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Tuesday, March 21, 2023

Nigeria Insurers Profit Margins Improve Amid Rising Costs

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Despite the unfavorable underwriting conditions as evidenced by rising claims expenses and high inflationary pressures, the largest listed insurers are able to translate top line impressive performance (revenue) into bottom line (profit) growth.

The average net premium margin of the largest listed insurers in Africa’s largest economy increased to 22.63 percent in December 2020 from 19.22 percent as at December 2019, according to MoneyCentral calculations.

Their combined net income spiked by 37.09 percent to N41.69 billion as at December 2020 from 30.41 billion as at December 2019, according to Data gathered by MoneyCentral.

Net profit margin measures how much net income is generated as a percentage of revenues received.

The ratio helps investors assess if a company’s management is generating enough profit from its sales and whether operating costs and overhead are contained.

A higher ratio is a harbinger that shareholders will be paid a dividend, a compensation for taking the risk of investing their money in an entity, and if earnings are robust enough, some could be ploughed back into the business for future expansion.

The improvement in profit margins was largely underpinned by investment income that helped compensate for rising claims and management expenses as insurers operate in a difficult business environment.

Insurers see rising cost, but investment income Salvage Situation

Of course, like all other sectors, companies in the insurance sector incur costs associated with the acquisition of new technology, hiring and training of talented workforce, and overhead costs such as daily miscellaneous expenses in running the head office and branch offices across the country.

Another elephant in the room is the high inflationary environment and incessant devaluation of the currency to protect the eternal reserve from macroeconomic headwinds as the coronavirus pandemic damped economic recovery.

The consumer price index, (CPI) which measures inflation accelerated by 16.47 percent in January 2021, a 0.71 percent point increase from 15.75 percent in December 2020, marking the 17th-consecutive uptrend since September 2019 and the highest in 34 months.

Total combined operating expenses (underwriting plus management expenses) increased by 6.04 percent to N92.48 billion in the period under review as against N87.21 billion the previous year, data compiled by MoneyCentral shows.

However, firms have been spending less to generate each unit of revenue as average loss ratio fell to 72.76 percent in the period under review from 77.66 percent the previous year,

There has been mounting obligation for losses suffered by policyholders and industry players have raised concerns over the continuous increase in claims value, against low policy rate, saying most rates in the market were not a true reflection of the risks the policies covered.

Of course, rising claims without commensurate strong growth in premium and deteriorating fixed income securities adversely undermine the balance sheets of insurance companies in Nigeria, as a few operators most times cough up about 60 per cent of their profit to pay these claims.

Data gathered by MoneyCentral shows listed insurers incurred N130.15 billion in claims expenses in December 2020, which is 65.65 percent of combined net premium income of N198.129 billion.

Insurer Shrug Off low penetration to Deliver Strong Profit Growth

Interestingly, industry growth remains abysmal with the sector lagging peers in major indicators penetration and density.

This poor level of growth is largely due to little awareness & understanding of insurance products, lack of trust especially with regards to claim settlement, socio-cultural & religious beliefs of Nigerians, weak enforcement of compulsory insurance policies and the slow pace of innovation amongst industry participants.

Nigeria’s insurance penetration stood at 0.55%, which 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).

The coronavirus pandemic and a low yield environment on the back of the central bank dovish stance means future profit will be under pressure as investment returns will take a beating.

Despite these challenges, insurers are growing profit, though not enough to deliver bumper dividends and share appreciation to shareholders who crave for the value stocks.

Custodian Investment Plc’s net profit margins increased to 37.73 percent in December 2020 from 21.45 percent the previous year while net income surged by 112.73 percent to N12.78 billion as at December 2020.

AXA Mansard Insurance’s net profit margin moved to 13.55 percent in December 2020 from 11.06 percent the previous year while net income increased by 47.70 percent to N4.29 billion as at December 2020.

Coronation Insurance Plc’s net profit margin rose to 10.02 percent in the period under review as against 2.74 percent the previous year while net income surged by 254.26 percent as at December 2020.

Mutual Benefit’s net profit margin improved to 28.39 percent in the period under review from 23.62 percent the previous year while net income moved by 25.92 percent to N4.54 billion as at December 2020.

Nem Insurance Plc’s net profit margin moved to 27.67 percent in December 2020 from 18.84 percent as at December 2020 while net income spiked by 71.72 percent to N4.08 billion as at December 2020.

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