General Insurance & Takaful Insurer Financial Strength Rating Assessment Framework

Analyst Contacts
Momin Farooque momin.farooque@pacra.com
October 2024
The Pakistan Credit Rating Agency
General Insurance & Takaful
Operator – Insurer Financial Strength
(IFS) Rating
Assessment Framework
Table of Contents
Introduction...........................................2
Profile ....................................................3
Ownership.............................................3
Governance...........................................5
Management .........................................6
Business Risk ........................................9
Financial Risk ..................................... 13
Summary
PACRA’s Insurer Financial Strength rating for General Insurance Companies is a representation of its opinion on a general insurer’s relative ability to meet policyholders' and contractual obligations. The opinion is not specific to any particular insurance policy or contract but reflects the overall ability of the general insurer. This opinion is arrived at by evaluating the general insurer’s ownership, governance, management, business risk, and financial risk. Overall, PACRA holds a more favorable view of insurance companies with strong Enterprise Risk Management, a solid market position, high persistency, robust underwriting performance, sound investment strategies, ample liquidity, and well-structured reinsurance arrangements. Analyst Contacts:
Muhammad Danish Nadeem danish.nadeem@pacra.com +92 42 3586 9504 The Pakistan Credit Rating Agency:
Head Office
FB 1 Awami Complex
Usman Block, New Garden Town
Lahore
Phone: +92 42 3586 9504
Karachi Office
169/1, Street No-21
Khyaban-e-Qasim, DHA Phase-8
Karachi
Phone: +92 346-2578624
Disclaimer: PACRA has used due care in preparation of this document. Our information has been obtained from sources we consider to be reliable but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA. Our reports and ratings constitute opinions, not recommendations to buy or to sell.

Page | 2 March 2026
General Insurance & Takaful Operator Rating
Assessment Framework
Introduction
Scope
Insurer Financial Strength (IFS) rating of a general insurer, assesses a general insurer/general takaful operator’s or a reinsurer’s relative ability to meet policyholders' and contractual obligations. The objective of this methodology is to enhance the transparency of PACRA’s rating process by clearly specifying and discussing the relevant factors for the IFS rating of the general insurers. PACRA understands the distinction that general insurance carries with respect to its risks and challenges despite its generic commonality with the life insurance business. PACRA recognizes the need to document its approach towards rating the general insurance companies and general takaful operators. This methodology draws upon the international perspective and the local experience gained through interaction with the market players and other participants of the broad financial sector of Pakistan. The financial strength rating is assigned to the general insurer itself, and no liabilities or obligations of the general insurer are specifically rated unless otherwise stated. The following methodology also applies to reinsurers, with a greater emphasis on certain aspects like natural catastrophe exposure, geographical exposure, and risk mitigation practices, as these may differ from general insurers. Digital insurers are also covered under this methodology, with a heightened focus on website design and technological infrastructure, given their reliance on digital platforms for operations and customer engagement. The insurer's financial strength rating does not address the willingness of management to honor the general insurer’s obligations. The insurer's financial strength rating considers the timeliness of payments relative to both contract and/or policy terms. However, it recognizes the possibility of acceptable delays caused by circumstances unique to the insurance industry, including claims reviews, fraud investigations, and coverage disputes. Although this methodology follows a distinct analytical approach compared to life insurance ratings, the rating scale on which general insurers’ ratings are placed is the same as that for life insurance companies. The reason is that, despite differences, the ultimate obligations being covered are towards the policyholders. This is why both have the same notational values along with the same definitions. Likewise, PACRA believes that insofar as obligations towards policyholders are considered, there is no difference between general insurance companies and general takaful operators. The latter would be employing Islamic principles for the structure of the business. However, the efficacy of these principles and the operators’ adherence to them would remain the prerogative of the Sharia advisors of the general insurer. This entails that the IFS rating assigned to the general takaful operator would not be an opinion on the accuracy of the principles and quality of the operator’s adherence to these principles, but rather on its
ability to meet obligations towards policyholders. Rating Framework The liabilities covered by a general insurer belong to the future period. Therefore, it is critical that the financial indicators of the general insurer remain stable over the medium term. The approach that PACRA has employed is an analysis of a blend of qualitative and quantitative data. The quantitative side assists in achieving objectivity in the rating process, while the qualitative side helps in establishing the sustainability of the relevant factors in the foreseeable future. Neither can all factors be quantified, nor do quantitative values portray the whole story. Therefore, PACRA seeks to employ a combination of both to ensure comparability between ratings over time. Overall factors are categorized under these key areas: Profile, Ownership, Governance, Management, Business Risk, and Financial Risk.

