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Sovereign Trust Insurance Profit Jumps on Growth in Commission Income

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Sovereign Trust Insurance Plc, one of the biggest underwriters in Africa’s largest economy, posted a 46.23 percent rise in full year net income on steady growth in commission income.

Net income rose to N503.38 million as at December 2019 from N344.23 million a year earlier, the underwriting firm said in a filing yesterday on the Nigerian Stock Exchange (NSE).

In the year ended December 2019, Sovereign Trust Insurance generated N941 million from commission income, which represents a 159.51 percent surge year on year.

A breakdown of commission income sheds more light on the major drivers of profit.
Commission income from property and fire surged 247.80 percent to N185 million; General Accident surged by 324.7 percent to N188.83 million; Car and engineering rose by 124.31 percent to N134.15 million, and oil and gas had a 91.47 percent increase to N335.20 million.

To strength its capital base so as to take on more risk and deliver a higher return to shareholders, Sovereign Trust embarked on a rights issue that was oversubscribed by 72.50 percent.

It will be recalled that a total of 4.17 billion ordinary shares of 50 kobo each at 50 kobo per share on the basis of one new ordinary share for every two ordinary shares of 50 kobo each held in the company as of the close of register on January 15, 2019, were placed on offer to the company’s shareholders.

Despite the harsh regulatory and operating environment, Sovereign Trust’s premium income spiked by 17.12 percent to N5.92 billion in the period under review as against N5.06 billion as at December 2018.

The underwriting firm honors obligations to policyholders as it paid out N2.21 billion in claims for the 2019 financial year, which represents a 23.12 percent increase from 2019’s N1.78 billion.

Loss ratio increased by 37.65 percent in December 2019. What this means is the company has spent more on claims expenses in generating each unit of premium income.
Sovereign trust’s total expenses (underwriting and operating expenses) make up 70.25 percent of net premium income, which is why combined ratio deteriorated to 107 percent as at December 2019.

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.

Even if the combined ratio is above 100 percent, a company can potentially still be profitable because the ratio does not include investment income.

Sovereign Trust’s posted a negative real underwriting result of N99.17 million in the period under review. The real underwriting result, which is different from underwriting profit, is a better measure of underwriting capacity because it takes cognizance of the combined ratio.

There are indications that claims expenses would spike in the second half of 2020 as the coronavirus pandemic resulted in cancellation of events, and job loss due to the headwinds means obligation to policyholders would mount.

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