concentration of takaful risk To optimize benefits from the principle of average and law of large numbers, geographical spread of risk is of extreme importance. There are a number of parameters which are significant in assessing the accumulation of risks with reference to the geographical location, the most important of which is risk survey. 352 ANNUAL REPORT 2020
  354. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 32 .1.2 Re-takaful arrangements Keeping in view the maximum exposure in respect of key zone aggregate, a number of proportional and nonproportional re-takaful arrangements are in place to protect the net account in case of a major catastrophe. Apart from the adequate event limit which is the multiple of the treaty capacity or the primary recovery from the proportional treaty, any loss over and above limit would be recovered from the non-proportional treaty which is very much in line with the risk management philosophy of the Operator. Gross sum covered 2019 2020 Class Fire and property Marine, aviation and transport Motor Accident and health Miscellaneous 212,596,719 114,158,337 36,598,225 33,902,621 2,962,076 400,217,978 224,859,121 58,061,664 32,326,306 11,377,027 2,847,097 329,471,215 Participants' Takaful Fund Re-takaful 2019 2020 Rupees in thousand 166,376,199 57,217,616 1,257,831 2,370,001 227,221,647 Net 2020 179,490,118 46,220,520 47,122,443 56,940,721 1,041,591 35,340,394 33,902,621 2,450,782 592,075 230,104,934 172,996,331 2019 45,369,003 10,939,221 31,284,715 11,377,027 396,315 99,366,281 32.1.3 Sources of uncertainty in estimation of future claim payments The key source of estimation uncertainty at the statement of financial position date relates to valuation of outstanding claims, whether reported or not, and includes expected claims settlement costs. Considerable judgment by management is required in the estimation of amounts due to participants arising from claims made under takaful contracts. Such estimates are necessary based on assumptions about several factors involving varying and possibly significant degrees of judgment and uncertainty, and actual results may differ from management's estimates resulting in future changes in estimated liabilities. Qualitative judgments are used to assess the extent to which past trends may not apply in the future, for example one-off occurrence, changes in market factors such as judicial decisions and government legislation affect the estimates. In particular, estimates have to be made both for the expected ultimate cost of claims reported at the statement of financial position date and for the expected ultimate cost of claims incurred but not reported (IBNR) at the statement of financial position date. 32.1.4 Neutral assumptions for claim estimation The process used to determine the assumptions for calculating the outstanding claim reserves is intended to result in neutral estimates of the most likely or expected outcome. The nature of the business makes it very difficult to predict with certainty the likely outcome of any particular claim and the ultimate cost of notified claims. Each notified claim is assessed in separate, case to case basis, with due regard to claim circumstances, information available from surveyors and historical evidence of the size of similar claims. Case estimates are reviewed regularly and updated as and when new information is available. The estimation of IBNR is generally subject to a greater degree of uncertainty that the estimation of the cost of settling claims already notified to the Operator, in which case the information about the claim event is available. IBNR provision is initially estimated at a gross level and a separate calculation is carried out to estimate the size of the retakaful recoveries. The estimation process takes into account the past claims reporting pattern and details of retakaful programs. The contribution liabilities have been determined such that the total contribution liability provisions (unearned contribution reserve and contribution deficiency reserve) would be sufficient to service the future expected claims and expenses likely to occur on the unexpired policies as of statement of financial poition date. The expected future liability is determined using estimates and assumptions based on the experience during the expired period of the contracts and expectations of future events that are believed to be reasonable. ANNUAL REPORT 2020 353
  355. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 32 .1.5 Sensitivity analysis The risks associated with the takaful contracts are complex and subject to a number of variables which complicate quantitative sensitivity analysis. The Operator makes various assumptions and techniques based on past claims development experience. This includes indications such as average claims cost, ultimate claims numbers and expected loss ratios. The Operator considers that the liability for insurance claims recognized in the statement of financial position is adequate. However, actual experience may differ from the expected outcome. As the Operator enters into short term takaful contracts, it does not assume any significant impact of changes in market conditions on unexpired risks. However, some results of sensitivity testing are set out below, showing the impact on surplus/(deficit), net of re-takaful. Surplus/ (deficit) 2020 2019 Rupees in thousand 10% increase in claims liability Net: Fire Marine Motor Accident & Health Miscellaneous 10% decrease in claims liability Net: Fire Marine Motor Accident & Health Miscellaneous 32.2 Financial Risk (659) 683 (26,070) (46,075) (44) (1,013) (335) (31,616) (19,244) (311) (72,165) (52,519) 659 (683) 26,070 46,075 44 1,013 335 31,616 19,244 311 72,165 52,519 Maturity profile of financial assets and liabilities: Markup bearing Maturity upto Maturity after one year one year Participants' Takaful fund December 31, 2020 Non-markup bearing Maturity upto Maturity after one year one year Sub total Sub total Total Rupees in thousand Financial assets Investments - Debt securities Investments - Equity securities Loans and other receivables Takaful / re-takaful receivablesunsecured and considered good Re-takaful recoveries against outstanding claims Salvage recoveries accrued Cash and bank - 125,000 - 125,000 - 50,614 27,650 - 50,614 27,650 125,000 50,614 27,650 552,900 552,900 125,000 552,900 677,900 384,445 279,132 35,986 777,827 - 384,445 279,132 35,986 777,827 384,445 279,132 35,986 552,900 1,455,727 552,900 125,000 677,900 558,082 79,436 116,783 10,417 764,718 13,109 - 558,082 79,436 116,783 10,417 764,718 13,109 558,082 79,436 116,783 10,417 764,718 691,009 Financial liabilities Outstanding claims (including IBNR) Takaful / re-takaful payables Wakala and mudarib fee payable Other creditors and accruals 354 ANNUAL REPORT 2020
  356. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Participants ' Takaful fund December 31, 2019 Non-markup bearing Markup bearing Maturity upto Maturity after one year one year Maturity upto Maturity after one year one year Sub total Sub total Total Rupees in thousand Financial assets Investments - Debt securities Loans and other receivables * Takaful / re-takaful receivablesunsecured and considered good Re-takaful recoveries against outstanding claims Salvage recoveries accrued Cash and bank - 125,000 - 125,000 - 21,655 - 21,655 125,000 21,655 434,658 434,658 125,000 434,658 559,658 261,580 88,706 13,631 385,572 - 261,580 88,706 13,631 385,572 261,580 88,706 13,631 434,658 945,230 434,658 125,000 559,658 257,810 38,513 70,933 4,937 372,193 13,379 - 257,810 38,513 70,933 4,937 372,193 13,379 257,810 38,513 70,933 4,937 372,193 573,037 Financial liabilities Outstanding claims (including IBNR) Takaful / re-takaful payables Wakala and mudarib fee payable Other creditors and accruals Operator's Takaful fund December 31, 2020 Non-markup bearing Markup bearing Maturity upto Maturity after one year one year Maturity upto Maturity after one year one year Sub total Sub total Total Rupees in thousand Financial assets Investment - Equity securities Loans and other receivables * Wakala and mudarib fee receivable Cash and bank - - - 209,446 209,446 - 209,446 209,446 35,873 2,215 116,783 154,871 209,446 - 209,446 52,102 52,102 102,769 650 650 35,873 2,865 116,783 155,521 35,873 2,865 116,783 209,446 364,967 650 52,102 52,102 103,419 52,102 52,102 312,865 Financial liabilities - Other creditors and accruals Operator's Takaful fund December 31, 2019 Non-markup bearing Markup bearing Maturity upto Maturity after one year one year Maturity upto Maturity after one year one year Sub total Sub total Total Rupees in thousand Financial assets Investment - Equity securities Loans and other receivables * Wakala and mudarib fee receivable Cash and bank - - - - 91,895 91,895 32,958 3,211 70,933 107,102 91,895 91,895 - 91,895 - - 32,958 3,211 70,933 107,102 32,958 3,211 70,933 91,895 198,997 91,895 44,664 44,664 62,438 - 44,664 44,664 62,438 44,664 44,664 154,333 Financial liabilities Other creditors and accruals ANNUAL REPORT 2020 355
  357. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 32 .2.1 Mark - up rate risk Mark-up rate risk is the risk that the value of a financial instrument or future cash flows of a financial instrument will fluctuate due to changes in the market mark - up rates. Sensitivity to mark-up rate risk arises from mismatching of financial assets and liabilities that mature or repaid in a given period. The Operator manages this mismatch through risk management strategies where significant changes in gap position can be adjusted. At the statement of financial position date the mark-up rate profile of the Operator's significant interest / mark-up bearing financial instruments was as follows: Effective interest rate (%) 2020 2019 Carrying amounts 2020 2019 Rupees in thousand Floating rate financial instruments Financial assets: Cash at bank - saving account 3.00% - 8.00% 5.00% - 11.00% 762,346 526,485 32.2.2 Sensitivity analysis The Operator does not have any fixed rate financial assets and liabilities. For cash flow sensitivity analysis of variable rate instruments, a hypothetical change of 100 basis points in mark-up rates at the statement of financial position date would have decreased / (increased) profit for the year by the amounts shown below. It is assumed that the changes occur immediately and uniformly to each category of instrument containing interest rate risk. Variation in market interest rates could produce significant changes at the time of early repayments. For these reasons, actual results might differ from those reflected in the details specified below. The analysis assumes that all other variables remain constant. Effect on profit before tax Effect on funds Increase Decrease Increase Decrease Rupees in thousand As at December 31, 2020 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 76,235 (76,235) 53,365 (53,365) As at December 31, 2019 - Fluctuation of 100 bps Cash flow sensitivity - variable rate financial liabilities Cash flow sensitivity - variable rate