The largest insurers in Africa’s most populous nation have collectively incurred N130.81 billion in reinsurance expenses in 2021 as they continue to limit their own losses in the case of a catastrophe.
That is 8.70 percent higher than N120.33 billion incurred in 2020, according to data gathered by MoneyCentral.
Reinsurance is a deal wherein the insurer shares a part of the risk portfolio with another insurance firm. It helps spread the risk to avoid an enormous unmanageable financial strain on a single entity. Reinsurance companies are of two types: facultative and treaty.
Its benefits include enhanced capacity, loss stabilization, decreased risk, and security against massive catastrophes.
Reinsurance can be an unfamiliar feature of the insurance business for several people, but its origin stems from the 14th century. Initially utilized for fire and marine insurance, reinsurance companies have grown through the past century to include almost all facets of the insurance sector.
It must be noted that the total reinsurance expenses of N130.18 billion is 45.38 percent of the combined net premium income (revenue) and 47.18 percent of total cumulative expenses of N278.44 billion as at December 2021, according to data gathered by MoneyCentral.
Insurers’ total costs of N278.44 billion is 97.18 percent of net premium income, which underscores the impact of inflationary pressures, currency devaluations, and rising diesel prices on the bottom line (profitability).
While insurers have been spending a lot of money on the recruitment and motivation of existing workforce and acquisition of new technology, there is the need for them to embark on cost cuts so as to bolster profit margins and pay good dividends to shareholders who have taken the risk to invest in the business.
A deteriorating profit margin as well as high claims and underwriting costs have weakened investors sentiments towards the sector, which is why valuations have been suppressed as sector players have recorded decline in returns so far.
However, despite the fact that the sector remains undervalued, there are upside potentials for AIICO Insurance, Lasaco, AXA Mansard, NEM, Coronation, and Cornerstone.
The sector remains undervalued with the price to earnings ratio and price to book ratio (PV) of 5.60x and 0.60x respectively.
And that compares with South Africa (PE: 11.0x, PBV: 1.90x, Ghana (PBV: 0.80x), Egypt (PVB: 1.00x), Kenya (PBV: 0.70x), Brazil, (PE: 8.30X, PVB: 2.20x), China (PE: 7.30x, PVB: 1.00x), and India, (PE: 36.20x, PBV, 5.10x).
This implies that the price of tickers in the sector remains relatively attractive despite the negative sentiments around the industry,” analysts at Meristem Securities Limited.
Analysts say the lack of clarity on the recapitalization discourages foreign investors from parachuting into an industry that contributes less than 1 percent to the country’s GDP.