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The widening gap between the spot and forward rates of the naira have boosted Sovereign Trust Insurance premium income as the insurer delivered improved underwriting conditions in the face of a challenging environment.
The first quarter results of Sovereign Trust showed gross premium income spike by 37.32 percent to N7.07 billion from N5.15 billion as at March 2021.
A breakdown of revenue shows gross premium from energy business, which make up 72.84 percent of total premium, increased by 64.49 percent to N4.56 billion as at March 2022.
“Of course, the exchange rate movement impacts revenue from energy business. A weak currency is a boon for firms as they make gains from currency variations,” said an industry expert who doesn’t want his name mentioned.
To stabilize an economy and protect the external reserve from the vagaries of crude oil price, the central bank has been devaluing the currency even though its refusal to adopt a uniform exchange rate regime and the continued clinging to capital control measures are significantly responsible for capital flight and economic debacle.
The currency has been suffering for 7 years and the steepest fall came last year when the central bank governor abruptly stopped the sale of foreign exchange to Bureau de Change operators (BDCs) across the country.
Naira depreciated to N416/$ in 2021 , but it is now at N545/$ as analysts see more devaluation this year.
A research firm said a defined and unified exchange rate regime should be implemented to prevent the insurance sector from making abnormal gains from currency variations/mispricing as this is necessary to build a sector that would be robust enough to absorb any exchange rate volatility that may occur in future.
Despite the challenging operating environment that undermines the operations of businesses in Nigeria, Sovereign Trust Insurance delivered improved underwriting conditions.
The insurer, which has consistently maintained its growth trajectory, posted a 25.88 percent increase in underwriting profit to N1.07 billion in the first quarter of 2022.
Underwriting profit is a term used in the insurance industry. It consists of the earned premium remaining after losses have been paid and administrative expenses have been deducted. It does not include any investment income earned on held premiums. Many companies will eschew underwriting profit in order to gain a greater
However, the insurer’s combined ratio which improved to 105.80 percent in March 2022 from 109.03 percent the previous year exceeds the 100 percent benchmark.
The company spends less on claims expenses to generate premium income, but it has a reputation of consistently meeting obligation to policyholders, which also validates its strong balance sheet, earnings stream, and adequate liquidity.
It paid N809 million in claims to customers in the first quarter of 2022, and that is a reduction of 16.18 percent the previous year. Claims ratio reduced to 40.70 percent in the period under review from 50.49 percent the previous year.
Sovereign Trust saw net income increase by 24.47 percent to N489.11 million as at March 2022 as it was able to translate top line (revenue) impressive performance into bottom line (profit) growth.
While there has been an improvement in earnings, the firm is spending more to generate premium income.
Expense ratio increased to 65.10 percent in 2022 from 58.54 percent as at March 2021, according to MoneyCentral calculations.
Insurers in Africa’s largest economy are spending more on the acquisition of the latest technology t0 bolster efficiency and generate more premium, while inflationary pressures and currency volatility adds another layer to rising operating expenses.
They operate in a challenging environment that makes it difficult for them to thrive and exploit their best potentials, which is why they lag peers in emerging and frontier markets in major indicators penetration and density.
This poor level of growth is largely due to little awareness & understanding of insurance products, lack of trust especially with regards to claim settlement, socio-cultural & religious beliefs of Nigerians, weak enforcement of compulsory insurance policies and the slow pace of innovation amongst industry participants.
In addition, the weak macroeconomic environment affects insurance adoption given weak economic growth and high unemployment and poverty rates.
Nigeria’s penetration which stood at 0.5 percent is abysmally poor when compared with South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).