Prestige Assurance: How high underwriting costs crippled its earnings

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Prestige Assurance Plc. like its peers, is grappling with increasing underwriting expenses due to challenging operating environment.Chris Ugwu writes

Nigerian insurance are grappling with reduced premium growth due to economic crunch, higher impairments from oil & gas exposures, and increasing regulatory capital requirements.
This is despite that the insurance industry has witnessed tremendous changes as a result of more reforms embarked upon by the National Insurance Commission (NAICOM), which include the full implementation of risk-based supervision, the introduction of market conduct reforms, claims settlement reforms as well as financial inclusion, among others.
The initiatives are all geared towards enhancing transparency in the industry and improving the general perception and image of insurance business in Nigeria.
However, in spite of these measures, insurance sub-sector is still in a state of abyss. The sub sector has found itself battling a variety of challenges, as they work to improve profitability, grow and compete. And this challenges, which also include negative perception have continued to weigh down on bottom line of most of the companies in the sub sector.
Contrary to the expectation that the Nigerian insurance industry would be the next growth sector, the performance of the industry, in spite of considerable improvement, remained far below optimal.
Nigerian insurers face the same challenges as their counterparts in other emerging markets. As a developing country, the challenges for Nigerian insurance companies will also include enforceability of insurance regulations.
Expectedly, the success of Nigeria’s insurance industry will depend largely on the resolution of the identified challenges especially the enforcement of compulsory insurance. Other key success factors are prompt claim settlement, competent management and corporate governance, innovative products, human capital and technology.
Since the crash of the nation’s capital market in 2008, negative perception has trailed the subsector, which was compounded by inability of more than 85 per cent of the companies in the industry to pay dividend to shareholders for many years.
Market watchers attributed the inability of the sub- sector to rise above the nominal level to crisis of confidence. For instance, the few ones that raised high expectation for good results ended up posting negative financial results.
Prestige Assurance Plc is one of the companies that have gotten fair share from the dwindling fortune of the sub-sector, as the economy continues to wobble.
The group, which began 2018 financial year on a positive note ended the financial year on decline, as the harsh operating environment continued to hurt earnings following increasing underwriting expenses.
However, despite the extensive economic crisis that has seen the company along with other insurance participants badly beaten, the share price of Prestige has enjoyed positive sentiment from investors.
The share price, which closed at 48 kobo per share in May, 2018 increased by 14.58 per cent or 7 kobo in value. At the close of business last Friday, the company’s share price stood at 55 kobo year to date.

Financials
The financial reports that the insurance outfit published for the first quarter 2018 ended March 31, showed that the company performed quite creditably. Its 2018 quarter one (Q12018) financial reports revealed that its topline advanced by 28.83 per cent, as its Gross Premium Written grew by N303 million to N1.354 billion recorded in the quarter against N1.051 billion recorded in the same period in the previous year. Gross premium income in the quarter advanced by 48.89 per cent from N0.99 billion recorded in the first quarter of 2017 to N1.474 billion recorded in the same quarter in 2018.
The insurance firm sustained positive rally in the second quarter ended June 2018 with a growth in profit after tax of 5.1 per cent to N367.444 million in 2018 from N347.745 million in 2017. Profit before tax stood at N510.338 million in 2018 from N697.989 million in 2017, accounting for 8 per cent, while gross premium written was N2.586 billion, 18.5 per cent increase from N2.238 billion recorded in 2017.
However, Prestige began to nosedive in earnings in the third quarter ended September, 2018, as its profit after tax dropped by 6.2 per cent to close at N403.376 million as against N429.917 million recorded a year earlier. The firm’s profit before tax stood at N560.322 million, from N580.969 million reported in 2017, representing a drop of 3.6 per cent, while gross premium written grew by 24.6 per cent to N3.799 billion in 2018 from N3.048 posted in 2017. Total underwriting expenses rose by 54.68 per cent from N1.121 billion in 2017 to N1.734 billion in 2018.
Prestige Assurance Plc’ s net profit for the 2018 financial year dropped by 20.3 per cent to N423.795 million from N531.841 million posted in 2017.
The audited financial reports obtained from the Nigerian Stock Exchange (NSE) showed that the insurance firm recorded a profit before tax of N645.430 million during the period under review, from N697.989 million recorded a year earlier. Underwriting expenses grew by 52.88 per cent, from N1.615 billion in 2017 to N2.469 billion in 2018.
However, gross premium written grew by 25.84 per cent from N3.808 billion in 2017 to N4.792 billion in 2018 financial year. With these, earnings per share declined from 9.90 kobo in 2017 to 7.89 kobo in 2018.
Prestige Assurance Plc has also declared a final dividend of 3 kobo per 50 kobo share for its 2018 financial period. This is subject to shareholders’ approval and appropriate withholding tax.

