Covid-19: Hard Knock on Insurance Stocks’ 2020 Q2 Earnings

Insurance companies like every other businesses are facing many challenges as a result of COVID-19 pandemic. However, it is expected that many or few of these businesses as the case may be would definitely survive this odd, depending on the approach and response deployed  to these challenges which will influence their resilience and ultimately how they will fare going forward.

Insurance business in Nigeria generally can be said to be underperforming as most people do not take it seriously. Despite several awareness campaign on the importance of taking insurance policy to secure, property, life and investment against future eventualities, people still perceive taking insurance as waste of resources because the future occurrence they are trying to protect may not happen. Except for third party insurance policy for vehicles that people are compelled to take, other insurance policies over the years have experienced low patronage.

In developed countries, insurance firms are far bigger than banks; in fact most of them own banks. Interestingly, it is the opposite in Nigeria as some banks own insurance firms as part of their subsidiaries. Sadly enough, insurance firms in Nigeria are regard as ‘poor cousins of banks’.

The outbreak of covid-19 pandemic I guess should bring about a paradigm shift in the perception of Nigerians about insurance policy as the recent occurrences, especially of sudden death and fire accidents should move most people pay attention to their health and also insure against unexpected. The impact of COVID-19, particularly on households should necessarily create a deeper awareness for insurance, as it has made most people to come to terms with the importance of risk coverage. A group of leading insurance companies comprising Leadway Assurance Company Limited, Custodian & Allied Insurance Plc, Lasaco Assurance Plc, AIICO Insurance Plc, Tangerine Life Insurance Limited and Ark Insurance Brokers Limited will partner Lagos State to pool together a health insurance cover of N5billion ($13.89 million at 360/$) for state COVID-19 health workers and volunteers.

 

For insurers, the fallout from the COVID-19 outbreak includes a surge in health, travel and business interruption claims, pressure on sales from reduced business activity, and less use of face-to-face channels. There were reports of insurers paying millions of naira claims through their e-payment channels notwithstanding the lockdown on businesses occasioned by the virus. For instance, companies like AIICO Insurance, FBN Insurance, Leadway, among others, were paying claims notwithstanding the lockdown, just as firms such as Wapic Insurance, Allianz Nigeria, Leadway, Old Mutual refunded some percentage of claims to their clients as a way of cushioning the effect of the lockdown.

The gathering economic slowdown emanating from the pandemic is also driving interest rates even lower and increasing credit risk exposures from businesses facing possible default. This may raise the possibility of regulators asking for extraordinary solvency tests to ensure insurers can withstand the immediate and knock-on impacts. Put together, this daunting list of issues represents a stern test of resilience for an industry already weighed down by  low interest rates and slow growth in mature markets.

Within and outside the shores of Nigeria, one of the negative impacts of the pandemic on insurance is that whereas it is a new development that is not covered by any known insurance policy, based on special consideration, members of the insuring public are insisting that insurers pay some business interruption claims.

For instance, in Nigeria, most aviation passengers, insist that insurers should refund premium they paid on their travel insurance policy because of cancellation of their flights due to the state ordered lock down, whereas insurers are saying that legally, the only premium that should be refunded is that paid under aircraft hull insurance as stipulated by aviation insurance contract regulation.

Solvency at this point of economic realities could be an important considerable factor when making an investment decision especially as it concerns any insurance company.

In the wake of COVID-19, questions about insurance company solvency positions have been raised. It’s been discussed in some of the regulatory commentaries that have been released; analysts have being focusing on the topic; many ratings agencies have negatively changed their industry outlooks; and of course, insurance companies themselves are just at the beginning of making public disclosures.

Solvency according to Investopedia refers to an enterprise’s capacity to meet its long-term financial commitments”. Wikipedia also says that “a solvency ratio measures the extent to which assets cover commitments for future payments, the liabilities”.

Like we did agreed last week, as investors, the length and breadth of this discussion is to x-ray how COVID-19 will affect our expectations in terms of naira and kobo as regards to our relative investments.  In this case, what impacts will it have on the insurers’ solvency positions? But more importantly, will the impact be so significant that it threatens the very existence of certain insurance companies themselves?

Let us limit this review to effects of covid19 on the second quarter performance.

 

Q2 Earnings Outlook

More than any other sector, I think the second quarter earnings of insurance firms will most definitely go under pressure and will grossly reflect more of the challenges stated overleaf.

Profit margins will of necessity thin out with many insurance company reporting loses but definitely there are some insurers that will still against all tides emerge profitable.