financial assets 52,649 (52,649) 36,854 (36,854) Foreign currency risk Currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Operator, at present is not materially exposed to currency risk as majority of the transactions are carried out in Pak Rupees. Price risk Price risk represents the risk that the fair value of financial instruments will fluctuate because of changes in the market prices (other than those arising from interest / mark-up rate risk or currency risk), whether those changes are caused by factors specific to individual financial instrument or its issuer, or factors affecting all or similar financial instrument traded in the market. The Operator is exposed to equity price risk that arises as a result of changes in the net asset value of mutual funds. The equity price risk arises from the Operator's investment in equity securities of mutual funds. The Operator's strategy is to hold its strategic equity investments on a long term basis. Thus, Operator is not affected significantly by short term fluctuation in its strategic investments provided that the underlying business, 356 ANNUAL REPORT 2020
  358. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 economic and management characteristics of the investees remain favorable . The Operator strives to maintain above average levels of shareholders' capital to provide a margin of safety against short term equity volatility. The Operator manages price risk by monitoring exposure in quoted equity securities and implementing the strict discipline in internal risk management and investment policies. The Operator has investments in quoted equity securities amounting to Rs. 35,873 thousands (2019: Rs. 32,958 thousands) at the statement of financial position date. The carrying value of investments subject to equity price risk are, in almost all instances, based on quoted market prices as of the statement of financial position date. Market prices are subject to fluctuation which may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. 32.2.3 Sensitivity analysis As the entire investment portfolio has been classified in the 'available-for-sale' category, a 10% increase / decrease in unit prices at year end would have increased / decreased Operator's fund as follows: December 31, 2020 Impact on Impact on profit before operator's fund tax Rupees in thousand Effect of increase in unit price Effect of decrease in unit price - December 31, 2019 Impact on Impact on profit before operator's fund tax Rupees in thousand - 2,424 (2,424) 2,307 (2,307) 32.3 Credit risk and concentration of credit risk Credit risk is the risk that arises with the possibility that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. The Operator attempts to control credit risk by monitoring credit exposure by undertaking transactions with a large number of counterparties in various sectors and by continually assessing the credit worthiness of counterparties. Concentration of credit risk occurs when a number of counterparties have a similar type of business activities. As a result any change in economic, political or other conditions would affect their ability to meet contractual obligations in a similar manner. The Operator's credit risk exposure is not significantly different from that reflected in these financial statements. The management monitors and limits the Operator's exposure and makes conservative estimates of provisions for doubtful assets, if any. The management is of the view that it is not exposed to significant concentration of credit risk as its financial assets are adequately diversified in entities of sound financial standing, covering various industrial sectors. The carrying amount of financial assets represents the maximum credit exposure, as specified below: December 31, 2020 Operator's Participants' Aggregate Fund Takaful Fund Rupees in thousand Investment in equity securities Investment in debt securities Loans and other receivable Due from takaful contract holders Due from other takaful / other re-takaful Retakaful recoveries against outstanding claims Salvage recoveries accrued Wakala and mudarib fee receivable Bank deposits 35,873 2,865 116,783 209,296 364,817 50,614 125,000 27,650 304,220 80,225 279,132 35,986 552,900 1,455,727 86,487 125,000 30,515 304,220 80,225 279,132 35,986 116,783 762,196 1,820,544 December 31, 2019 Operator's Participants' Aggregate Fund Takaful Fund Rupees in thousand 32,958 3,211 70,933 91,895 198,997 125,000 21,655 230,238 31,342 88,706 13,631 434,590 945,162 32,958 125,000 24,866 230,238 31,342 88,706 13,631 70,933 526,485 1,144,159 ANNUAL REPORT 2020 357
  359. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Provision for impairment is made for doubtful receivables according to the Operators 's policy. The impairment provision is written off when the Operator expects that it cannot recover the balance due. Age analysis of due from takaful contact holders (net of provision) other than related parties is as follows: Note 2020 2019 Rupees in thousand Upto one year Above one year Less: provision for doubtful balances 241,618 44,870 286,488 286,488 182,713 32,626 215,339 215,339 16,927 805 17,732 17,732 13,852 1,046 14,898 14,898 Age analysis of due from related parties against takaful contracts is as follows: Upto one year Above one year Less: provision for doubtful balances The credit quality of Operator's bank balance can be assessed with reference to external credit rating as follows: Rating Short Term Long Term Dubai Islamic Bank Limited MCB Islamic Bank Limited Meezan