Company Analysis

Why insurance sector is still losing attraction


The insurance sector isn’t getting the attention of investors in the current stock market rally that has seen some share prices double within three weeks of the New Year. The sector continues to face weak growth in revenue and rising underwriting expenses.
The core business of underwriting remains constrained in the face of operating difficulties but there are reasonable improvements in investment incomes. The operators here are generally profitable but many are still unable to establish stability in profit performance and there is little or nothing to show in dividend records.
A rise and fall pattern in revenue and profit has marked the insurance sector for several years but an increased number of operators entered the path of recovery and growth in 2017. Yet the records are tattered: some that were able to grow revenue were losing profit as per the interim reports. Their records show that there is a wide variation in performances in terms of different pictures of revenue as well as the cost-income relationships inherent in the business.
This situation gives rise to an operating climate in the insurance sector where many companies swing back and forth between profit and loss on a continuing basis. There is no general earnings pattern for the operators here. The year of a major profit drop for one company can be one of a big rebound for another depending on the specific cost and revenue challenges in the particular year.
Investment risk therefore remains high in this sector for now, as earnings swing widely from year to year. With the recovery in share values however, a likely further boost in investment incomes offers a link through which insurance stocks may join the stock market bull in the medium-term.

African Alliance Insurance

African Alliance Insurance plunged into a deep loss at the end of the third quarter, as revenue dropped during the period. The collapse of gross premium income followed a drop of annuity that contributed 75% of gross premium written in the same period in 2016 to insignificance at the end of September 2017. Amid the revenue fall, net claims expenses grew by 31%, resulting in an underwriting loss of N2.81 billion. An increase of 16% in total investment income to N2.62 largely covered the underwriting loss but there was no revenue to meet administrative and other expenses. The company closed the third quarter with a loss of N2.19 billion.

AIICO Insurance

AIICO Insurance faced the challenges of declining revenues and rising costs in the 2017 interims and that affected most income and expense lines. Against a 10% decline in gross premium income at the end of the third quarter, reinsurance expenses rose by 11%, resulting in a drop of 13% in net premium income. Increases of 38.5% in net claims expenses and 30% in underwriting expenses led to an underwriting loss of about N838 million at the end of September.
Profit was made possible for the company by improvements in investment income and other non-core earning lines and more so by major drops in operating and tax expenses. These developments hold the promise for AIICO’s profitability in the 2017 fiscal year.

Continental Reinsurance

Continental Reinsurance kept underwriting expenses under control at the end of the third quarter despite a major increase in claims expenses. The company grew underwriting profit by 178% to over N2 billion at the end of September.
Profit capacity was however affected by a drop of over 92% in foreign exchange gain and an upsurge of 140% in administrative expenses. Other compensating changes on the income statement during the period include a strong growth of 128% in other income and a sharp drop of 22% in impairment on financial assets. The favourable developments were however insufficient to fully compensate for the drop in foreign exchange gain, which accounted for much of the profit the company posted in 2016.

Cornerstone Insurance

Cornerstone Insurance recorded a decline in business volume at the end of the third quarter, which led to an underwriting loss of N728 million. Net claims expenses rose by 32% against a flat growth in net underwriting income. Net underwriting expenses also grew by 21% while the company also suffered a drop of 93% in operating income during the period.
The company’s main revenue lines were constrained but cost could not be contained, which explain a big increase in the loss position to N1.18 billion at the end of September. The loss position is likely to follow the company to full year in the light of inability to grow business volume.

Consolidated Hallmark Insurance

Consolidated Hallmark Insurance was unable to grow revenue while expenses rose rapidly, which undermined profit capacity at the end of the third quarter. Against a marginal increase in net underwriting income, claims incurred grew by 15% while underwriting expenses declined marginally. That lowered underwriting profit by 5.6% to N837 million.
Investment income nearly doubled but that was punctuated by a drop of over 74% in other income. An increase of 20% in management expenses also constrained profit capacity during the period. The full year outlook indicates a moderate improvement in gross premium income but profit prospects are uncertain.

Custodian & Allied

Custodian & Allied maintained stable growth in both revenue and profit at the end of the third quarter. It had grown revenue and profit numbers by 29% and 27% in 2016 respectively. Revenue growth was driven by investment income, which rose by 50% year-on-year to N4.93 billion at the end of September 2017.
Costs made some incursion into revenue during the review period, which prevented the company from improving profit at equal pace with revenue. The cost increases came from operating expenses, which grew by 23% and income tax expenses, which rose by 17%. The company closed the 2016 operations with a revenue of a little over N28 billion and with an after tax profit of N5.33 billion.

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