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The country’s insurance sector has come under pressure as well as the country entered the austerity mode. All factor’s that were going for the sector like accelerated economic and industrial activity lower inflation and the rising use of technology are now largely going against the sector; inflation is up and so is its outlook, while economic growth has slowed down and is expected to remain slow. And there is nothing exciting happening in the general insurance sector when it comes to the opportunity that lies in CPEC and SEZs or insurtech.

These factors have also impacted the profitability of the insurance companies. EFU General Insurance Limited (PSX: EFUG) - a non-life insurance company with products in the motor, marine, fire & property, and others like travel. liability, money, credit card insurance etc. - announced its 9MCY19 financial performance recently where the insurance company’s EPS was seen coming down by 22 percent year-on-year.

EFU General Insurance Limited - Unconsolidated accounts 
Rs(mn) 3QCY19 3QCY18 Yoy 9MCY19 9MCY18 YoY 
Net insurance premium      2,086      2,266 -8.0%       5,707       5,940 -3.9%
Net insurance claims      1,017          809 25.6%       2,691       2,370 13.6%
Net commission and other acquisition costs          102            75 35.9%          471          412 14.4%
Insurance claims and acquisition costs      1,118          884 26.5%       3,162       2,782 13.7%
Management expenses          706          641 10.2%       2,129       1,912 11.3%
Underwriting results          261          741 -64.8%          416       1,246 -66.6%
Investment income          351          233 51.0%       1,254       1,144 9.6%
Rental income            28            27 4.2%             82             77 5.8%
Other income            48            30 57.4%          171             97 76.1%
Other expenses              8            10 -16.7%             45             43 4.1%
Result of operating activities          680      1,022 -33.4%       1,878       2,521 -25.5%
Finance cost              4             -             12              -
Profit from Window Takaful operations - Operator's Fund            66            32 104.9%          154             85 80.4%
Profit before tax          742      1,054 -29.6%       2,019       2,606 -22.5%
Income tax expense          233          414 -43.7%          726          956 -24.0%
Profit after tax          509          639 -20.4%       1,293       1,650 -21.7%
EPS (Rs/share)         2.50         3.20 -21.9%         6.46         8.25 -21.7%
investment income 17% 10% 22% 19%
PAT/Net Premium 24.4% 28.2% 22.7% 27.8%
Underwriting Results/ Net Premium 12.5% 32.7% 7.3% 21.0%
Net Claims/Net Premium 48.8% 35.7% 47.2% 39.9%
Net Commission /Net Premium 4.9% 3.3% 8.3% 6.9%
Management expenses/Net Premium 33.9% 28.3% 37.3% 32.2%
Source: PSX 

The contraction in the non-life insurance company’s earnings started at the top where EFUG’s revenues i.e. net insurance premiums declined by around 4 percent year-on-year. While the first six months had flat revenue growth the real squeeze to the bottomline came from the latest quarter (3QCY19) where EFUG witnessed a drop of 8 percent in net premiums.

However, the main culprit in lower profitability during the period was the disproportionate increase in costs. Underwriting results dropped by more than half as the insurance company’s net claims, commissions and management costs grew in double digits versus the single digit growth in revenues.  As a result, the ratio of underwriting results to net premium fell from 21 percent in 9MCY18 to 7 percent in 9MCY19.

The decline in profits were partially offset by higher investment income in 3QCY19 that is usually a big chunk of revenues for insurance companies to diversify risk. The growth in other income in 3QCY19 was primarily due to higher interest rate environment in the country and hence higher return on financial assets. Additional income from Takaful operations also supported the bottomline.