Insurance companies quoted on the Nigerian bourse are not feeling the pinch of an ultra-low interest environment as they made sizable income from investment securities that helped add impetus to profit.
The largest companies realized N92.71 billion in investment income in 2020, which is 74.58 percent higher than December 2019’s N55.04 billion, according to data gathered by MoneyCentral.
Many Nigerian insurers have large holdings in short term government securities, parking their funds in treasuries when yields are high. They also invest in real estate.
These investments are made because the underwriting income- are slim or abysmally low, no thanks to catastrophic events such as hurricane, typhoon, earthquake, flood, fires and in the case of Nigeria the recent #EndSARS protests.
AIICO Insurance Plc, the largest listed insurer by market capitalization, saw income from investment securities surge by 112.42 percent to N52.25 billion in December 2020 from N24.59 billion the previous year.
Custodian Investment Plc’s investment income spiked by 40 percent to N13.74 billion in the period under review as against N9.81 billion the previous year.
Cornerstone Insurance Plc income from investment securities spiked by 114.54 percent to N3.44 billion from N1.60 billion the previous year while NEM Insurance’s investment income was up N2.32 billion in December 2020 from N1.04 billion as at December 2019.
Mutual Benefit Assurance Plc income from investment income was up N5.36 billion in the period under review from N3.46 billion the previous year.
But there are indications Insurers may experience a sharp reduction in investment returns that may cast a pall on future profit as the central bank’ dovish tone has sent net treasury yields crashing to an unprecedented level.
The Apex bank barred individuals and local corporates from its Open Market Operations (OMO) while it cut the monetary policy rate with a view to stabilizing an economy hard hit by the coronavirus pandemic.
Nigerian 12 months Treasury Bill (T-bill) now yields 4 percent, that compares with 22 percent in 2017.
The Federal Government of Nigeria (FGN) Naira bond with 10 years to maturity has hit 10.77 percent, and yields on fixed income securities have been on an upward trajectory amidst strong local demand for higher yields and the need to attract foreign interest in Nigeria securities amid dollar shortage.
Also, the recent volatility in earnings means dividend income will be pressured, a double whammy for an industry that lags peers in insurance penetration.
The Nigerian Stock Exchange (NSE) All Share Index (ASI) has shed -3.16 percent year to date, according to data from Bloomberg terminal.
It is worthy to note that a sharp drop in investment income could have a devastating effect on the already poor valuation of insurers since dividend expectation will be damped on the back of deteriorating margins.
Of course, the companies have very poor valuation as industry price-to-book ratio of 0.43x is low when compared to with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x), which underscores investor apathy towards the listed insurers, quite evident in their stock prices.
However, low valuations mean these stocks are cheap, an entry point for investors who are patient to make reasonable returns on investment.
This is because the planned recapitalization would unlock growth in an industry that contributes less than 1 percent to an economy of $494 billion.