EFU General Insurance

Incorporated in 1932, EFU General Insurance was formed under the leadership and administration of Mr Ghulam Mohammad and the financial and mutual support of Aga Khan III and the Nawab of Mughal. Under the umbrella of EFU Group, the company stands as the leading insurance company. EFU General offers non-life insurance products comprising of property, marine/aviation, motor and other miscellaneous products.
EFU General's standing in non-life insurance sector:
In Pakistan's non-life insurance sector, EFU General enjoys the biggest slice of the cake in terms of market share. On the basis of premiums written, the company holds a market share of 26 percent in the private non-life insurance sector, followed by Jubilee Life and Adamjee Insurance.
It is interesting to note that these three big fishes control over 60 percent of the market, whereas the share of remaining insurers remain tiny, standing at not more than 5 percent of the market.
Financial performance during 9MCY14: For the stakeholders of EFU General, there is less to worry. Posting phenomenal profitability growth year-after-year has become more like a norm for this insurance giant. The period ending September 2014 buttressed the same sentiment, with its bottom line boasting a whopping growth of 77 percent year-on-year.
Thanks to the remarkable performance of motor segment, its share surged to 44 percent as of September 2014, from 42 percent as of June 2014, on the basis of net premium revenue. Fire and property segment contributed the second highest share of 28 percent (June 2014: 30 percent). Contrary to double-digit profitability growth in top line during the preceding periods of CY14, the momentum seems to have cooled down a little during nine months ending September 2014. Net premiums during the period rose slightly by 4 percent year-on-year.
On the claims side, efficiencies in company's claims management processes are crystal-clear. Claims as a percentage of premiums as depicted by claims ratio has been following a waning trend. This time, with a nominal rise in premiums, net claims witnessed a downfall, taking the claims ratio down to 48 percent from 58 percent in the corresponding period last year. Resultantly, combined ratio which also takes into account management expenses and commission dropped down to 79 percent versus 91 percent in the same period last year.
Thanks to declining claims, underwriting profit more than doubled to Rs 989 million. Furthermore, its highly lucrative investment portfolio also lent a good hand in uplifting bottom line growth. Income from investments grew by Rs 119 million or 31 percent. This is despite of deterioration in dividend income and gain on sale of non-trading securities. Here, the reversal of impairment on available for sale investments turned out to be the saving grace. Besides, improvement in return on government securities also gained grounds, rising by over two times during 9MCY14 led by gains on PIBs holdings on account of discount rate cuts. With further interest rate cuts in the offing, some gains are likely to be in the offing for the company.
Investment Portfolio: EFU's fund managers seem to be quite active when it comes for managing its investment portfolio. Considering the recent scenario where discount rates are anticipated to go down further leading to gains on high yielding government securities, the company has increased its holding of government securities to 15 percent (as of September 2014) from 1 percent as of December 2013. With the recent 100bps cut in discount rate, the company is likely to have made substantial gains on its PIB holdings, the impact of which will be reflected in coming periods and as interest rates move south, the bottom line will continue to feast on healthy gains from government securities.
The share of government securities has been increased at the expense of mutual funds whose share has been dropped to 4 percent (December 2013: 16 percent). The share of equities (including associate investment) has remained stagnant at over 80 percent. Company's equity exposure is considered to be on the higher side which is contrary to the industry wide notion where fixed income securities are given precedence. Though increased equity exposure bodes well in times of equity market booms, it carries the risk of burgeoning losses when equities face a downturn.
Going onwards...
Numerous challenges lie in the way of insurers in Pakistan. Diminishing retention levels over the years coupled with diminishing margins, subdued economic growth, restricted distribution channels are some of the many hurdles being faced by the insurance industry, according to Insurance Industry Reforms Committee. Exploring unconventional distribution mediums including ATM machines, UBL Omni and Easy Paisa to expand insurance outreach need to be explored. At present, insurers are relying mainly on conventional mediums with agent distributional channel dominating the industry.
Besides, the introduction of microinsurance regulations and allowance of window takaful operations have opened doors for insurers to expand their wings into new segments. Though, it will take some time for companies to expand their footprints in these areas.
As for the financial performance of EFU General, the fate looks bright. BMA Capital anticipates the company's stock price to touch Rs 171 per share. Currently, the scrip is trading at Rs 160.55 (January 27, 2015). At this level, there lies an upside of 6.51 percent to the targeted level. Further, the company is also likely to reap gains from its portfolio recomposition.

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EFU General Insurance - Financial Highlights

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Rs (mn)                           CY12        CY13      9MCY14

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Net premium revenue              6,009       6,341       4,823

Net claims                     (3,297)     (3,406)     (2,294)

Management expenses            (1,285)     (1,375)     (1,093)

Net commission                   (748)       (788)       (447)

Underwriting result                679         772         989

Investment income                  851         772         501

Rental income                       98         101          87

Profit on deposits                 116         113          87

Share of profit of an assoc        390         398         247

General& administrative exp      (512)       (524)       (425)

Profit before taxation           1,615       1,623       1,480

Profit after taxation            1,566       1,392       1,157

Net claims to Net premium r        55%         54%         48%

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