• Friday, March 29, 2024
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BusinessDay

FBNInsurance, Aiico, Mutual Benefit, NEM, Regency are more efficient than peers

Insurance

In the insurance parlance, investors pay attention to how much of a company’s revenues are paid out as expenses because it determines to a large extent money left to pay dividend and fund expansion plans. 

When claims, operating, and underwriting expenses exceed premium income, a company is said to be operationally inefficient, and it is beleaguered with underwriting losses. 

Despite the myriad of challenges undermining the growth of companies, three firms have outperformed their peers to emerge the most efficient as gleaned from the third quarter financial statement of the largest insurers. 

For the first nine months through September 2019, FBNInsurance Limited, Aiico, Mutual Benefit, NEM, and Regency recorded combined ratio (CR) of 47.45 percent, 96.90 percent, 99.38 percent, 91.95 percent, a figure that is below the 100 percent bench mark. 

This compares with Custodian Investment, (123.86 percent); AxA Mansard, (112.03 percent); Wapic, (141.14 percent); Cornerstone Insurance, (139.55 percent); Lasaco, (114.98 percent); Consolidated Hall Mark, (114.93 percent); Law Union and Rock, (118.05 percent). 

Others are Continental Reinsurance, (100.77 percent); Sovereign Trust Insurance, (100.75 percent); Royal Exchange, (115.85 percent); Prestige Assurance, (126.17 percent); Linkage Assurance, (149.17 percent), and Niger Insurance, (153.69 percent). 

The combined ratio is the sum of an insurance company’s loss ratio and its expense ratio. The industry norm is to achieve a combined ratio of less than 100 percent and the target is to bring it as low as possible.

 

The implication is that a combined ratio of over 100 percent equates to an unprofitable company, though insurance companies can still be profitable with combined ratios of 100 percent by having other income streams, such as fee income from asset management subsidiaries.

The continued deteriorating combined ratio underscores analysts’ view that companies have to be more cost efficient so that they deliver a higher returns to shareholders in form of bumper dividend and share appreciation.

Insurers return on equity can’t cover their cost of capital because of rising operating expenses. However, it is expected that all Nigerian service industries have high costs thanks to inefficient energy supply and transportation.

Analysts at Coronation Merchant Bank said that cautious underwriting can pass up on growth opportunities and that high costs can also mean high levels of investment in technology to prepare for future growth.

The cumulative management expenses of insurers quoted on the bourse increased by 22.97 percent (higher than October inflation figure of 11.24 percent) to N46.06 billion while combined average expense ratio moved to  33.0 percent in the period under review from 30.80 percent as at September 2018.

A high ratio means a firm is spending more in running its operations to generate each unit of revenue.