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Insurance companies seek capital gains tax exemption

KARACHI (June 05 2003) : Insurance companies are once again looking forward to some positive announcements to flow from the FY 2004 Budget like capital gains tax exemption on sale of shares.

According to an analyst this is not a new demand of the insurance companies operating in Pakistan rather Karachi Stock Exchange (KSE) in their budget proposals for 2003-04 have asked the government to restore capital gains tax exemption for the industry.

Since last few years the insurance industry has been demanding this exemption to bring it at par with others.

Moreover, with chances that the upcoming Budget will be investor friendly, the overall economic activity that may be generated as a result also bodes well for the insurance sector of the country.

It's very difficult to predict whether the government will allow this exemption to insurance companies.

This is because in last few years' Budgets, the government has totally ignored this demand of the insurance companies.

However, if the insurance sector is lucky enough this time when government revenues are rising, this will definitely affect the overall profitability and cash liquidity of insurance companies.

With share prices already having risen to new highs, insurance companies, depending upon the size of the investment portfolio, may be willing to realise some capital gains if they are exempted from the said tax in new Budget.

According to a report of Invest Capital Securities, the largest insurer, Adamjee Insurance, has booked capital gains (on an average) of Rs 56 million in last 4 years.

If that trend continues, capital gains tax exemption will have a positive impact of Rs 14 million (EPS Rs 0.25) on Adamjee's bottom line.

Currently, Adamjee has a stock market portfolio of Rs 1.2 billion with current market value of approximately Rs 2.2 billion.

Since the issuance of 800 percent bonus shares, activity in Pakistan Reinsurance (previously PIC) stock has increased.

Looking at the key ratios and realising the fact that company can book huge capital gains on its investments in 2003, the stock is worth looking at.

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