In Nigeria it seems like it is easier for the donkey to pass through the eye of the needle than for an insurance company to deliver returns to shareholders.
Spiraling operating and claims expenses combined with weak premium growth makes it difficult for Nigeria Insurers to record double digit growth in earnings necessary to declare bumper dividend to their owners.
Of course, in a country where over 50 percent of a population of 200 million live on less than $1.90-day, it means insurers are often unable to effectively market their products, hence losing potential revenue.
Inflationary pressures are also increasingly ballooning cost of operations, which is why combined ratio is growing out of proportion, hence, eroding profitability.
Nigeria’s inflation rate rose to 13.22 percent in August 2020, highest recorded in 29 months, since March 2018 (13.24 percent).
Since there is a strong relationship between the state of the economy and performance of the insurers, it is not surprising that the country lags its peers across sub-Saharan African in penetration and density.
Also, the second quarter gross domestic product (GDP) report the National Bureau of Statistics (NBS) shows insurance sector of the Nigerian economy contracted by 28.15 per cent.
Analysts have identified other impediment to the growth of the industry to include; poor regulation, lack of trust for the claims process, and apathy towards the insurance due to cultural and religious belief.
However, amid these challenges, some insurers are thriving as they have recorded strong earnings, but the coronavirus pandemic could dampen future earnings.
For instance, AXA Mansard Insurance’s return on average equity increased to 11.06 percent in June 2020 from 5.51 percent the previous year.
What’s more, AXA Mansard’s returns beat the 5.73 percent industry average, according to data compiled by MoneyCentral. It’s net income surged by 154.42 percent to N3.60 billion as at June 2020.
Cornerstone Insurance Plc’s ROE increased to 6.81 percent in June 2020 from 4.81 percent the previous year; net income surged by 99.41 percent to N1 billion as June 2020.
Regency Insurance Plc’s ROE increased to 8.93 percent in the period under review as against 5.75 percent the previous year. It’s net income also spiked by 73.49 percent to N550.46 million as June 2020.
Prestige Assurance’s ROE moved to 7.08 percent in the period under as against 4.24 percent the previous year. The insurer’s net income spiked by 79.25 percent to N620.35 million as at June 2020.
The overall performance of listed insurers was below average as average ROE fell to 5.73 percent in June 2020 from 10.40 percent the previous year.
That’s why their share prices are very low and valuations weak as investors apathy towards the industry continues to be heightened.
Nigerian insurers have a price-to-book ratio of 0.43x, which compares with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x), according to data gathered by Afrinvest Securities Limited.
“This indicates investor apathy towards the listed insurers, quite evident in their stock prices,” said analysts at Afrinvest Securities.
“Although this underpricing appears attractive from an investment standpoint, we believe the pricing is synonymous with the value-added by the insurers over time in terms of performance,” said analysts at Afrinvest Securities.