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)3QCY193QCY18Yoy9MCY199MCY18YoY 
Net insurance premium     2,086     2,266-8.0%      5,707      5,940-3.9%
Net insurance claims     1,017         80925.6%      2,691      2,37013.6%
Net commission and other acquisition costs         102           7535.9%         471         41214.4%
Insurance claims and acquisition costs     1,118         88426.5%      3,162      2,78213.7%
Management expenses         706         64110.2%      2,129      1,91211.3%
Underwriting results         261         741-64.8%         416      1,246-66.6%
Investment income         351         23351.0%      1,254      1,1449.6%
Rental income           28           274.2%            82            775.8%
Other income           48           3057.4%         171            9776.1%
Other expenses             8           10-16.7%            45            434.1%
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           32104.9%         154            8580.4%
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 income17%10%22%19%
PAT/Net Premium24.4%28.2%22.7%27.8%
Underwriting Results/ Net Premium12.5%32.7%7.3%21.0%
Net Claims/Net Premium48.8%35.7%47.2%39.9%
Net Commission /Net Premium4.9%3.3%8.3%6.9%
Management expenses/Net Premium33.9%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.