Coronation Insurance Plc materially relied on investments to boost returns as mounting obligations from policyholders led to a spiraling combined ratio.
For the first three month through March 2021, Coronation Insurance net income spiked by 79.44 percent to N648.24 million from N361.25 million as at March 2020.
The growth in net income was largely driven by a 95.24 percent increase in investment income to N559.81 million in March 2021 from N273.09 million the previous.
It’s been clear that the insurer is turning to active management of the investment portfolio and taking on more risk, but the relatively unstable bond yields and central bank’s dovish policy could undermine future income from both short- and long-term government securities.
Across the globe, insurers take advantage of benign interest rates to bolster investment returns that help make up for deteriorating underwriting results caused by huge losses that relate to catastrophic events. In short, investment in bonds, equity, and real estate are the reasons companies are turning a profit.
Yields on short term government securities were at double digit through 2017-2018, but crashed to below 5 percent in 2019 due to the central banks’ decision to bar individuals and corporate from its Open Market Operations (OMO) market.
However, bond yields have been rising since the start of 2021 as investors dumped shares -as a result of unpredictable macroeconomic environment and lack of transformation policy on the part of the government-for fixed income securities.
The Nigeria 10 Years Government Bond has a 12.476 percent yield as of June 25, according to data from FMDQ. The Nigeria 10 Years Government Bond reached a maximum yield of 15.856 percent as at December 4, 2018
Coronation Insurance combined ratio deteriorated to 135.85 percent In March 2021 from 129.13 percent as at March 2020, according to MoneyCentral calculations.
There have been mounting obligations, and the company is paying more in claims than it is earning revenue.
Claims ratio increased to 54.05 percent in the period under review from 33.41 percent the previous year; claims expenses surged by 65.35 percent to N1.25 billion in the period under review from N757.52 million as at March 2020.
Analysts attribute amounting obligations to losses incurred due to the EndSars protest that resulted in wanton destruction of properties; they added that inflationary pressures are jerking up replacement cost of assets.
“We believe the settlement of claims is key to emphasizing the purpose of insurance among the Nigerian populace and encouraging uptake of insurance policies although this would imply higher costs and depressed profitability for insurers,” said analysts at Afrinvest Securities in a recent note to clients.
The insurer is able to reduce management expenses, operating expense ratio moved to 58.63 percent in March 2021 from 67.17 percent the previous year; management expenses were down by 10.80 percent to N1.35 billion as at March 2021 from N1.52 billion as at March 2020.
Interestingly, Coronation Insurance’s innovative market penetration products are making an inroad into the Nigerian market as evidenced in top line (Revenue) growth.
Gross premium income (GPI) rose by 27.25 percent to N5.22 billion in March 2021 from N4.10 billion as at March 2020.
Since revenues are rising for most insurers in the country, then bond yields have to continue to rise so investment returns underpin profitability; also, the combined ratio will keep going up since inflation expectations are expected to be elevated on the back of structural issues.