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Insurers Profit Hit by Fair Value Loss, Rising Claims

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The profits of the largest listed insurers are practically at a standstill due fair value loss on financial assets and rising claims which raises concerns about deteriorating underwriting margins and poor valuations.

Of course, insurers are not earning their cost of capital as expenses exceed revenue, and shareholders will bear the brunt as they will get paltry dividends.

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.

Financial assets held at fair value through profit or loss comprise assets held for trading and those financial assets designated as being held at fair value through profit or loss.

“Because of bond yields were high at the end of last, a lot of them had to book market losses on their existing bond investments,” said an industry analyst who doesn’t want his name mentioned.

“It’s payback time because they had made gains on those same investment securities in 2020 when interest rates went down,” said the analysts.

The Nigeria 10-year Government Bond has a 11.926 percent yield, according to data from World Government Bonds.

To validate the aforementioned argument, AIICO made a gain of N30.15 billion on its bond investment in 2020. Mutual Benefit, Linkage Assurance, African Alliance, and AXA Mansard realized N3.29 billion, N1.89 billion, N4.94 billion, and N3.28 billion in net fair value gains on their investment securities in 2020, respectively.

It is important to note that soaring obligations to policyholders due to reopening of the economy, inflationary pressures, and currency volatility combined with spiraling management and underwriting expenses prevented insurers from delivering a higher return to their shareholders in the form of share price appreciation and bumper dividend.

There are concerns that lack of clear-cut strategic plans and protracted underperformance will underpin investors apathy towards insurers stocks.

Already, they are trading below their book value, and some have their share prices below N1. For instance, AXA Mansard (the most capitalized firm) has a market capitalization of N86 billion, which is below Union Bank (Tier 1 lender) market cap of N176.18 billion.

Analysts have urged insurers to embark on cost cuts measures so as to reduce expense ratio and they added that deploring latest technology in operations will help bolster cost optimization.

The largest listed firms collectively incurred N133.03 billion in underwriting and management expenses, which is 12.06 percent higher than 202o’s N118.71 billion, according to data gathered by MoneyCentral.

Also, their combined claims expenses increased by 21.57 percent to N138.57 billion in December 2021 from N113.97 billion the previous year.

Analysts recommend that insurers regain relevance through product innovation and coverage of new risks, and enhancing personalizing customer engagement and experience.

They also urged them to adapt business models to digital requirements and address the imperative for greater productivity.

Many have fallen off the cliff this earnings season that is about to come to an end.

Mutual Benefits Assurance Plc has recorded its first net loss after tax in four. For the year ended December 2021, it posted a loss after tax of N4.30 billion from a profit of N5.10 billion as at December 2020.

AIICO Insurance’s net income reduced by 20.80 percent to N4.15 billion as at December 2021, despite an item of exceptional income of N2.37 billion, being money realized from the sale of a subsidiary.

AIICO’s profits were significantly pressured by N34.72 billion in net fair value loss on financial assets, and analysts attribute this to the low yield environment as the central bank stuck to a dovish tone.

Royal Exchange posted a loss after tax of N973.24 million in 2021 as its inability to earn premium from Life business tipped it into technical insolvency.

African Alliance posted a loss after tax of N1.02 billion in 2021, its first loss since 2016 as accumulated losses in its balance sheet was responsible for negative shareholders’ funds that indicates technical insolvency.

AXA Mansard saw net income dip by 21.80 percent to N3.55 billion in the period under review from N4.54 billion the previous year.

Coronation Insurance posted a net loss of N1.25 billion in the period under review from a profit of N1.20 billion in 2020.

Stakeholders are optimistic that the looming recapitalization scheme by the regulator will pave the way for mergers and acquisitions needed to stabilize and solidify the industry and enhance the ability of sector players to take on more big-ticket transactions.

The sector continues to lag  its peers in terms of penetration which stood at 0.5% 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).

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