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Rising Interest Rates, Improved Underwriting Performance Spur AIICO Insurance to Growth

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AIICO Insurance Nigeria Plc is benefitting from rising interest rates that adds impetus to investment income as the insurer earns more in revenue than the claims that it pays.

The largest insurer by premium income in Africa’s largest economy has produced strong technical performance over the underwriting cycle and a strong capital makes it much easier for it to surmount macroeconomic headwinds.

Of course, a double digit growth in revenue and a reduction in expense ratio are major drivers of improved underwriting conditions even amid inflationary pressures, currency volatility, and rising energy cost.

The insurer’s combined ratio improved to 95.82 percent in September 2022 from 106.18 percent as at September 2021, according to MoneyCentral calculations.

The combined ratio is typically expressed as a percentage. 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.

AIICO Insurance honors obligation to policyholders as it paid N32.95 billion in claims as at September 2022, which is 5.93 percent higher than 2021’s N30.16 billion.

Claims ratio fell to 62.87 percent in the period under review from 70.21 percent the previous year.

The insurer’s profit surged by 153.30 percent to N6.13 billion in September 2022 from N2.42 billion as at September 2021.

The growth at the bottom line (profit) was largely driven by an uptick in investment returns that enjoys a high yield environment and significant paring of net loss fair value on financial.

AIICO Insurance realised N12.61 billion from trading in bonds and other securities, which is 32.31 percent higher than N9.53 billion made in 2021.

Net fair value loss on financial instruments dipped by 82.55 percent to N5.90 billion from N33.83 billion the previous year.

Modestly rising interest rates are generally positive for the insurance industry.

When rates rise at a reasonable pace, portfolio yields also rise. With these new, higher-yielding corporate and other bond purchases, insurers’ investment earnings also increase. Life insurers, in particular, benefit from a rising interest rate environment as they’re likely to earn improved spreads over the cost of funding liabilities.

The central bank has hiked the policy rate from 14 percent to 15 percent as it is steadfast in curtailing red-hot inflations exacerbated by the war between Russia and Ukraine.

Nigeria’s inflation rate surged to 20.77% in September 2022, up from 20.52% recorded in the previous month.

The Nigeria 10 year government bond has a 14.439% yield, according to data from World Government Bonds.

That compares with the yield of 4.17 percent as at March 2021, when a lot firms took advantage of a low interest environment and borrowed to fund their future expansion plans.

It is important to note that the improvement in general economic activities post Covid-19, growing demand for insurance products, and improved adoption of digitalization and regulatory efforts to drive insurance inclusion have helped propel the revenue of AIICO Insurance and peer rivals.

AIICO insurance delivered double-digit top-line growth in the third quarter as gross premium grew by 27.12 percent to N69.50 billion from N54.67 billion the previous year.

The major driver of top-line (sales) growth is the life business which make up 59.42 percent of gross premium written; life business was up 12.35 percent to N41.30 billion as at September 2022 while non-life business increased by 46.68 percent to N23 billion.

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