FBN Insurance: Rare Gem Acquired by Sanlam is Nigeria’s Most Efficient Insurer

Navigating the macroeconomic headwinds is a herculean task for insurance companies.

Because they are part of the financial ecosystem, that means they are susceptible to inflationary pressures, low interest rates, and foreign exchange volatility.

These systematic risks combined with poor regulations, little awareness and understanding of insurance products, lack of trust especially with regards to claim settlement, and socio-cultural and religious beliefs of Nigerians, have weakened insurance adoption.

In a country where the misery index is 51.42 percent (one of the highest in the world), taking insurance cover is the least of the worries of most Nigerians.

While Nigeria’s inflation reduced to 18.12 percent for the month of April, from 18.17 percent in March, it is way below the 6 percent and 9 percent Central Bank of Nigeria (CBN) target range. This reflects erosion in the purchasing power of consumers while new borrowing becomes more expensive.

Unemployment rate, which surged to the second highest on a global list of countries monitored by Bloomberg, rose to 33.3 percent in the three months through December, according to a report published by National Bureau of Statistics (NBS).

Little wonder, the sector continues to lag its peers in terms of penetration which stood at 0.5 %, despite its promising growing young population.

That compares with South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).

Lack of transparent strategic plans and bumper dividend combined with inability of insurers to exceed cost of capital is responsible for poor valuations. Investor apathy towards the industry is responsible for poor stock performance.

Across peers, Nigerian insurers have an average price-to-book ratio of 0.43x, and that compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x).

Insurers are paying more in claims and operating expenses more than they are generating in premium income. Expense ratios are vertiginous  as companies spend copiously on diesel oil to power generator plants at head office and branch offices across the country, that is on top of inflationary pressures, devaluation of the currency, and cost of hiring and retaining existing talented workforce.

The coronavirus pandemic that took a toll on the economy added another layer of concerns for the industry.

And broader fallout from the pandemic in terms of lower demand and investment returns, deterioration in the credit quality of fixed income securities and increased mortality rates from the virus pressured earnings, reserves, and profitability of the life insurance sector.

For the non-life sector, there was a rise in Covid-19 related claims, premium rebates as there are concerns that lower interest rates could reduce profitability.

Despite these monumental challenges, FirstBank Nigeria Insurance Limited or “FBN Insurance” is using its resources to drive up top line (revenue) growth.

Last year FBN Holdings Plc sold its stake in FBN Insurance to Sanlam Emerging Markets (Proprietary) Limited (Sanlam) for a total consideration of N24.62 billion. The sale was completed on June 1, 2020 and FBN Holdings said it used the proceeds to shore up its capital.

FBNH had earlier announced the transfer of its 65 percent shareholding in FBN Insurance Limited to Sanlam.

This effectively confers full ownership of FBN Insurance Limited and its subsidiary, FBN General Insurance Limited on Sanlam following receipt of all relevant regulatory approvals. Both organizations had activated the Shareholders Agreement which provided pre-emptive rights to Sanlam.

Sanlam is a South African financial services group headquartered in Bellville, Western Cape. It is listed on the Johannesburg Stock Exchange, the Namibian Stock Exchange and the A2X. Established in 1918 as a life insurance company, Sanlam Group has developed into a diversified financial services business.

FBN Insurance was one of the fastest growing subsidiaries of FBN Holdings and doing its bit to help turnaround the Tier one lender.

Its results as at December 2020 showed it recorded the lowest combined ratio among peers.

A low combined ratio means FBN Insurance is receiving more money than it is paying out in dividend more than any other firm.

The combined ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making an underwriting profit.

First Bank Insurance has a combined ratio of 52.23 percent as at December 2020, that compares with Custodian Investment Limited, 173.83 percent, AIICO Insurance, (96.64 percent); Mutual Benefit Assurance, (119.85 percent); NEM (92.11 percent); Cornerstone Insurance, (164.46 percent); Lasaco, (127.42 percent), and Consolidated Hallmark, (109.75 percent).

Interestingly, FirstBank Insurance posted positive real underwriting results of N18.17 billion, the largest among peer rivals who have released full year 2020 results.

The real underwriting results is a better measure of efficiency and profitability because it includes management expenses in its calculations.

The insurer honors obligations to policyholders as it paid N12.12 billion in net claims in the period under review,  that is 19.17 percent higher than 2019’s N10.07 billion. Claims ratio increased to 28.27 percent in December 2020 from 25.69 percent the previous year.

Net income spiked by 25.44 percent to N9.88 billion in December 2020, thanks to contributions from income from investment securities that helped wipe out liabilities incurred on changes in long term insurance contract.

The insurers realized N36.82 billion from income in both short- and long-term government bonds, that is a surge of 94.91 percent from 2019’s N18.89 billion.

FirstBank Insurance utilizes its shareholders’ resources in generating higher profit as the return on equity (ROE) increased to 41.55 percent in the period under review from 40.43 percent the previous year.

With a shareholders’ fund of N23.78 billion, the insurer has the capital to take on more risk and meet the capitalization requirements of the regulator.

On 21 2019, the regulator minimum paid up capital for Life Insurance firms by 200 percent to N8 billion. By the new paid up capital regime, insurance firms underwriting general business have been mandated to shore up their capital to N10 billion from N3 billion.

Additionally, composite insurers, that is firms that underwrite both life and non-life, will raise their capital to N18 billion from the previous N5 billion.