In the last five years, AIICO Insurance Plc has realized N109.18 billion as income from investing in government securities, but the insurer suffered underwriting loss due to change in life and annuity fund, according to data gathered by MoneyCentral.
Despite the slide in yields of fixed income securities since September 2019, AIICO Insurance made N52.24 billion as at December 2020, which represents a surge of 112.44 percent compared to 2019’s N24.59 billion.
Insurers park their money in financial securities such as bonds and stocks when yields are high as they try to fend off the impact of rising claims and operating expense ratios amid a harsh and unpredictable macroeconomic environment.
Low yield environment to jeopardize future profits
Juicy yields have been underpinning the company’s bottom line (net income) as huge underwriting expenses brought on by mounting obligations and change in life and annuity funds subdued impressive premium growth.
A cursory look at the financial statement shows the insurer incurred N45.46 billion in life and annuity funds expense as at December 2020, and that resulted in an underwriting loss of N35.43 billion.
However, the strong investment income wiped-out the underwriting loss and the company recorded 19.91 percent uptick in net income to N7.09 billion in the period under review from N5.91 billion the previous year.
There are concerns that the central bank’s dovish stance that sent net treasury yields crashing to unprecedented levels will deal a great blow on the investment income and bottom line of the largest insurers.
The Apex bank barred non-bank locals (individuals and corporates) from participation in its Open Market Operations (OMO) at both the primary and secondary markets. Also, it slashed the Monetary Policy Rate (MPR) by 100 basis points, which caused an unprecedented rotation from bonds into equities, and the Nigerian Stock Exchange (NSE) All Share Index (ASI) was among the best performing markets in the world in 2020.
Analysts see the Covid-19 crisis having a significant negative impact on Life and non-life business segments and they added that volume of transactions have been slow as a result of lockdown imposed by the government to curb the spread of the virus.
“Lower demand and investment returns, a significant deterioration in the credit quality of fixed income securities and increased mortality rates from the virus could pressure earnings in the life segment while a rise in COVID-19 related claims, premium rebates and lower interest rates could affect non-life,” said analysts at Afrinvest Securities Limited in a note to clients.
Strong expansion in premium income amid economic downturn
Despite the macroeconomic uncertainties and low insurance penetration, AIICO Insurance’s gross premium income spiked by 21.40 percent to N60.70 billion in the period under review from N50 billion the previous year.
Net premium income (NPI) increased by 19.82 percent to N52.78 billion as at December 2020 from N43.77 billion as at December 2019.
Gross Premium income was up 23.69 percent to N62.01 billion in December 2020 as against N50.13 billion as at December 2019.
A breakdown of the gross premium written shows revenue from the Life segment (individual and Life) increased by 37.48 percent to N41.63 billion in the period under review as against N30.28 billion the previous year. Income from the non-life segment was up 15.20 percent to N14.03 billion in the period under review.
AIICO Insurance is meeting its obligations to policyholders as claims expenses were up 24.70 percent to N31.65 billion as at December 2020 from N25.38 billion the previous year while loss ratio moved to 60 percent to in the period under from 57.98 percent the previous year, according to MoneyCentral Calculations.
The loss ratio formula is insurance claims paid plus adjustment expenses divided by total earned premiums.
Recession Looms in Insurance Industry
Nigerian insurers will continue to wallow while an inevitable recession looms as the economic downturn resulting from the Covid-19 prevented them from underwriting risk in the second quarter of 2020.
The sector contracted by 18.67 percent year on year (y/y) in the third quarter (Q3 ) gross domestic product (GDP) report released by the National Bureau of Statistics (NBS).
Before the outbreak of the virus, the industry was reeling from lack of trust by consumers, poverty and uneven distribution of infrastructure, which is why the sector continues to lag its peers in penetration.
The country’s insurance business as a percent of GDP stood at 0.5 percent compared with South Africa (12.9 percent), Kenya (2.8 percent), Angola (0.8 percent) and Egypt (0.6 percent) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).
With over 200 million of Nigeria living below the $1.98 a day benchmark and high unemployment rate, it is practically difficult for insurers to magnify premium income and contribute to economic growth.