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Friday, March 31, 2023

Insurers’ Investment Income Jumps on Boost From Rising Bond Yields

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The uptick in bond yields in 2021 from the lows of the previous year has bolstered the investment portfolio of the largest insurers who rely on juicy yields to turn a profit.

“They would have got interest income on all the new assets that they are putting their money in at a high interest rate,” said an analyst who did not want his name mentioned.

“It must be noted that 10-year bonds which hovered between 6.30 percent and 6.5 percent had increased to 11.80 percent in 2o21,” said the analyst.

The largest insurers collectively realized N46.88 billion from investment income in December 2021, according to data gathered by MoneyCentral.

That compares with a 6.88 percent reduction to N43.95 billion in 2020, but investment returns were up 15.19 percent to N47.20 percent in 2019; the largest expansion was in 2017 when it spiked by 36.14 percent.

The Nigeria 10-year government bond has a 12.251 percent yield as at February 25, 2022, according to World Government Bonds.

With margins down and combined ratio rising due to mounting obligations and spiraling expenses, insurers are materially reliant on investment income to make a profit.

Of course, companies invest part of the premium income that they collect from policyholders in investment securities such as equity and bonds. Some own skyscraper buildings generate rental income to support the bottom line (profit) as they operate in an unfavorable underwriting environment.

However, the growth in investment income is not enough to bolster profit that dipped, as the big ones booked fair value losses on financial assets brought on by rising interest rates.

The combined net profit of the largest listed insurers fell by 66.24 percent to N15.74 billion in December 2021 from N46.67 billion as at December 2020, according to Data gathered by MoneyCentral.

The sharp drop at the bottom line (profit) was partly driven by a N48.40 billion net fair value loss on bonds or financial assets passed through the profit and loss account collectively incurred by AIICO Insurance Plc, Mutual Benefit Assurance Plc, Linkage Assurance Plc, and African Alliance Plc who recorded huge net losses.

Analysts are optimistic that insurers will record strong profit growth this if rising yields continues to support investment returns because the majority of them are recording double digit growth in revenue

Deteriorating profit margins and very thin dividends are partly responsible for poor valuations and investor apathy towards insurance companies’ stocks.

It is expected that the recapitalization scheme of the regulator will spur mergers and acquisition that will pave the way for firms with very strong balance sheets and liquidity to take on more big-ticket transactions.

The country’s penetration stood at 0.5%, and that compared with South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).

Custodian Investment Plc’s investment income increased by 13.93 percent to N11.60 billion as at December 2021.

AIICO Insurance Plc investment income was up 14.63 percent to N13.42 billion in December 2021 from N11.71 billion as at December 2020.

AXA Mansard Plc’s investment income was up 5.95 percent to N5.13 billion in the period under review from N4.85 billion the previous year.

Coronation Insurance Plc’s investment income spiked by 77.67 percent to N1.63 billion in the period under review from N922.17 million the previous year.

NEM Insurance Plc saw investment income increase by 12.34 percent to N1.12 billion in the period under review from N1 billion the previous year.

Cornerstone Insurance Plc investment income increased by 7.30 percent to N1.24 billion in the period under review from N1.15 billion as at December 2020.

Lasaco Assurance saw investment income rise by 24.32 percent to N686.55 million in December 2020 from N552.24 million the previous year.

Consolidated Hallmark Plc investment income was up 4.05 percent to N1.93 billion in the period under review as against N1.86 billion the previous year.

Linkage Assurance Plc investment income rose by 20.60 percent 2021 from N2.42 billion the previous year.

Prestige Assurance Plc investment income was up 22.26 percent to N809.71 million in the period under review from N662.25 million the previous year.

However, Mutual Benefit Assurance Plc investment income was down 15.77 percent to N2.18 billion in the period under review from N2.60 billion as at December 2020.

African Alliance Plc income reduced by 41.55 percent to N1.43 billion in December 2021 from N2.45 billion the previous year.

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