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While higher interest rates and currency devaluation were deleterious to non-financial firms, the financial performance of insurers, most especially the life ones, have improved with the monetary policy tool.
This is because as insurers’ existing bonds mature, they will be replaced by bonds with higher interest earnings, which adds impetus to their profits and help compensate for underwriting losses caused by rising claims and spiraling expenses ratio amid inflationary pressure and currency volatility.
The bonds obtained during a period of low interest rates would ostensibly be held on insurer balance sheets for an extended period of time, according to analysts at Centre for Insurance Policy and Research.
“For some, many years must pass before the bonds reach maturity and can be exchanged for higher-interest-earning bonds,” said the analysts.
Bond yields have been elevated since the first quarter of 2022 when the Russia and Ukraine war forced central banks across the globe to embark on a hiking cycle to tame rising inflation.
Of course, the Nigeria central bank has intensified its policy to stabilize an economy beset by headwinds and the unification of the exchange rate to spur foreign investment and the removal of subsidy on Premium Motor Spirit (PMS) has aggravated price rises.
The Apex Bank has moderately raised the monetary policy rate (MPR) from 18.5 percent to 18.75 percent, the highest in 22 years.
Nigeria’s inflation surged to 24.08 percent in the month of July 2023, a 129 basis-point increase compared to 22.79 percent recorded in the previous month.
Nigeria 10 year government bond has a 13.795 percent yield, according to World Government Bonds.
The Nigeria credit rating is B-, according to Standard & Poor’s agency.
The bad run in Naira as evidenced by incessant devaluation of the currency bolstered the dollar denominated assets of some insurers.
The monetary policy tool is a boon for listed insurers who had invested in government securities to enjoy juicy yields as they collectively made N27.53 billion in investment income as at June 2023, which is 32.78 percent higher than 2022’s N20.73 billion, according to data gathered by MoneyCentral.
Life insurers are a greater beneficiary of the windfall as they have a larger balance sheet and much more liquidity to invest in the treasury market.
Custodian Insurance, AIICO Insurance, and Benefit Assurance rake in a combined N23.84 billion in investment income, which is 86.56 percent of total industry figure.
Despite the macroeconomic headwinds, the majority of insurers recorded profit growth and their share prices have been rallying due to renewed investors’ appetite for the equity market since the announcement of some market friendly reforms by president Bola Ahmed Tinubu.
The NGXASI Insurance index has gained 56.05 percent so far this year, outperforming the main board’s 26.15 percent as of Friday August, 2023.
Nigeria’s insurance sector will be seeing more growth in premium income on the back of improved regulations that ensures firms magnify their revenue base.
One of the most notable highlights of the industry in 2022 was the increase in third-party motor insurance policy rates by the National Insurance Commission, the apex regulator, on 22 December 2022.
NAICOM raised the new premium for private motors to N15,000, staff buses to N20,000, commercial trucks/general cartage to N100,000, commercial tricycles to N5,000 and commercial motorcycles to N3,000. These policies previously had a basic rate of N5,000.