Let us look at their strength one after the other.

 

AIICO INSURANCE

AIICO Insurance recently submitted an application to the Nigerian Stock Exchange for the approval and listing of a Rights Issue of Four Billion, Three Hundred and Fifty Seven Million, Seven Hundred and Seventy Thousand, Nine Hundred and Fifty Four (4,357,770,954) ordinary shares of Fifty Kobo (N0.50) each at Eighty Kobo (N0.80) per share, on the basis of five (5) new ordinary shares for every thirteen (13) ordinary shares held.

Half year earnings history AIICO Insurance for the past five years shows consistent growth in profit after tax and earnings per share from 2015 to 2019, except from a mild drop in 2017 reports.

The firm grew its earnings per share from 11kobo in 2015 to 20kobo in 2016.

As at 2017, the half year earnings dropped to about 14kobo from the previous 20kobo realized the previous period. The underwriting firm achieved a profit after tax of N1.93 billion and earnings per share of 27 kobo thereafter in the second quarter of 2018, this represent a growth of 95.6% respectively from the profit after tax of N988.29 and earnings per share of 14 kobo achieved in the second quarter of 2017.

In the second quarter of 2019, profit after tax and earnings per share of AIICO Insurance grew further by 52.28% to settle at N2.94 billion and 41 kobo respectively.

Under normal circumstance, based on past Q2 earnings history, the underwriting firm has the capacity to improve on its Q2 earnings. However, due to the impact of covid-19 on businesses, we do not expect a fantastic Q2 earnings for most insurance companies. We expect the Q2 profit after tax and earnings per share of AIICO insurance also would decline below what was achieved the previous year.

In price performance, the stock has also been very rewarding and resilient. Rewarding in such that, currently trading at 99kobo, the stock has within the last 10 years ranged between N1.40 and 49kobo; and in terms of resilience, the stock as over the years remained one of the few that has weathered the storm of financial crisis cum market crash simply because at the current price, the stock is still trading not far below where it use to be before 2008 market crash.

It may not be a bad one to look at.

Below is the half year earnings history of the firm for five years

 

CONSOLIDATED HALLMARK INSURANCE

It seems very much that primary market action is the immediate surest avenue for the insurance firms to maintain their financial health. Though extended, this insurance firm also like its counterpart was going   to proceed on a Rights Issue and increase its capital base by N1.05 billion. This is in effort to meet up with the minimum paid up capital as directed by its regulator.

 

The management believes its recent capital raising efforts in the last couple of years had been successful due to the belief of shareholders in the intrinsic value of the company. The need for higher working capital and risk retention capacity had led the firm to embark on raising funds through rights issue and private placement in the last two years, both of which were fully subscribed.

The general insurance and special risks underwriter in the second quarter of 2018 started recording growth in its topline and bottom line figures. In the second quarter of 2015, it achieved profit after tax of N333.73 million and earnings per share of 4 kobo. In the second quarter of 2016, profit after tax and earnings per share dropped to N259.14 million and 3 kobo respectively. Q2 earnings dropped further in 2017 as the firm reported profit after tax of N119 million and earnings per share of 1 kobo. However, in 2018 Q2 financials the firm bounced back as profit after tax grew to N148.27 million with the earnings per share of 2 kobo. In Q2 2019, profit after tax grew to N332.37 million and earnings per share grew to 4 kobo from 2 kobo.

Based on the current reality of business disruption caused by covid-19, Q2 earnings of Consolidated Hallmark Insurance may not be better than what was achieved in 2019.

In terms of price performance, the stock has a very good rallying history. It currently trades at 49kobo which incidentally is the highest it has traded this year with a low of 27kobo.

Below is the half year earnings history of the firm for five years

 

CORNERSTONE INSURANCE

This company last year was said to be in merger talks with some insurance companies ahead of the recapitalization deadline set by the National Insurance Commission (NAICOM) for the insurance sector in a move to strengthen its capital base.

According to the Group Managing director of the company, consolidation with other market players was considered more efficient compared to just seeking fund raising.

 

The insurer also claimed to have risen to exceed the N18 billion new minimum capital requirement by the National Insurance Commission (NAICOM).

 

After hitting a low point on huge claims payment in its 2016 and 2017 financial year, the composite insurer is also back to profitability; came out from its loss position of N1.7 billion in 2017 to N1.8 billion profit in 2018.

 

It was also widely rumored that the company in distress sold off its head office building in Lekki of which the management of the company admitted the sale would only boost its liquidity and no cause for alarm.

