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Tuesday, March 28, 2023

Insurers Profit Jumps Despite Deteriorating Underwriting Performance

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Insurers in Africa’s largest economy recorded double digit growth in profit supported by an improvement in yield environment even as sector players are beset by foreign exchange losses, rising claims, and spiraling operating expenses.

These firms saw their combined net income spike by 39.21 percent to N12.29 billion in March 2021 from N3.46 billion the previous year, according to data gathered by MoneyCentral.

The average industry profit margin increased to 22.82 percent in the period under review from 10.70 percent the previous year, according to MoneyCentral calculations.

Of course, the improvement at the bottom line (profit) was largely driven by investment income as huge underwriting and claims expenses had wiped out most of the gains from strong premium growth.

The growth in investment income was largely driven by a rise in interest income on fixed income assets as the central bank’s hawkish stance bodes well for the industry since insurers enjoy juicy yields by packing their money in both short and long term government securities.

Last week, the central bank raised the interest rate to 14 per cent and the new interest rate comes barely two months after the apex bank raised the interest rate to 13 per cent. The lender of last resort is seeking to tame rising inflation exacerbated by the Ukraine war and rising borrowing cost in the United States.

The Nigeria 10 years government bond has a 11.778 percent yield while the 1 year government bond has a 5.467 percent yield.

The Nigeria 10 Years Government Bond reached a maximum yield of 15.856 percent (4 December 2018) and a minimum yield of 4.048 percent (3 November 2020).

AIICO insurance’s net income surged by 206.62 percent to N4.73 billion in March 2022 from N1.54 billion the previous year.

NEM Insurance’s net income spiked by 41.67 percent to N1.54 billion in the period under review from N1.09 billion the previous year.

Consolidated Hallmark’s net income was up 51.62 percent to N441.90 million in the period under review from N291.45 million the previous year.

Cornerstone Insurance’s net income increased by 98.38 percent to N297.57 million as at March 2o22.

However, underwriting profit for most insurers declined while combined ratio exceeded the 100 percent mark, as a sharp rise in fixed income yields during the period resulted in lower valuations for and annuity funds liability.

Analysts at Meristem Securities in a note to clients raised the alarm bells that high claims payment given a surge in inflation alongside soaring inflation could impair the profitability of players in the sector.

However, they added that general expectation of uptrend in the fixed income yields could lead to a lower actuarial provision for the life and annuity fund which could boost underwriting profit.

Despite the stellar performance of insurers last year and the first quarter of 2022, the insurance index ended FY2021 and Q1 2022 as the worst performing index on the stock exchange declining 9.98 percent in the first half of 2022.

The sector has been greeted with increased apathy by investors given the heightened uncertainty around recapitalization of the industry, high claims, and rising fixed income yields, according to analysts at Meristem Securities.

 “All these have combined to weaken investors’ sentiments towards the sector as major tickers recorded decline in total returns for the period,” said the analysts.

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