Sovereign Trust Insurance capitulates to headwinds as earnings slump

Sovereign Trust Insurance (STI) Plc has capitulated to the volatile and tough operating environment undercutting the growth of companies in the country as the Nigerian insurer recorded a sharp drop in revenue and profit.

For the year ended December 2016, Sovereign Trust’s net income dipped by 95.71 percent to N23.59 million from N557.84 million the previous year.

Net margins, a measure of efficiency, dropped to 0.60 percent in the period under review from 14.15 percent as at December 2015.

Sovereign Trust has not utilized the resources of its shareholders in generating higher profit as return on equity (ROE) fell to 0.44 percent in December 2016 from 11.18 percent as at December 2015.

The Nigerian insurer has negative retained earnings or accumulated losses of N1.30 billion in the balance-sheet, a sign that the company hasn’t consistently earned income over time. Its accumulated net losses outweigh any net earnings for given periods.

Retained earnings are what companies rely on for expansion and growth. A negative retain earnings means Sovereign Trust has nothing to invest in for growth.

Sovereign Trust and other insurers in Africa’s largest economy continue to record low margins, weak reserves while share prices are strapped at below N3 in the past five years.

Six of the 14 most liquid insurers firms quoted on the NSE recorded cumulative negative retained earnings of N20.39 billion as at December 2016, raising concerns about their ability to take on more risk.

A breakdown of the figure shows Standard Alliance Insurance recorded a negative retained earnings of N13.87 billion; Staco Insurance Plc, N4.97 billion; Prestige Insurance Plc, N776.15 million; Corner Stone Plc, N519.06 million; Linkage Assurance, N230.70 million, and Law Union and Rock N23.11 million as at December 2016.

Analysts say accumulated losses could hinder these firms from paying dividend to shareholder or owners of the business. This explains why share price has stagnated.

Sovereign Trust did not propose a dividend for the year ended December 2016 while shareholders received no income from profit the previous year.

The last time an insurance company paid dividend was in May this year when AxA Mansard paid a dividend of 5k on every ordinary shares held.

Sovereign Trust’s share price has been stuck at N0.50 since 2013 when it touched a high of N0.55.

Perhaps more worrisome is the fact that the N24.15 billion total market capitalization of the most capitalized insurance company, AXA Mansard Plc, is less than the N36.50 billion total market value of tier 2 lender, Fidelity Bank.

On the whole, the Nigerian insurance market remains under-penetrated largely due to the same challenges such as a weak regulatory framework, low awareness and public apathy towards insurance.

The country’s gross premium to GDP ratio of 0.4 percent in 2015 was well below that of South Africa (14.7 percent) and Malaysia (4.8 percent).

Further analysis of Sovereign Trust Insurance 2016 audited financial statement shows gross premium written dropped by 10.26 percent to N6.40 billion in December 2016 from N7.13 billion the previous year.

The company paid a total of N1.44 billion in claims in 2016, representing a 4.35 percent drop from the N1.50 billion figure recorded last year. Underwriting expenses increased by 1.10 percent to N1.17 billion.

Sovereign Trust’s underwriting profit was down 1.30 percent to N1.65 billion in the period under review from N1.67 billion as at December 2015.

BALA AUGIE