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Insurance firms, problem of underwriting industry, NAICOM tells shareholders

By Kingsley Ighomwenghian and Sola Alabadan

Gbadebo Adetokunbo, a shareholder activist and investor in several companies listed on the Nigerian Stock Exchange (NSE) has seen and encountered the various seasons in the bourse, having started investing soon after leaving secondary school in the early 1970s.

In a telephone interview with Daily Independent on Monday, the founding member and former publicity secretary of the Nigerian Shareholders Solidarity Association (NSSA) compared the insurance subsector with others, lamenting: “It has never been this bad.”

Reason, Gbadebo, a shareholder in almost all insurance companies listed on the bourse, cannot remember the last time he received any dividend from most of these companies, except, according to him, Mansard Insurance (formerly GT Assurance) that has remained shareholder friendly over the years.

“They (the management of the insurance companies) have been telling us one story or the other over the years. They must have been the ones that lobbied the National Insurance Commission (NAICOM) to meet shareholder groups, because they do not want to face us at the annual general meetings,” he fumed.

Gbadebo, a retiree of the Nigerian Television Authority (NTA), was reacting to the meeting NAICOM held with shareholder groups last week, blaming the insurance firms of failing to adjust their cost structure to realities in their operating environment.

The commission, represented by Ibrahim Hassan, Deputy Commissioner for Insurance (Technical), blamed the failure of Nigerian insurance companies to operate profitably on the lingering huge operating expenses.

Speaking at the workshop for executives of shareholders’ association and independent directors of insurance companies in Lagos, Hassan lamented a situation where 80 per cent of insurer’s income was spent on operating expenses, making it the highest in Africa.

He told the gathering to “be mindful of reported operating expenses in the books of companies. A situation where huge proportion of premium income ends up as operating expenses is not very healthy.”

 

Some results

According to the NSE’s Daily Official List, of the 28 stocks on the insurance sub-sector, only seven paid a dividend in the whole of 2012, the highest of which was eight kobo per share by Continental Reinsurance and Mansard Insurance; followed by Aiico’s six, and the five kobo each distributed to shareholders by NEM Insurance. Others like Niger Insurance paid three kobo; Prestige Insurance, two kobo, just like Regency Alliance Insurance.

Shareholders of these companies are luckier, for instance, as Consolidated Hallmark Insurance last paid a dividend of two kobo in 2006; the last dividend by Linkage Insurance was eight kobo in 2005; while Universal Insurance and Investment & Allied Insurance, have no dividend history, according to the NSE daily official list.

Also, according to the results submitted to the NSE by Staco Insurance for the year ended December 31, 2011, for example, while gross earnings rose from N5.248 billion to N6.485 billion, the company reported a loss after tax of N1.051 billion, as against a previous net profit of N43.054 million. This may not be unconnected with cost such as underwriting expenses of N1.719 billion; N1.205 billion claims; and management expenses of about N1.854 billion from N1.325 billion, in addition to a provision for bad and doubtful debts of N961.549 million, in addition to financing charges and exchange loss of N112.779 million from N77.954 million; and exceptional charges of N1.379 billion.

The company’s third quarter unaudited result to September 30, 2012, shows that gross premium rose to N6.329 billion, up from N5.004 billion; out of which underwriting income stood at N5.708 billion from N4.958 billion, and expenses of N2l.32 billion from N2.174 billion. This left a profit of N3.388 billion, from N2.784 billion, while investment income slumped by 73.53 per cent to N38.65 million, as against the previous N146.052 million. Management expenses was N1.514 billion; just as N335 million was provided for doubtful debt, down from N817.999 million; leaving a net profit of N125.087 million, down by 78.87 per cent from M592.021 million in the corresponding third quarter of 2011.

Also, except by a miracle, shareholders of UNIC Insurance may be in for another bad harvest, going by the result for the third quarter ended September 2012, showing that premium income fell from N828.304 million to N616.2 million, out of which total claim stood at N679.671 million. Net loss therefore stood at N55.286 million, as against a profit of N168.661 million in the corresponding period of 2011.

Equity Insurance may have a chance of redemption with a half year 2012 net loss of N88.721 million, which was an improvement over the previous loss of N128.245 million, from a premium income of N1.48 billion, slightly better than the N1.294 billion raked in, in 2011. Operating expenses for the period for both period remained same at N439.472 million and N438.852 million.

For the 2012 third quarter, Unity Bank reported gross premium income of N1.659 billion, compared with N1.582 billion, and impairment charge of N346.176 million, as against N109.695 million; and management expenses of N894.994 million from N679.331 million. Net profit for the period fell to N298.939 million from N379.038 million.

