The largest listed insurers in Africa’s largest economy are reaping the rewards of parking their money in government securities as strong growth in investment income catapulted profit to four year highs.
Data compiled by MoneyCentral shows combined investment income was up 17.19 percent to N19.67 billion as at June 2020.
That triggered a 84.06 percent surge in net income of the largest listed firms to N15.58 billion as at June 2020, the highest in fours.
Investment returns help compensate for unfavorable underwriting conditions since claims and underwriting expenses most times eat deep into underwriting profit.
AXA Mansard’s net income surged by 154.24 percent to N3.60 billion as at June 2020, as it realized N2.57 billion in investment income.
AIICO Insurance recorded an underwriting loss of N10.58 billion on the back of change in annuity and life fund, but investment income and foreign exchange gains of N19.07 billion led to net income of N2.75 billion.
Analysts have warned that the coronavirus related claims expenses and deterioration in fixed income securities casts a significant doubt over the future earnings of insurers.
Nigerian Treasury bills auction rates crashed following the central bank’s restriction of individuals and Nigeria’s corporates from participating in both primary and secondary markets of its Open Market Operation (OMO) window.
The dovish tone of the Apex bank that cut benchmark interest rate to 11.25 percent from 12.20 percent suggests yield could be low for a while longer, which is inimical to the earnings of insurers who rely on such juicy yields.
While most insurers have seen an improvement in profitability in the period under review, investors’ apathy towards their stocks lingers, which is why valuations have remained poor compared to peers in sub-Saharan Africa.
Analysts at Afrinvest Securities Limited in a recent report on the insurance industry observed that industry price-to-book ratio stood at 0.43x, which compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x).
Insurers are also reeling from poor government regulations, lack of trust for the claims process, inflationary pressure, currency volatility, and weak consumer spending.
Analysts are optimistic that the planned recapitalization of unlock growth in the industry. Many firms operate on weak capital that hinders them from participating in big ticket business.
“There is a need for insurers to plug the funding gap between asset and liabilities and also, reprice policies in the light of the current interest rate environment,” said analysts at Afrinvest Securities.