• Thursday, May 23, 2024
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Nigeria insurers deliver returns to shareholders amid economic downturn

Nigeria insurers deliver returns to shareholders amid economic downturn

Some insurance companies have recorded a return on equity above industry average, which means they are efficient in the use of their owners’ resources in generating higher profit even amid a tough and unpredictable macroeconomic environment.

The current investment climate has been unfavourable to insurers as they are reeling from rising management expenses and premium growth that are failing to keep pace with loss cost.

Despite these challenges, Business Day’s data shows that Cornerstone Insurance Plc and Mutual Benefits Assurance recorded a return on average equity (ROE) of 33.15 percent and 32.30 percent as at December 2019, higher than the 12.78 percet industry average, according to Business Day calculations.

Others that outperform the benchmark are: AIICO Insurance, (28.28 percent0; NEM Insurance, (25.40 percent); Leadway Assurance Limited, (21.67 percent); Custodian and Allied, (13.94 percent); Regency Insurance Plc, (12.96 percent).

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“ROE is one of the most important parameters to look at the quality of a business,” said Abhishek Basumallick, Founder, Intelsense.

“A company that continues to have a strong ROE on a consistent basis means it can generate a significantly high return on capital over long periods of time under different circumstances,” said Abhishek Basumallick.

Insurers in Africa’s largest economy have a weak valuation compared to their peer rivals in Sub Saharan Africa, as evidenced in deteriorating profit margin and spiralling combined ratio. Nearly all of them have their stocks trade below N0.50k, as an abysmally poor dividend means investors will not be attracted to the investment.

The average price to book ratio of the Nigerian insurance industry is 0.43x compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x), according to data gathered by Afrinvest Securities Limited.

“This indicates investor apathy towards the listed insurers, quite evident in their stock prices,” said analysts at Afrinvest Securities.

“Although this underpricing appears attractive from an investment standpoint, we believe the pricing is synonymous with the value-added by the insurers over time in terms of performance,” said the analysts.

Analysts at Afrinvest Securities placed buy ratings on the stocks of Cornerstone Insurance, citing superior operational efficiency compared to peers in the composite insurance business.

Experts are of the view that the planned recapitalisation would unlock more of this growth as consolidation by way of mergers and acquisition will result in cost reduction and elimination of wastages.

The National Insurance Commission (NAICOM), the body that regulates insurance in the country, has hiked the minimum capital for companies as it seeks to ensure that operators in the industry take on more risk and deliver higher returns to shareholders in the form of bumper dividend and share appreciation.

It increased the minimum capital of Life Insurance Business to N8 billion from N2 billion; General Insurance Business to N10 billion from N3 billion; Composite Business to N18 billion from N5 billion, and Reinsurance to N20 billion from N10 billion.

The policyholder surplus or shareholders’ funds of the largest insurers increased by 15.95 percent to N322.79 billion as at December 2019 from N278.38 billion the previous year.

Leadway Assurance has shareholders’ funds of N53.67 billion; Custodian and Allied, (N44.75 billion); AIICO Insurance, (N26.15 billion); AXA Mansard, (N25.16 billion); Linkage, (N23.04 billion).

Others are: Guinea Insurance, (N2.27 billion); Consolidated Hallmark, (N6.65 billion); Law Union and Law, (N7.15 billion), and African Alliance has a negative shareholders’ fund as it has been recording recurring losses.

The coronavirus pandemic that elicited the government to impose lockdown measures that paralyzed business activities across the country is expected to compound the woes of insurers who had been struggling with a myriad of inherent risks.