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Insurers’ investment Income Wanes for First Time in 5 years

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Listed insurers’ investment income has slumped for the first time in five years despite the gradual increases in bond yields since December 2020, which indicates they have to embark on cost reduction to bolster profit.

The combined investment income of the most liquid and well capitalised companies on the NGX reduced by 6.98 percent to N20.02 billion as at June 2021, according to data gathered by MoneyCentral.

That compares with a 31.27 percent increase to N21.52 billion in 2020; 15.0 percent uptick to N16.39 billion in 2019, and an increase of 7.26 percent in 2018.

Interestingly, investment income surged 58.35 percent in 2017, when yields hovered between 22 and 18 percent.

In the past five years, insurers have realized N120.70 billion in income from both short- and long-term government securities, according to data gathered by MoneyCentral.

Insurers invest the money given to them by policyholders, and profits on those investments have traditionally been an important source of income for the industry. But that income withered since the central bank barred individuals and domestic firms from its Open Market Operations (OMO) sent net treasury yields crashing.

However, there has been an improvement in interest rates since December 2021 as investors rotated from equities to bonds.

For instance, yields on the one-year treasury bills, which bottom out at near-1 percent in December 2020 rise to 9 percent by the end of June 2021.

Similarly, yields on bonds such as the 20 year benchmark bond which traded at 7 percent in December 2020 spiked to over 12 percent level in June 2021.

The Nigeria 10 Years Government Bond has a 11.638% yield as at September 2, 2021.

The Nigeria 10 years Government Bond reached a maximum yield of 15.856% as of December 2018  and a minimum yield of 4.048% (3 November 2020).

Analysts are optimistic that there will be further improvement in yields on financial instrument insurers needed to make up for weak underwriting income.

Income from fixed income securities have prevented some insurers from recording net losses, but slow growth investment returns have exposed insurers to deteriorating margins and there are indications future earnings will be pressured.

That is double whammy for in industry reeling rising claims and operating expenses amid inflationary pressures and volatility in currency.

AIICO Insurance, the largest insurer by premium income, saw investment income dip by 21.89 percent to N5.91 billion in June 2021 from N7.57 billion as at June 2020.

AXA Mansard’s investment income reduced by 12.48 percent in the period under review from N2.75 billion the previous year.

Mutual Benefit’s investment income dipped by 50.72 percent in the period under review from N559.42 million in June 2021 from N1.13 billion as at June 2020.

While Custodian and Investment’s investment income rose by 7.29 percent as of June 2020, it is far below the 93.14 percent surge recorded in 2017.

Linkage Assurance’s investment income reduced by 18.17 percent to N1.36 billion in June 2021 from N1.66 billion the previous year.

Yields hover and their direction is largely determined by monetary policies of the central bank in response to macroeconomic uncertainties.

But a significant improvement in fixed income securities will be enjoyed by small companies who do not have the capacity or liquidity to trade in financial instruments.

Little wonder analysts and investors have unanimously agreed the recapitalization exercise by the regulator would drive a market wide strengthening of capital adequacy.

“Market consolidation, and the resultant reduction in competition should help alleviate fierce pricing pressure and improve underwriting capacity,” said analysts at AM Best.

Analysts at AM Best are upbeat that the industry has immense potential to grow given the country’s young population and low penetration rate.

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