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Leadway, AIICO, FBNInsurance, Custodian, AXA Mansard, NEM, are Economically Viable

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A large number of insurers are economically efficient as their return on equity is keeping pace with cost.

Specifically, Leadway Assurance, AIICO, FBN Insurance, Custodian Investment, AXA Mansard, NEM Insurance, Lasaco, Veritas, and Universal Insurance saw return on average equity (ROAE) rise faster than combined operating expenses, according to data compiled by MoneyCentral.

Suffice to note that the operating expenses does not include underwriting and claims expenses that make up total costs that forms part of the combined ratio.

Leadway Assurance, the largest insurer by total asset in the country, saw operating expenses (OPEX) and personnel cost dip by 0.90 percent to N8.90 billion as at December 2020, compared to ROAE of 16.58 percent from the period.

AIICO Insurance’s combined OPEX and personnel cost increased by 5.56 percent to N10.90 billion, but it posted ROAE of 19.50 percent in the period under review.

FirstBank Insurance’s operating expense (OPEX) and personnel expenses reduced by 1.34 percent to N6.61 billion as at December 2020, compared to ROAE of 41.55 percent for the period.

Custodian Investment, the largest insurer by market capitalization in Africa’s largest economy, saw its combined OPEX and personnel cost dip by 2.43 percent to N6.59 billion, while it posted ROAE of 22.23 percent for the period.

In the same vein, AXA Mansard’s operating expenses and personnel costs reduced by 3.52 percent to N7.36 billion in 2020, and ROAC stood at 12.70 percent.

NEM Insurance’s operating and personnel costs impressively reduced by 14.63 percent to N2.67 billion as at 2020, while it recorded ROAE of 23.40 percent.

Lasco Insurance saw operating expenses and personnel cost fell by 11.2o percent to N2.36 billion and ROAE was 8.68 percent in the period.

Universal Insurance, which recorded the fastest net income growth among peers, saw operating and personnel costs dipped 14.0 percent to N951.10 million as at December 2020, while ROAE stood at 11.97 percent for the period.

Return on equity is an important measure of a bank or country’s banking sector’s profitability. ROE is calculated by taking the amount of net income returned as a percentage of the shareholder’s equity.

Return on Equity looks at how well a bank’s (or company’s) management is using its assets to create profits.

However, the majority of small insurers are not economically viable as the ROAE is not keeping pace with OPEX, which validates the minimum capital rules imposed by the regulator with a view to ensuring that companies have strong capital to take on more risk.

It is noteworthy that a lot of big players in the industry are shrinking management expenses in the face of inflationary pressures, currency volatility, and spiraling over cost brought on by diesel expenses as electricity from the national grid is unreliable.

However, costs of running operations within a particular period which are charged against premium income are gradually exceeding the 0.50 percent of the asset under management that covers directors’ remunerations, administration, audit fees, and share of registration expenses.

Analysts say operating and personnel expenses will be high because firms are embarking on expansion plans and repositioning themselves for big-ticket transactions.

Nigerian insurers are spending on latest technology as they seek to attain cost optimization and improved efficiency so as to ward off unfavorable macroeconomic conditions.

However, the majority of them are spending more on claims than they are earning revenue.

Rising obligations to policyholders are the largest expense items in the cost structures of companies, and bond yields have to continue rising so that they make more money from investment securities that helps compensate for deteriorating underwriting performance.

The average industry combined ratio deteriorated to 143.50 percent in December 2020 from 129.08 percent the previous year, according to MoneyCentral’s calculations.

Interestingly, they collectively incurred negative underwriting results of N66.62 billion as at December 2020, from an adverse position of N14.52 billion the previous year.

The real underwriting results are different from the underwriting profit in the sense it includes management expenses in its calculations. But both exclude investment income in arriving at the final answer.  It is arrived at by deduction 1 from the combined ratio and multiplying the results by the net premium income.

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