Life Insurers to see margin expansion as industry pressures remain

MARKETS

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 shortterm 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 losses 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 the year ended December 2017, for instance, Leadway Assur- ance 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 of N13.83 billion, thanks to the N35.26 billion it realised 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 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, 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, Salami said.

An industry expert who doesn’t want his name mentioned said undue competition has resulted in 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 capitalisation – 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 8.23 percent in 2015.

These declining profits come despite a 6.31 percent increase in 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 – compared to South Africa’s 14.7 percent, Kenya (2.8 percent), Angola (0.8 percent), and Egypt (0.6 percent).

•Continues online at www.businessday.ng