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Nigerian Insurers Profits Face ‘Double Whammy’ of Low Yields, Coronavirus

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Nigerian Insurers are set to see earnings slow as low yield environment and the coronavirus pandemic means future profit will wither away like chaff blown away by the winds.

Treasury Bills real interest rate crashed to the lowest level in four years in November 2019 when the central bank barred individuals and local non-banking firms from its Open Market Operations (OMO).

What this means is that insurers will face a more challenging environment as low yields will dampen their investment portfolio.
Insurance companies invest the chunk of their money in liquid financial asset such as bonds/equity and earn reasonably investment income. And this investment income bolsters profit as it helps compensate for deteriorating underwriting performance.

For instance, the average industry return on average equity (ROAE) increased to 13.23 percent in December 2019 from 12.53 percent as at December 2018, according to data compiled by Money Central

There was a 27.93 percent jump in combined net income of the largest insurers to N47.46 billion as at December 2019, from N37.09 billion at December 2018.

The growth in profit was largely driven by 17.36 percent uptick in investment income to N44.97 billion as companies parked their cash in bonds and equity when yields were high.
The opportunity is gone and 2020 and 2021 will be tough. Claims will rise either genuine or not and with yields falling its double whammy, said an expert in the industry, who doesn’t want his mentioned.

“Now that investment returns are gone the focus will now be on investment income,” said the expert. He added that insurers will be in a better position to increase pricing at a renewable period when they are well capitalized and that some operators in the industry are not paying claims.

Most operators in the industry do not have a hoard of cash to pay huge claims when disaster happens, and inadequate underwriting makes it a herculean task to write any risk.
Nigeria Treasury Bills interest rate hovered between 18 percent and 22 percent in 2017, but it now holds at below 4 percent for one year paper.

Nigerian Insurers are going to feel the pains of travel disruption because following countless cancelled flights, holidays and events; travel and leisure businesses will quickly begin to feel the effects of disrupted business continuity and will not hesitate to make a claim.

“Travel insurance covers medical treatment, repatriation, cancellation of trip and treatment while abroad, but the level of cover varies greatly depending on the policy that has been purchased,” said Duff & Phelps, Managing Director and Head of Valuation Advisory, Michael Weaver.

The coronavirus pandemic will cost insurance companies across the globe $200 billion, according to Lloyd’s of London. The research firms added that just over half of the $200 billion estimated loss relates to claims, with insurers expected to pay out for event cancellations, business interruptions, and trade credit loss.

Leadway Assurance Limited, Nigeria’s largest company by total asset and premium income, saw net income spike by 26.53 percent to N9.19 billion as at December 2019 as against N7.26 billion as at December 2018.

Investment income of N31.01 billion and foreign exchange gains helped wipe out Leadway Assurance’s N47.06 billion underwriting loss. ROAE moved to 18.35 percent in the period under review from 14.27 percent the previous year.

Aiico Insurance Plc’s net income surged by 86.24 percent to N5.86 billion as at December 2019, thanks to investment income of N10.53 billion that helped wipeout N6.34 billion underwriting loss. ROAE Increased to 27.13 percent in December 2019 from 24.41 percent the previous year.

FBNInsurance Limited’s net income increased by 36.90 percent to N8.16 billion as at December 2019. Mutual Benefits’ net income surged by 214.31 percent to N3.61 billion in the period under review from N1.14 billion the previous year. ROAE increased to 24.76 percent in the period under review from 13.57 percent the previous year.

With the Nigerian Insurers part of the global economy and financial market, future earnings will take a hit, and shareholders are not guaranteed a high return on investment.
The Covid-19 shock has disrupted the demand and supply side of the market as first quarter GDP report shows the economy still wobbling.

According to the Q1-2020 GDP report published by the National Bureau of Statistics (NBS) on 24 May 2020, economic growth slowed to a nine-quarter low of 1.87 percent yoy from 2.55 percent yoy in Q4-2019 and 2.12 percent yoy in Q2-2019.

Additionally, the statistics body added that capital importation for the first quarter (Q1) 2020-the total amount of foreign investment inflows into the Nigerian economy- declined by 31 percent year on year (y/y) to $5.85 billion in the first (Q1) 2020 from $8.51 billion in Q1 2019.However, the new recapitalization scheme by regulator could strengthen the liquidity position of insurers.

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