Sovereign Trust Insurance: Final Quarter Loss Dashes Growth Agenda
Sovereign Trust Insurance has reported a final quarter loss of N109 million in 2019 and that has undermined the new growth agenda that management unveiled at the beginning of the year. The company’s half year position had raised hopes high with profit already well ahead of the 2018 full year figure. The position overturned at full year with the last quarter loss slashing profit a clear 26 percent from third quarter closing.
Our analysis of the company’s earnings prospects at the end of half year hinted that the second half of the year could be disappointing despite the somewhat promising profit outlook. The preceding year’s closing profit was about one-half of the company’s reported profit at half year, meaning that the second half ran at a loss all the way. The caution was that the preceding year’s pattern was likely to repeat itself in the 2019 financial year, which has happened.
The loss in the final quarter came from an upsurge in finance expenses, which grew five times above the corresponding figure in the prior year. That was a hurdle that hindered the poise of the risk underwriting firm to take the business to a greater height in 2019.
The company’s chief executive officer, Mr. Olaotan Soyinka, was able to convince shareholders to inject new equity capital into the company last year in support of the new growth agenda. He gave his word to make the company one of the top players in the insurance industry if he got the money.
He asked for N2 billion in new money from shareholders in a rights issue of one for two. Shareholders, who have not seen any dividends for years, managed to cough out N1.5 billion of the money. That raised the company’s share capital from N4.17 billion in 2018 to N5.7 billion at the end of December 2019.
However the high hopes for a quantum leap in shareholder value and perhaps an end to a long running dividend holiday failed to be realised. The company instead extended the many years of running on accumulated losses and no dividends by yet another year.
The capital account is impaired by close to N1.3 billion of accumulated losses at the end of 2019 – which ate up every kobo of the profit for the year. The company still requires several years of consistent profit in order to wipe off the deficit in the capital account without which dividend payment isn’t going to happen.
The company’s full year results for 2019, yet to be audited, shows an after tax profit of N371 million, a sharp drop from N502 million it reported at the end of the third quarter. It was the same pattern in the preceding financial year when half year profit of about N673 million shrank to N344 million at the end of the year. The closing profit for 2019 is however 7.8 percent up on the closing profit of N344 million in 2018.
Interim reports in 2019 had raised high hopes with the third quarter profit standing at 146 percent of the full year profit figure in 2018. The full year reality is stripped of all the promises of a quantum leap in shareholder value. Instead, the company’s low earnings per share declined further at the end of the year.
The rights issue raised the volume of issued shares by 36 percent to 11,364 million against less than 8 percent improvement in profit for the year. A much bigger profit was targeted in the year than was realised and the hopes for cleaning up the books swiftly for cash dividends have faded for Sovereign Trust Insurance for now.
The second half appears to be a bad season for the company on the earnings front. It closed the 2018 operations with profit down to one-half of the half year figure. The 2019 financial year has just ended in the same pattern. The downturn began in the third quarter when only N21 million of the N502 million after tax profit at the end of September was realised within the quarter. This worsened to a loss in the final quarter.
The company realised net premium income of N5.93 billion at the end of 2019, an upturn from a 4 percent decline at half year to a 17 percent growth at the end of the period. The improvement came from a 23 percent drop in reinsurance expenses within the final quarter.
There was a favourable change of direction in net underwriting income from a 5 percent drop at half year to a 21 percent leap to N6.56 billion at full year. This follows an outstanding growth of about 74 percent in fee and commission income to N629 million at the end of the year.
There was equally an unfavourable change of direction in claims expenses from a drop of 22 percent at the end of June to an increase of close to 20 percent at the end of the year. The increase consumed much of the gain in net underwriting income.
A similar behaviour came from underwriting expenses, which accelerated from a marginal increase of 2 percent at the end of September to 34 percent growth to stand at N2.3 billion at the end of December 2019. Part of the increase in net underwriting income still flowed down to underwriting profit and changed the reading from flat growth at the end of the third quarter to an increase of over 6 percent at full year.
Underwriting profit amounted to over N2 billion for Sovereign Trust Insurance at the end of 2019. Yet it is a loss of momentum in the year from a 60 percent advance in underwriting profit at the end of 2018.
There was an upturn in investment income in the final quarter, which caused a sudden change of direction from a drop of close to 22 percent in investment income at the end of the third quarter to an increase of 11 percent at full year. Investment income generated within the final quarter accounted for 57 percent of the closing figure of over N421 million for the year.
Another benign development is a slowdown in management expenses from a 6 percent growth at the end of June to 3 percent at the end of December 2019. That turned around a drop of over 17 percent in operating profit at half year to a 16 percent lifting to N758 million at full year.
The final straw came from an upsurge in finance expenses in the final quarter during which 78 percent of the total finance cost was incurred. This is mainly interest expenses on the company’s N1.25 billion zero coupon rate bond. Finance cost tripled to N343 million at the end of the year, consuming more than all the increase in operating profit.
The company earned 3 kobo per share at the end of December 2019, down from 4 kobo per share in the preceding year. No dividend is to be expected as long as the company carries retained deficits in the books.
Management has a big task ahead to rid the balance sheet of accumulated losses. The injection of new money last year is expected to boost the underwriting business and investment income – which could advance the pace of profit improvement and the rebuilding of retained earnings.
Sovereign Trust Insurance is a general business underwriter and has attained a post rights issue paid-up capital of N5.68 billion. It still has well over N4 billion to go to meet the N10-billion new capitalization benchmark specified for general insurance businesses.
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