Bank Limited Bank Islami Pakistan Limited A-1+ A1 A-1+ A1 AA+ A AA+ A+ Rating Agency 2020 2019 Rupees in thousand JCR-VIS PACRA JCR-VIS PACRA 355,244 243,357 60,275 103,319 762,195 227,172 108,592 50,398 140,323 526,485 The credit quality of amount due from other co-takaful/retakaful operators (gross of provisions) can be assessed with reference to external credit rating as follows: Retakaful and Retakaful and Amounts due Amounts due other other from other cofrom other corecoveries December 31, recoveries December 31, takaful / takaful / 2020 2019 against against re-takaful re-takaful outstanding outstanding operators operators claims claims Rupees in thousand A or Above (including PRCL) BBB Others 80,225 - 176,439 15,342 87,351 256,664 15,342 87,351 31,142 - 67,507 5,870 15,329 98,649 5,870 15,329 Total 80,225 279,132 359,357 31,142 88,706 119,848 32.4 Capital adequacy risk The Operator’s objective when managing capital is to safeguard the Operator’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain a strong capital base to support the sustained development in its businesses. 358 ANNUAL REPORT 2020
  360. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 33 Fair values of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants ' at the measurement date. Underlying the definition of fair value is the presumption that the company is a going concern and there is no intention or requirement to curtail materially the scale of its operations or to undertake a transaction on adverse terms. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm's length basis. IFRS 13 'Fair Value Measurement' requires the company to classify fair value measurements and fair value hierarchy that reflects the significance of the inputs used in making the measurements of fair value hierarchy has the following levels: - Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) - Inputs other than quoted prices included within level 1 that are observable for the asset either directly (that is, derived from prices) (Level 2) - Inputs for the asset or liability that are not based on observable market data (that is, unadjusted) inputs (Level 3) Transfer between levels of the fair value hierarchy are recognised at the end of the reporting period during which the changes have occurred. Participants' Takaful Fund December 31, 2020 Note Available-for-sale Loans and receivables Carrying amount Cash and cash equivalents Fair value Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets not measured at fair value Investments - Debt securities Investments - Equity securities Loan and other receivables Takaful / re - takaful receivables Re - takaful recoveries against outstanding claims Salvage recoveries accrued Cash and bank deposits 8 7 10 11 13 125,000 50,614 - 27,650 384,445 279,132 35,986 - 552,900 - 125,000 50,614 27,650 384,445 279,132 35,986 552,900 50,614 - - - 50,614 - 175,614 727,213 552,900 - 1,455,727 50,614 - - 50,614 Financial liabilities not measured at fair value Outstanding claims including IBNR Takaful / re - takaful payables Wakala and mudarib fee payable Other creditors and accruals 19 15 - - - 558,082 79,436 116,783 10,417 558,082 79,436 116,783 10,417 - - - - - - - 764,718 764,718 - - - - ANNUAL REPORT 2020 359
  361. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Participants ' Takaful Fund December 31, 2019 Note Available-for-sale Loans and receivables Carrying amount Cash and cash equivalents Fair value Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets not measured at fair value Investments - Debt securities Loan and other receivables Takaful / re - takaful receivables Retakaful recoveries against outstanding claims Salvage recoveries accrued Cash and bank deposits 8 10 11 13 - 125,000 21,655 261,580 88,706 13,631 434,658 - - - 385,572 434,658 434,658 945,230 - - - - - - - 257,810 38,513 70,933 4,937 257,810 38,513 70,933 4,937 - - - - - - - 372,193 372,193 - - - - 125,000 125,000 21,655 261,580 88,706 13,631 - Financial liabilities not measured at fair value Outstanding claims including IBNR Takaful / retakaful payables Wakala and mudarib fee payable Other creditors and accruals 19 15 Operator's Takaful Fund December 31, 2020 Note Available-for-sale Loans and receivables Carrying amount Cash and cash equivalents Fair value Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets measured at fair value Investments - Equity securities 7 35,873 - - 35,873 35,873 - - 35,873 2,865 116,783 - 209,446 - 2,865 116,783 209,446 - - - - 119,648 209,446 - 364,967 35,873 - - 35,873 - Financial assets not measured at fair value Loan and other receivables Wakala and mudarib fee receivable Cash and bank deposits 10 - 13 37,873 Financial liabilities not measured at fair value Other creditors and accruals 360 ANNUAL REPORT 2020 15 - - - 52,102 52,102 - - - - - - - 52,102 52,102 - - - -