Pre-covid-19, Cornerstone Insurance assured to be in a comfortable financial situation to scale through the then recapitalization exercise. Can same claim still be said to be valid?

Just like any other businesses, Q2 earnings of Cornerstone Insurance may not be better than what was achieved in in the recent previous performance on the back of covid-19 distress.

Below is the half year earnings history of the firm for five years

 

LASACO ASSURANCE

Half year earnings history of LASACO Assurance shows that the earnings per share of the firm has been revolving around 5 kobo and 7 kobo.

In the second quarter of 2015, LASACO achieved the profit after tax of N396.18 million and earnings per share of 5 kobo. In Q2 of 2016, profit after tax grew to N492.88 million and earnings per share rose to 7 kobo. However Q2 profit after tax in 2017 declined to N387.45 million and earnings per share dropped to 5 kobo. In 2018, Q2 profit after tax dropped further to N382.46 million while earnings per share remained at 5 kobo. In 2019, Q2 profit after tax rose to N479.83 million and earnings per share grew to 7 kobo.

Based on current economic reality Q2 earnings of LASACO Assurance for 2020 may fall below what was achieved the previous year.

Below is the half year earnings history of the firm for five years

 

LAW UNION & ROCKS INSURANCE

Q2 Earnings history of Law Union & Rocks Insurance for 5 years shows decline in profit after tax and earnings per share. In the second quarter of 2015, the underwriting firm achieved a profit after tax of N433.82 million and earnings per share of 10 kobo. In 2016, Q2 profit after tax dropped to N307.33 million and earnings per share dropped to 7 kobo. Profit after tax and earnings per share in 2017 rose to N318.75 million while earnings per share remained at 7 kobo. In 2018, the profit after tax of the firm grew to N364.23 million and earnings per share rose to 8 kobo. In 2019, Q2 profit after tax dropped to N102 million and earnings per share likewise declined to 2 kobo from 8 kobo.

Q2 earnings of the underwriting firm for 2020 might fall short of what was previously reported in 2019.

Below is the half year earnings history of the firm for five years

 

LINKAGE ASSURANCE

Linkage Assurance in the second quarter of 2015 achieved profit after tax of N485 million and earnings per share of 6 kobo. In 2016, Q2 profit after tax grew to N751.8 million and earnings per share rose to 9 kobo. In 2017, Q2 profit after tax grew to N2.3 billion while earnings per share appreciated to 31 kobo. In 2018, Q2 profit after tax declined to N493.77 million and earnings per share dropped to 6 kobo. In 2019, Q2 profit after tax appreciated to N572 million while earnings per share also grew to 7 kobo.

Q2 earnings of the Linkage Assurance for 2020 might fall short of what was previously reported in 2019.

Below is the half year earnings history of the firm for five years

 

AXA MANSARD INSURANCE

Half year earnings history of AXA Mansard for five years shows a downward trend in profit after tax and earnings per share.

AXA Mansard in the second quarter of 2015 achieved profit after tax of N1.07 billion and earnings per share of 10 kobo. In 2016, Q2 profit after tax appreciated to N2.26 billion and earnings per share grew to 22 kobo. In 2017, profit after tax drooped to N2.12 billion and earnings per share likewise declined to 20 kobo. In 2018, profit after tax declined further to N1.54 billion and earnings per share dropped to 15 kobo.  In 2019, profit after tax declined further to N1.42 billion while earnings per declined to 14 kobo.

Based on the past Q2 earnings of the underwriting firm and also considering the impact of covid-19 on businesses, Q2 earnings of AXA Mansard for 2020 will definitely fall below the performance of what was reported the previous year.

 

MUTUAL BENEFIT ASSURANCE

Mutual Benefit Assurance in the second quarter of 2015 achieved a profit after tax of N2.66 billion and earnings per share of 24 kobo. In 2016, Q2 profit after tax dropped to N363.58 million and earnings per share dropped to 3 kobo. Profit after tax in 2017 rose to N776.5 million and earnings per share appreciated to 7 kobo. In 2018, profit after tax declined to N650 million while earnings per share dropped to 6 kobo. In 2019, profit after tax rose to N1.43 billion and earnings per share grew to 13 kobo.

 

NEM INSURANCE

NEM Insurance over the years has grown its Q2 earnings as profit after tax and earnings per share. In 2015, NEM Insurance achieved profit after tax of N1.58 billion and earnings per share of 30 kobo. Profit after tax in 2016 dropped to N1.12 billion while earnings per share declined to 21 kobo. In 2017, profit after tax rose to N1.25 billion and earnings per appreciated 24 kobo. In 2018, profit after grew to N1.51 billion and earnings per share rose to 29 kobo. In 2019, profit after tax grew to N1.61 billion and earnings per share rose to 31kobo.

