EFU General (PSX: EFUG) is the largest non-life insurer in the country. It commenced operations before partition in Kolkata as Eastern Federal Union Insurance Company (EFU), making it one of the oldest companies in Pakistan. Later, it was split into separate life and non-life firms.
For the local insurance sector, EFU had a pioneering role. During 1960s, the EFU brand name was recognised around the world, especially for its life business. After 1972, when the government nationalised life businesses, the company changed name to EFU General. The firm offers property, marine/aviation, motor and other miscellaneous insurance products.
In comparison to life insurance, general insurance has been much sluggish in growth, courtesy of unimpressive economic expansion. In the past five years (till CY14), the compound annual growth rate (CAGR) of net premiums for non-life sector is seven percent as opposed to life's 31 percent. For general insurance products, growth is linked tightly with economic activity; for life insurers, growth is more of a function of distribution efforts.
Another key difference in the two sectors is competition. There are over 35 general insurance companies in Pakistan compared to only seven in the life segment. Still, life accounts for the most business - gross premiums of Rs 122 billion compared to non-life's Rs 64 billion in 2014.
Performance in recent years
Top line performance for EFU General, like many of its peers, hasn't been particularly impressive. The firms' gross and net premiums have experienced a five-year CAGR (through CY15) of eight and 2.7 percent respectively - both lower than the sector average. Soaring competition has hurt EFU General in this regard, with players like Jubilee General and IGI having much steeper trajectories.
Despite premium revenue not depicting positively for the market leader, other operational metrics have gone from strength to strength over the years. EFUG's claims, underwriting income and after-tax profits have all moved favourably as a percentage of premiums in the past half decade.
Claims, which make up a significant chunk of insurers' payouts, have trended downwards over the years. The firm's claims ratio has gone from strength to strength in recent years. In CY14, claims made up 45.5 percent of EFU General's net premiums. In the same period, the sector's average was 50.3 percent. In CY15, the ratio eased further to 44.9 percent. For reference, the firm had a claims ration of 67.4 percent in 2010 - 430 bps more than the sector's average.
Better claims management over the years has resulted in a significant increase in EFU's underwriting business income. From an income of Rs 112 million resulting from underwriting in CY10, the firm has come a long way - reporting Rs 1.53 billion income in CY15. This implies a CAGR of 68.8 percent, much superior to the peer group average.
Besides underwriting, income from investments is major source of revenue for insurers. In fund management though, EFUG's performance hasn't been up to the mark recently (barring-CY15), especially in 2013 and 2014. In the recently concluded period though, investment (and other) income grew 2.6 times to Rs 4.1 billion.
Improvement in claims, underwriting business and income from investments all combine into a solid growth in EFU General's bottom line over the years. Since 2011, profits have grown nearly eight-folds from Rs 561 million to over Rs 4 billion. This implies a CAGR of 64 percent, much higher than that of other players in the non-life space.
Stock performance and outlook
In wake of the shrinking market share and intensifying competition, the company's stock couldn't do well in 2015, although still outperforming the benchmark index with a nine percent return. In fact, EFUG has easily outperformed the market in four of the past five years. Trading at around Rs 40 a share in early 2012, EFUG closed CY14 priced at around Rs 150. Currently the stock trades at around Rs 132.
Non-life insurance business did pick up pace in 2015, with the boom set to continue. Stronger GDP and the hope for FDI growth on back of CPEC and greater political stability will be accretive to insurers. The heavy spending on power projects will create business for non-life insurers, among which EFU General is the most renowned.
According to findings of Alfalah securities, one megawatt of installed capacity requires annual insurance expense of Rs 0.85 million on average. For 15.9 GW, this means incremental revenue (gross premiums) of Rs 13.4 billion from CPEC.
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