  362. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Operator 's Takaful Fund December 31, 2019 Note Available-for-sale Carrying amount Cash and cash equivalents Loans and receivables Fair value Other financial liabilities Total Level 1 Level 2 Level 3 Total Rupees in thousand Financial assets measured at fair value Investments - Equity securities 7 32,958 - - - 32,958 32,958 - - 32,958 Financial assets not measured at fair value Loan and other receivables Wakala and mudarib fee receivable Cash and bank deposits - 10 13 32,958 3,211 70,933 - 91,895 - 3,211 70,933 91,895 - - - - 74,144 91,895 - 198,997 32,958 - - 32,958 Financial liabilities not measured at fair value Other creditors and accruals 34 15 - - - 44,664 44,664 - - - - - - - 44,664 44,664 - - - - Statement of Solvency - Participants' Takaful Fund December 31, 2020 Rupees In thousand Assets Investments Loans and other receivables Takaful / Re - takaful receivables Re - takaful Recoveries against outstanding benefits Salvage recoveries accrued Prepayments Cash and Bank Total Assets (A) 175,614 27,650 384,445 279,132 35,986 104,047 552,900 1,559,774 In-admissible assets as per following clauses of section 32(2) of the Insurance Ordinance, 2000 Contribution due but unpaid more than 3 months Direct Co-takaful balances more than 3 months Prepaid Monitoring charges Loans and other receivables 156,163 55,484 20,213 24,102 255,962 Total of In-admissible assets (B) Total Admissible Assets (C=A-B) 1,303,812 Total Liabilities Outstanding benefits including IBNR Unearned contribution reserves Unearned commission income Contribution deficiency reserves Deferred taxation Contributions received in advance Takaful / Re - takaful payables Wakala and mudarib fee payable Other Creditors and Accruals Total Liabilities (D) Total Net Admissible Assets (E=C-D) 558,082 421,449 17,183 178 11,037 79,436 116,783 35,650 1,239,798 64,014 ANNUAL REPORT 2020 361
  363. Window Takaful Operations Notes To and Forming Part of Financial Statements For the Year Ended 31 December 2020 Operator 's Takaful Fund Available for sale 35 36 Movement in Investment - Available for sale At the beginning of previous year Additions Disposals Fair value on gains (excluding net realized gain) At the beginning of current year Additions Disposals Fair value on (loss) / gain (excluding net realized (loss) / gain) At the end of current year Participants' Takaful Fund Available for sale Rupees in thousand Held to Maturity 29,930 1,144 - - 125,000 - 1,884 32,958 34,627 (31,048) 50,000 - 125,000 - (664) 35,873 614 50,614 125,000 Corresponding figures Corresponding figures have been rearranged and reclassified for better presentation, where considered necessary. 37 Date of authorization for issue This condensed financial information was authorized for issue on 23 February 2021 by the Board of Directors of the Operator. 38 General Figures have been rounded off to the nearest thousand rupees unless other wise stated. Umer Mansha Chairman 362 ANNUAL REPORT 2020 Ibrahim Shamsi Director Shaikh Muhammad Jawed Director Muhammad Asim Nagi Chief Financial Officer Muhammad Ali Zeb Managing Director & Chief Executive Officer
  364. ANNUAL REPORT 2020 363
  365. Notice of 60th Annual General Meeting NOTICE is hereby given that the 60th Annual General Meeting (AGM) of Adamjee Insurance Company Limited (the “Company”) will be held on April 27, 2021 (Tuesday) at 11:00 A.M. at Registered Office of the Company, Adamjee House, 80/A, Block E-1, Main Boulevard, Gulberg III, Lahore through video-link facility to transact the following ordinary business: 1. To receive, consider and adopt the Standalone and Consolidated Audited Financial Statements of the Company for the year ended 31 December 2020, Directors’ and Auditors’ reports thereon and the Chairman’s Review Report. 2. To declare and approve, as recommended by the directors, the payment of final cash dividend of Rs. 1/25 per share i.e., @ 12.5% in addition to 12.5% interim cash dividend already declared and paid i.e., total 25% for the year ended 31 December 2020. 3. To appoint auditors and fix their remuneration. The members are hereby notified that the Board of Directors and the Audit Committee have recommended the name of retiring auditors M/s Yousuf Adil, Chartered Accountants for appointment as auditors of the Company. By Order of the Board Tameez-ul-Haque Secretary Lahore: April 6, 2021 NOTES: 1. Video-Link Facility for the AGM: Due to rising COVID-19 cases and to ensure the safety and well-being of the shareholders and general public, the Company is holding this meeting through video link as allowed by the Securities and Exchange Commission of Pakistan vide its Circular No. 6 of 2021 dated 03 March, 2021. To attend the meeting through video link, the members and their proxies are requested to register themselves by providing the following information along with their Name, Folio Number, Cell No., and Number of Shares held in their name, a valid copy of CNIC (both sides)/ passport attested copy of board resolution / power of attorney (in case of corporate shareholders) through email at zafar.iqbal@adamjeeinsurance.com and/or info@adamjeeinsurance.com by 23 April, 2021: Name of Member/ proxyholders CNIC No. Folio No./ Participant Id/ Account No. Cell No./ WhatsApp’s No. Email ID. The shareholders who are registered after the necessary verification shall be provided a video link by the Company on the said email address. The login facility will remain open from start of the meeting till its proceedings are concluded. Shareholders can also provide their comments and questions for the agenda items of the AGM at the email address zafar.iqbal@adamjeeinsurance.com and/or info@adamjeeinsurance.com or at WhatsApp No. 03400004421. Members are therefore, encouraged to attend the AGM through video link or by consolidating their attendance through proxies. 364 ANNUAL REPORT 2020
