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Monday, March 1, 2021

Rising Costs Erode Cornerstone Insurance’s Profitability

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Cornerstone Insurance Plc is spending its way into the future and shareholders should be perturbed as rising expenses combined with spiraling annuity change are eroding profitability.

The insurer is not using its owners’ resources in generating higher profit as return on average equity (ROAE) fell to 9.89 percent in December 2020 as against 32.43 percent as at December 2019, according to MoneyCentral Calculations.

Rising costs have prevented top line (revenue) impressive growth from trickling down to the bottom line (profit), and an uptick in investment income was not enough to forestall deteriorating margins in an environment notorious for a myriad challenges that undermines insurers growth.

Net profit margin dipped to 27.03 percent in the period under review from 62.31 percent the previous year, according to MoneyCentral Calculations.

Expectedly, net income dipped by 61.20 percent to N1.59 billion in the period under review as against N4.10 billion the previous year.

The huge costs hindering Cornerstone Insurance from delivering higher returns to shareholders in the form of bumper dividend or share appreciation underscores the need for insurers operating in the country to embark on cost reduction, especially their management expenses that include directors’ bonuses and other pecks.

Analysts attribute such huge expenses to expansion plans by firms with a view to magnifying  their share of the market and outlays that pertain to retail mass offering and acquisition of latest technology.

The National Insurance Commission, (NAICOM), the body that regulates insurance activities in Nigeria, had said that firms with huge expenditure profiles were mandated not to spend beyond certain limits.

The body said the decision was taken to ensure companies do not spend unnecessarily to the extent that they would not be able to attend to claims settlement and some other relevant matters in the industry.

Of course spiraling expenses in the face of the high inflationary environment weakens the financial position of a firm as Cornerstone Insurance total expenses (management plus underwriting) stood at N6.17 billion as at December 2020, which is 1.05 times net premium income.

Total operating expense ratio increased to 104.90 percent in the period under review from 87.35 percent the previous year.

Cornerstone Insurance’s combined ratio (CR), a measure of efficiency and profitability, deteriorated to 163.91 percent as at December 2020 against 133.85 percent the previous year.

A CR above 100 percent means a firm is paying out more in claims than it is earning premium income.

Cornerstone Insurance’s is reeling from mounting obligations to policyholders as claims ratio increased to 59.01 percent in the period under review as against 46.50 percent the previous year.

Despite the low yield environment, the insurer saw investment income spike by 96.85 percent to N3.43 billion as at December 2020.

While expenses are skyrocketing with combined ratio breaking the scale, Cornerstone is using its diversified product base to bolster revenue.

Gross premium income was up 19.33 percent to N15.86 billion in the period under review as against N13.29 billion the previous year.

Brief Historical Background

Cornerstone Insurance was incorporated in 1991 as a private limited liability company and became listed on the Nigerian Stock Exchange in 1997. Cornerstone is licensed by NAICOM to offer both life and non-life insurance policies including takaful policies through its subsidiary, FIN Insurance Company limited.

The Company also offers asset leasing services through its fully-owned subsidiary, Cornerstone Leasing and Investment limited.

In 2020, Cornerstone sold its major real estate property in order to meet the new capital threshold while indicating merger negotiations with two other insurance companies to boost capacity.

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