Sovereign Trust Insurance: Still A Big Mountain Ahead
Sovereign Trust Insurance Plc still has a big mountain ahead to cross for it to get to the end of the long-running ‘no dividend story’. Yet the risk underwriting firm seems to lack both the strength and the speed to scale through the hurdles for yet another year.
The company’s capital account is injured by accumulated losses in excess of N1 billion – which needs to heal before dividend hopes may come alive. Expectations of considerable reduction in the accumulated losses last year were undermined by the last quarter disappointment that left full-year profit virtually unchanged from the third-quarter figure.
This year so far, the company is again losing speed. First-quarter operations ended in a profit drop, as claims expenses multiplied more than four and half times year-on-year. That caused a drop of over 30 percent in underwriting profit.
The company’s chief executive officer, Mr. Olaotan Soyinka, is coming under pressure to build profit and pay dividends after shareholders struggled to inject new equity capital of N1.5 billion into the company in 2018.
His new growth agenda delivered a profit growth of 46 percent last year and kept profit performance elevated for the third year on. However, the impact on the hanging losses remained relatively scratch.
A retained deficit of about N1.2 billion at the end of 2019 is slightly higher than the figure in 2015. The company’s profits keep disappearing into the retained deficit hole in the balance sheet and yet without a reasonable decline in the outstanding.
The company needs several years of consistent profit at the current growth rate in order to wipe off the deficit in the capital account. Achieving a quantum leap in profit big enough to keep retained deficit off the books and permit dividend pay-out is the task on hand for the Sovereign Trust Insurance Company’s chief executive officer this year.
In order to accomplish that, he needs to recover the speed loss in the first quarter and turn on the cruising gear for the rest of the year. Profit needs to grow at an accelerated momentum in view of a 36 percent increase in the volume of issued shares through a rights issue in 2018.
In the event of a further loss of momentum, the many years of running on accumulated losses and no dividends may yet increase by one in 2020.
The company realised net premium income of N1.6 billion at the end of March 2020, a decline of 4 percent year-on-year. The decline came from a 12 percent drop in gross premium written during the quarter.
Good news came from fee and commission income, which changed the direction of the earnings story from a decline in net premium income to an increase of 14.5 percent in net underwriting income. The income line had multiplied more than four times year-on-year to N423 million at the end of March. Net underwriting income amounted to over N2 billion at the end of the review period.
Bad news followed from claims expenses – which multiplied by 468 percent year-on-year to over N896 million in the first quarter. The high jump consumed more than all the gain in net underwriting income and crashed underwriting profit by close to 31 percent to N555 million. That was despite a drop of 25 percent in underwriting expenses to N598 million.
Underwriting profit amounted to over N2 billion for Sovereign Trust Insurance at the end of 2019, which is an increase of 8 percent in the year. That was a sharp slowdown from a 60 percent advance in 2018. The company’s slowing underwriting profit in the prior year is, therefore, speeding up to a drop this year.
Investment income continues to hold up from an increase of 21 percent in 2019 to a growth of roughly 22 percent to N112 million in the first quarter. Further support came from a drop of 31.5 percent in management expenses to N338 million at the end of the quarter.
Finance expenses have shifted position from an outstanding growth of 86 percent last year to a drop of 57 percent to less than N24 million at the end of the first quarter. This constitutes interest expenses on the company’s N1.16 billion zero-coupon rate bond outstanding at the end of March 2020.
The company earned over 2 kobo per share at the end of March 2020, down from close to 4 kobo per share in the same period in the preceding year.
The company’s earnings outlook reflects the impacts of multiplying fees and commission income and claims expenses. The bottom line prospects for the year depend on which outweighs the other in the course of the financial year.
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.