Agusto report reveals poor performance of insurers’ investment portfolios


Matthew Otoijagha

The 2018 Nigerian Insurance Industry report by Agusto & Co. has revealed poor performance of the investment portfolio in the sector.

The 206-page report which also ranked firms in the industry across various financial indicators, also highlighted major challenges contributing to the industry’s low performance, particularly its investment portfolio management, which it stressed requires improvement.

Agusto & Co estimated that the insurance industry’s investment portfolio grew by eight per cent to N762 billion in 2017 (approximately 75% of total assets).

A breakdown of the industry’s investment portfolio showed a 44 per cent allocation to government securities, 18 per cent in bank placements & deposits, 16 per cent in real estate, seven per cent in subsidiaries and six per cent each in quoted and unquoted investments.

“Despite growth in the industry’s investment portfolio, a rise in yields and significant investments in treasury bills, the average returns on investments remained below 10 per cent,” it stated.

The report cited inefficient investment management strategies as the main factor that resulted in the low returns for the industry. With an average investment yield of about nine per cent in 2017, it stated that the real returns was negative considering that inflation closed at 15.37 per cent same year.

“In addition, the average yield of 364 days treasury certificates of about 13 per cent in 2017 was significantly higher than the industry’s average returns on its investment portfolio. Investment manager’s inputs are only made after the fact. Some investment officers who carry out daily investment operations are not adequately equipped for the positions they hold and are not trained in the management of investment securities in the capital and money markets.

“In their opinion, the recruitment process for key positions such as investment manager in the Insurance industry should be improved, while regular trainings need to be held for staff,” it added.

Furthermore, the report noted that limited investment options also plague the investment performance of the sector. Although this is an external factor that underwriters have little or no control over, Agusto & Co expressed belief that the Nigerian financial market is nascent with limited investment channels.

“This is obvious when investment assets available to South African insurance companies are compared with those accessible by Nigerian underwriters.

“Apart from the traditional money market and government securities, real estate investments and equities in quoted and unquoted companies, South African underwriters invest in other financial assets like collaterised securities and equity linked notes, as well as, derivatives such as exchange traded and over the counter (OTC) futures and interest rate swaps.

“Although a naira settled OTC FX Futures market was introduced by CBN in 2016, it is not well traded: an average of about $100 million worth of OTC FX futures are traded weekly in less than 20 deals.

“The South African capital market boasts of a $1 trillion market capitalization (Nigeria: $45 billion) and more than 400 companies listed on the Johannesburg Stock exchange (JSE) (Nigeria: about 170 listed companies) as at December 2017,” the report stated.

Continuing, it pointed out that the large number of listed companies on the JSE, provides a variety of potentially investable companies, particularly those with listings in other stock exchanges throughout the world providing support for equity investments.

In view of persistent weaknesses in the Nigerian macroeconomic environment which has moderated growth in the core underwriting business of the Industry, Agusto & Co noted that efficient investment management strategies would be vital to support the industry’s margins in the short term.

Against the backdrop of a developing financial market and a high interest rate regime, underwriters will require stronger governing oversight and adequate investment expertise to optimize opportunities across all asset classes available within regulatory confines, it added.

“When the three business segments in the insurance industry were analyzed on a standalone basis, it was observed in the report that composite insurers recorded an average yield on investment of about 8.4 per cent with only AXA Mansard and AIICO reporting double digit yields of about 12 per cent each.

“Life insurers recorded a low seven per cent while non-life had 8.3 per cent. Agusto & Co has identified lack of and in some cases non-compliance with in-house investment policies.

“This has negatively affected the equity portfolio of most insurance companies as stop losses or exit strategies in their investment policies are not adhered to, retaining stocks of underperforming companies in the underwriter’s books until they become non-viable and illiquid.

“Decisions to invest in some unquoted companies do not complement the insurer’s overall business strategies and most times are not in line with their core business of insurance.

“Agusto & Co believes that a policy overhaul and enhanced governance oversight is required to forestall a repetition of weak investment decisions going forward. In addition, Investment in real estate accounts for approximately 16 per cent of the Industry’s total investment portfolio,” it stated.

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