The National Insurance Commission (NAICOM), the apex body that regulates insurance businesses in Nigeria, introduced the ‘No Premium No Cover’ policy to deepen insurance penetration. But despite the rules enforced by regulators to improve premium of insurers and bottom line, most insurance companies have continued record dismal profits.
The sub-sector has found itself juggling a variety of challenges, as they strive to compete, improve profitability and growth. And these challenges, which also include negative perception, have continued to weigh down on bottom line of most of the companies in the sub-sector.
Contrary to the expectations that the Nigerian insurance industry would be the next growth sector, the performance of the industry, despite considerable improvement, remains far below optimal. As a developing country, the challenges for Nigerian insurance companies also include enforceability of insurance regulations. It is believed by experts that the growth target expected for the industry by the regulators would only be achieved through the enforcement of compulsory insurance. Expectedly, the success of Nigeria’s insurance industry will depend largely on the resolution of the identified challenges, especially the enforcement of compulsory insurance.
Other key success factors are prompt claims settlement, competent management and corporate governance, innovative products, human capital and technology Since the crash of the nation’s capital market in 2008, negative perception has trailed the subsector, which was compounded by inability of about 85 per cent of insurance firms in the industry to pay dividend to shareholders for many years.
Market watchers linked this development to crisis of confidence in the sector. Sovereign Trust Insurance Plc, like any other insurance firm, got its fair share from the dwindling fortunes of the sub-sector, as the movement of share price has remained at the value it was quoted on the Nigerian Stock Exchange (NSE). Since the beginning of the year, the insurer’s share price has been flat at 50 kobo. Investigation revealed that the last time its shares were higher was in 2013 when it hit 55 kobo.
The insurance firm’s price trend, just like others, reflects the spike in values observed in 2007 into the early part of 2008, as post-consolidation and speculative trades pushed prices upward. However, the extensive economic crisis has seen the company along with its peers badly hit.
Despite of the impressive appearance made by the company in the second and third quarters of 2014, the firm, just like in 2013, ended the financial year 2014 with bad numbers. Operating and underwriting expenses absorbed most of its revenue, leaving the company with low profit margins.
However, expectations that the company will sustain the profitability it recorded in the second and third quarters of the year was a mirage following poor outing that led to a report of 68.3 per cent decline in profits for the financial year ended December 31, 2014. The share, which closed at 50 kobo per share on August 31, 2014, remained flat at a nominal value. At the close of business last Friday, the company’s share price remained flat at 50 kobo year-to-date.
Financials
For the first three months of 2014, Sovereign Trust Insurance Plc, taking a cue from 2013 financial year loss, posted a drop in net earnings. Similarly, profit before tax for the first quarter of 2014, declined by 92.3 per cent to N160.46 million in Q1 2014 from N308.63 million as at Q1 2013. Profit after tax also fell by 84.6 per cent to N140.04 million as against N259.25 million as at Q1 2013. The insurer’s gross premium written, however, grew by 21 per cent to N2.93 billion from N2.31 billion the same period of the corresponding year (Q1) 2013.
Its underwriting capacity also improved as net underwriting income rose by 14.8 per cent to N1.89 billion compared with N1.61 billion as at Q1 2013, while gross premium income rose by 24.4 per cent to N2.57 billion in the review period. Net premium earned increased by 19.9 per cent to N1.70 billion in Q1 2014 compared with N1.36 billion as at Q1 2013, while reinsurance expenses rose by 33.1 per cent to N872.25 million in the period under review. Claims and underwriting expenses were up by 54.48 per cent to N1.30 billion in Q1 2014 as against N845.54 million as at Q1 2013.
The insurer, in the second quarter ended June 30, 2014, returned with good numbers as Profit After Tax rose by 66.1 per cent to N553. 877 million. This is against the N333. 365 million it achieved in the same period of 2013. The gross premiums written for the second quarter stood at N4. 802 billion as against N4.253 billion recorded in the same quarter of 2013.
For the nine months through September 2014, Sovereign Trust’s net premium earned increased by 15.80 per cent to N3.85 billion from N3.32 billion the same period of the corresponding year (Q3) 2013. Its underwriting profits were up by 33.5 per cent to N1.46 billion in Q3 2014, from N1.09 billion in the same period of the corresponding year 2013.
Claims and underwriting expenses increased by 3.27 per cent to N4.73 billion, while management expenses reduced by 1.69 per cent to N1.16 billion in the review period. The insurer’s ability to reduce cost to a single digit level culminated in a 60.0 per cent rise in profit before tax to N672.20 million, compared with N420.60 million during the same period of the corresponding year (Q3) 2013.
Similarly, profit after tax jumped by 66.80 per cent to N613.09 million as against N420.60 billion in the preceding year. Total assets were up by 40.50 per cent to N8.77 billion compared with N6.24 billion last year, while total equity in the review period increased by 16.80 per cent to N4.09 billion.
However, the company ended the financial year 2014 with bad numbers, recording a profit of N294.49 million in 2014 compared with N929.92 million in the previous year of 2013, indicating a loss of 68.3 per cent. Profit before tax also shrank by 62 per cent to N326.02 million from N857.850 million. Analysts believed that Sovereign Trust’s flagging growth at the bottom line was due to its rising operating and underwriting expenses that undermined profits, leaving the insurance firm with low margins. Total operating and underwriting expenses was up by 22.41 per cent to N4.86 billion, compared with N3.97 billion in 2013.
Sovereign Trust recorded a 16.0 per cent reduction in gross premium written to N7.286 billion in the period under review from N8.673 billion the same period in 2013. Gross premium income rose by a mere 2.90 per cent to N7.656 billion from N7.437 billion, while net premium earned firmed up by 6.90 per cent to N4.606 billion from N4.309 billion in 2013.
Outlook
The Managing Director of the company, Mr. Wale Onaolapo, had said that more than ever before, Sovereign Trust Insurance was poised to take the insurance business to a greater height as it gravitates to the next phase of its growth agenda. He also said that management of the company has set a growth, which is aimed at positioning the underwriting firm as one of the top players in the insurance industry, particularly in the oil and gas sector where it has developed very unique expertise and professionalism. He stressed that the company is committed to creating exceptional value to all its shareholders.
Conclusion
Despite having faced several challenges recently, market watchers believe that with the enforcement of ‘No Premium No Cover’, better corporate governance structures and tighter supervisory oversight, the insurance sector will experience positive times if the industry steps up introduction of innovative products, strategic business models and improved service delivery.
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