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Investments Insufficient to Help Insurers Offset Mounting Underwriting Losses

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It is obvious that the current climate is not benign because investment income has been lackluster and insufficient to provide much needed financial padding against underwriting losses.

A low yield environment brought on by the central banks’ dovish stance has reduced what insurers can earn from both short term and long term government securities to meet payouts, an auxiliary income that adds much impetus to the bottom line (net income).

The investment income of the most liquid and capitalised insurance companies was flat at N32.90 billion as at September 2021, according to data gathered by MoneyCentral.

That compares with 3.38 percent increase to N32.61 billion in 2020 financial year from N31.42 billion in 2019; and 44.85 percent uptick to N32.42 billion in 2019 from N21.74 billion in 2018.

Interestingly, investment income spiked by 59.07 percent to N21.46 billion in 2017 from N13.49 billion in 2016, when yields were hovering between 22 percent and 18 percent.

But recent data from the fixed income securities market shows yields on 12 months’ treasury bills now stands at 6.60 percent while the 6-month short tenor goes for 3.40 percent.

The Nigeria 10-year Government Bond has a 12.241 percent yield as of November 30, 2021, according to World Government Bonds.

The low yield environment is taking a toll on margins, but analysts say there is light at the end of the tunnel as rate increases could pave the way for insurers to generate enough underwriting profit to mitigate against the current low investment environment.

If the low yield environment persists, companies would have to make their profit from underwriting and not investment.

Of course, the combined net income or profit after tax of the largest listed insurers dipped by 42.28 percent to N15.03 billion from N26.27 billion as at September 20210, according to data gathered by MoneyCentral.

It is not surprising that insurers’ return on equity is less than cost of capital as they operate in unfavorable underwriting environments where inflationary pressures and currency volatility balloon claims expenses.

However, premium growth is able to absorb such mounting obligations, but very slim margins enhance investors’ apathy for insurance shares since dividends are abysmally poor compared to banks.

“Once returns on equity starts to erode that might be the impetus for underwriters to become more stringent on pricing models. But history has shown that doesn’t happen,” said an industry stakeholder who did not want his name mentioned.

The combined gross premium income of insurers rose by 12.83 percent to N265.73 billion in September 2021 from N235.0 billion the previous year.

There are growing optimisms that the gradual economic recovery buoyed by the relaxation of social distancing rules and successful roll out of vaccines would strengthen premium income. That means there will be acceleration in business activities and renewals.

The Nigerian economy grew by 5.01 percent year on year (yoy) in the second quarter (Q2) of 2021, according to recent data from the National Bureau of Statistics (NBS).

AIICO Insurance’s investment income was down 10.28 percent to N9.53 billion in September 2021 from N10.62 billion as at September 2020.The insurer’s net income fell by 55.10 percent to N2.42 billion in the period under review from N5.40 billion the previous year.

AXA Mansard’s investment income reduced by 3.22 percent to N3.80 billion in September 2021 from N3.93 billion the previous year. The insurer’s net income dipped by 32.90 percent to N3.80 billion in September 2021 from N5.67 billion as at September 2020.

Mutual Benefit Assurance’s investment income fell by 21.24 percent to N1.37 billion in September 2021 from N1.74 billion the previous year. The insurer posted N3.40 billion net loss as it continues to grapple with net fair value loss on financial instruments.

Consolidated Hallmark Insurance’s investment income dipped by 2.98 percent to N1.51 billion in September 2021 from N1.56 billion the previous year.

Lasaco Insurance’s investment income reduced by 16.13 percent to N423.90 million in September 2021 from N505.41 million the previous year. The insurer saw net income increase 46.80 percent to N458.97 million in September 2021 from N862.54 million as at September 2020.

Since net treasury yields may not hit the double-digit figure soon, insurers will have to explore the retail end of the market to bolster underwriting income in such a way that leaves them with strong profit growth.

According to the World Bank, 80.40 percent of Nigeria’s employment is in the informal sector, the majority of these people do not have an insurance cover.

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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