Insurers Return on Equity Improves Despite Deteriorating Underwriting Performance

….NEM, Mutual Benefit, AIICO, Leadway, Cornerstone records highest ROEs

Most insurers are efficient in turning shareholders’ investments into profit with high return on equity (ROE), but they still grapple with deteriorating underperformance brought on by rising claims and higher energy costs in a challenging environment.

It is important to note that the ROE is lower than the cost of capital, which raises concerns about the entities to create value for their owners.

According to MoneyCentral calculations, the average return on equity (ROE) for the largest insurers saw a marked improvement as it rose to 9.08 percent in December 2022 from 4.42 percent as at December 2021.

Their combined profit after tax or net profit surged by 103.82 percent to N2.63 billion in December 2022 from N1.29 billion the previous year, according to data compiled by MoneyCentral.

The drivers of ROE were an increase in investment income and a reduction in fair value loss on financial assets.

Insurers enjoyed juicy yields on fixed income securities as they had parked their money in treasury bills when yields were high. There has been elevated yields on the back of the central bank’s aggressive tightening aimed at taming rising inflation.

The Nigeria 10 year government bond has a 14.39 percent yield as at May 4, 2023, and that compares with a yield of 4.023 percent as at November 2, 2021, according to data from World Government Bonds.

The Central Bank of Nigeria raised its monetary policy rate to 18% from 17.5% in its February 2023 meeting, marking the second interest rate hike in 2023.

Insurers realised N29.03 billion in investment income for the year December 2022, which represents a 143.52 surge from 2021’s N11.92 billion.

NEM Insurance Plc, Mutual Benefit Assurance Plc, AIICO Insurance Plc, Leadway Assurance Limited, and Cornerstone Insurance Plc, have the highest industry ROEs at 21.05 percent, 20.38 percent, 16.64 percent, 14.74 percent, and 14.17 percent respectively.

While there has been an uptick in profit, firms capitulated to an unfavorable underwriting environment. The largest insurers reported higher combined ratio for 2022 as high inflation, rising interest rates, and spiraling costs led to lower underwriting results as nearly all of their premiums go to paying off insured losses and expenses.

The average combined ratio of the 17 companies deteriorated to 116.54 percent in December 2022 from 109.23 percent the previous year, according to MoneyCentral calculations.

Of course, the combined underwriting profit dipped by 62.92 percent to N53.07 billion from N143.15 billion the previous year.

The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations.

A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.

Analysts are of the view that a continued hiking of interest rate by the central bank would lead to moderate growth in investment income which adds impetus to profitability.

To bolster analysts’ positive prognosis as that an increase in Motor Insurance is expected to underpin premium growth, which augurs well for sector players who wish to deliver higher returns to their shareholders.