Agusto & Co Limited, leading Pan African credit rating agency in Nigeria for over 26 years has assigned a "Bb" rating to the Insurance Industry in its newly published 2019 Nigerian Insurance Industry report.
The assigned rating reflects heightened risks in the country's geopolitical and macroeconomic environment, weak gross domestic product (GDP) growth and inflationary pressures. In addition, dwindling crude oil prices and a contractionary monetary policy stance aimed at forestalling speculative activities on the naira both impact the assigned rating.
Agusto & Co's rating takes into cognisance the size and strategic importance of the Insurance Industry in Nigeria. Though relatively small, with a Gross Premium Income as a percentage of GDP at 0.4%, the Industry's economic importance is noteworthy. The Agency highlights the primary responsibility of insurers in supporting businesses and individuals recover from unexpected losses promptly, through claims payments.
The Insurance Industry promotes economic growth by mobilising domestic savings most of which is used to fund the budget deficit through investments in treasury bills. According to an insurance analyst at the rating agency, there has been an influx of foreign direct investments (FDIs) over the last two years which has resulted in changes in the Industry's shareholding structure. A large number of these investors are prominent international insurance companies seeking to take advantage of lurking opportunities in Africa, and indeed Nigeria. Nigeria has a large underserved population which presents enormous growth opportunities in the retail and corporate markets. In addition, increased activities in the oil & gas, construction and manufacturing sectors are bright spots for growth in the Industry. Investors remain attracted by low share prices of the few listed insurance companies on the Nigerian Stock Exchange (NSE) and NASD OTC Securities Exchange which makes acquisition relatively cheaper. 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 circa ₦160 billion (~$438.4 million at ₦365/$).
According to Agusto & Co, the assigned rating recognises the Industry'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. Profitability lags behind the Industry's 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 predominantly 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 Agency's short-term outlook on the Industry is stable. The performance of 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.