Nigeria insurers’ investment yield below 10% on inefficient asset allocation

Despite the bullish returns on government securities, which impacted other money market investments positively in 2017, Nigeria’s insurance industry’s estimated investment yield is still at single digit of about 8 percent, according to Agusto & Co.

The foremost credit rating and research firm says the abysmal poor returns in the industry are as a result of inefficient asset allocation and weak balance sheet management.

In a November economic newsletter seen by Businessamlive, its analysts noted that the woes in the industry are equally compounded by poor regulatory enforcement, weak corporate governance and risk management framework, as well as general inefficiencies.

“The net effect of the financial condition of the industry is its poor return on Equity (ROE) of about 8.4 percent. With inflation averaging 15 percent and one-year Treasury Bill rates at about 18 percent, investors are losing in real returns and can earn higher returns on alternative risk-free assets,” they highlighted.

This is despite the insurance industry controlling an investment portfolio of about ₦723 billion as at FYE2016, with about 60 percent of total investments in money market placements (bank placements and government securities).

Specifically, they noted that 16 percent of the industry’s investments are in real estates that continue to record poor rental yields on account of poor location, poor state of the infrastructure and significant exposure to undeveloped land.

“Unlocking the income potentials of these real estate investments alone could significantly impact the bottom line of the Nigerian Insurance Industry in the near term,” they opined.

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To this end Agusto & Co recommended industry recapitalisation through consolidation and foreign direct investments (FDIs).

“The full implementation of the risk based capital framework, which simply measures capital adequacy in view of underwriting risks, should spur recapitalization in the near term,” they argued, adding that it could be positive for the industry by strengthening underwriting capacity, while fringe players may capitulate.

The industry has undergone two major rounds of capitalisation in the last 15 years leading to a drop in number of operators to 49 from 103.

Currently, the minimum capital requirement for life, non-life, composite and reinsurers are ₦2 billion, ₦3 billion, ₦5 billion and ₦10 billion respectively. At this level, it is clear that capitalization remains inadequate and a significant amount of risks are insured overseas as the capital base of most insurers cannot carry the risks of insuring assets in key sectors such as oil & gas and aviation.

This has led to the consortia of insurance companies pooling funds together to underwrite significantly large risks.

“In our view, there could be major consolidations within the Nigerian Insurance Industry, driven by recapitalisation which would separate the wheat from the chaff,” they stressed.

They however, noted that such recapitalization could only be fast tracked by stronger regulatory oversight leading to an effective corporate governance framework.

“Without these reforms, the industry may continue to falter at the cross roads,” the pointed out.