Insurance companies are using income from bonds and short-term government securities to underpin profit and compensate for deteriorating underwriting performance.
Across the globe, insurance companies, who are very liquid, park their floats in investment securities, and they generate rental income from skyscrapers they own.
For the first nine months through September 2019, net income of 15 largest listed insurers that have reported results spiked by 41.06 percent to N24.10 billion from N17.08 billion the previous year.
The growth at the bottom line (profit) was largely driven by a combined investment income of N31.15 billion that was up 44.09 percent from the N21.61 billion recorded in 2017.
If it were not for the support of investment securities, a lot companies would have recorded a loss or reduction in profitability.
“If the growth in investment income is driven by policy holders’ fund, then the insurers are doing well, as they are sweating their asset to generate more income,” said Owolabi Salami, executive director, Allianz Nigeria. “However, if the growth is driven by capital, it then means that they are doing nothing. That is, all they are doing is using owners fund and investing it in either fixed income securities or short-term government securities.”
Salami, however, said that the fall in treasury bills in recent times has put operators in the industry in dilemma as they do not know where to park their money.
Interest rates on Nigerian government short-term debt securities are no longer attractive as myriads of CBN’s directives aimed at cutting the high cost of government borrowing despite weak economic fundamentals have plunged rates on the instruments.
For instance, the 364-day NTBill cleared at 18.98 percent at a CBN auction conducted in April 2017, the highest in about 17 years, while the stop rate on the bill settled at 10 percent at a November 2019 auction.
The equities market has been in a lull since the start of 2018, as investors dumped shares over economic uncertainties and lack of transformation policy on the part of the present administration.
The Nigerian Stock Exchange (NSE) All Share Index (ASI) has returned -14.13 year to date.
AIICO Insurance, the largest quoted insurance company by asset, recorded an underwriting loss of N3.21 billion as at September 2019, but its net income surged by 157.51 percent in the period under review, thanks to investment income of N7.22 billion.
Cornerstone Insurance saw underwriting profit dip by 12.26 percent to N1.46 billion in the period under review, but net income surged by 327.81 percent to N2.81 billion in the period under review, thanks to 219.88 percent surge in investment in fixed income securities.
While AXA Mansard’s underwriting profit was down 3.15 percent to N4.29 billion in the period under review, a 29.08 percent increase in investment income to N8 billion helped the largest insurer by market capitalisation post a profit of N2.11 billion.
However, analysts are of the view that Nigerian insurers should be cautious on how they invest their coffers to generate investment return since the environment is fraught with interest, inflation, and currency risk.
They argued that companies should be able to meet obligation to policy holders in form of claims payment as and when due.
“There is a guideline on how you invest the money in Treasury bills, bonds and real estate,” said Moronfola Monsuru, actuarial analyst at Wapic Insurance. “It deals with a lot of risk and firms are usually cautious because the money belongs to policy holders and it will be used to settle claims.”
There are concerns that insurers may not know what to do with the capital at their disposal after the recapitalisation exercise by the regulator.
In order to strengthen the insurance industry so that it competes with its peer across the globe, the National Insurance Commission (NAICOM) has jacked up the minimum capital requirement of companies.
The aim of the new rules is to ensure that insurers have a solid capital base that will enable them take on more risk and grow premium and magnify shareholders’ earnings.
In the new capital base, life insurance companies will now have a minimum paid-up capital of N8bn from the previous N2bn, general insurance companies will have to recapitalise to N10bn from N3bn, while composite insurance companies will need N18bn to underwrite businesses from the previous N5bn minimum capital.
The new capital base requirement also affected reinsurance companies who will now have to raise their minimum paid-up capital from N10bn to N20bn if they must remain in business.
BALA AUGIE
