Consolidated Hallmark Insurance Plc lost the high growth momentum with which it began 2020 financial. Yet its management expects a further slowdown in the final quarter. The risk underwriting firm closed the third quarter last September with an after-tax profit of N456 million up to 46 per cent of which was earned in the first quarter.
The company lost the earnings growth speed in the second quarter when profit for the quarter dropped to N87 million. It regained some strength in the third quarter when it posted an after-tax of N160 million for the quarter. Its forecast for the final quarter is, however, indicating the lowest quarterly profit figure of N46 million.
The full-year expectation is that a decline in profit will follow the elevated performance the company registered in 2019. The company had attained an impressive profit advance of over 47 per cent to N600 million at the end of 2019. By management’s estimates, profit is expected to close at N502 million for the 2020 financial year – a drop of 16 per cent.
The downturn in earnings performance reflects a change in cost-income behaviour as from the second quarter. Management’s strategy for the year, which was to unlock new revenue streams and reduce operating costs worked well in the first quarter but appears to have lost track amidst the coronavirus pandemic.
To the contrary, revenue growth slowed down but costs failed to follow. Management was able to keep underwriting income up year-on-year – which saw it through to a slight improvement in pre-tax profit. However, a rise of 54 per cent in tax expenses caused a year-on-year drop in after-tax profit at the end of the third quarter.
Investment earnings remained a weak front in earnings in the year from the first quarter to the end of the third. The weakness was largely countered by strong improvements in other operating income and net gains on financial assets over the review period.
The insurance company closed the third quarter operations in September 2020 with earnings growth for the third straight year. At N7.4 billion, gross premium income improved by 14.6 per cent year-on-year.
This is further upon an increase of close to 28 per cent in gross premium revenue at the end of 2019. Net premium income grew by 17 per cent over the same period to over N4.5 billion. This is a continuing improvement from an increase of 16 per cent in the 2019 full year.
Net underwriting income improved by 13 per cent to N4.9 billion at the end of the third quarter. It had grown by 18 per cent to N5.5 billion at the end of 2019.
The company’s cost reduction drive lost track as from the second quarter. Net claims expenses that dropped by 27 per cent in the first quarter changed direction to a 26 per cent rise year-on-year to stand at N1.8 billion at the end of the third quarter.
Underwriting expenses were slightly down at N1.5 million but total underwriting expenses still rose by 12 per cent to N3.3 billion at the end of the third quarter. This is the main point where the company’s initial cost-saving success swerved to a revenue consuming direction in the course of the financial year.
The significant cost saving the company achieved in the first quarter thinned down at the end of the third quarter. The changes undermined the outstanding growth in underwriting profit the company recorded at the beginning of the year.
Underwriting profit decelerated sharply from 63 per cent growth in the first quarter to 16 per cent year-on-year to less than N1.6 billion at the end of the third quarter. The company had grown underwriting profit by 51 per cent to N1.8 billion at the end of 2019.
The ability to convert net underwriting income into underwriting profit weakened significantly at the end of the review period. The margin of underwriting profit dropped from over 41 per cent in the first quarter to less than 32 per cent at the end of September 2020.
At N660 million at the end of the third quarter, investment income maintained its declining trend all the way from the first quarter. It went down by 17 per cent over the review period and management expects the year-on-year drop to sustain, even worsen in the final quarter.
Some compensatory developments during the period include a 226 per cent leap in other operating income to N92 million and a turnaround from net fair value loss on financial assets of N35 million to a gain of over N14 million during the period.
Also, management expenses slowed down considerably from as much as 30 per cent increase in the first quarter to 12 per cent to close at N1.6 billion at the end of September. This was however tempered by a major shift from net impairment write back to a net charge of over N3 million during the period.
The result of the cost-income relationship at the end of the third quarter of the 2020 financial year is that the initial elevated earnings position of the company has dimmed. Costs increased while earnings moderated, leaving pre-tax profit only marginally improved at less than 2 per cent to N672 million at the end of the third quarter.
A big increase of 54 per cent in tax expenses to N216 million made the difference between the marginal improvement in pre-tax profit and a drop of 12 per cent in after-tax profit to N456 million at the end of the third quarter. By the company’s calculation, after-tax profit is expected to drop by 16 per cent to N503 million at full year.
The company earned 5 kobo per share at the end of the third quarter, down from 7 kobo per share in the same period in the preceding year. It earned 7 kobo per share at the end of 2019.
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