Despite an underwriting loss of over N22 billion, AIICO Insurance Plc kept on building profit for the third straight year at the end of the third quarter operations in September 2020. An after-tax profit of N5.4 billion at the end of the third quarter is already quite close to the full-year figure of N5.9 billion in 2019.
Babatunde Fajemirokun, the company’s managing director/CEO, is making greater promises for the full year. “At the company level, we expect a return to profitability in our non-life business – our relationships with corporates remain strong while we make in-roads into the retail segment of the market. This assumes that our claims experience develops as expected.
“Reported profits in the life business have been affected by the decline in yields. However, with improved contribution from our subsidiaries, we expect to end the year at or above reported profits before taxes in 2019.
“We will be spinning off our pensions business this year, …we expect this to improve profitability in 2020”, Fajemirokun disclosed while responding to InsideBusiness’ inquiry on AIICO Insurance’s performance at the end of the third quarter.
A major favourable development for the company this year is sustaining strong growth in the volume of underwriting business. Net premium income advanced by a quarter year-on-year to the region of N39 billion at the end of September. Fajemirokun hinted on how his company was able to make this happen in defiance of economic lockdown and the Covid-19 pandemic.
“Ideally, insurance should be a necessary good that is not impacted by economic lockdown, as risk does not cease to exist during economic lockdowns. If anything, the pandemic and recent looting hammered on the necessity/importance of having insurance”.
He said AIICO is determined to change the perception of insurance as a discretionary or grudge purchase. The company is doing so through development of innovative products made available at affordable prices to meet the needs of customers. This strategic positioning ensures that regardless of the state of the economy, clients still see the value in insurance products and can also still afford to pay premiums, the AIICO’s boss explained.
Another factor that has given the company a millage in the marketing front is its adjustment to digital sales training for its sales and business development teams in the second quarter, especially the agency field force. “Sales and business development teams have since then conducted sales without the face-to-face interaction necessitated by the lockdown and ensuing environment”.
“The online payment platforms have also helped in ensuring continued premium payments by customers without or with minimal physical contact. Engagement with the agency field force was also moved to virtual platforms. This has also contributed to the increase in premiums across key lines of business”.
Despite the strong growth in net premium income, the company saw the doubling of underwriting loss between June and September 2020 and more than four and half times increase year-on-year at N22.4 billion. The company’s CEO explained that the true picture is obscured by the long-term nature of life insurance businesses where cash flow and profit profiles do not fit into the short-term framework of other companies.
“From the accounts, we can trace the reason for the huge “underwriting loss” to the change in Life funds. Change in life funds is simply the increase or decrease in reserves, which cannot be matched to the premium income from only one policy/financial year. Life insurance products are priced such that “reserves” are to be funded from both premium and investment income and unfortunately, investment income is not included before determining underwriting profit for life insurance business in the current reporting format used in Nigeria. This creates an illusion of a gap between underwriting income and expenses that is difficult to close for
life insurance businesses”, he said.
He hopes that the introduction of IFRS17 for the insurance industry globally, expected to take effect from January 2023, will allow insurers to show the change in assets and liabilities due to yields in the economy adjacently. In his view, this would provide a better picture of the profitability of life insurance companies as the joint impact of the change in yields on both the asset and liability sides and relevant cash flows will be seen.
In spite of the shortcomings of the current reporting framework, AIICO’s management was able to rise from the underwriting loss to build profit for shareholders so far this year. The strength came from rapid growth in two income lines – investment income and net fair value gains.
Net fair value gains multiplied more than three times to N21 billion year-on-year, almost absorbing the entire net underwriting loss for the period. Investment income grew by 35.5 percent to N10.6 billion over the same period. The strong growth is despite a re-classification and netting off of previously reported interest expense of N2 billion from investment earnings.
The company is reaping the investment earnings from a large investment portfolio that it has kept on building from N127 billion at the end of last year to over N194 billion at the end of September 2020. The portfolio consists largely of fixed income government and corporate bonds.
The robust growths in the two earning lines provided the funds to overwrite the underwriting loss, cover total operating cost in excess of N7 billion and still leave a pre-tax profit of N4.7 billion at the end of the third quarter.
A tax credit of over N564 million as well as profit from discontinued operations enabled the company to push up after tax profit to N5.4 billion at the end of September, close to twice the N2.8 billion profit figure at the end of June. This is an increase of 17 percent year-on-year, accelerating from a marginal decrease at half year.
AIICO Insurance earned 45 kobo per share at the end of the third quarter operations, down from 65 kobo per share in the same period in 2019. The drop reflects an increase in share capital and the resulting increase in the volume of shares this year.
Shareholders can hope for a good dividend pay-out at full year, as dividend prospects remain good for the 2020 financial year, according to Fajemirokun. “AIICO expects to close the year strongly in Q4. Our financial position remains strong, inspiring confidence in our ability to assume the risks our customers wish to transfer.
“We deploy this capital judiciously, generating risk-adjusted returns for our shareholders, and ensuring that we can continue to keep our promises. Also, some of the dividend declarations are driven by the recapitalization exercise”, he assured.
Comments are closed.