Cornerstone Insurance: Another Windfall To The Rescue
Cornerstone Insurance Plc reaped a windfall of over N3 billion in the third quarter that has enabled the company fill up a big equity hole in the balance sheet. This is further to a windfall of close to N3 billion in 2018 that leveled up more than one-half of over N4 billion retained deficit at the end of 2017. In the main however, Cornerstone’s core business of underwriting continues to lack the strength to drive profit growth.
Last year, it was a share of profit from joint venture that changed the face of the company’s income statement and produced a big turnaround. This time around, it is fair value changes in its investment in MTN. The gain turned a drop in underwriting profit into over four times growth in after tax profit at the end of the third quarter in September 2019.
The difference is a high jump in an after tax profit from N502 million at half year to N2.82 billion at the end of the third quarter. That has narrowed the gap between this year’s interim profit numbers and last year’s closing profit figure of over N3 billion.
At half year, the question mark on the company’s earnings outlook for 2019 hanged over the prospects for filling up outstanding retained deficit of N1.6 billion. Big profit was needed not only to do that but also to position the company for dividends. Directors need a cash dividend payout at the end of this year to excite investors towards a new capital injection.
The company found the panacea from the financial asset revaluation that it has carried into the profit and loss account in the third quarter. With that, accumulated losses are now off the balance sheet and retained earnings of N624 million have appeared.
Cornerstone Insurance is on the way to repeating the earning pattern of robust second half experienced last year. As much as 85 percent of the profit of last year was earned in the second half. This year so far, over 82 percent of the nine-month profit was earned within the third quarter.
Management is on track to building profit for the second year and it is expected to be another big one. The company can hope to put finally behind it, two years of big losses and the resulting retained deficit of over N4 billion in 2017 and move ahead at the end of this year.
As was the case at half year, revenue performance isn’t providing the strength needed to improve profit performance. Net premium income edged up by 2 percent against a slight decline at the end of half year operations.
Reinsurance premium continued to claim an increased share of gross premium income from 46 percent at the end of last year to 52 percent at the end of September. A 51 percent leap in fees and commissions however raised net underwriting income by over 7 percent to N5.28 billion.
A major strength that came from a 20 percent drop in net insurance claims at half year disappeared completely in the third quarter. Instead, net claims expenses grew by over 11 percent to N2.16 billion. This is a reverse movement from a drop of 62 percent in net claims expenses at the end of last year.
The drop in net claims expenses at half year had provided a cost saving centre that permitted a 52 percent advance in underwriting profit over the review period. The position changed drastically in the third quarter with close to 28 percent rise in net underwriting expenses and more than 11 percent drop in underwriting profit.
Growth in investment income accelerated significantly from 8 percent at half year to over 26 percent to N909 million at the end of the third quarter. The big boost came from a change of direction in fair value changes in financial assets from a drop of 33 percent at half year to an upsurge of 486 percent at the end of the third quarter.
At N3.06 billion at the end of September, the upturn in fair value changes in financial assets was the most significant event in the company’s income statement in the third quarter. The figure was more than twice the underwriting profit of N1.47 billion during the period. It is the singular event that powered profit improvement against a drop in underwriting profit and increased management expenses.
The company closed the third quarter operations with an after tax profit of N2.82 billion – advancing from about N502 million at half year and 328 percent year-on-year. Last year, a windfall of N2.9 billion share of profit from joint venture in the final quarter lifted after tax profit from N656 million in the third quarter to N3.02 billion at full year.
Whether or not the joint venture profit will again drop in the final quarter, the gain in financial assets valuation has saved the day for Cornerstone Insurance. How to recharge the core business of underwriting to drive profit growth rather than count on windfalls to dress up earnings should be on management’s strategy paper going forward.
The company lifted earnings per share from 3 kobo at half year and from 5 kobo in the third quarter of last year to 19 kobo at the end of September 2019. This is almost matching the 20 kobo per share the company earned at the end of 2018.
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