Life Insurers who sell annuity are set to see margin expansion when they release full year results as the rest of the industry is expected to remain pressured by claims, underwriting, and operating expenses.
Mounting expenses and slow growth in premium incomes have been a drag on bottom lines (profit), but firms that are liquid enough to have been able to invest in short term government securities, fixed income securities and real estate, should be compensated for slim underwriting profits.
Fola Lawal, an industry expert said short term insurance companies suffered or concluded negotiations on a number of high profile loses in 2018, and this would put pressure on margins.
Lawal however added that life companies, particularly those who sell annuity, may see improved margins from investment returns.
“Whether they end with lower or higher margins compared with the prior year depends on how they manage underwriting expenses including claims and reinsurance expenses,” said Lawal.
If past events are a projection for the future then these analyses validate Lawal’s views.
For instance, for the year ended December 2017, Leadway Assurance Limited recorded an underwriting loss of N10.41 billion due to huge claims expenses and increase in annuity fund, but the company made a net income N13.83 billion, thanks to a N35.26 billion it realized from financial assets.
First Bank Insurance Limited’s underwriting income dipped by 31.92 percent to N2.73 billion in 2017, but a N3.97 billion income from treasury bills, and N1.76 billion interest income from bonds added impetus to bottom line as profit increased by 54.20 percent to N3.67 billion.
A.R.M Life Plc’s recorded underwriting loss of N121.01 million in 2017, but it made a profit of N106.82 million, thanks to interest income from short term government securities of N1.28 billion.
“Generally speaking, there will be pressure on profit margins,’’ said Owolabi Salami, Executive Director, Allianz Nigeria Insurance Plc.
“The cost of doing business has gone up as we are paying more for diesel. Staff costs have spiked because we have to pay more to retain a talented workforce,” said Salami.
However, Salami said firms that are liquid and have invested in short term government securities such as Treasury bills when rates were high could see investment income underpin profit.
An industry expert who doesn’t want his name mentioned said undue competition has resulted on low pricing, as the environment is increasingly becoming business unfriendly.
Data from the Bloomberg Terminal shows full year 2018 net profit margin estimates for the NSE Insurance 10 Index -lists of largest insurers by market capitalization- at 6.71 percent, compared with 11.34 percent recorded the previous year.
Analysis of the group of 19 insurers tracked by BusinessDay shows aggregate net income for the third quarter of 2018 reduced to N13.77 billion from N15.72 billion the previous year, causing a drop of combined average return on equity (ROE) to 7.41 percent down from 2015’s 8.23 percent.
These declining profits come despite a 6.31 percent increase of aggregate shareholders’ funds for companies, marked at N191.91 billion as of September 2018, according to data gathered by BusinessDay
Experts are of the view that harsh operating environment affects insurance companies more than some other sectors.
Nigeria has an insurance penetration of 0.30 percent- one of the lowest figures in the world-, this compares with South Africa (14.7%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%).
Similarly, the sector’s insurance density (a measure of industry gross premium per capita) is still one of the lowest when compared to peers – South Africa ($762.5), Egypt ($22.8), Kenya ($40.5) Angola ($30.5) and Nigeria ($6.2).
Analysts are upbeat that 2019 will be a good year for the industry as firms are expected to continue to create traction in the retail space. Also, the review of the Group Life rate should mature fully this year as more corporates gain awareness and comply.
“The investment climate remains attractive, government has signaled a deficit in the 2019 budget which is positive for insurance investment managers chasing high yields,” summed Lawal.
