Leading Pan African credit rating agency, Agusto & Co Limited, has assigned “Bb“ rating to the Nigerian insurance industry in its newly published 2019 Nigerian Insurance Industry report.
The rating, Agusto explained, reflects heightened risks in the country’s geopolitical and macroeconomic environment, weak gross domestic product (GDP) growth and inflationary pressures.
The assigned rating, it continued, recognises the sector’s satisfactory capitalisation ratios which is expected to further strengthen on the back of anticipated changes in capital requirements for operators across different segments, although it notes that a number of fringe players remain undercapitalised.
Added to this, the company said, are: dwindling crude oil prices and a contractionary monetary policy stance aimed at forestalling speculative activities on the naira both impact the assigned rating.
The rating takes into cognisance the size and strategic importance of the insurance industry in Nigeria, which though relatively small, having a gross premium income as a percentage of GDP of 0.4%, even as its economic importance is noteworthy.
The agency highlighted the primary responsibility of insurers in supporting businesses and individuals recover from unexpected losses promptly, through claims payments, while promoting economic growth via mobilization of domestic savings. This is mostly used to fund government budget deficits through investments in treasury bills.
According to insurance analysts, there has been an influx of foreign direct investments (FDIs) in the industry over the last two years, which has changed in its shareholding structure. A large number of these investors are prominent international insurance companies seeking to take advantage of inherent opportunities in Africa, and indeed Nigeria.
Total market capitalisation of about 26 underwriters listed on both the NSE and the NASD OTC Securities Exchange as at December 2017 collectively amounted to ₦160bn (about $438.4m at ₦365/$).
Industry profitability, it noted also, lags behind its banking counterpart, which recorded an estimated return on average equity (ROE) of 13.3% in 2018 (Insurance Industry ROE: 9.8%).
Furthermore, the Industry’s ROE was significantly lower than the average yield on 365-day treasury bills of about 14% in the same year. From the agency’s findings, key pressure points are rising claims expenses, high underwriting & operating costs driven by investments in growing its agency network to service the retail market.
Agusto & Co pointed out that although investment management has improved over time, returns remain subpar due to limited investment channels which are mainly money market securities.
The Industry’s increasing administrative costs and a large life deficit (elicited by the impact of interest rates volatility on asset/liabilities mismatches in the life business) are also contributors to subdued operating profit margins. The Insurance Industry’s operating cash flows remain satisfactory, upheld by marked growth in unearned risk reserves and higher outstanding claims.
Notwithstanding, the Agusto said its short-term outlook on the Industry is stable, just as performance of the underwriters is expected to improve as political uncertainties subside and business operations pick up in the second half of the year. Buoyed by stronger regulatory support and anticipated recapitalisation requirements from the National Insurance Commission (NAICOM), the Insurance Industry’s underwriting capacity is expected to improve in the medium to long term.