Capital restructuring
Prestige Assurance had in 2018 undergone a major capital restructuring. According to report, the insurance company had in June 2018 concluded share reconstruction exercise that led to cancellation of about 1.6 billion ordinary shares of 50 kobo each. The reconstruction was undertaken to remove bubble assets.
Under the share reconstruction, the insurance firm had reduced its share capital from N2.685 billion or 5.370 billion ordinary shares of 50 kobo each to N1.909 billion or 3.817 billion ordinary shares of 50 kobo each in the issued and fully paid up ordinary shares of the company.
This led to reduction of N776 million or 1.55 billion ordinary shares. “The share capital so reduced will be applied in writing off the capital of the company which is lost or unrepresented by available assets,” according to a regulatory filing on the reconstruction.
Prestige noted that the essence of the capital reconstruction was to enable it wipe out its accumulated retained losses of N776.511 million.
The company explained that the reconstruction would reposition it on a trajectory for subsequent accumulated retained profit, while creating more value to its shareholders.
Besides, the reconstruction would allow the company to declare dividend and improve its perception in the market thereby making it more competitive.
Shareholders of the insurance company on August 18, 2017 at its 47th annual general meeting (AGM) in Lagos approved the share reconstruction and authorised the board of directors to take necessary actions to implement the share reduction.
Prestige Assurance in November 2018 distributed 1.53 billion ordinary shares of 50 kobo each to its shareholders as bonus shares, almost restoring 1.6 billion ordinary shares that it had cancelled under a recent capital restructuring.
Prestige Assurance distributed bonus shares of 41 ordinary shares of 50 kobo each for every 100 ordinary shares of 50 kobo each held as at the close of business on November 27, 2018.
With then current issued outstanding shares of 3.817 billion ordinary shares of 50 kobo each, Prestige Assurance issued 1.53 billion ordinary shares on the basis of 41 shares for 100 shares.
The company capitalised N782.57 million from its share premium account to pay for the new shares issuance. The scrip issue increased the company’s issued share capital from N1.91 billion or 3.82 billion ordinary shares to N2.69 billion or 5.38 billion ordinary shares.

Outlook
Prestige Assurance recently revealed plans to boost its gross premium income to N9 billion by the year 2021.
Managing Director/Chief Executive Officer of the company, Dr. Balla Swamy, said this on the floor of the NSE at the presentation of the company’s fact behind the figures.
Swamy said that gross premium income is expected to grow from N3.4 billion in 2017; N5.2billion in 2018; N6.6 billion in 2019; N7.5billion in 2020 and N9billion at the end of 2021.
He added that despite the harsh economic conditions faced with acute shortage of foreign exchange, forex, its firm still strived to record significant profits.
According to him, the net premium of the company is projected to grow by 45 percent in 2017 and 60 percent by the end of 2021, while profit before tax will grow from N877million in 2017 to N3.078 billion by the end of 2021. Profit after tax will also rise from N567million in 2017 to N2.093 billion by the end of 2021.
Swamy called on the Federal Government to facilitate ease of doing business, at least by amending the companies’ income Tax Act in relation to computation of insurance taxation, easy entry of foreign investment and provision of suitable environment that guarantees return on investment (ROI).

Last line
Effective risk management, alongside a tailored product offering, are vital to bringing more Nigerians into the market and boost insurance, but unless more focus is given to training new actuaries, insurance firms will continue to bear the brunt of the massive slow-down in economic activity as revenue from premium income drops significantly.

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