All other things being equal, NEM insurance as the capacity to grow its Q2 earnings in 2020, based on the half year history of the firm for 5 years. However, due to the current economic realities caused by Covid-19, Q2 earnings of NEM Insurance might fall below expectation.

 

 

ROYAL EXCHANGE

Royal Exchange Plc in the second quarter of 2015 achieved profit after tax of N170.24 million and earnings per share of 3 kobo. In 2016, Q2 profit after tax grew to N171.14 while earnings per share remained at 3 kobo. In 2017, profit after tax grew to N203.3 million and earnings per share appreciated to 4 kobo. In 2018, profit after tax declined to N19.45 million while earnings per share dropped to 0.4 kobo. In 2019, the firm reported a loss of N631 million and a negative earnings per share of 12 kobo.

Based on the half year earnings history of the firm and the current economic reality caused by covid-19, second quarter earnings of Royal Exchange may not be that fantastic.

 

PRESTIGE ASSURANCE

Prestige Assurance has shown consistent growth in its second quarter earnings since 2015. Except for the fact that earnings per share declined to 6 kobo in 2019 from the earnings per share of 7 kobo achieved in 2018.

Prestige Assurance in the second quarter of 2015 achieved a profit after tax of N54.79 million and earnings per share of 1 kobo. In 2016, Q2 profit after tax grew to N189 million and earnings per share appreciated to 4 kobo. In 2017 profit after tax grew further to N349.75 million and earnings per share rose to 6 kobo.  Profit after tax in the second quarter of 2018 grew further to N367.44 million while earnings per share rose to 7 kobo. However in 2019, profit after tax declined to N346 million while earnings per share settles at 6 kobo.

 

REGENCY ASSURANCE

Regency Assurance in the second quarter of 2015 reported a profit after tax of N109.67 million and the earnings per share of 2 kobo. In 2016, profit after tax grew to N294.3 million and earnings per share appreciated to 4 kobo. In 2017, profit after tax grew further to N411 million and earnings per share rose to 6 kobo. Profit after tax however dropped to N284.78 million and earnings per share dropped to 4 kobo in 2018. In 2019, profit after tax bounced back as it appreciated to N317.29 and earnings per share rose to 5 kobo.

 

WAPIC INSURANCE

Wapic Insurance in the second quarter of 2015 reported a profit after tax of N18.79 million with earnings per share of 0.1 kobo. In 2016, profit after tax grew to N168.64 million and earnings per share grew to 1 kobo. In 2017, the profit after tax of the firm grew to N395.7 million and earnings per share grew to 2 kobo. In 2019, profit after tax declined to N61.1 million and earnings per share declined to 0.3 kobo.

In 2020, profit after tax appreciated to N305.02 million and earnings per share also grew to 1 kobo.

Based on the half year earnings history of the firm and the current economic reality caused by covid-19, second quarter earnings of Royal Exchange may not be that fantastic.

 

 

Commenting on the Q2 earnings expectation for insurance firms, a capital market expert stated thus:

“Insurance companies are service firms. The product they sell is service. It is a product that people can do without. As at the time the economy was under lockdown, nobody was talking about insurance. It does not form part of essential commodity that people cannot without. Whether it is house insurance, fire insurance or marine insurance. At the point of lockdown, everybody can do without insurance product. The impact of covid-19 is going to hit insurance firms very well. If you look at the relevance of insurance in the midst of lockdown; it is something that people can do without. Even when people are voluntarily flouting insurance, when everything was opened; is it when there is lockdown that people will not run away from them?”

 

Another capital market expert is of the opinion that Insurance firms are not likely to be much affected by covid-19. According to him

“Insurance is a business whose contract is at least for a year. They are not business that is likely to be affected by covid-19 because anything you are going to insure, you are insuring it not for 3 months, but for one year. So I think their business is not likely to be much affected by covid 19 because their insurance business is not short term, at least, it is one year. Since their business nature is annually, whether there is covid-19 or not, it will continue to run. Now that there is covid-19, I think that insurance firms will likely have more business on the life insurance. Because when people are afraid of death, they will insure their life rather than before. Insurance business is likely going to look better. If you are afraid of death, you insure your life. When you insure your life, you get premium and they earn more”

 

 

 

 

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