  366. 2 . The annual report containing inter alia audited standalone and consolidated financial statements and mandatory reports have been placed on the website of the Company www.adamjeeinsurance.com 3. The share transfer books of the Company will remain closed from April 21, 2021 to April 27, 2021 (both days inclusive). Transfers received in order at the office of the Company’s Independent Share Registrar, M/s CDC Share Registrar Services Ltd., CDC House, 99- B, S.M.C.H.S, Main Shahrah e Faisal, Karachi by the close of business (1:00 PM) on April 20, 2021 will be treated in time for the purposes of entitlement of members to the final cash dividend and for attending and voting at the AGM. Proxy Forms, in English and Urdu languages, have been dispatched to the members along with the notice of AGM. 4. A member entitled to attend and vote at this meeting may appoint any other member as his/her proxy to attend and vote. The Instrument appointing a proxy and the power of attorney or other authority under which it is signed or a notarial attested copy of the power of attorney must be deposited at the registered office of the Company at least 48 hours before the time of the meeting. A proxy must be a member of the company. A Company or a Corporation being a member of the Company may appoint a representative through a resolution of board of directors for attending and voting at the meeting. 5. Members who have deposited their shares into Central Depository Company of Pakistan Limited (“CDC”) will further have to follow the under mentioned guidelines as laid down by the Securities and Exchange Commission of Pakistan in Circular No 1 of 2000. A. B. For Attending the Meeting a. In case of Individuals, the account holder and/or sub-account holder whose registration details are uploaded as per the CDC Regulations, shall authenticate his/her identity by showing CDC Participant ID and account number and his/her original CNIC or, original Passport at the time of attending the Meeting. b. In case of corporate entity, the Board’s resolution / power of attorney with specimen signature of the nominee shall be produced (unless it has been provided earlier) at the time of the Meeting. For Appointing Proxies a. In case of individuals, the account holder and/or sub-account holder whose registration details are uploaded as per the CDC Regulations, shall submit the proxy form as per above requirements. b. The proxy form shall be witnessed by two persons, whose names, addresses and CNIC numbers shall be mentioned on the form. c. Attested copies of the CNIC or the passport of beneficial owners and the proxy shall be furnished with the proxy form. d. The proxy shall produce his original CNIC or original passport at the time of the Meeting. e. In case of corporate entity, the Board’s resolution / power ANNUAL REPORT 2020 365
  367. 6 . Members are requested to timely notify any change in their addresses. 7. Notice to Shareholders who have not provided CNIC: The shareholders who have not yet provided their CNICs are once again advised to provide the attested copies of their CNICs (if not already provided) directly to our Independent Share Registrar at the address given at Note No. 3. 8. Payment of Cash Dividend Electronically: Under the provision of Section 242 of Companies Act, 2017 and the Companies (Distribution of Dividends) Regulations, 2017, it is mandatory for a listed company to pay cash dividend to their shareholders only through electronic mode directly into the bank account designated by the entitled shareholders instead of issuing physical dividend warrant. In order to receive cash dividend directly into the designated bank account, shareholders are requested to fill and sign the “Mandate Form for e-dividend” available on the Company’s website link: https://www.adamjeeinsurance.com/pak/investors/downloads/shar eholder_useful_documents/Mandate_for_e_ dividend.pdf, and send to the relevant Broker/Participants/Investor Account Services of the CDC/Share Registrar of the Company (as the case may be) before April 20, 2021 along with a copy of their valid CNICs. The aforesaid form is also available at the end of Annual Report of the Company. The form has also been provided with CDs to the shareholders. In case of non-receipt or incorrect International Bank Account Number (IBAN) with other related details or non-availability of CNICs, the Company will withhold cash dividend of such members in terms of Section 242 of the Companies Act, 2017. 9. Shareholders, who by any reason, could not claim their dividends/shares, if any, are advised to contact our Share Registrar to collect / enquire about their unclaimed dividend/shares, if any. 10. Hardcopy of Annual Financials: The shareholders who wish to receive hard copy of the aforesaid documents may send to the Company Secretary / Share Registrar, the Standard Request Form available on the website of the Company and the Company will supply hard copies of the aforesaid document to the shareholders on demand, free of cost, within one week of such demand. Shareholders have passed Special Resolution in AGM held on 29th April 2017 to transmit annual report from 31st December 2017 onwards through email in compliance of directive of SRO 470(1)/2016 dated 31st May 2016. The annual report is emailed to shareholders who have provided their email address. 11. Deduction of Withholding Tax on the amount of Dividend: Pursuant to Circular No.19/2014 dated October 24, 2014, SECP has directed all companies to inform shareholders about changes made in the Section 150 of the Income Tax Ordinance, 2001. The Company, hereby advise to its shareholders, the important amendments, as under: The Government of Pakistan through Finance Act, 2019 has made certain amendments in Section 150 of the Income Tax Ordinance, 2001 whereby different rates are prescribed for deduction of withholding tax on the amount of dividend paid by the companies. These tax rates are as under: 366 ANNUAL REPORT 2020