Page | 3 March 2026
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Assessment Framework
Digital-only insurers: In August 2022, the Securities and Exchange Commission of Pakistan (SECP) introduced a registration regime for digital-only insurers and dedicated micro insurers to promote digitalization and innovation. This framework is expected to enable the expansion of the insurance product range in Pakistan and greater financial inclusion. The factors described in this methodology apply to traditional as well as digital insurers. However, additional factors pertain to technological infrastructure and digital platforms . Qualitative Rating Factors Ownership Governance Management

Ownership Structure
Stability
Business Acumen
Financial Strength
Board’s Structure
Member’s Profile
Board Effectiveness
Transparency
ESG Considerations
Organizational Structure
Management Team
Management Effectiveness
Claim Management System
Investment Management
Risk Management Framework
Profile
Background & Operations
PACRA reviews the background of the general insurer to understand its evolution from where it started to where it currently stands. We analyze how and through what means the general insurer has achieved its desired expansion. PACRA assesses the general insurer's progress by analyzing trends in its historical performance. The progress of the general insurer helps PACRA in determining the ability of the general insurer to successfully realize its strategy. The significant factor here for PACRA is to assess whether the general insurer has achieved its expansion through organic growth or through acquisitions. Meanwhile, the source of funding for desired growth is also critical. The assessment of operations of a general insurer depends on the exposure of business segments and the life cycle stage the business is in. Here, PACRA reviews the diversity and geographic spread of operations, product offerings, size of the franchise/portfolio, track record of operations, adherence to standard operating procedures, and policies & protocols. Size may be an important factor if it confers major advantages in terms of operating efficiency and competitive position. Ownership Ownership Structure The assessment of ownership begins by looking at the legal status of the general insurer. The level of perceived stability gradually increases from a sole proprietor to a listed company. This is followed by an in-depth study of the shareholding mix in order to disentangle the structure of ownership. Key factors that are considered for this purpose include the shareholding structure, which includes whether the individual(s) own the general insurer directly or indirectly, whether it is owned by foreign or local shareholders, whether the general insurer is owned by a single group or through a combination of entities and individuals, and whether it is part of a group or a standalone entity. All these deliberations

Page | 4 March 2026
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Assessment Framework are done to identify the man at the last mile (or key shareholder). PACRA further considers how the general insurer is actually run, as, at times, entities are operated as family concerns despite being legally structured as companies. Stability In order to analyze the stability of ownership, a particularly important factor to be taken into account is succession planning. A very important part of our background analytical work is an attempt to assess whether, and under the right of succession, the general insurer’s prospects would be supported and by whom. This is particularly relevant in cases involving family-owned businesses and joint ventures, whose failures could have a contagious effect on the sustainability of the general insurer. Stable ownership with clarity in succession, perhaps major stakes held by a single family or group, is considered positive for ratings. On the contrary, high free float (in case of listed concerns) leads to a risk of takeover and may anchor lower ratings. Complex shareholding/ownership structures: In cases where the general insurer has a complex ownership structure, there are unique challenges in evaluating the decision-making process, lines of hierarchy, and financial obligations and liabilities. In analyzing these companies, the fundamental issue is to explore the underlying reason or motivation for the complexity of the structure. Insurance companies that are owned by private individuals and families: On the one hand, the concentration of equity ownership might indicate that the majority shareholders have a strong vested interest in creating long-term value and closely monitoring management behavior. On the other hand, a potential concern in such cases is that the owners might rely heavily on extracting funds from the general insurer as a source of income or to fund other business activities, potentially undermining the financial stability of the general insurer. Business Acumen Here, PACRA gauges the Sponsor’s business skills. Having a strong business skill set has been critical for the sustainable success of the general insurer. PACRA analyzes business acumen through two primary areas: industryspecific working knowledge and strategic thinking capability. Meanwhile, a deep and applicable understanding of the system is critical to determine how a business achieves its goals and objectives. The scope includes the assessment and understanding of how the apex of the general insurer thinks about and makes the correct business decisions. Financial Strength PACRA analyzes the ability and willingness of the major shareholders to support the general insurance company both on a continuing basis and in times of crisis. Here, PACRA gives due importance to the behavior of the major shareholders to provide timely and comprehensive support in times of need in the past, the prospective view of key shareholders, in case such need arises, other businesses of sponsors, and the level of commitment by major
shareholders to the general insurer in terms of providing capital support. In case of no explicit commitment by the shareholders, PACRA attempts to form a view on the availability of likely support. Support in this context refers strictly to financial support, rather than operational support. The scope for looking at other businesses of sponsors includes overall profiling of the key sponsors in the context of identifying the resources they have, outside the general insurer. Here, the standalone rating of the institution can benefit from having majority shareholders with very strong financial strength and commitment to the business. If, in a group structure, the financial strength of the sponsor is deemed to be weaker than that of the general insurer, this may bode negatively for the general insurer’s standalone rating, given

Page | 5 March 2026
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Assessment Framework the possibility that the general insurer may at some point in time be bound to extend financial support to its weaker parent. Information Required on Ownership

