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NEM Insurance Plc: Rising Claims Expenses Undermines Profit

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NEM Insurance Plc in its recently released results for the period ended 30 September 2020, showed a marked drop in profitability due to spiraling expenses.

In a bid to meet the deadline set out by the National Insurance Commission (NAICOM) on recapitalization, the shareholders of the company have given approval for the proposed increase in issued share capital to N10 billion from N2 billion.

Top line sees modest growth despite economic downturn

Gross premium written (GPW) for the period ended third quarter of September 2020 increased by 14.40 percent to N18.76 billion from N16.76 billion as at September 2019.

Gross premium income followed the same growth trajectory as it was up 3.12 percent to N15.63 billion in the period under review as against N15.21 billion the previous year

However, net premium income (NPI) was flat at N14.22 billion in the period under review. The Coronavirus induced headwinds that disrupted economic activities could also be inimical to future revenue.

Rising claims and other expenses balloon Combined Ratio

The insurer’s mounting obligation to policy holders amid weak revenue growth has ballooned the combined ratio, worsening the deteriorating underwriting condition of the company. What that means is it is paying out more in claims than it is getting from premium income.

Claims ratio increased to 40.56 percent in the period under review from 26.26 percent as at September 2019.Total net claims expenses spiked to N4.22 billion in the period under review as against N1.49 billion the previous year.

There are indications that the #EndSars protests and the twin shocks of the pandemic and the difficult environment means future payout will climb as more jobless people demand for their claims, which is an obligation that must be honored.

NEM Insurance combined ratio at 105.13 percent has crossed the 100 percent benchmark, but pretty much higher than the 91.54 percent recorded the previous year.

A ratio above the threshold also means the company is inefficient, and it has to embark on cost optimization strategy.

Expectedly, underwriting profit dipped by 31.49 percent to N2.59 billion as at September 2020 from N3.79 billion the previous year, however, the insurer recorded negative real underwriting results of N522.10 million.

The real underwriting result is a more realistic way of measuring gross profit than the underwriting profit because it includes management expense ratio, and it is calculated as 1 minus the combined ratio. Of course, the combined ratio is: claims expenses +underwriting expenses +management expenses/net premium income.

Rising combined ratio squeezes profit

Profit after tax for the first nine months of 2020 was down 45.13 percent to N1.11 billion from N2.04 billion the previous year. Pretax profit followed the same downward trend as it fell by 45.22 percent to N1.32 billion as against N2.41 billion the previous year.

However, investment income was up 30.56 percent to N766.13 million as at September 2020 from N586.80 million the previous year even amid the ultra-low interest rate environment.

NEM has a solid balance sheet as total assets increased by 17.64 percent to N30.02 billion as at December 2020 as against N25.66 billion the previous year. Total liability jumped 43.91 percent to N15.61 billion as at September 2020 from N11.55 billion the previous year.

The growth in liabilities was largely driven by a 43.44 percent increase in insurance contract liability to N12.93 billion as at September 2020 as against N9 billion the previous year.

Overview of Company

NEM Plc, which commenced operations in Nigeria through the agency of Edward Turner & Co in 1946, became listed on the Nigerian Stock Exchange in 1989 following its privatization by the Federal Government of Nigeria.

NEM was initially licensed to offer both non-life and life insurance services, however, following its merger with Vigilante Insurance Company during the 2007 recapitalisation exercise, the Company focused majorly on non-life insurance business.

NEM expanded operations into West Africa by setting up NEM Insurance Ghana limited in 2009, however, the subsidiary was merged with following a recapitalisation exercise in Ghana.

The Company diversified into asset management in 2016 through its subsidiary NEM Asset Management limited. In 2019, a private equity fund Advanced Finance Investment Group (AFIG Funds) – acquired a 29.9 percent stake in NEM Insurance Plc.

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