  368. a . For filers of income tax returns 15% b. For non-filers of income tax returns 30% To enable the company to make tax deduction on the amount of cash dividend @ 15% instead of 30%, all the shareholders whose names are not entered into the Active Taxpayers List (ATL) provided on the website of Federal Board of Revenue, despite the fact that they are filers, are advised to make sure that their names are entered into ATL before the date for payment of the cash dividend otherwise tax on their cash dividend will be deducted @ 30% instead @ 15%. In the case of shares registered in the name of two or more shareholders, each joint-holder is to be treated individually as either a filer or non-Filer and tax will be deducted by the Company on the basis of shareholding of each joint-holder as may be notified to the Company in writing. The joint-holders are, therefore, requested to submit their shareholdings otherwise each joint holder shall be presumed to have an equal number of shares. The corporate shareholders having CDC accounts are required to have their National Tax Number (NTN) updated with their respective participants, whereas corporate physical shareholders should send a copy of their NTN certificate to the Company or its Independent Share Registrar at the below mentioned address. The shareholders while sending NTN or NTN certificates, as the case may be, must quote company name and their respective folio numbers. 12. The members of the Company are required to submit Declaration for Zakat exemption in terms of Zakat and Ushr Ordinance, 1980. ANNUAL REPORT 2020 367
  369. FORM 34 THE COMPANIES ACT 2017 THE COMPANIES (GENERAL PROVISIONS & FORMS) REGULATION, 2019 [Section 227(2)(f)] PATTERN OF SHAREHOLDING 1.1 Name of the Company ADAMJEE INSURANCE COMPANY LIMITED. 2.1 Pattern of holding of the shares held by the shareholders as at 31-12-2020 2.2 No. of Shareholders Shareholdings Total Shares Held 1,004 Shareholding From 1 To 100 26,481 971 Shareholding From 101 To 500 301,911 563 Shareholding From 501 To 1000 471,922 2,104 Shareholding From 1001 To 100000 27,726,536 125 Shareholding From 100001 To 475000 27,393,424 29 Shareholding From 495001 To 1020000 20,955,804 27 Shareholding From 1040001 To 7560000 65,619,669 1 Shareholding From 7570001 To 7575000 7,571,500 1 Shareholding From 17105001 To 17110000 17,107,420 1 Shareholding From 19210001 To 19215000 19,213,878 1 Shareholding From 27760001 To 27765000 27,763,351 1 Shareholding From 27875001 To 27880000 27,877,735 1 Shareholding From 37970001 To 37975000 37,970,369 1 Shareholding From 69995001 To 70000000 70,000,000 4,830 368 ANNUAL REPORT 2020 350,000,000
  370. FORM 34 THE COMPANIES ACT 2017 THE COMPANIES (GENERAL PROVISIONS & FORMS) REGULATION, 2019 [Section 227(2)(f)] PATTERN OF SHAREHOLDING 2.3 Categories of Shareholders 2.3.1 Directors, Chief Executive Officer their spouses & minor children Ibrahim Shamsi Imran Maqbool Malik Mian Umer Mansha Mohammad Ali Zeb Mohammad Arif Hameed Muhammad Anees Sadia Younas Mansha Shaikh Muhammad Jawed Shareholders Shares held Percentage 1 1 1 1 1 1 1 1 16,797 7,073 60,335 7,073 2,500 20,000 2,500 2,500 0.005 0.002 0.017 0.002 0.001 0.006 0.001 0.001 1 104 0.000 2 1 1 70,861,241 102,809 1,083,000 20.246 0.029 0.309 1 2,164 0.001 2.3.4 Banks, Development Finance Institutions, Non-Banking Finance Companies 16 9,091,203 2.597 2.3.5 Insurance Companies 11 31,378,884 8.965 2.3.6 Modarabas and Mutual Funds 35 22,081,051 6.309 4,501 24.269 11 84,941,839 2,502,400 16 13,383,391 3.824 226 114,453,136 4,830 350,000,000 32.701 100.000 2.3.1(a)Executives 2.3.2 a) b) c) Associated Companies, undertakings & related parties MCB Bank Limited - Treasury Nishat Mills Limited Nishat (Aziz Avenue) Hotels and Properties Limited 2.3.3 NIT and ICP 2.3.7 Shareholders holding 5% or more voting interest (reflected in relevant category, reference given) i) MCB Bank Ltd (2.3.2a) 70,861,241 20.246 ii) Trustee-MCB Employees Pension Fund(2.3.9) 37,970,369 10.849 iii) Security General Insurance Co Ltd (2.3.5) 27,771,587 7.935 iv) D.G. Khan Cement Company Limited (2.3.9) 27,877,735 7.965 v) Anjum Nisar (2.3.8a) 19,213,878 5.490 2.3.8 General Public a) Local-Individuals b) Foreign Individuals c) Foreign Companies/organizations(on repatriable basis) 2.3.9 Others:(Joint Stock Cos., Pension/Provident Funds etc.) Ibrahim Shamsi Director 0.715 Muhammad Ali Zeb Managing Director & Chief Executive Officer ANNUAL REPORT 2020 369
  371. FOR YOUR IMMEDIATE ACTION E-dividend mandate form for shareholders of Adamjee Insuracne Company Limited in Compliance of Section 242 of the Companies Act 2017 Please fill the following details & forward by e-mail/letter to any of the following three (not to AICL): 1. Investor Account Services - Central Depository Company of Pakistan Limited. If you have an investor account in CDC, the email is mentioned below. 2. In case of a sub account with any of the broker participants, kindly convey information to your broker participant. 3. In case of Physical Shares, by post at the following address: CDC Share Registrar Services Ltd Share Registrar Adamjee Insurance Company Limited CDC House, 99-B, Block B, S.M.C.H.S., Main Shahrah-e-Faisal, Karachi - 74400 Participant ID Investor / Sub Account No. Folio In case of Physical Shareholder Title of Account IBAN Number Bank Name Branch Branch Address Mobile Number Email address Authorized Signatories (to be signed as per operating instruction) 1) 2) 3) 4) For information: A) IBAN Number (24 Digit) : PK37 HABB 0000 0700 3333 9999 B) E-mail Investor Account Services CDC : ias-khi@cdcpak.com C) CDC Participant : in case of a sub account with any of the broker participants, kindly convey information to your broker participants. For receipt of future dividend, the submission of this form is mandatory. Form also available on website: www.adamjeeinsaurance.com 370 ANNUAL REPORT 2020 www.adamjeeinsaurance.com