Shareholding pattern
Details of major shareholders’ other businesses
Shareholders’ financial information
Past pattern of support provided by the shareholders
Governance
Board Structure
This comprises the assessment of the board on various criteria, including overall size, presence of independent members, the duration of the board members’ association with the general insurer, and the overall skill mixes and structure of board committees. The size of the board may vary as per the scope and complexity of the operations of the general insurer. While a very small board is not considered good, similarly, deciding in an effective and efficient manner may not be possible in the case of a large board. A healthy composition of the board includes the presence of independent/non-executive members having a limited relationship with the sponsoring group of the general insurer. Meanwhile, the chairman and CEO positions being held by the same individual are considered a weak governance practice. The chairman is expected to have a non-executive role. Compliance with the code of corporate governance is also examined. PACRA also examines the independence of the governance framework from major shareholders. Lastly, PACRA evaluates the number of board committees, their structure, and how these committees provide support to the board. A board with a larger number of members should have a greater number of committees in place to assist it in performing its role. Members’ Profile PACRA collects information regarding the profile and experience of each board member. This helps in forming an opinion about the quality of the overall board. Moreover, diversification in terms of knowledge background and experience is considered positive.However, a fair number of board members should have industry-related experience. Board Effectiveness In PACRA’s view, the role of the board is to work with management in steering the general insurer to its performance objectives and to provide critical and impartial oversight of management performance. PACRA analyzes the type and extent of information shared with board members, along with the quality of discussions taking place at the board and committee levels. Effective oversight requires frequent sharing of detailed information covering various aspects of business and market development. Meanwhile, PACRA also reviews the number of board meetings held during the year, as these should be justified with the number of issues/matters arising. Board members’ attendance and participation in meetings is important and is gauged by reviewing the board meeting minutes. Transparency The quality of the governance framework is also assessed through the board-designed procedures to ensure transparent disclosures of financial and other information. This can be achieved by ensuring independence of the audit

Page | 6 March 2026
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Assessment Framework committee, strengthening the quality of the internal audit function, which may be in-house or outsourced, and by improving the quality of external audit by engaging auditors who are included in the State Bank of Pakistan’s panel of auditors and/or have a satisfactory QCR rating. Environmental, Social, and Governance (ESG) Considerations PACRA assesses how ESG factors are measured and incorporated into the overall strategy. In this regard, emphasis is placed on the evaluation of board policies and compliance regarding ESG disclosures alongside the adoption of related frameworks and reporting guidelines. The impact of ESG factors on the sustainability and business and financial profile of the entity is also considered. In the case of General Insurance and Takaful companies, these become more important since they undertake insurance business (fire, marine, etc.) where these risks play a critical role. Accounting Quality: PACRA reviews the quality of the general insurer’s accounting policies as reflected in its notes to accounts, auditors’ comments, and other disclosures which are part of its financial statements. Adherence to accounting standards is assessed, particularly for unlisted concerns. Quality of Disclosure: A well-established information system is required for adequate disclosures. The characteristics of quality information include timelines and disclosures beyond the minimum regulatory requirements to improve transparency and consistency of such disclosures. Information Required on Governance

Size and composition of board
Details of board committees including TORs
Profile of board members
Information packs used by the board
Minutes of board meetings
ESG Framework, related policies and reports
Internal auditor detail (if outsourced) and External Auditor detail
Management
Organizational Structure
The assessment of management starts with PACRA conducting an in-depth analysis of the organizational structure of the general insurer. On a standalone basis, PACRA looks into the hierarchical structure, reporting line, dependence of the management team on one or more persons, and the coherence of the team. PACRA also places the organizational structure in the general insurer’s relative universe for comparison in order to form an opinion of optimal structure within the sector in the context of its complexity. A number of management committees are established to monitor performance to ensure adherence to the policies and procedures. PACRA measures the effectiveness of the general insurer by forming an opinion on the quality of management committees.

Page | 7 March 2026
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Assessment Framework
Management Team
Analysis of management includes evaluating the experience profile of key individuals, management’s track record to date, in terms of building up a sound business mix, maintaining operating efficiency, and strengthening the general insurer’s market position. Although judgment about the management team is subjective, the performance of the general insurer over time provides a more objective measure. PACRA analyses the quality and credibility of management’s strategy, examining plans for internal or external growth. Loss of key personnel, particularly members of senior management, can have potentially adverse effects on the overall standing of the general insurer relative to peers. Hence, HR turnover is used to determine the stability of critical staff, with a particular focus on key departments. Similarly, the dependence of the management team on one or more persons is considered risky. In addition, the general insurer’s human resource policies are also reviewed to gauge its emphasis on retaining and recruiting vital staff. Field Staff: The role of mid- and low-tier staff is critical in maintaining relationships with the policyholders. Any misconduct on their part may lead to deterioration in the institution’s underwriting or retention of business. Thus, the general insurer’s ability to retain good field staff is considered important while assessing human resource management. Moreover, PACRA attempts to understand the client’s staffing policies, the local language ability of the staff dealing with prospective clients and policyholders, and their training on social aspects. Key-person Risk: Key-person risk occurs when a general insurer is heavily reliant on an individual, or a limited number of individuals, who are accepted as the key holder(s) of important intellectual capital, knowledge, or relationships. While this type of risk is more common in small to medium-sized entities, it can also exist in larger entities and is relatively challenging to benchmark and, hence, mitigate. PACRA attempts to identify the extent to which the general insurer is dependent on the expertise of such individual(s) and to ensure policies exist for succession/redundancy to limit the adverse impact of such a person unexpectedly leaving the insurer. Management Effectiveness PACRA conducts a qualitative review of management systems and technology infrastructure to assess management effectiveness. A key measure of management effectiveness is its track record of delivering on past projections and sticking to its strategic plans. One of the key tools available to management to effectively run an organization is the information provided to it. Information available to management must be concise, clear, and timely, so it can be easily interpreted and understood, allowing the management to respond accordingly. An important part of this analysis is looking at the general insurer’s MIS. PACRA further assesses whether management has developed any critical success factors to
evaluate the performance of various business segments and their efficacy. Management meeting minutes are also reviewed, wherever available, to assess the quality of the discussion. MIS: System–generated, real–time–based MIS reports add more efficiency in decision making, whether related to operational, financial, or strategic issues. PACRA evaluates the quality and frequency of the MIS reports used by the management team to ascertain that decision-making within the general insurer is information-based. Claim Management System The Claims department has to be independent of underwriting and marketing. It must be resourced fully, both in terms of manpower and infrastructure, including MIS. A senior, experienced, and independent Head of Claims can ensure