Mansard Insurance however continued to inspire investors’ hope for a dividend when its full year result for 2012 is presented to the market soon, going by its third quarter outing, showing that gross premium rose to N10.05 billion, 22 per cent better than the previous N8.26 billion. Management expenses and provision for doubtful debt rose by 18 per cent from N1.047 billion to N1.233 billion, leaving net profit of N1.224 billion, which represented a significant 98 per cent rise from N619.213 million, helped by the investment and other income of N1.176 billion, as against N661.124 million in the preceding third quarter.

NEM Insurance also seem set to make investors smile in the 2012 full year result if it is able to continue with the third quarter trend. During the period, gross premium income grew slowly from N7.034 billion to N7.987 billion, following which underwriting expenses rose to N1.777 billion, from N1.683 billion, followed by administrative expenses of N1.254 billion from N790.133 million and bad and doubtful debt of N1.619 billion from N905.609 million, leaving a net profit of N1.486 billion, as against N860.542 million in the preceding nine months.

Which such performance score cards, analysts believe, there is little wonder why most of the stocks in the sub-sector trades at par value of 50 kobo. Specifically, only eight of the insurance stocks sells above 50 kobo per share, with just half the number trading above N1.00 each at the close of last weekend’s trading.

 

Adopting IFRS

The NAICOM boss equally told the shareholders “the various initiatives the commission has been taken to make the insurance industry attractive to investors both local and foreign, in order to enlist your involvement in efforts to transform the insurance industry.”

Consequently, he said NAICOM has through the adoption of the International Financial Reporting Standards (IFRS) facilitated improvements in financial reporting practices in the insurance industry in line with international best practices, hoping that this would be able to attract foreign investment to the insurance sector.

In the last three years also, he said “NAICOM has been initiating developmental policies aimed at strengthening and deepening insurance penetration in order to enhance the insurance sector contribution to GDP through its Market Development and Restructuring Initiative (MDRI). These measures include development of the agency system with the hope of creating jobs for jobless Nigerians, enforcement of compulsory insurances in our statute books, among others.”

As part of the transparency initiative, Hassan explained that as part of providing more information that would guide investors, NAICOM has directed that all infractions should be reported in the annual accounts of companies, so that the shareholders can raise questions during AGMs, since it is what should come to the shareholders as dividend that is being used to pay fines for avoidable offences.

 

Expanding the market

Determined to expand the market for the operators, Hassan said the commission recently fashioned financial inclusion initiatives to take insurance to the poor via micro-insurance and **takaful**. He emphasised that “this is a very fertile ground for most companies to do business instead of relying on the big ticket deals that seldom come.”

The NAICOM boss further stated that the implementation of no premium, no cover provision in section 50(1) of the Insurance Act 2003 was aimed at redressing the issue of outstanding premiums so that insurers can make profit and pay dividends to their shareholders.

Cost cutting

Olatokunbo is not happy that the companies have failed to cut their cost as was done during the sector’s crisis, when many undertook such measures like salary slash, among others. This help them record profit despite growth despite shrinking earnings, when their operating expenses drops, following which some were able to pay shareholders dividend or distribute bonuses.

Idowu Ogedengbe, a stockbroker, laments the inability of most insurance companies to rid their books of the aftermath of the market meltdown, which seriously affected their investments in the shares of quoted companies.

The insurance companies have continued to carry the bad debts in their books in the absence of a bad bank in the mould of the Asset Management Corporation of Nigeria (AMCON) to purchase the toxic assets, this, he continues is why many continue to carry huge “bad and doubtful debts” in their books

Nonah Awoh, an analyst and shareholder however believes investment income remains a problem in the industry, even as he spoke of the need for operators to grow the business. Another problem, he said, is fact that many of the companies are having issues managing their bogus sizes.

A pointer to this, he stressed, is the fact that “those of them that are smaller  have been able to pay dividend.”

 

Imperatives of cost cutting

Experts at Accenture, a consulting and outsourcing firm, believe the imperative of reducing cost is not altogether new, as “current economic conditions, combined with market forces that have gained momentum in the insurance industry over the past few years, have caused cost reduction to become a top strategic business priority.

“The manner in which this priority is addressed depends largely upon the circumstances in which the insurer finds itself. For some the imperative is survival, with short-term stability being the primary goal. For others it is improvement of their cost structure and their operational capability, the aim being to emerge from the downturn a more formidably positioned competitor. And for high-performance insurers, the strategy may be to fundamentally transform their cost structure, implementing a new business model that enables them to capitalise on the opportunities for growth that the economic crisis presents,” the firm said in a document titled: “A strategic approach to cost reduction in insurance,” pasted on its website.

Reducing cost, according to Accenture can come in the form of short-term strategies, strategic cost reduction, which entails “broader ambitions and more far-reaching changes to both the current operating model and the organisational structure—in fact, throughout the value chain. Its aim is not simply to take out cost but to build capability that supports the business strategy. It defines value not only from an internal perspective, but also in terms of what it means to customers, agents, regulators and shareholders.”

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