Royal Exchange: Can It Break The Chain Of Losses?
Will Royal Exchange Plc break the chain of four years of running losses or extend the loss to the fifth year is the question mark on the company’s earnings outlook for 2019. The company made a surprising break out performance in the third quarter that seems to have stopped it short of building one of the biggest losses in five years.
A profit of N535 million came like a windfall in the third quarter, wiping off a good part of a half year loss of N631 million. The company still ended the nine months of the year in a loss, raising hopes for a possibility of a turnaround at full year as well as doubt whether the third quarter miracle can be repeated in the final quarter.
A drastic cut in the loss position has, at least, landed the company a few steps away from profit. That leaves a chance for ending four-years of running losses this year should the upturn in earnings extend to the final quarter.
Royal Exchange has been on a stream of losses since 2015 when it incurred a loss of N1.3 billion. It finished the 2018 operations at a loss of N156 million, which was a drop from a loss of N969 million in 2017. It had been expected that the company would open the current year at a profit.
Rather than a profit, it built a loss of N187 million in the first quarter and expanded it to N444 million in the second quarter. A change of fortune however happened in the third quarter, which has rekindled hopes for a possible return to profit this year.
Returning to profit is only one leg of the hurdles ahead for the company. Filling up the hole in the capital account created by four years of running losses is another mountain ahead of management. The company’s equity stock is impaired to the tune of over N3 billion accumulated losses as at the end of September 2019.
The outstanding performance in the third quarter came from cost savings from two major expense lines. Management expenses dropped by over 32 percent quarter-on-quarter and a tax credit of N130 million was realised against a tax expense of N43 million over the same period. The cost savings from the two angles are the fortune changers that turned a marginal decline in net income into an upsurge of 483 percent in after tax profit in the third quarter.
At the end of the third quarter, net premium income was flat at N6.92 billion. Net underwriting income went down by 4 percent to N7.26 billion, reflecting a 50 percent drop in fees and commissions.
The company recorded a drop of over 27 percent in insurance claims and benefits incurred to about N3.30 billion at the end of September 2019. The cost saving however was claimed by a drop of 69 percent in claims recovered from reinsurers. Only about 2 percent decline in net claims to N2.75 billion was recorded during the period.
A marginal cost saving from net claims expenses was more than consumed by a 12 percent rise in underwriting expenses to over N3 billion at the end of the third quarter. Total underwriting expenses grew by more than 4 percent to N5.94 billion against a decline in net underwriting income. Underwriting profit therefore dropped by about 31 percent to N1.3 at the end of the third quarter.
Other revenue lines of the company also closed on the down side during the review period, which undermined profit capacity. Against a net interest income of N54 million in the same period last year, the company reported a net interest expense of over N372 million at the end of the third quarter.
Net fair value gain of over N155 million in the same period in 2018 also turned into net fair value loss of N77 million at the end of September 2019. A further disappointment came from investment income, which dropped by 24 percent year-on-year to N573 million during the period.
A favourable development came from over 127 percent advance in other operating income to N605 million. That helped the company to moderate the earnings disappointments. Yet, it still suffered a loss of more than 33 percent in net income – which amounted to a little over N2 billion at the end of the third quarter.
The critical development during the period is a 26 percent drop in management expenses year-on-year to about N2.1 billion. This reflects a drop of over 32 percent in management expenses achieved within the third quarter.
Royal Exchange ended the third quarter operations in a net loss of N96 million compared to an after tax profit of N111 million in the same period last year. The company’s third quarter profit last year turned into a full year loss of N156 million.
The full year outlook this year carries a question mark. Will the company make a reverse movement of turning a third quarter loss into profit or build a bigger loss at full year? Profit prospects rest on a singular note of holding management expenses down to full year. That again depends on preventing further kinks on underwriting expenses in the final quarter.
Royal Exchange group operates through a number of subsidiaries in life, healthcare and general insurance businesses as well as financing, asset management, trusteeship and microfinance banking services. The company announced last week that Luxembourg-based InsuResilience Investment Fund has acquired 39.25 percent of equity stake in its subsidiary – Royal Exchange General Insurance Company Ltd.
Proceeds of the investment are expected to enhance the underwriting capacity of the company in the agricultural business. The company is a key player in agriculture insurance and hopes to capture an estimated 30 million under-insured small-scale farmers in Nigeria.
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