Page | 8 March 2026
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Assessment Framework that the mandate of the Claims department is fulfilled. In the case of digital-only insurers, claim lodgment, payment systems, and claims processing status are expected to be fully digitalized. Therefore, PACRA may gauge the quality of these systems through soliciting information about vendors or system-generated report samples. Claim Settlement System: Claim settlement begins with the recording of the claim. Claims need to be booked immediately and without discrimination in the books of account; related provisions need to be created, and claims need to be tracked along the settlement process. An efficient claim settlement process depends a lot on technology integration. With technology, all stakeholders may be fully aware of the stage and time further required for the settlement. Turn-around time is important for a single claim and for the portfolio of claims; this can be monitored through detailed MIS reports. Investment Management PACRA evaluates the investment management function in aspects, including the structure of the function, the experience of the staff, the investment policy, and the role of MIS. PACRA emphasizes the quality of the investment committee and the expertise of the investment manager. The investment committee must include members who are knowledgeable in investment decision-making, while the investment managers must also be experienced and well entrenched in the equity and debt markets, depending upon the portfolio of the insurance company. In addition, the investment policy statement, duly approved by the Board, is the document that lays down the investment philosophy of the general insurer. PACRA assesses whether the statement covers key areas such as proposal generation, decision-making, investment allocation, benchmarks, and performance evaluation. Market Risk: PACRA's analysis of market risk incorporates structural risks (such as interest-rate risk management) and/or trading risks where present. Scrutinizing the duration of the general insurers’ liabilities compared to their assets is crucial. PACRA reviews the asset and liability management strategy to assess the risk appetite of the general insurer. Board and management policy limits are typically expressed as earnings at risk limits. These are usually evaluated along with reports from management systems. Market risk on its own may not be a rating driver; however, poor market risk management or aggressive market risk-taking without mitigants would likely pressure a general insurer’s ratings. Risk Management Framework/Control Environment:
This includes an analysis of the general insurer’s appetite for risks and the systems in place to manage these risks. PACRA examines the independence and effectiveness of the risk management function, the procedures and limits that have been implemented, the limits-setting authority, and the degree to which these procedures are adhered to. PACRA endeavors to assess senior management’s understanding of and involvement in risk management issues and examine the reporting lines in place. In recent years, there has been a noticeable upgradation in the risk management systems, in the face of increasing guidance and supervision from SECP. Insurance companies are primarily governed under the Insurance Ordinance, 2000. PACRA evaluates the ERM to assess whether the general insurer executes risk management practices across the enterprise in a systematic and consistent manner. Our primary focus is to assess whether a general insurer addresses risk through silos, i.e., each risk area is conducted as narrowly focused and fragmented activities, or instead adopts an integrated approach across all functions. PACRA also assesses the extent to which a general insurer effectively

Page | 9 March 2026
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Assessment Framework limits key risks within its appetite to optimally achieve its business goals and objectives. The ERM assessment consists of four sections: role of the board, risk culture, risk exposure management, and risk optimization. Operational Risk: In the context of Basel II and Basel III, operational risk is defined as “the risk of loss resulting from inadequate or failed internal processes, people and systems or external events”. Our analysis of operational risk focuses on a number of issues, including (a) the insurer’s definition of such risk, (b) the quality of its organizational structure, (c) operational risk culture, (d) approach to the identification and assessment of key risks (e) data collection efforts, and (f) overall approach to operational risk quantification and management. The extent of technological integration is considered crucial in the mitigation of operational risks such as fraud, cyber risk, loss of data, and technological disruptions in critical processes. A high degree of automation in day-to-day operations is considered favorable to operational risk management. Reputation and Other Risks: Reputation risk may emanate from operational problems or failure in any risk management systems. It may be difficult to evaluate, but it could adversely affect the general insurer’s rating in cases where it is significant. In addition to reputation risk, any regulatory non-compliance may lead to legal risk with potential ramifications as well. Information Required on Management

