2016 insurance sector perfomance

…continued from last week

The pension reforms have become a global issue. Locally, the balance sheets of NICO Life, Old Mutual and Vanguard are direct beneficiaries of the local pension reforms. Smile Life is a victim of specialisation.

The ruling blueprint for Smile Life mandates the company to retain only profitable business until 2019. Sometimes “cherry picking” strategy may prove unsuccessful. Unprofitable business may turn profitable, yes, a lily of the valley with access to the business denied. To this end, Smile Life should tread carefully.

Life insurance policyholders are getting a fairer share of their premium contribution in Smile Life. In 2016, Smile Life paid out K157 million in claims using its K237 million net premium income, culminating in 66 percent claims ratio. Again, customer loyalty should take centre stage drawing a proverbial analogy of “a friend in need is a friend indeed.”

Mixed results characterised the banking sector in the year under review. It was business as usual for National Bank of Malawi and Standard Bank with their eleven digits profit margins gaining momentum each passing year. However, the talking point for National Bank is its recent takeover of Indebank.

Conceptualised as horizontal integration, National Bank strategically seeks to achieve increased market power by acquiring Indebank. National Bank disclosed in its audited financial statement that it had “incurred a one off integration costs in excess of K1.7 billion which affected the reported results.” Whether National Bank could have made a higher profit than K16.6 billion in 2016 with or without the integration activity was reliant on the group’s overall acquisition budget.

Merger and acquisition is inherently a long-term project and requires the board of directors’ input and full support in terms of project budget endorsement, be it fixed or flexible. The group’s retained profits reserved prior to the acquisition could be employed to meet the acquisition and integration costs. In this regard, the 2016 results could be unaffected. In case of budget constraints, an overlap was likely and National Bank could achieve, say, K18 billion ‘profit.’ National Bank will leap the fruits of the integration in the medium to long-term.

The banking sector contracted following National Bank’s takeover of Indebank.

Conversely, the move has eliminated a non-performing bank as evidenced by “pre-integration losses amounting to K400 million” that Indebank had posted, according to National Bank’s performance statement.  In fact, Indebank had been underperforming in the past three years or so. The disposal of Indebank was ultimately a relief to the shareholders having given it a down to line endorsement.

Up surging of FMB’s ‘profit’ from K4.3 billion in 2015 to K7.7 billion in 2016 signifies the group’s ambition to take its profitability level to as far as eleven digits, provided this trend is sustained. In the last three years, FMB has experienced a peaks and troughs performance trend.

All is not rosy in the banking sector. Some banks are struggling to make ends meet. NBS Bank is a typical example. Exactly 12 months after posting K195 million losses, history repeated itself in 2016 when NBS’ results were catastrophically encapsulated in K4.3 billion losses. Last time NBS registered ‘profit’ was in 2014 and the highest was in 2013 amounting to K1.8 billion.

NBS management is under intense pressure to restore the lost glory because NBS remains the only unprofitable, local business unit of NICO Holdings Limited. NICO General, NICO Life and NICO Asset Managers have a consistent performance track record. The parent company is optimistic that the new leadership of NBS would bring transformation with the technical support of and in collaboration with Rabobank of Netherlands. NBS Bank and Rabobank signed a 3-year strategic partnership in May 2017.

The negative and painful part of the transformational journey NBS embarked is loss of jobs. It is commonplace that redundancies affect the rank and file rather than senior staff members of an organisation. Subsequent redundancy costs would negatively impact on the results of NBS in the next financial year.

Nedbank also underperformed miserably in the year under review. Having registered a K156 million ‘profit’ in the previous year, results for 2016 were a disaster. It posted K1.4 billion losses primarily as a result of unrealistic spending: unrobust cost management. While Nedbank’s net income grew by 25 percent, its operating expenses skyrocketed by 120 percent, compounded by moderate impairment losses.

As a South African headquartered financial services provider, Nedbank can “make things happen” towards a profitable rebound, tapping experience into sister companies across the region.

A comeback of the liquidated Finance Bank now trading as “New Finance Bank” (NFB) has faced strong resistance to penetrate the banking market. During the two years as a fully fledged commercial bank, NFB have leapt catastrophic results. NFB posted cumulative losses amounting to K2.7 billion in two years with K1.9 billion reported in 2016 and the remainder in 2015.

From the word go, the income statement of NFB recounts losses. In 2015, NFB generated total income of K316.6 million against total expenditure of K1.4 billion.  Come 2016, the total income fell miserably from nine to five digits and yet, the total expenditure inflated by a K1 billion margin. The equation could not balance for NFB to brea keven.

Critically, NFB risks liquidation following unsuccessful merger negotiations with Opportunity Bank of Malawi in the context of recapitalisation enforced under Basel II. Consolidation of the two companies could have created a stronger, financially sound entity.

It can, therefore, be opined that NFB’s underperformance in 2016 underlies unprecedented collapse of the merger discussion. Let foreign investors bail out, overhaul and transform NFB otherwise it might fall prey to statutory management.

Amongst the capital market financial institutions, Old Mutual Unit Trust Money Market outperformed its rivals in the context of operating expenses and bottom line results. The company registered K1.5 billion ‘profit’ and is the only capital market player to have made a ten digit profit margin. Out of K1.8 billion total income, the company spent K296 million only. Probably, it is the most cost efficient financial institution in Malawi based on 2016 results.

Going forward, players in the financial services market must learn to cut their coat according to the size of their cloth.

For general insurance sector, an expense ratio is a determinant of a firm’s cost efficiency. SGIs recorded 34 percent expense ratio in 2016, 5 percent point higher than 2015. An expense ratio of, at least, 25 percent is more reasonable. SGIs achieved a 2-year commission ratio of 12 percent and claims ratio of 57 percent. It can be inferred that the six general insurers achieved a 103 percent combined ratio. A commended COR threshold is 110 percent.

Insurers can control commission ratio by writing more direct business. In all circumstances, delay or avoidance of settling valid insurance claims is a contravention of insurance regulation.

Using the “expense to income ratio” metric, commercial banks are on a spending spree. National Bank is the lowest with an average of 54 percent followed by FMB’s 68 percent. NBS overspent in 2016 with an expense ratio of 122 percent and Nedbank is the highest, scoring 280 percent. NFB’s expense ratio was massively astronomical. High expense ratio is a deterrent for positive results within the financial system.

The Profitability Barometer sees 70 percent (with inflation factored in) as an equitable expense ratio. Old Mutual Unit Trust Money gained cost leadership in 2016. Other financial institutions must, therefore, emulate because cost efficiency palm oils bottom line results. 

The author is a Fellow of the Chartered Insurance Institute (CII) of London and Program Director for GISC Insurance Career Centre.