Universal Insurance: An Unclear Long Jump To Profit
A loss of N173 million that Universal Insurance Plc posted at half-year disappeared suddenly in the third quarter and in its place, a profit of over N90 million appeared at the end of September. Its third-quarter report, however, shows that a profit of about N114 million was realised within the third quarter.
The connection between the company’s half-year loss and the third-quarter profit isn’t clear.
There is a swelling of underwriting profit from N200 million at half year to over N626 million at the end of the third quarter. The growth is a result of a drop in net claims expenses from over N246 million in June to N169 million in September. Total underwriting expenses also fell from N539 million to about N340 million over the same period. Investment income doubled from less than N54 million at half year to close to N107 million at the end of the third quarter.
The effect of these changes is a big leap in net income from below N254 million to N733 million over the three months period. The big jump isn’t evident from a net income of just N80.6 million generated within the third quarter.
At half year, operating expenses of over N420 exceeded net income and yielded an operating loss of N167 million. The position changed in the third quarter. Net income covered operating cost of N633 million and produced an operating profit of N100 million. The company’s report showed that it generated operating profit of below N119 million in the third quarter.
Universal Insurance ended third quarter operations in September 2019 with net premium income of a little over N1 billion, which is an increase of 77 percent year-on-year. Revenue is growing reasonably for the second year after a near doubling in 2018 to N1.15 billion.
On year-on-year basis, net claims expenses changed course from over four fold advance at half year and grew by 134 percent at the end of the third quarter. Also, underwriting expenses detracted from an increase of more than seven times year-on-year at the end of June to a moderated increase of 63 percent in September.
Against a drop of 19 percent in net income at half year, net income grew by close to 38 percent at the end of the third quarter. The company’s management seems determined to avert a loss position for the second year but it isn’t anywhere close to building the big profit it really needs to dress up for recapitalizing the business.
A profit of close to N91 million reported at the end of the third quarter is an upturn from a marginal profit figure in the same period last year. The company closed last year with a loss of N45 million, which topped up accumulated losses to over N3 billion.
A major challenge for the company is coming from operating cost, which is enlarged relative to revenue. At N420 million at half year, operating expenses were more than twice the underwriting profit of N200 million. Despite the swelling of underwriting profit in the third quarter, it remained below operating cost at the end of the period.
The mismatching cost-income relationship has been in place for a while. At the end of last year, operating expenses far exceeded underwriting profit at N702 million compared to N527 million. While underwriting profit dropped by 15.5 percent in the year, operating cost rose by over 465 percent from a positive figure in the preceding year. The preceding year’s total expenses figure was a positive figure produced through a net impairment write back.
The situation continues to prevail so far this year. The total expenses figure of N202 million incurred within the third quarter isn’t that far from a total underwriting income of N231 million generated within the quarter. It is more than seven times the underwriting profit of N27.7 million earned in the quarter and more than two and half times the net income of N80.6 million realised within the third quarter.
Universal Insurance is a general insurance business underwriter and needs to have a minimum share capital of N10 billion by June 2020 in order to remain in business. It appears quite close to meeting the target with a paid-up capital of N8 billion. It doesn’t appear that close however in finding an additional N2 billion to balance up.
The company’s stock has been beaten down in the equities market due to dwindling fortunes, which seems to rule out rights issue for now. Huge accumulated losses keep cash dividend out of the way so that directors have nothing to draw investors near for now. That seems to leave the company with limited options in meeting the raised minimum paid-up capital for its class of insurance business.
Besides, the company already has a large volume of shares in issue, presently 16 billion while profit figures are nowhere close to yielding reasonable earnings per share. How to build profit big enough and consistently to give the company a clean slate of retained earnings is the transformation that needs to happen in the company.
Whether the sudden jump from the loss at half-year to profit in the third quarter would be maintained to full year is the development to watch out for on Universal Insurance. How the rise and fall in claims and underwriting expenses in the interims will end up at full year will determine the possibilities of profit or loss for the company at the end of 201
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