Latest organogram
Profile of senior management
Redundancy pattern
MIS reports
Management meeting minutes
General Insurer’s policies and SOP
A brief write-up on technological infrastructure and the claim management system
A brief write-up on the risk management framework and investment management framework
Quantitative Factors
Business Risk Financial Risk

Industry Dynamics
Relative position
Revenues
Diversification
Investment Performance
Cost Structure
Sustainability
Claim Efficiency
Reinsurance
Liquidity
Capital Structure
Business Risk
Industry Dynamics
The process for IFS rating builds on PACRA’s understanding of the general insurance industry dynamics. This understanding, following an in-depth research approach, is documented. The analysis captures the placement of the

Page | 10 March 2026
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Assessment Framework local industry in the international context to see the points of identity and distinction. In terms of identity, the risks and challenges identified for the international players are re-evaluated for the local players, with a view to seeing to what extent local players are exposed to these challenges. In the second part, we analyze the measures and effective mitigants against these risks and challenges. At the same time, we identify the risks and challenges specific to the local context of the industry. While conducting the analysis, PACRA takes a view of the industry alone, independent of the market players. This exercise helps PACRA to form a view of the industry’s significance in the economic environment of the country, its regulatory environment, and likely support, if needed. Economic Risk: PACRA analyzes basic economic indicators of the country, including the size and composition of the economy, performance of important sectors, gross domestic product (GDP) growth, inflation, and saving and investment trends. An important part of economic analysis is the positioning of the industry and the impact assessment of economic risk factors on the industry. Regulatory Environment: A well-regulated and supervised system is pivotal for credibility and stability of the general insurer, even when the operating environment is unfavorable. PACRA’s evaluation of the regulatory system involves evaluation of criteria related to capital and other countercyclical measures to absorb risk and the extent of regulatory supervision and changes in response to the macro environment and prospective regulatory changes. Relative Position Market position reflects the standing of the general insurer in the related market. The stronger this standing is, the stronger the general insurer’s ability to sustain pressures on its business volumes and underwriting margins. The insurer’s standing is supported by various factors, such as market size, growth trends, and franchise value/brand value. Market Share: Market size represents the general insurer’s penetration in the chosen market. Size is advantageous as it provides the ability to acquire a larger business, pricing power, and better expense management. There is a positive correlation between a general insurer’s absolute and relative size and its market position and brand value. The large companies exercise greater power over the pricing while ensuring commensurate profits. Small companies struggle to obtain business, and with less flexibility in the cost structure, their profits remain low. While absolute size is important, it is basically the relative proportion that provides a clear yardstick to analyze the comparative strength of the market players. The more distant a player is from the average on the positive side, the stronger its ability to reflect the characteristics just mentioned. In a dynamic industry that is not characterized by concentration, PACRA believes that relative size would better
capture the strength of the general insurer’s standing in the related market. However, growth in size is not meaningful if the general insurer cannot maintain underwriting discipline and strong pricing. The quality of risk management guidelines and their invariable implementation is the key to ensuring sustainability in the market position. Aggressive expansion at the expense of underwriting quality is considered negative, while sustainable growth is viewed positively. Growth Trend: While evaluating the size, PACRA looks at the rate of growth. Growth is important as it ensures that the general insurer continues to have the ability to meet (or beat) the industry’s benchmarks. As the industry grows, it uplifts the scale of its operational context. This is reflected in the ability of the players to invest in human resources, upgrade the control environment, enhance the product slate, increase the outreach, and improve the quality of service. To lag the industry’s growth trend means to remain short on these avenues, putting pressure on the market position.

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Assessment Framework
Brand Value:General insurer’s brand reflects the strength of its image and reputation in the market, recognition and perception of its products by the distributors and ultimate clients. The brand also commands the clients’ loyalty, the ability of the general insurer to cross-sell, while bringing down its cost of distribution. Typically, higher and sustainable price trends would highlight the strength of the brand and/or franchise value. This would help the general insurer strengthen its market share, ensure a comparative growth rate, and enjoy healthy margins. While a stronger combination of these enables the general insurer to withstand prolonged difficult market conditions, these also enable it to carve out new niches and tap emerging opportunities better than its peers. Consequently, the strength of the competitive position would have a direct bearing on the rating of the general insurer. Revenues PACRA’s analytical approach starts with an assessment of product-wise underwriting contribution, which provides a good indication of the returns generated by the general insurer’s business segments. In measuring the earning quality of the general insurer, diversification and stability are very important factors. A general insurer with a diverse product slate with more than one revenue stream is considered better than a general insurer with a concentrated earning profile. In the case of a mono-line business, PACRA evaluates its expertise and track record. PACRA sees concentration at both product and customer levels. In addition, the analysis of target markets to which the general insurer serves forms a part of the assessment. Stability is measured through historical trend analysis of the general insurer’s revenues. Total revenues of general insurers are a combination of their underwriting results and their investment income. Diversification Diversification is desirable since it enhances the general insurer’s ability to meet challenges, both present and upcoming. Lack of diversification gives rise to concentration risk, reflecting a general insurer’s vulnerability to a few elements. At the same time, it enhances the risk of disruption if the area of concentration goes wrong. This does not entail that the insurer specializing in a certain product/segment would necessarily be at a disadvantage. The disadvantage would only arise if the general insurer’s business gives rise to concentration risk. At the same time, diversification into riskier segments may not improve resilience and, therefore, may not translate into superior ratings. Based on this understanding, PACRA places high emphasis on the diversification of premiums across key segments such as Fire, Marine, Motor, Health, and others. Within others, a balanced mix of all contributing elements would be appreciated. Moreover, a higher proportion of retail clientele over institutional clients is preferred due to the relatively stable nature of these premiums. Investment Performance Profits derived from
investments can take the form of interest, dividends, and capital gains. The level of investment earnings is dictated by the investment allocation strategy and the quality of management. Like underwriting income, investment returns and their volatility are also correlated with the level of risk assumed. PACRA measures overall profitability (underwriting and investing) by calculating the general insurer’s operating ratio. To further understand the quality of earnings, PACRA evaluates the diversification of earnings, as earnings that are well diversified tend to be less volatile.

