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Insurers Profit Surge Amid Poor Underwriting Performance

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Insurers in Africa’s largest economy have recorded advancement in profit even amid rising operating expenses and mounting obligations that underscores deteriorating underwriting results.

The combined net income or profit after tax or bottom line of the largest and most liquid insurers surged by 108.37 percent to N17.81 billion in June 2022 from N9.28 billion the previous year, according to data gathered by MoneyCentral.

Of course, profit in the insurance parlance is defined as the difference between premium rates firms charge customers for indemnifying risk of unforeseen losses and the expenses and claims obligations.

Also, insurance companies invest part of the premiums in investment securities and real estates that earn reasonable returns.

Analysts attribute the advancement in profit to the gradual improvement of the yield environment that added impetus to investment income that helped make up for the weak underwriting results.

The expansion in profitability was supported by growth in investment income which was driven by a rise in interest on fixed income security during the period, according to analysts at Meristem Securities.

The Monetary Policy Committee of the Central Bank of Nigeria has unanimously voted to increase the benchmark interest rate (monetary policy rate) to 14% from 13%, being the second hawkish move by the apex bank in 2022 following the rising rate of inflation.

The Nigeria 10 years government bond has a 12.820% yield, according to data from the Word Government Bonds.

The Nigeria 10 Years Government Bond reached a maximum yield of 15.856% (4 December 2018) and a minimum yield of 4.048% (3 November 2020).

It is important to note that aside from the uptick in investment returns, profit got a boost from strong revenue growth as the reopening of the economy and relaxation of the lockdown measures strengthened business activities.

The average industry net profit margins increased to 14.97 percent in June 2022 from 6.41 percent the previous year, according to MoneyCentral calculations.

Investigations by MoneyCentral reveal that the bottom line (profit) also got a boost from foreign exchange gains as there has been a reversal of huge foreign loans due to the interest rate environment and mark to market rate.

“A lot of them now have foreign assets as they were buying bonds,” said Rasaq Abiola, former economist at United Bank for Africa (UBA).

AIICO Insurance net income earned N33.80 billion in foreign exchange gains from a currency loss of N33.08 billion last year.

And that helped out the sharp reduction of 3752 percent reduction on underwriting profit, which led to 51.38 percent increase in profit after tax (PAT).

Similarly, Mutual Benefit Assurance realised N89.66 million in foreign exchange gains from a currency loss of N5.51 billion in 2021, which helped the insurer to the path of profitability.

Coronation Insurance Plc saw a 23.28 percent increase in net income to N490.47 billion in June 2022 from N397.84 million the previous year.

NEM Insurance Plc net income was up 25.73 percent to N2.53 billion in the period under review from N2.01 billion the previous year.

Linkage Assurance Plc net income posted profit after tax of N1.39 billion from a loss of N2.09 billion the previous year.

Regency Insurance’s net income increased by 29.29 percent in the period under review from N544.83 million the previous year.

However, insurers are reeling from poor underwriting performance due to rising claims and spiraling operating expenses when investment income is stripped off the calculation.

This means in actual fact they are paying out more in claims than they earn from premium income, which is worrisome in a low yield environment.

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

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.

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