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Wednesday, March 22, 2023

Insurers Underwriting Margins Under Pressure Amid Rising Inflation

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Insurers’ expense ratio and underwriting margin have deteriorated as red-hot inflation balloons obligation to policyholders in a country where businesses are reeling from spiraling diesel prices and f0riegn exchange crisis.

This leaves most of them spending more on claims than the premium that they earn, raising concerns about the efficiency of operations and their ability to survive the difficult environment, but investment income and revenue growth ensure insurers remain profitable.

For the first six month through June 2022, the largest quoted insurer in Africa’s largest economy saw a combined underwriting profit dip by 52.13 percent to N27.71 billion from N57.89 billion as at June 2021, according to data gathered by MoneyCentral.

Also, analysts at Afrinvest in a latest report seen by MoneyCentral attribute poor underwriting performance to the high base effect witnessed in the corresponding period of last year as sharp rise in fixed income yield resulted in lower valuation for life and annuity fund liability.

The Nigeria 10 year government bond has a 12.797 percent yield as at 2:00 pm on August 20, 2022, according to World Government Bonds.

The policy-setting committee of the Central Bank of Nigeria (CBN) has raised the monetary policy rate (MPR), which measures interest rate, from 13 percent to 14 percent to tame rising inflation.

In July, inflation rate hit 19.64 percent, the highest in 17 years, and there are indications of an energy crisis and the Russia and Ukraine war will continue to stoke price pressures.

Inflationary pressure and currency devaluations are significantly responsible for underwriting losses or insurable loss because they balloon the replacement cost of assets.

The average industry combined ratio deteriorated to 114.85 percent in June 2022 from 110.06 percent the previous year, according to data compiled by MoneyCentral

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.

Of course, sector players collectively incurred negative real underwriting returns of N3.10 billion in the period under review, from a negative figure of N3.31 billion as June 2o21.

Analysts prefer the real underwriting results as a measure of insurance profit because management expenses are included in its calculations, while investment income and exceptional income are omitted.

The average expense ratio increased to 75.24 percent in June 2022 from 68.28 percent as at June 2021; this means they are spending on average N0.75 on costs to generate every N1 of premium income, which is why profit margins are slim and abysmally poor dividend are given to shareholders who take the risk to invest in the business.

It is important to note that a weak dividend payout underpinned investors’ apathy towards the insurance stocks and poor valuation as most stocks trade below N1.

Similarly, the sector remains underpriced with the price to earnings ratio (P/E) and price to book ratio (PBV) of 5.60x and 6.0x respectively, according to data from Meristem Securities.

That compares with: South Africa (PE:11.0x, and PVB: 1.90x), Ghana  (PE:0.80x), Egypt (PBV:1.00x), Kenya (0.70x), Brasil (PVB:8.30x, PVB, 2.0x), China (7.30x, PBV, 1.00x), and India (PE:36.20x, PVB:5.10x), according to data from Meristem.

AIICO Insurance, the largest insurer by premium income, saw  underwriting profit fall by 99.36 percent to N203.41 million in June 2022 from N31.96 billion the previous year.

AXA Mansard saw underwriting profit dip by 40.86 percent to N3.88 billion in the period under review from N6.56 billion the previous year.

Linkage Assurance’s underwriting profit was down 122.53 percent to N231.27 billion in June 2022 from N1.02 billion the previous year.

The general expectation of uptrend in the fixed income yields could lead to a lower actuarial valuation provisioning for the life and the annuity fund which could boost underwriting profitability,” summed analysts at Meristem.

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