EFU General Insurance (EFUG), the largest non-life insurer in Pakistan, has a history of robust operating profitability, with a five-year (2019-2023) weighted average return on equity of 12.9%, supported by positive underwriting and investment results, says AM Best.
The company has generated solid underwriting profits over the same period, with an average combined ratio of 90.5%. Despite difficult market conditions and higher natural peril losses in recent years, AM Best expects prospective underwriting performance to remain strong.
Outlooks revised to ‘Stable’
AM Best has revised EFUG’s outlooks to ‘Stable’ from ‘Negative’ and affirmed the Financial Strength Rating of ‘B-’ (Fair) and the Long-Term Issuer Credit Rating of ‘bb-’ (Fair).
The credit ratings reflect EFUG’s balance sheet strength, which AM Best assesses as adequate, as well as its strong operating performance, neutral business profile, and marginal enterprise risk management (ERM).
The ‘Stable’ outlooks reflect the improvement in EFUG’s risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), and AM Best’s expectation that BCAR will remain at least at the strong level prospectively.
Capitalisation
The improvement in EFUG’s risk-adjusted capitalisation to the strong level in 2023 from the weak level in 2022 follows an increase in reported capital and surplus and a shortening of the duration of the bond portfolio.
However, risk-adjusted capitalisation remains potentially volatile and sensitive to asset risk, which is the primary driver of required capital.
In line with regulatory requirements, all assets are held in Pakistan and the investment portfolio is concentrated in domestic government bonds and equity securities. This exposes the company to potential capital volatility. Further offsetting factors include a high dependence on reinsurance and exposure to a non-rated reinsurance counterparty, through mandatory cessions to the state-owned reinsurer in Pakistan.
Business profile
EFUG benefits from its leading market position domestically in Pakistan, with an estimated market share of 22% in 2023. The company has a well-diversified underwriting portfolio across non-life business segments, and when combining conventional and takaful business, EFUG wrote consolidated gross written premium of PKR41.5bn ($149.1m) in 2023. The company leverages its long-standing client relationships to maintain a defendable market position, which has helped it to navigate its challenging business environment.
Over the past year, EFUG has continued to formalise and strengthen its ERM framework and capabilities. However, in AM Best’s view, the company’s risk profile remains high as a result of Pakistan’s ongoing deteriorated risk environment. Whilst AM Best notes EFUG’s historical operational resilience to country risk factors, risk management challenges are presented by its concentration of business and assets in Pakistan.