The burden of insurance stocks

The insurance sub-sector of the Nigerian financial services industry is overwhelmed by many challenges, including narrow product development, a dearth of innovation and a pervading weak corporate governance structure, which have led to low insurance uptake at one percent and poor returns.

The above have affected investors’ sentiments about the industry, which has affected value of insurance stocks. Especially, narrow product focus by the Nigerian insurers has continued to generate low premium income. For example in 2016, gross premium income (GPI) of over ₦356 billion was generated through mainly six compulsory insurance policies – third party motor insurance, employer’s liability insurance, group life insurance, builders’ liability insurance, healthcare professional indemnity insurance, and occupiers liability insurance.

The products and services are not only concentrated in statutory insurance policies but also within the formal sector, which only represents about 40 percent of the economy while the informal segment accounted for 60 percent.

Little wonder the value of the sector on the floor of the Nigerian Stock Exchange (NSE) has been declining day by day as shareholders have lost hope in the sector.

The current investor apathy on the sector is very much unlike late 2007 when shareholders were hoping for a bright future in the industry on government implementation of 45 percent local content policy in the oil and gas sector, which was expected to significantly boost insurance income. But operators did not take the advantage of the government policy for lack of innovation, poor governance and strategic direction.

Though most insurance companies went into the market to raise funds for the recapitalization of the sector and rounded off their recapitalization programme in December 2007 with sector outlook brightened for more investment.

However, the industry has struggled in the market as poor returns have put many investors adrift. Today, one could say that the general assessment of the sub-sector on the floor of the NSE is below average in terms of standards and expectations.

Many insurance stocks are underweight and fallen in value much below their listing price levels, which market analyst say is as a result of poor performance.

Again, the implementation of new pricing methodology by the NSE has seen 15 insurance stocks capitalisation dropping N16.488 billion between January 29, 2018, and last Friday (March 9, 2018). The management of the NSE commenced implementation of one kobo rule on January 29, 2018, from an initial floor of 50 kobo per share.

What this means is that stocks can now trade as low as one kobo per share. Currently the insurance stocks that trade below 50 kobo include Equity Assurance, Consolidated Hallmark Insurance, Niger Insurance, Regency Alliance Insurance and Royal Exchange Insurance.

Others are Mutual Benefit Insurance, Sovereign Trust Insurance, Standard Insurance, Unity Kapital, African Alliance Insurance, Unicorn Diversified Holdings, Prestige Insurance, Cornerstone Insurance and Guinness Insurance.

Investors are worried about the free fall in insurance stocks prices on the exchange and some have called on the regulators of the market to take action towards mitigating the problems that are responsible for the sub-optimal performance in the sector.

As investments in insurance stocks steadily depreciate in value, there is the need for all regulatory agencies to immediately review some of the laws and practices that are responsible for the development. Asides reviewing industry laws, there should be new approaches to be devised in order to enhance optimum efficiency and forestall further stagnation in their share prices.

The situation is dire: Five insurance companies in the country are risking regulatory sanction over their inability to curtail their management expenses, which surpasses their premium income.

The insurance industry regulator, the National Insurance Commission (NAICOM) should step up its oversight function in the industry and go beyond its persuasive approach to fully sanction erring companies flouting regulations especially regarding cut-down of management expenses.

The insurers involved should be heavily sanctioned since their actions affect their solvency margin, which would make them dip into their shareholders’ funds to run the affairs of their respective firms.

According to data sourced from the umbrella body of operators, the Nigerian Insurers Association (NIA), NICON Insurance Company Limited in its 2016 financial year, generated N92 million gross premium and spent N453.7 million, translating to 4.93 percent on management expenses, while Old Mutual Life Assurance Company Limited had N1.30 billion gross premium and spent N1.83 billion, representing 1.41 percent on management expenses.

SpringLife Assurance Plc., on its part, had N32 million premium income and spent N105.2 million on its management in the same financial year, UNIC Insurance Plc. had N38.7 million gross premium income and spent N244.9 million with Investment & Allied Insurance Plc. having N4.3 million gross premium and spent N169.4 million on its management.

The Nigerian insurance industry is one of the most under-performing industries in the country with the gross premium of $1.9 billion it generates. It contributes only 0.73 percent to the Nigerian GDP compared to its counterparts in Kenya and South Africa, which accounted for 17 percent and 3.4 percent of those countries’ GDPs respectively.

This is despite its immense growth opportunities and the fact that it is highly important in the quest to ensure national development. Equally, the gross premium collected by insurance companies in Nigeria is about $1 .9 billion compared to the $ 3. 8billion collected in South Africa.

It is time for regulators, management of the companies and market makers to bring back the sector to life.