AIICO Insurance Plc seems to have overcome the coronavirus pandemic induced headwinds as net income jumped, but the insurer is still reeling from huge underwriting losses brought on by change in annuity life funds.
For the year ended December 2020, the insurer’s net income increased by 19.96 percent to N7.09 billion as against N5.91 billion the previous year.
The uptick at the bottom line (profit) was majorly driven by contribution from investment income as the company had put its capital into fixed income securities such as bonds and stocks when yields were high.
Investment and other income surged by 112.48 percent to N52.25 billion in the period under review as against N24.54 billion the previous year.
However, the company is reeling from rising underwriting expenses on the back of spiraling annuity costs even amid acceleration in obligations to policyholders.
It incurred total underwriting expenses of N90.13 billion in the fourth quarter of 2020, which is a 68.87 percent uptick from 2019’s N53.13 billion.
The significant uptick in underwriting expenses was triggered by a 183.29 surge in change in annuity life fund by N45.46 billion in the period under review, and that resulted in an underwriting loss of N35.43 billion.
There are concerns that the ultra low yield environment caused by the central bank’s continued dovish stance could deal a significant blow to AIICO Insurance’s investment income and future profitability.
For the past 7 five years, the company has been relying on juicy yields on short term government securities to fend off the effect of unfavorable underwriting conditions, and the difficult business environment makes it difficult to deliver higher returns to shareholders in the form of bumper dividend and share appreciation.
Return on equity fell to 19.07 percent in December 2020 from 21.71 percent the previous year, according to MoneyCentral Calculations.
Another risk on the horizon is the severity or devastating effect of the covid-19 crisis on the insurance industry, and the economy was not spared the pang of virus that disrupted the demand and supply side of the market.
Analysts at Afrinvest Securities in a recent note to clients have said that 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.
“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.
Apathy towards insurance, poor regulations, lack of trust for the claims process, and inherent uncertainties in the macroeconomic environment is responsible for low penetration of the insurance industry.
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).
Because the operators were unable to undertake more risk due to paralysis in business activities due to the Covid-19 crisis, the industry could be tipped into a recession.
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).
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 Written (GPW) was up 23.69 percent to N62.01 billion in December 2020 as against 50.13 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.