Continental Re’s Profit Heading Lowest In 5 Years On Rising Claims.
MICHAEL MOSES
Insurers are in business to redeem losses which they do by paying claims to policyholders in distress. However, when both the underwriting expenses and claims are rising astronomically, the situation becomes threatening to the firms’ profits. The shareholders definitely wont like this because of the effects on payouts to them at the end of the operational year.
Continental Reinsurance Plc is currently in this position. The firm is losing good profit that ought to be entering the kitties of shareholders so far this year. Management is able to break free from a stagnant revenue situation it faced last year and is building net premium income reasonably. It is however losing profit so rapidly that it may be headed for the lowest profit mark in five years.
Net insurance premium revenue grew reasonably well at over 14 percent year-on-year at the end of half year operations in June 2019 but profit for the period fell by more than 64 percent. This takes a revised order of last year’s position when the company raised profit by 34 percent from flat growth in net insurance premium income.
The pan-African reinsurance organisation is in a season of swollen claims and surging underwriting expenses. The increase in revenue is unable to meet the increase in underwriting expenses, resulting in a 60 percent drop in underwriting profit at half year.
Of close to N2.2 billion increase in net premium income at the end of half year operations, no part of the increase reached the bottom line. Total underwriting expenses consumed 97 percent of net premium income during the period, rising from 91 percent in the same period last year.
The huge drop in underwriting profit was not remedied either by any other line of income or cost moderation/reduction. Interest income was only moderately improved and other income remains relatively small. The biggest hit came from a sudden shift from a foreign exchange gain of over N1 billion in the same period last year to a loss of N50 million over the review period.
Administrative expenses added to the pressure, jumping ahead by close to one-half year-on-year at the end of June 2019. From both sides of revenue and expenses, the company’s management lacked the strength to defend profit during the review period.
The outlook for the second half of the financial year shows that the rapidly falling profit may be sustained to full year. Half year profit stands at about a quarter of the N3.32 billion after tax profit the company posted at the end of 2018.
The cost-income functions that delivered the profit of last year have altered significantly this year. Net insurance claims and underwriting expenses were flat last year and so total underwriting expenses ended flat compared to nearly 22 percent advance year-on-year at the end of first half of this year. A big factor is a foreign exchange gain of close to N2 billion at the end of last year that turned into a loss at half year.
Continental Reinsurance posted net premium income of N17.2 billion at the end of June 2019, which is a year-on-year increase of 14.4 percent. This is breaking out from a flat growth recorded last year when net premium income ticked downwards to N23.1 billion at the end of the year.
The good news on income is followed by bad news on insurance claims – which surged up by over 35 percent to N9.6 billion over the review period. This is a surprising leap from a decline of 5 percent in insurance claims and loss adjustment expenses at the end of 2018. A major growth in insurance claims recovered lowered the growth in net claims expenses to about 25 percent compared to flat growth in the preceding year.
Underwriting expenses followed the same pattern, speeding up at close to 19 percent year-on-year at the end of June 2019 from a flat position at the end of last year. Total underwriting expenses rose by close to 22 percent to N16.6 billion at the end of half year operations after closing flat last year.
The result of the underwriting business at half year is a drop of nearly 60 percent in underwriting profit to N536 million. The company recorded a decline of 8.5 percent in underwriting profit in 2018 to less than N1.2 billion. A further drop looks likely for Continental Reinsurance at the end of this year though a significant reduction in the margin of drop from the half year record can be expected.
At about N1.16 billion, interest income is maintaining a slowing growth from 11 percent last year to 3 percent at half year. The company held an investment portfolio of largely fixed income securities of close to N13 billion at the end of June 2019.
There was an improvement of 35 percent in other income but the figure could not make a noticeable impact at N142 million. By far the biggest adverse impact on the income statement at the end of half year is a plunge in foreign exchange gain from N1.1 billion in the same period last year to a loss of N50 million at the end of June 2019.
The adverse impact was further extended by a 47 percent growth in administrative expenses to N612 million during the review period. The company closed the period with an after tax profit of N864 million, down by over 64 percent year-on-year.
The outlook for the second half indicates that the company is likely to end the 2019 financial year with the lowest profit figure in five years. It saw a major profit recovery and growth last year from a sharp drop in 2017. A much bigger profit drop is indicated for Continental Reinsurance for 2019.
The company is a pan-African reinsurance organisation operating in more than 50 African countries with three regional offices in Nigeria, Cote d’Ivoire and Tunisia. It reinsures all classes of insurance business within and outside Nigeria with a product mix that includes a full range of treaty and facultative reinsurance services.
The company’s equity is held 65.45 percent by foreign investors and 34.55 percent by Nigerians. It is presently in the process of being acquired fully by CRe African Investments Limited. The company said the initiative is in order to effect a restructuring exercise that would consolidate the Nigerian operations and reposition it for enhanced competitiveness in the global insurance market.
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