Rising Claims Erode NEM Insurance’s Earnings At Half Year
NEM Insurance Plc, a provider of both Life and Non-Life started business in Nigeria in 1948 through the agency of Edward Turner & Co. but was incorporated in 1970 as a Nigerian company and was quoted on the Nigerian Stock Exchange in 1989.
The combined effect of the two expense items is a high rise of 150 percent in total underwriting expenses at the end of June. This is against an increase of 70 percent in net underwriting income over the same period. Underwriting expenses claimed much of the revenue improvement, squeezing margins and leaving profit just a little improved.
On the side of revenue, the year is quite promising for NEM Insurance so far. Against moderate improvement in premium income last year, the company has given an indication that an outstanding year in the underwriting business is in the making.
The challenge however is that the best part of the growing revenue isn’t coming to shareholders. Will the strong growth in revenue be good enough to permit profit recovery from a drop at the end of last year is the question mark on the company’s earnings outlook for 2019.
Some drawbacks are yet coming from three angles that are hurting the bottom line. These are a drop in investment income at half year, a collapse of other income and the appearance of impairment expense on financial assets. Management is responding by keeping a seal on operating expenses – which has helped so far to keep profit marginally up at the end of half year operations.
The company closed half year trading with a net premium income of N7.98 billion – a top record growth of 80 percent year-on-year. Despite a decline in fee and commission income, net underwriting income still advanced by 70 percent to N8.59 billion at the end of June 2019.
This is an outstanding growth in net underwriting income for the company so far this year from the increase of 9 percent recorded at the end of last year. Revenue growth is expected to accelerate further in the second half of the financial year. Net underwriting income is projected to be in the region of N19 billion for NEM Insurance at the end of 2019. That will be an increase of 66 percent from the full year figure of N11.44 billion in 2018.
A phenomenal growth in claims expenses from only N136 million to N2.08 billion over the review period was the most critical development on the company’s income statement at the end of half year operations. Added to that was a 68 percent upsurge in underwriting expenses to N3.58 billion.
Total underwriting expenses amounted to N5.66 billion at half year, an increase of 150 percent year-on-year. This is more than twice the 70 percent growth in net underwriting income. In effect, underwriting cost claimed as much as 66 percent of net underwriting income during the period compared to 45 percent in the same period in 2o18.
The big cost increases prevented the outstanding growth in earnings from flowing down to underwriting profit. At N2.93 billion, underwriting profit improved by 5 percent year-on-year, still maintaining slow growth observed last year.
The weakness in underwriting profit was reinforced by a decline of 12 percent in investment income to N316 million at the end of half year operations. This is unlike in the preceding year when investment income grew by 34 percent to N953 million. The drop in investment income is expected to be sustained to full year.
Further weakness to the bottom line came from other income, which collapsed from close to N15 million to less than N2 million over the review period. Yet an appearance of about N5 million in impairment expenses on fixed deposits further undermined the bottom line performance during the review period.
The company’s management moderated the impacts of theses adverse developments by holding operating expenses from rising. Relative moderation of operating cost permitted a marginal improvement in profit the company showed at half year.
NEM Insurance closed the first half of the 2019 financial year with an after tax profit of N1.61 billion, a moderate improvement of 6.6 percent. Profit growth may slow down in the second half as happened last year. The company earned 75 percent of its 2018 full year profit in the first half.
If the profit building pattern is repeated this year, NEM Insurance may lose profit again this year. Given the uneven growth pattern of the company, the full year profit is subject to a wide variation from the growth rate at half year.
The company earned 30 kobo per share at half year, slightly up from 28 kobo per share in the same period last year. It earned 39 kobo at the end of 2018 and paid a cash dividend of 23 kobo per share.
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