Page | 12 March 2026
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Assessment Framework
Quality of Investment Book: The quality of the investment book is assessed to form an opinion on whether investments are concentrated in high-risk avenues. Apart from the equity investments, which are otherwise viewed in the context of the overall risk appetite of the general insurer, the remaining investments are evaluated from the perspective of the credit profile of the investee. Investment Income Contribution: Investment income is the alternative revenue stream. It supplements the general insurer's profitability. This is the profit which an insurance company makes over and above the underwriting income or loss, measured through the combined ratio. Investment income contribution is computed by comparing the investment income against the underwriting income. Stronger companies make more money from investments; good companies match investment income to underwriting income. Yield: PACRA evaluates the performance of the investment portfolio. It shows whether the general insurer is underperforming, meeting, or exceeding the relevant benchmarks. Strategic Investments: Strategic Investments are considered good when they are cash-producing; when they are cash-consuming, they put pressure on the liquidity. PACRA assigns scores in terms of the percentage of cashproducing investment to cash-consuming investment. Cost Structure Cost structure is analyzed for the amount of flexibility provided when market conditions are less favorable. In this regard, PACRA considers how much of the cost base is variable. PACRA also evaluates the general insurer’s performance ratios relative to those of its peers to understand whether costs have been contained while growing assets and revenue. If expense ratios are high, it could be an indicator that the insurer has a significant fixed cost burden. In this context, the key measure that PACRA looks at is the expense ratio. [(Net commission and other acquisition costs + Management expenses) / Net insurance premium]. Performance measures are not assessed in isolation, as there may be variations that are caused by business model differences and the importance of ongoing investment in the general insurer’s franchise. A low-cost base relative to peers offers the general insurer greater flexibility to deal with competitive pricing pressures. Margins: The focus of PACRA’s analysis of profitability is to understand the sources of profits, the level of profits on both an absolute and relative basis, and potential variability in profitability. Profits for general insurers are sourced from two primary functional areas: 1) underwriting and 2) investment income. As indicated above, profits from underwriting are generated when operating revenues (generally premiums) exceed the sum of losses and cost of acquisition (including management and admin expenses). The underwriting margin and its volatility generally correlate with the level of risk that is being assumed. The profitability from underwriting is measured through the combined ratio
Sustainability Earning prospects are also monitored, based on budgets and forecasts prepared by the general insurer. A reality check is performed while analyzing underlying assumptions taken by the management, as well as the management’s track record in providing reliable budgets and forecasts. Event Risk: Incorporating the risk of unforeseen events into the general insurer’s rating opinion is challenging, given their unpredictable nature and the magnitude of impact of the underlying event. These events may be external (e.g.,

Page | 13 March 2026
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Assessment Framework
M&As, regulatory changes, or a natural disaster) or may be internally driven (unrelated diversification, system breakdown leading to significant operational risk, or strategic restructuring) and can lead to substantial rating changes. PACRA applies its analytical judgment in assessing the likelihood of such occurrences and potential impact, insofar as may be possible, and assesses the general insurer’s track record, expertise of management team, and level of financial discipline to incorporate the same into its ratings. Information Required on Business Risk

