Analysts see modest growth in investment income in 2018 on lower yields

Insurers who invested in government securities when yields were high were rewarded with profit growth despite rising claims and underwriting expenses and annuity on life contracts.

However such growth in investment income may be difficult to replicate when firms release their 2018 audited financial statement.

This is because yields on treasury bills ( T-bills) yields nosedived in the beginning of last year but it started a gradual increase in the second quarter, but such uptick is too late to make an impact on investment returns.

T-bills yield on one year securities hovered between 18 percent and 22 percent for the month part of 2017, but it fell to between 11 percent and 13 percent in early 2018, and it is now between 15 percent and 16 percent.

Analysts at Coronation Merchant Research think OMOS will be issued in a range of 17 percent to 19 percent and that T-bill rates will be very close to this level during 2019. This is means insurers with a strong capital base can make money from the expected high yield environment.

Insurance firms usually channel premiums from their clients to government securities, shares and real estate from which they look to earn interest.

“I don’t think they will see much growth in investment income in their full year income statement because they had thought what happened in 2017 will happen the following but yields dipped and the increase around July 2018 was too late to make a positive impact,” said Moronfola Monsuru - Actuarial Analyst - Wapic Insurance Plc.

While firms are yet to release 2018 audited financial statement, 2017 should give investors an insight into those that were aggressive in using shareholders money in generating higher returns.

For instance, the cumulative investment income of 29 largest insurers- Composite, Life, and Non-lifeincreased by 47.68 percent to N63.58 billion in December from N43.05 billion as at De- cember 2016, data gathered by Markets and Intelligence show.

Investment income help augment net profits, after rising total underwriting expenses have shrunk underwriting profit.

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.

A breakdown of investment income shows leadway realized N13.04 billion in income on debt securities

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 incomes 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.

Custodian Assurance Life recorded an underwriting loss of N1.12 billion in December 2017, but it posted a profit after tax of N1.01 billion, thanks to investment income of N3.69 billion.

While the industry operates in a tough and unpredictable macroeconomic environment, analysts.see Life Insurers record improved margins in 2018.

Fola Lawal, an industry expert said short term in- surance 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 prior year depend on how they manage underwriting expenses including claims and reinsurance expenses,” said Lawal.

Despite the bullish returns on government securities, which impacted other money market investments positively in 2017, Nigeria’s insurance industry’s estimated investment yield is still at single digit of about 8 percent, according to Agusto & Co.

The foremost credit rating and research firm says the abysmal poor returns in the industry are as a result of inefficient asset allocation and weak balance sheet management.

Poor regulatory enforcement, weak corporate governance and risk management framework, as well as general inefficiencies, are responsible for low insurance penetration.

Nigeria has an insurance penetration of 0.30 percentone 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 (US$762.5), Egypt (US$22.8), Kenya (US$40.5) Angola (US$30.5) and Nigeria (US$6.2).

Nigerians are getting poorer every minute, which means they don’t have money in their pockets to purchase a cover.

According to a recent World Bank data, 92.10 percent of Nigerians live at below $5.50 a day. The reality is that most people cannot afford to buy a packet of Spaghetti or proteins.

Nigeria with a population of 180 million people has 87 million people, nearly half its population, in extreme poverty; as high inflation environment continues to erode discretionary income.

The economy has been sluggish as GDP for the third quarter stood at 1.80 percent, this compares to 2.10 percent fourth quarter of 2017, when the country existed a recession.

The harsh operating environment makes it practically difficult for insurers to thrive.

“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. The price of air-ticket has gone up. There have also been pressures on rates,” said Owolabi Salami, executive Director, Allianz Nigeria Insurance Plc.