At first glance for the financial statement of the largest insurance companies, one would think they are profitable.
But strip out investment income from the equation and you will find that revenue growth is not enough to absorb rising total expenses that erodes profitability.
Because investment returns deepen on the movement of interest rates, they do not guarantee a steady stream of income.
Interestingly, insurers make money when interests are high as income from investment securities increases help compensate for slim underwriting income.
Across the globe, analysts have unanimously agreed that insurers are not profitable as the cost of capital is higher than the return on equity.
The same holds for Nigeria, where a difficult operating environment adds to the layer of cost, that is on top of weak consumer purchasing power, volatile currency, poor regulations, and spiraling unemployment.
Investors and analysts measure the performance of companies and financial institutions by comparing return on equity (ROE) against the cost of equity capital (COE). If ROE is higher than COE, management is creating value. If ROE is less than COE, management is destroying value.
Nigeria’s largest insurer may not be creating value as they collectively incurred negative underwriting results of N66.62 billion as at December 2020, from the negative position of N14.52 billion the previous year.
The real underwriting results are different from the underwriting profit in the sense it includes management expenses in its calculations. But both exclude investment income in arriving at the final answer. It is arrived at by deduction 1 from the combined ratio and multiplying the results by the net premium income.
However, AIICO Insurance, Regency, and Prestige Assurance posted positive real underwriting results of N1.77 billion, N462.24 million, and N343.28 million respectively.
Of course, these companies are paying more claims than they are earning in premium income as their industry average combined ratio deteriorated to 143.50 percent in December 2020 from 129.08 percent the previous year.
The coronavirus pandemic that disrupted economies across the globe took a toll on the insurance industry. The virus stoked mortality rates for Life insurers, while the non-life sector saw spiraling Covid19 related claims and rebates.
The gathering economic slowdown emanating from the pandemic is also driving interest rates even lower and increasing credit risk exposures from businesses facing possible default.
Last year, the central bank slashed the interest rate so as to protect the external reserve shock of the coronavirus pandemic.
“This raises the possibility of regulators asking for extraordinary solvency tests to ensure insurers can withstand the immediate and knock-on impacts,’’ said analysts at PWC.
Custodian Investment with a combined ratio of 173.83 percent, posted negative real underwriting results of N25.03 billion as at December 2020.
Wapic Insurance with a combined ratio of N156.95 percent, posted a negative underwriting result of N4.31 billion.
Mutual Benefit Assurance with a combined ratio of 119.85 percent, recorded negative underwriting results of N3.17 billion.
Cornerstone insurance posted negative real underwriting results of N3.79 billion, and it has a combined ratio of 164.46 percent.
Lasaco Insurance with a combined ratio of 127.42 percent, posted negative real underwriting results of N1.72 billion.
Royal Exchange Insurance with a combined ratio of 114.92 percent, posted a negative underwriting results of N1.19 billion.
Linkage Assurance with a combined ratio of 140.70 percent, posted negative real underwriting results of N1.97 billion.
Niger Insurance Plc with combined ratio of 345.46 percent, posted negative real underwriting results of N2.24 billion.
Veritas Kapital Assurance with a combined ratio of 173.27 percent, posted a negative underwriting result of N1.84 billion.