Detail of gross premium written from the 10 largest customers for each line of business
Details of the 10 largest claims intimated for each class of business separately
Total sum insured consolidated and for each category separately, and the net share of the company after
reinsurance
The general insurer's medium-term business plan
Rates of commission received from reinsurers and contracted commission rates
Financial projections for the next two years
Financial Risk
Claims Efficiency
The underlying risk that the insurer's financial strength rating covers is the risk of claims not being met by the general insurer. Timely and accurate repayment of claims carries utmost importance in the rating methodology. Claims efficiency represents the pattern in which claims are being settled by the general insurer. PACRA believes that general insurers having a higher rating would be carrying a lower number of outstanding claims in general circumstances (adjusted for one-off events). While this ensures the ultimate satisfaction of the policyholder, it denotes the spreadout of cash outflows over a number of periods instead of their accumulation over a single year. This safeguards the general insurer from building undue pressure on the liquidity of the company in any specific period. Re-insurance The re-insurance is the risk coverage obtained by the general insurer against insurance claims. Herein, the business philosophy of the general insurer with reference to risk retention comes into play. A high quantum of risk retention means higher exposure to claims, though profits would be higher as well. PACRA looks deeply into the receivables to be recovered from the reinsurers. The analysis of the amount of the general insurer’s reinsurance recoverable, its concentrated reliance on a few reinsurers, and the credit quality of the individual reinsurers is important because write-offs of the recoverable as uncollectible could impact the general insurer’s income and capital, and because the loss of reinsurance capacity could require the general insurer to modify its market/product focus. PACRA looks at what kind of rating the reinsurer enjoys, their experience in the Pakistani market, their historical relationship with the general insurer, treaty terms, and their respective share in the reinsurance pool. Liquidity The liquidity profile of the general insurer is the ultimate cover that the company has against claims. The general insurer operator may carry multiple shields against the claims. The first shield is the operational cash flows coming in the

Page | 14 March 2026
General Insurance & Takaful Operator Rating
Assessment Framework form of premiums and return on investments. An effective structure deployed in the operational framework would ensure that a significant portion of claims is being met through the operational cash flows. The second shield is the liquid investment book. The investment book may represent investment in a mix of fixed-income and equity securities. Equity securities are adjusted for those scrips wherein volumes are insignificant. PACRA believes that the mix of the investment book is critical in assessing the overall comfort that may be placed on the liquidity of the insurance company. While exposure towards the equity market may be determined by the investment philosophy of the general insurer, PACRA relates the extent of exposure to the overall risk profile of the general insurer and hence its IFS rating. The third shield of protection is the strategic investment book, if any. PACRA assesses the quality of the strategic book and its size in the light of the general insurers’ liquidity requirement and the attractiveness of the book for disposal. Admissible Assets: Incorporating the risk of unforeseen events into the general insurer’s rating opinion is challenging, given their unpredictable nature and the magnitude of impact of the underlying event. These events may be external (e.g., M&As, regulatory changes, or a natural disaster) or may be internally driven (unrelated diversification, system breakdown leading to significant operational risk, or strategic restructuring) and can lead to substantial rating changes. PACRA applies its analytical judgment in assessing the likelihood of such occurrences and potential impact, insofar as may be possible, and assesses the general insurer’s track record, expertise of the management team, and level of financial discipline to incorporate the same into its ratings. Capital Structure At the heart of PACRA’s financial risk assessment lies the adequacy of the capital for the general insurer’s business. Capital is pivotal for organizational sustainability, growth drive, and as a last cushion against adverse circumstances. PACRA evaluates the capital in the context of the general insurer’s business model. This understanding stems from the realization that the general insurer following a high-risk and high-growth business strategy would need entirely different capital requirements than a general insurer following a conservative business model. In December 2022, the SECP issued a concept paper on the proposed shift from the current rule-based capital adequacy framework towards a risk-based capital regime for Pakistan’s insurance sector. This transition is envisioned to ensure that the level of capital maintained by an insurer is commensurate with the level of risk undertaken by it. This is expected to more accurately reflect various risks and capital buffers for individual insurers. The new regime would result in the Capital Adequacy Ratio (CAR) becoming a key metric in determining the loss
absorption capacity of an insurer. While the capital adequacy levels have not yet been defined, PACRA will consider the applicable regulatory regime, once implemented, in its assessment of the insurer’s capital structure. As per S.R.O. 310 (I)/2025, SECP has implemented a revised minimum paid-up capital requirement, applicable to currently operating and new general insurance companies. Therefore, PACRA will continue to assess the capital adequacy position, taking into consideration the revised paid-up capital requirements. For a viable business, PACRA understands that the capital has to be serviced as well. Therefore, analysis of the return on capital and its consistency is another important aspect of capital adequacy assessment. While a general insurer is generating returns, it may have a varied policy with reference to the payout to the shareholders. PACRA believes that this policy should take due account of the existing and future needs of the general insurer’s business. Capital formation rate, the rate at which the general insurer adds to the capital after dividends, would determine the accumulation of strength that the general insurer demonstrates on a relative scale. Furthermore, a comparison of the proportion of high-risk assets with the issuer’s equity allows PACRA to measure risks associated with the investment book. A higher

Page | 15 March 2026
General Insurance & Takaful Operator Rating
Assessment Framework portion of investments in high-risk assets does not necessarily result in a lower rating as long as the issuer backs it up with a higher equity base. Additionally, PACRA assesses the insurer’s capital buffer over regulatory requirements to measure the issuer's ability to absorb unexpected losses. In order to gauge the risk present on a general insurer’s books, PACRA measures net insurance premiums relative to the insurer’s equity. This aims to provide an estimate of the issuer’s ability to underwrite risks without significantly compromising its solvency. Credit Enhancement: The general insurer that carries a third-party commitment to make good on an amount obligated to the lenders may provide additional support to its financial risk profile. In this case, in determining the impact on rating, key factors to assess are the financial profile of the third party and the extent of coverage – quantum and duration – it provides. Information Required on Financial Risk

