Financial institutions in the country continue to experience a fluctuating trend in bottom line results with general insurance companies attributing their downward performance to slow economic growth, high inflation and interest rates and rare new business opportunities in 2016 while impairment losses partly underpin underperformance of some commercial banks.
Insurance firms, commercial banks, microfinance and capital markets are the core constituents of the Malawi financial system and are authorised and supervised by the Registrar of Financial Institutions. As part of his office’s off-site surveillance activities, the Registrar monitors financial performance of financial institutions to ensure the financial system is financially stable and resilient to systemic risk.
The Profitability Barometer has, for the past four years, predominantly been focusing on financial performance of insurers. This edition extends the coverage to non-insurance financial institutions. Unfortunately, details of summarised accounts of few players are not publicly plat formed. This limitation will affect the holistic analysis of the general insurance sector in terms of economic value, underwriting performance and individualistic market share. Therefore, this edition evaluates “interim” rather than actual results.
Profitability of financial institutions is highly sector-dependent.
In the general insurance sector, for instance, underwriting profit and after-tax profit are two distinct determinants of profitability. As an actuarial term, underwriting profit is calculated based on earned premium rather than total revenue, as the case with after tax profit. The sum of insurance claims and operating expenses expressed as a percent of earned premium is referred to as “combined operating ratio”.
Generally, results are said to “break even” when expenses match revenue. A general insurer makes underwriting profit when its earned premium is the greater of expenses. The reverse is true. After-tax profit is a generic method of measuring profitability of firms of all sizes and in diverse sectors. Investment income boosts bottom line results, as we shall see.
The word ‘profit’ as used in this paper denotes after-tax profit.
Underlying analysis of the general insurance sector are the results of Nico General, General Alliance, United General, Britam, Charter and Reunion Insurance companies, referred to as the “SGIs” (six general insurers) for the purpose of this financial benchmarking. The list is apparently merited, but objectively interim.
Nico General and General Alliance retain their membership in the corporate billionaire club of profit makers. An astronomical profit margin is good news for Government, the company’s shareholders, directors, employees and other stakeholders.
Nico General sustained its grip on being a highly profitable general insurer in Malawi. It stands out to be an insurer whose profit surged in tandem with its top line growth. It retained profit leadership by posting K1.8 billion ‘profit’ in 2016.
Nico General believes that profit growth premises on excellent customer service, a psychological charm that woos potential customers and cultivates a long term relationship with them. In pursuit of this belief, in the year under review, Nico General paid K4 billion out of its K7.5 billion net premium income, representing a 53 percent claims ratio.
The claims data vindicates Nico General’s Fast Track Claims Service as being customer-centric and not rhetoric. While this innovation fundamentally benefits claimants, it has ramifications on the company’s liquidity and profitability. In 2016, Nico General achieved a one percent underwriting profit and recorded a combined operating ratio (COR) of 99 percent. This is a proximity to break even performance. An investment income of K1.8 billion was a game changer for Nico General.
Performance of General Alliance is analyzed from a Group and company viewpoints. The Group made a ‘profit’ of K1.3 billion, creating a difference of 600 million in favour of Nico General, implying that the Group’s profitability trend is downing. As a company, General Alliance’s ‘profit’ declined as well, from K1.1 billion in 2015 to K1 billion in 2016. The local market, by far, is more profitable to the Group than foreign markets as the results infer.
A benign claims environment for General Alliance saw the Group incurring 37 percent of its earned premium in claims settlement (claims ratio). With commission and expense ratios of 10 percent and 30 percent, respectively, the Group made underwriting profit of 23 percent. General Alliance has maintained a COR of less than 80 percent for the past five years.
By contrast, 2016 was the worst financial year for United General Insurance (UGI), in particular and the SGIs, in general. UGI posted K645 million in post tax loss. The loss has depleted the accumulative profits made in the last three years which will take some time to be replenished.
The combined ratio for UGI was exactly twice General Alliance’s COR. eighty four percent of UGI’s earned premium accounted for claims settlement with the remaining 18 percent and 42 percent allocated for acquisition cost and management expenses, respectively.
An upsurge in claims cost in the face of constant net premium income precipitated UGI’s underwriting loss as well as negative bottom-line results. The existing policyholders of UGI should exercise loyalty to the company which guarantees claims settlement at the expense of its profitability. Customer- centricity is a driving force of UGI’s operations. Therefore, let us give UGI a benefit of doubt, pending transformation, at least in the next three years.
Britam is currently undergoing transformation through restructuring and rebranding functionalities. A turnaround of relatively positive results in 2016 is a vindication of the transformational leadership concept the Profitability Barometer is advocating.
A recovery from two consecutive years of posting operating losses, Britam is geared for total transformation having recapitalised by US$2.4 million in tune with the new capital regime and registered K85 million ‘profit’ in 2016. Britam’s management expenses increased from K946 million to K1.2 billion, representing 29 percent growth, contrary to 34 percent as the company’s statement opines. It’s COR improved by 14 percent point to stand at 109 percent.
Results for Reunion and Charter present a profitable, but a downward trend.
Despite a 42 percent top line growth, Reunion was the most extravagant insurer in terms of expense ratio which stands at 47 percent followed by UGI with 42 percent. The two companies must strategize to achieve cost efficiency while sustaining real-time customer experience.
In 2016, Liberty Holdings Limited, a South Africa based investment holding company acquired a majority stake in Charter Insurance Company. As such, Charter is repositioning itself in the market and will tap into the parent company’s vast experience in the South African general insurance market. Better results are expected in the next three to five years to come, perhaps leapfrogging from the current eight digits to ten digits ‘profit’.
Overall, SGIs grossed K32.8 billion in premium revenue in 2016 compared to K26.9 billion in 2015. Interim market share for Nico General and General Alliance remain unchanged for the past two years at 38 percent and 19 percent, respectively. The rest registered an average of two percent mixed growth.
The life insurance sector encapsulates pension administration. Nico Life and Old Mutual are the dominant players in this sector, needless to over emphasise their success stories. The focus now shifts to Smile Life, which is a specialist life insurer. n
….to be continued next week
The author is a Fellow of the Chartered Institute (CII) of London and programme director for GISC Insuarnce Career Centre.