AM Best Downgrades Credit Ratings of EFU General Insurance Limited

LONDON--(BUSINESS WIRE)--AM Best has downgraded the Financial Strength Rating (FSR) to B (Fair) from B+ (Good) and the Long-Term Issuer Credit Rating (Long Term ICR) to “bb+” (Fair) from “bbb-” (Good) of EFU General Insurance Limited (EFUG) (Pakistan). The outlook of the Long-Term ICR has been revised to negative from stable, while the outlook of the FSR is stable.

The Credit Ratings (ratings) reflect EFUG’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, neutral business profile and marginal enterprise risk management (ERM).

The Long-Term ICR outlook revision to negative reflects pressure on EFUG’s credit fundamentals from heightened economic, financial system and political risk in Pakistan. In spite of economic growth and support from the International Monetary Fund, Pakistan faces significant headwinds from rising debt servicing costs, a depreciating rupee and elevated global commodity prices. EFUG has significant exposure to Pakistan, where the company generates all of its business and holds all of its investments. The recent floods in Pakistan are expected to have a manageable impact on EFUG’s operating performance, owing to its moderate exposure to related losses. However, the floods are exacerbating the country’s liquidity and external credit issues, and government resources have been negatively impacted. AM Best notes the company’s historical operational resilience to country risk factors.

The rating downgrades reflect the limited capital buffers available to the company to absorb the impact of increasing country risk in Pakistan, along with sensitivity of EFUG’s risk-adjusted capitalisation to growing asset risk. EFUG’s balance sheet strength assessment is underpinned by its risk-adjusted capitalisation, as measured by Best’s Capital Adequacy Ratio (BCAR), at the very strong level at year-end 2021. Investment risk remains the most significant driver of required capital. The company’s investment portfolio is concentrated in Pakistan, in line with domestic regulatory requirements, which, in AM Best’s view, exposes the company to potential capital volatility.

EFUG has a history of robust operating profitability, with a five-year (2017-2021) weighted average return on equity of 12.6%, supported by positive underwriting and investment results. The company has generated solid underwriting profits over the same period, with an average combined ratio of 86.6%. Despite competitive pressure on premium rates and higher natural peril losses in recent years, AM Best expects prospective underwriting performance to remain strong.

EFUG has formalised and strengthened its ERM framework and capabilities. However, the company's risk profile has increased recently as a result of the deteriorating risk environment in Pakistan.

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