Average returns on equity (ROE) across a group of life and non-life insurance firms have tumbled materially, according to calculations by MoneyCentral.
It’s been clear for a number of years that insurers’ returns on equity (ROE) were on the wane, with the impact of the coronavirus pandemic and mounting obligations from policy holders due to the ENSARS protest, combined with the influence of inflationary pressures and the currency devaluation.
The added pressure from poor investment returns even as there has been an increase in interest rates since December 2020, and unrealised losses on certain assets, premium growth that is failing to keep pace with loss cost trends, has all driven the decline.
MoneyCentral data shows that the average return on equity for the largest insurers “declined materially’’ to 8.73 percent in June 2021 from 11.42 percent as at June 2020.
It is not surprising that industry valuations are poor as investors crave companies that have robust profit that guarantees bumper dividends and share buy backs.
Deteriorating margins (underwriting and operating), abysmally poor dividend declaration, lack of strategic direction and poor regulations have continued to spur investors’ apathy towards insurers’ shares.
That is majorly responsible for industry poor valuations compared to peer rivals across Sub-Saharan Africa. However low valuation signals an entry point for investors to buy cheap stocks on the expectation of future appreciation in share price predicated on an economic rebound and reorganization by board of directors.
Some analysts believe insurers’ valuations are now overly dependent on moves by the regulator, as opposed to companies’ earnings or the economic growth outlook.
Nigeria Insurance Commission (NAICOM) had mandated all operators in the industry to jerk up their capital bases, a policy that would spur mergers and acquisition needed to galvanize an industry that contributes less than 1 percent to the economy.
AXA Mansard’s ROE reduced to 15.22 percent in June 2021 from 22.53 percent as at June 2020. Net income decreased by 36.50 percent to N2.28 billion as at June 2021.
Coronation Insurance Plc’s ROE declined to 4.30 percent in the period under review from 6.02 percent the previous year; net income dipped by 39.21 percent to N397.84 million as at June 2021.
Mutual Benefit Assurance recorded negative ROE of (29.54 percent) in June 2021 from 17.04 percent the previous year. The negative number was caused by huge loss on bond investment that undermined the bottom line.
Cornerstone Insurance’s ROE reduced to 12.44 percent in the period under review from 13.11 percent the previous year. Its net income dipped by 20.39 percent to N796.46 million as at June 2021.
Linkage Assurance’s recorded negative return on equity of (18.15 percent) in June 2021 from 4.46 percent the previous year. The insurer capitulated to huge fair value loss on financial assets that was responsible for the net loss of N2.09 billion.
Of course, insurers’ bottom line (profit) are pressured by accelerating obligations to policyholders. They were exposed to insured losses emanating from the disruption of properties across the major cities during the protest against police brutality referred tom as “ENDSARS protest”
According to Nigeria Insurers Association (NIA), insurance firms have paid over N5.4 billion in claims settlement arising from #EndSARS losses.
Analysts at AM Best say higher inflation may introduce volatility into insurers claims cost, however, they added that elevated premium could partially offset this.
In the past five years, the most liquid and well capitalized companies collectively incurred N237.56 billion in claims, according to data gathered by MoneyCentral.
They are paying more in claims for every premium collected as industry average loss ratio otherwise known as claims ratio increased by 7.26 basis point to 42.07 percent in June 2021, according to MoneyCentral calculations.
Analysts at Afrinvest Securities are of the view that profitability would rely heavily on effective risk management and operational efficiency as a result of slower growth in premiums and rising claims (majorly in the life segment due to increasing death toll from the pandemic).
“The pandemic may provide an avenue for players to roll out variants of health insurance and pandemic-related policies,” said the analysts.
Some insurers have bucked the trend as they are able to deploy shareholders’ resources in magnifying profit.
AIICO Insurance’s ROAE increased to 23.30 percent in June 2021 from 18.28 percent as at June 2020.
Custodian Investment’s ROAE moved to 21.33 percent in the period under review from 17.96 percent the previous year.
Consolidated Hallmark’s ROAE’s increased to 13.20 percent in the period under review from 7.91 percent the previous year.
Prestige Assurance’s ROAE rose to 18.38 percent in June 2020 from 11.90 percent the previous year.
Universal Insurance’s ROAE increased to 10.37 percent in June 2021 from 2.21 percent the previous year.