  372. ADAMJEE INSURANCE COMPANY LIMITED Registered Office : Adamjee House, 80/A, E-1, Main Boulevard, Gulberg-III, Lahore. Form of Proxy I/We _______________________________________________________ of ___________________________________________________ being a member of Adamjee Insurance Company Limited and holder of __________________________ shares as per Folio No. _______________________________ CDC Participant ID No. ________________________ and Sub Account No. _______________________ / CDC Investors Account No. _____________________ hereby appoint Mr./Miss/Mrs. ____________________________________________ of ______________________________ (Folio No _________________CDC Participant ID No. ____________________ and Sub Account No. __________________ / CDC Investors Account No. _____________________) or failing him Mr./Miss/Mrs. _______________________________________ of ______________________ (Folio No. _____________CDC Participant ID No. ______________and Sub Account No. _________________ / CDC Investors Account No. ________________________ ) as my/our Proxy to attend, speak and vote for me/us and on my/our behalf at the 60th Annual General Meeting of the Company to be held on April 27, 2021 (Tuesday) at 11:00 AM at Registered Office of the Company through video link facility and any adjournment thereof. Signed this .__________________ day of ________________ 2021 Witness 1: Signature _________________________________________ Name ____________________________________________ CNIC No. or Passport No. ___________________________ Rupees Five Revenue Stamp Address __________________________________________ Witness 2: Signature _________________________________________ Name ____________________________________________ CNIC No. or Passport No. ___________________________ Address __________________________________________ Signature of Member Notes 1. A member entitled to attend and vote at this meeting may appoint any other member as his/her proxy to attend and vote. The Instrument appointing a proxy and the power of attorney or other authority under which it is signed or a notarial attested copy of the power of attorney must be deposited at the registered office of the Company at least 48 hours before the time of the meeting. A proxy must be a member of the company. A Company or a Corporation being a member of the Company may appoint a representative through a resolution of board of directors for attending and voting at the meeting. 2. Members, who have deposited their shares into Central Depositary Company of Pakistan Limited, are being advised to bring their original National Identity Cards along with CDC Participant ID and account number at the meeting venue. 3. Members who have deposited their shares into Central Depository Company of Pakistan Limited (“CDC”) will further have to follow the under mentioned guidelines as laid down by the Securities and Exchange Commission of Pakistan in Circular No 1 of 2000. A. B. For Attending the Meeting i. In case of Individuals, the account holder and/or sub-account holder whose registration details are uploaded as per the CDC Regulations, shall authenticate his/her identity by showing his/her original CNIC or, original Passport at the time of attending the Meeting. ii. In case of corporate entity, the Board’s resolution / power of attorney with specimen signature of the nominee shall be produced (unless it has been provided earlier) at the time of the Meeting. For Appointing Proxies i. In case of individuals, the account holder and/or sub-account holder whose registration details are uploaded as per the CDC Regulations, shall submit the proxy form as per above requirements . ii. The proxy form shall be witnessed by two persons, whose names, addresses and CNIC numbers shall be mentioned on the form. iii. Attested copies of the CNIC or the passport of beneficial owners and the proxy shall be furnished with the proxy form. iv. The proxy shall produce his original CNIC or original passport at the time of the Meeting. v. In case of corporate entity, the Board’s resolution / power of attorney with specimen signature shall be furnished (unless it has been provided earlier) along with proxy form to the Company. ANNUAL REPORT 2020 371
  373. Af fix Correct Postage Company Secretary Adamjee Insurance Company Limited 9th Floor, Adamjee House, I.I. Chundrigar Road, Karachi - 74000. UAN: 111 242 111 372 ANNUAL REPORT 2020
  374. Correct Postage   ‫ى‬     ‫آد  ا ر‬ ،‫ آ  آ   ر  روڈ‬، ‫ آد   ؤس‬،‫  ر‬٩ ٧٤٠٠٠ -  ‫ا‬  ١١١ ٢٤٢ ١١١ : ‫ےا‬   ‫ ا‬ ANNUAL REPORT 2020 373
  375. ‫ ر‬ ‫  وز ‬ ‫  ر  ‪ 27‬ا‬ ‫ ‪ /‬‬ ‫ر    د   ‬ ‫ ‪ 2021‬‬ ‫  ۔‬ ‫   ‪    11‬ر  و  ‬ ‫ ‬ ‫ ‬ ‫ وا‬ ‫ ‪ 60‬و  ‬ ‫ ا س  م   ‬ ‫ ‬ ‫ ‪ ،‬‬ ‫ ‬ ‫ڈ آ ‪  ،‬ر‬ ‫ اور ووٹ د       ے‪  /‬رے ‬ ‫ے   ‬ ‫‪2021‬‬ ‫اہ  ‪1‬‬ ‫ ‬ ‫رٹ  ‬ ‫اہ  ‪2‬‬ ‫ ‬ ‫رٹ  ‬ ‫‪374 ANNUAL REPORT 2020‬‬
  376. Registered Office : Adamjee House, 80/A, Block E-1, Main Boulevard, Gulberg III, Lahore - 54000, Pakistan Phone: (92-42) 35772960-79, Fax (92-42) 35772868 Email: info@adamjeeinsurance.com, Web: www.adamjeeinsurance.com