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Nigeria Insurers Annuity Boom Fades as Bond Yields Collapse

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Nigeria Insurers are cutting down on their annuity business portfolio as a collapse in fixed income yields elevates the risks inherent in the hitherto booming business.

A low yield environment making it difficult for insurance companies to meet obligations to customers, while annuity payout is eating deep into profitability.

Annuities are essentially insurance contracts.

A person pays a set amount of money today, or over time, in exchange for a lump-sum payment or stream of income in the future.

To earn a high return on investment, an insurer invests this pool of fund in government securities such as equities and bonds when interests are high.

However, yields have nosedived following central bank decision to ban insurance companies and Pension Fund Administrators (PFAs) from the Open Market Operations (OMO), securities.

“If you are doing this kind of business, your investments (assets) must match the liabilities,” said an actuarial scientist.

“You used some assumptions to price your product when the environment was benign; but now that the market is unfavorable you are not going to get high returns when you sold annuities when yields were high” said the actuarial scientist, speaking anonymously to MoneyCentral.

Yields on the 10 year benchmark Nigerian bonds have fallen below inflation to around 9 percent from over 13 percent last year. One year Treasury bill yields are at sub 3 percent from north of 14 percent a year ago.

Nigeria Insurers Annuity portfolio rose to N323 billion as at the second quarter (Q2) of 2019, according to data from the Insurance regulator, National Insurance Commission (NAICOM).

The annuity portfolio includes the annuity funds of individuals managed by insurers, as well as those from retirement savings accounts of retirees under the Contributory Pensions Scheme.

This represents a growth of 17.46 percent from N274.9 billion as at end of the fourth quarter (Q4), 2018.

Within the same period under focus, the cumulative total Retiree Life Annuity (RLA) payouts was N122 billion.

Retiree Life Annuity is an insurance product and one of the available retirement benefit options for retirees which can be purchased from a Life Insurance Company licensed by NAICOM and authorized to sell RLA under the regulation on retiree life annuity.

The growth (year on year) during the last three years (2016 – 2019) for RLA business for Nigerian Insurers has averaged 34.28 percent and 35.12 percent in count and volume respectively, while RLA fund portfolio growth has averaged 27.46 percent notwithstanding the RLA payouts made.

With investment returns expected to be pressured due to low yield environment, insurers are increasingly exposed to mounting obligations to policy holders.

For the year ended December 2019, the largest insurers in Nigeria saw combined net profit increase by 30.86 percent to N48.55 billion, from N37.10 billion as at December 2018.

However, insurers are struggling with deteriorating underwriting performance as there has been an increase in annuity fund payments.

The largest companies posted cumulative underwriting losses as at December 2019, from a profit position of N40.56 billion the previous year.

A breakdown of the figures shows Leadway Assurance Limited, the largest insurer posted underwriting loss of N47.04 billion as at December 2019, but it recorded profit growth, thanks to investment income of N31.12 billion.

Leadway Assurance’s recurring deteriorating underwriting performance was largely driven by increase in annuity fund of N73.16 billion in the period under review.

AIICO Insurance’s recorded underwriting loss of N6.34 billion in the period under review from N3.21 billion the previous year; but it recorded an uptick in profit, bolstered by investment income of N10.54 billion.

The largest listed insurers by total assets also incurred change in annuity loss of N19.15 billion, which was responsible for the weak underwriting performance.

Insurers are exposed to longevity risk, which means they have to pay more money to customers, incurring huge liabilities in the process.

Experts say those with young people in their portfolios are more susceptible to high payout.

Longevity risk refers to the chance that life expectancies and actual survival rates exceed expectations or pricing assumptions, resulting in greater-than-anticipated cash flow needs on the part of insurance companies or pension funds.

Volumes for Nigeria Insurers annuity portfolio have been reducing as operators in the industry are weighing volatility risk.

The domestic economic growth in the first quarter (Q1-2020) slowed to 1.87 percent and the figure for second quarter (Q2 2020) is set to come in negative.

To further compound the already amenic position of the country, the International Monetary Fund (IMF) has forecast that the economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020,

While the Nigerian stock exchange  main index jumped 10.7 percent in the first three weeks of the year to emerge as the global best performer, the Nigerian Stock Exchange (NSE) All Share Index (ASI) however now shed -9.94 percent, year to date.

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