Nigerian insurers are barely covering their cost of capital let alone providing returns above or matching the risk free rate as the tough business landscape continues to pressure firms’ profit.
As insurers return on equity (ROE)-a measure of profitability- has continued to slide, their ability to meet cost of capital is shrinking, according to a recent report by Coronation Merchant Bank.
In the finance parlance, superior stocks generate results (ROE) that in the long term exceed their equity borrowing costs, while the poor ones do not meet their cost of capital.
That means a rational investor will prefer to park his money in risk free assets like Treasury bills that is backed by government than wait for an investment that yields lower returns.
Therefore, it is better for companies to upgrade their ROE (profit) above yields on short term government securities so as to benefit from re-rating by investors.
Analysts suggest insurers create economies of scale, and tap into the retail space of the market so as to magnify profit and deliver superior returns to shareholders in form of bumper dividend and share price appreciation.
The simple average Composite Insurance ROE was 14.10 percent in 2018, this compares with the year’s average Treasury-bill (T-bill) rate of 12.8 percent, while the simple average Non-Life RoE in 2018 was 6.9 percent, according to Coronation Merchant Bank.
“It is not surprising that the Nigerian insurance industry lacks profitability,” said Guy Czartoryski, Head of Research Coronation Merchant.
“We have already seen how, over the past 10 years, the industry has barely grown in real terms. One effect of lack of growth is that companies are unable to create economies of scale for their front and back office operations,” said Czartoryski.
Insurers profit has been strained by major claims that resulted in huge underwriting losses, while weak premium income makes it practically difficult for them to absorb such losses.
In 2018, they paid claims in excess of N160 billion from total premium of N400 billion, a 14.30 percent increase over 2107 claims figure of N140 billion.
Operators say claims in the industry were also from aviation and maritime risks, which many companies lament pushed their bottom lines (profit) to negative levels during the 2018 financial year.
Analysts say companies are grappling with declining underwriting profit arising from falling rates due to unhealthy competition and craze to get few available businesses particularly corporate accounts.
The average combined ratio (CR) of Composite Insurers over the period 2014-18 was 119.1 percent, while Non-Life and Life Insurers have combined ratios of 110.20 percent and 115.40 percent, implying lack of underlying profitability, according to data compiled by Coronation Merchant Bank.
However, First Bank Life Insurance Limited, and Zenith Insurance Limited bucked the trend as they recorded average combined ratio of 56.80 percent and 82.0 percent over the period of 2014-2018.
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 a company that will have to eke out profitability from investment/finance incomes.
Tajudeen Ibrahim, head of research at Chapel Hill Denham say insurers need to magnify their capacity to underwrite bigger business, and increase their penetration of the retail side of the market.
“Insurance is a game of numbers in terms of volumes of policies. The retail will grow at a faster pace than corporate because it goes with per capita income,” said Ibrahim.
Nigeria, with a population of 200 million, has an insurance penetration of less than one percent, this compares with India’s penetration rate of 3.69 percent, Namibia, 7.25 percent; South Africa, 12.89 percent.
The new minimum capital requirement by the regulator is expected to shore up insurers capital bases and make the industry attractive to foreign investors.
BALA AUGIE