Re-insurance arrangements and policies
List of "Treaties" along with the retention limits and details of surplus lines
Number of policies above the retention limit and the average amount of policy thereof
Ageing analysis of a) premiums due but unpaid, b) reinsurance recoveries against outstanding claims, c)
provision for outstanding claims, and d) amount due to agents
Details of 10 largest claims intimated for each class of business separately
Total sum insured consolidated and for each category separately, and the net share of the general insurer after
reinsurance
Details of 10 largest claims outstanding at period end, identifying the period since outstanding and the reason
for delay
Amounts pertaining to disputed claims, while giving details of major disputed claims along with reasons

Page | 16 March 2026
General Insurance & Takaful Operator Rating
Assessment Framework
Insurer Financial Strength (IFS) Rating
An IFS rating reflects a forward-looking opinion on an insurance company's relative ability to meet policyholders' and contractual obligations Scale Definition AAA (ifs) Exceptionally Strong. Exceptionally Strong capacity to meet policyholders' and contract obligations. Risk factors are minimal, and the impact of any adverse business and economic factors is expected to be extremely small. AA++ (ifs) AA+ (ifs) AA (ifs) Very Strong. Very Strong capacity to meet policyholders' and contract obligations. Risk factors are very low, and the impact of any adverse business and economic factors is expected to be very small. A++ (ifs) A+ (ifs) A (ifs) Strong. Strong capacity to meet policyholders' and contract obligations. Risk factors are low, and the impact of any adverse business and economic factors is expected to be small. BBB++ (ifs) BBB+ (ifs) BBB (ifs) Good. Good capacity to meet policyholders and contract obligations. Risk factors are moderate, and the impact of any adverse business and economic factors is expected to be manageable. BB++ (ifs) BB+ (ifs) BB (ifs) Modest. Modest capacity to meet policyholders' and contract obligations. Though positive factors are present, risk factors are relatively high, and the impact of any adverse business and economic factors is expected to be significant. B++ (ifs) B+ (ifs) B (ifs) Weak. Weak capacity to meet policyholders' and contract obligations. Risk factors are high, and the impact of any adverse business and economic factors is expected to be very significant. CCC (ifs) CC (ifs) C (ifs) Very Weak. Very weak capacity to meet policyholders' and contract obligations. Risk factors are very high, and the impact of any adverse business and economic factors may lead to insolvency or liquidity impairment. D (ifs) Distressed. Extremely weak capacity with limited liquid assets to meet policyholders and contract obligations, or subjected to some form of regulatory intervention or declared insolvent by the regulator. Outlook (Stable, Positive, Negative, Developing):
Indicates the potential and direction of a rating over the intermediate term in response to trends in economic and/or fundamental business/financial conditions. It is not necessarily a precursor to a rating change. ‘Stable’ outlook means a rating is not likely to change. ‘Positive’ means it may be raised. ‘Negative’ means it may be lowered. Where the trends have conflicting elements, the outlook may be described as ‘Developing’. Rating Watch:
Alerts to the possibility of a rating change subsequent to, or in anticipation of, some material identifiable event with indeterminable rating implications. But it does not mean that a rating change is inevitable. A watch should be resolved within the foreseeable future, but may continue if underlying circumstances are not settled. A rating watch may accompany the rating outlook for the respective opinion. Suspension:
It is not possible to update an opinion due to a lack of requisite information. Opinion should be resumed in the foreseeable future. However, if this does not happen within six (6) months, the rating should be considered withdrawn. Withdrawn:
A rating is withdrawn on a) termination of rating mandate, b) cessation of underlying entity, c) the debt instrument is redeemed, d) the rating remains suspended for six months, e) the entity/issuer defaults, or/and f) PACRA finds it impractical to surveil the opinion due to lack of requisite information. Harmonization:
A change in rating due to a revision in the applicable methodology or underlying scale.
Surveillance: Surveillance on a publicly disseminated rating opinion is carried out on an ongoing basis till it is formally suspended or withdrawn. A comprehensive surveillance of rating opinion is carried out at least once every six months. However, a rating opinion may be reviewed in the intervening period if it is necessitated by any material happening. Note: This scale is applicable to the following methodology(s): General Insurance & Takaful Operator, Life Insurance & Family Takaful Operator. Disclaimer: PACRA has used due care in the preparation of this document. Our information has been obtained from sources we consider to be reliable, but its accuracy or completeness is not guaranteed. PACRA shall owe no liability whatsoever to any loss or damage caused by or resulting from any error in such information. Contents of PACRA documents may be used, with due care and in the right context, with credit to PACRA. Our reports and ratings constitute opinions, not recommendations to buy or to sell.