Rising Losses Threaten African Alliance Insurance
MICHAEL MOSES
African Alliance Insurance Plc at 59 years old, remains the widely recognised as the most experienced and strongest Specialist Life Assurance Office in Nigeria. It parades intimidating credential having served thousands of customers with bespoke insurance products for each stage of their lives.
With the likes of popular names like Chief S.L. Edu, Mr T. A. Braithwaite and Chief M.E.R. Okorodudu, and also backed by world class reinsurers and co-shareholders, Munich Reinsurance Company, it definitely knows its onions in industry.
The economic situation of Nigeria however, is making nonsense of its credential. In a struggling economy where feeding has now become the topmost priority of majority, larger percentage of Nigerians has consigned their lives to fate and pushed insurance to the back seat as exemplified in the financials of African Alliance Insurance where market is turning red, getting worse as the day passes by.
The company half year accounts say a lot about the state of life business in the country and that the directive by the sector regulatior that operators should buoy their capitalkisation is ill-timed.
For the fifth year running, African Alliance Insurance has been building losses and the worry is that the losses is running wild and could threaten its health.
At N2.4 billion at half year, the loss figure is set for a major rise, being already close to last year’s closing figure of N2.7 billion.
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The group has been running with retained deficits for many years – which grew large enough to throw the equity capital into negative of N511 million in 2017. The equity hole multiplied six times to N3.2 billion in 2018. It has multiplied further to over N6 billion in six months to June 2019.
African Alliance Insurance is one of the oldest insurance companies in Nigeria and underwrites life and non-life businesses, offers Sharia compliant insurance and investment products and also operates through a subsidiary in pension fund administration.
The company’s management said the group’s loss position dropped last year from over N6 billion in 2017 to N2.7 billion as a result of changes it introduced to re-position operations. The changes apparently aren’t working this year so far. The loss figure is likely to rise in the second half of the year, as recorded last year – when 59 percent of the full year loss figure occurred.
If the preceding year’s pattern is repeated this year, African Alliance Insurance may close the year with a net loss getting close to the N6 billion region. That could see negative shareholders’ funds in excess of N9 billion for the company at the end of 2019.
The company is facing operating pressures on both sides of underwriting and investing operations while operating expenses are on the rise. A change in trend that could see a reversal of the present cost-income relationship appears to be far-fetched. The company’s earnings numbers were down last year all the way from gross premium written to net underwriting income. The improvements seen so far this year aren’t strong enough to deliver profit.
There was a leap of 32 percent in gross premium written year-on-year at the end of June 2019 but virtually the entire increase represents unearned premium. That permitted only a moderate improvement of 2.8 percent in gross premium income at N2.94 billion. A sharp drop in re-insurance premium helped the company to step up growth in net premium income at 6 percent to N2.92 billion.
Fee and commission income is negligible and still dropped over the review period, leaving net underwriting income virtually as good as net premium income. Underwriting expenses are on the rise against the moderate improvement in underwriting income.
Claims expenses grew ahead of net underwriting income at 8 percent to N4.28 compared to less than 6 percent increase. That is already well above the net underwriting income of N2.92 billion at the end of the review period. Underwriting expenses grew by over 40 percent to N729 million though moderated by a significant increase in changes in long term insurance contracts.
The company closed half year operations with net underwriting expenses of N4.92 billion, an increase of 11 percent year-on-year. That left an underwriting loss of N2 billion for the company at the end of June 2019. African Alliance Insurance ended last year’s trading with an underwriting loss of N2.6 billion – a drop from over N7 billion in the preceding year. This year, underwriting loss is set to rise again.
Further constraining the earnings picture, investment and other incomes declined and loss from investment contracts grew over the review period. Other income went down by 65 percent to N24 million and fair value gain of N5 million on investment assets in the same period last year plunged into a loss of N25 million at the end of June 2019. This is further to a huge fair value loss of N1.2 billion at the end of 2018.
Investment income went down by 6 percent year-on-year to less than N1.6 billion at the end of half year operations. Investment income was flat at the end of last year at N3.2 billion and the weakness is intensifying in the current financial year.
The company continues to record loss from investment contracts, which grew by 28 percent to over N67 million at half year. Loss from investment contracts equally rose in 2018 by 20 percent to N138 million. Share of profit from associate declined by close to 18 percent to N306 million over the review period.
Against the general declines in income lines, operating costs grew generally over the period. Personnel costs increased by 12 percent to N567 million, other operating and administrative expenses advanced by about 48 percent to N1.4 billion and finance cost grew by 87 percent to N42 million.
The result of declining earnings and growing costs is that net loss more than doubled at 108 percent to almost N2.4 billion at the end of June 2019. This is already quite close to the full year net loss figure of N2.7 billion in 2018. The full year outlook indicates that the company is headed for a major increase in net loss in 2019 after a drop of 57 percent in the loss figure in 2018.
The last time the company tasted profit was in 2014 when it reported an after tax profit of N486 million. It is therefore building a loss position for the fifth year running and one of the biggest losses in five years can be expected this year based on the half year numbers.
With accumulating losses, shareholders have since lost their investments in the company with galloping growth in negative equity capital from N511 million at the end of 2017 to over N6 billion at half year 2019. Despite that shareholders have been starved of dividend for years, they may have to cough out new money big enough to seal up the punctured equity basket and meet the new regulatory capital requirement for the business.
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