Nigerian insurers’ average return on equity tumbled in 2019

It’s been clear for a number of years that insurance companies return on equity (ROE) has been waning, with the impact of deteriorating underwriting margins, combined with weak investment performance and spiralling inflation all impacting the profitability of the sector.

The added pressure of from weak valuations, unrealised losses on certain assets, premium growth that is failing to keep pace with loss cost trend, weak capital, and economic downturn, have all driven the decline.

Consequently, the industry average ROE fell to 14.52 percent as at December 2019 from 16.44 percent the previous year, according to data gathered by Businessday.

A deteriorating ratio means insurers are not using shareholders money to generate profits, which is why the valuation of Nigerian companies is weak compared with peers in sub-saharan Africa.

Also clear is that a lot of insurers are not managing their investment portfolio to the extent such gains will help compensate for rising claims, underwriting and management expenses.

Huge losses have been eroding profitability and a lot of operators in the industry are wary of the risk they undertake.

Mounting obligations that have resulted in huge underwriting losses have forced operators to be more than ever cautious of the risk they admit into their books.

Analysts attribute the protracted slump in returns to shareholders to escalating operating and underwriting expenses in the face of inflationary pressures.

They add that firms spend a lot of money in the acquisition of latest technology, staff training and recruitment, and diesel costs since electricity from the grid is unreliable.

Nigerian insurers are not making underwriting profit as average industry combined ratio hit 125.89 percent in December 2019, higher than the 100 percent benchmark, according to the data.

Analysts at Coronation Merchant Bank believe that low profitability results in lack of investment in technology necessary to bolster efficient and underpin seamless operations.

The key difficulty, we believe, is lack of scale, according to the analysts.

“Composite insurers, like all insurers, have a level of fixed costs which can only be justified by levels of business, but most Composite insurers lack the level of business to absorb these central costs

sufficiently,” they say.

African Alliance Insurance recorded a loss of N7.26 billion as at December 2019, while a negative total equity of N11.34 billion means it total liability exceeds total assets.

Niger Insurance plc posted a loss of N1.65 billion in the period under review, and its management expenses are 1.37 times net premium income of N1.84 billion.

Guinea Insurance recorded a loss of N795.04 billion as at December 2019, and it combined ratio stood at 1.27 percent as it continues to grapple with receding revenue.

However, some companies were reliant on investment returns to shore up profit and deliver returns to shareholders.

For instance, Leadway Assurance Limited, the largest insurer by assets, revenue and total equity, saw return on equity increased to 18.35 percent in December 2019 from 14.27 percent as at December 2018.

Leadway Assurance’s net income spiked by 26.53 percent to N9.19 billion as at December 2019, thanks to income from investment income and foreign exchange gains of N64.76 billion that helped compensate for underwriting loss of N47.05 billion.

AIICO Insurance’s ROE rose to 27.11 percent in the period under review as against 24.41 percent the previous year. AIICO’S net income surged by 86.24 percent to N5.86 billion in the period under review, thanks to contribution from investment income and other income to a tune of N10.53 billion that wiped out N6.8 billion underwriting loss.