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Insurers Hit by N154.04 bn Fair Value Loss as ROE Shrinks

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Several insurers in Africa’s largest economy are exposed to fair value loss on investment due to exposure to upward move in yields that has adverse effects on the value of their bond holdings.

The firms including Leadway Assurance, Custodian Investment, AIICO Insurance, Mutual Benefit, and African Alliance collectively incurred N154.04 billion in fair value loss on financial assets in December 2021, according to data gathered by MoneyCentral.

“Yields on Federal Government Bonds trended higher in 2021, medium term maturity closing with an average yield of 12.50 percent vs 7 percent that it opened the year with,” Leadway Assurance said in a note to its financial statement glimpsed by MoneyCentral.

Rise in yield was expected following crash to historic lows in 2020; this coupled with government borrowing required to fund budget deficit and also low system liquidity,” said Leadway Assurance.

There is an opposite relationship between a bond’s yield and its price. When interest rates rise, bond prices fall.

It is noteworthy that insurers might be exposed to more losses this year as the central bank’s unexpected hike in the monetary rate to tame rising inflation is expected to spur bond yields.

The Nigeria 10 year government bond has a 11.339 percent yield, according to data from World Government Bonds.

The combination of rising claims due to rising inflation and currency devaluation coupled with unpredictability of risky assets undermined profitability.

However, some firms remained profitable because they earned income from investment securities as they parked their money in both short and long term government securities.

The average industry return on average equity (ROAE) for the largest insurers was -41 percent in December 2021 from 5.82 percent as at December 2020, according to calculations by MoneyCentral.

That compares with the ROAE of 15.04 percent and 16.22 percent in 2019 and 2018 accordingly.

Insurers saw a combined net income dip by 52.24 percent to N32.05 billion in December 2021, according to data gathered by MoneyCentral.

Also, that compares with a 93.08 percent spike in cumulative net income to N67.13 percent in 2o20 from N34.75 billion in 2019.

Some insurers fell off the cliff as they posted loss after tax while others are technically insolvent with huge negative retained losses.

Coronation Insurance, Mutual Benefit, Royal Exchange, Linkage Assurance, Niger Insurance, and African Alliance posted loss after tax of N1.22 billion, N4.33 billion, N973.15 million, Linkage Assurance, N2.37 billion, Niger Insurance, N2.63 billion, and N1.23 billion.

A weak profit margin and abysmally poor dividend distribution has heightened investors’ apathy towards insurers’ shares that are below N5, but there is light at the end of the tunnel as the regulator has hiked the minimum capital requirement of sector players.

And it is expected that the new rules that are expected to strengthen the capital bases of firms will spur mergers and acquisitions needed to unlock the potentials in a sector that contributes less than 1 percent to the economy.

While the insurance sector recorded impressive growth in premium income, the sector continues to lag its peers in terms of penetration which stood at 0.5% 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).

An industry expert who spoke to MoneyCentral on the condition of anonymity said many companies are paying out more in claims than premium earned and that the ones that do not have enough liquidity to invest in fixed income securities find themselves in a precarious situation.

Leadway Assurance incurred N83.68 billion in fair value loss on assets in 2021, and that compares with fair value gains of N78.18 billion as at December 2020.

With an increase in annuity fund and investment income, the largest insurer in Africa’s largest economy was able to post net income of N11.38 billion as at December 2021.

AIICO Insurance incurred fair value loss on assets of N34.65 billion as at December 2021, and that compares with a gain of N30.62 percent recorded the previous year.

Mutual Benefit incurred a fair value loss of N5.68 billion that helped tip the insurer into a net loss position even as it recorded positive underwriting results.

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