Equity Assurance Plc low profit margins accentuate the Insurance firms low market capitalization as analysts call for urgent recapitalization and consolidation of the sector.
For the year ended December 2014, Equity Assurance recorded a profit after tax of N183.33 million, from N437.78 million losses it recorded the same period of the corresponding year (FY) 2013.
While Equity’s Assurance reverted to the path of profitability, its ability to transform top line performance to bottom line growth was weaker than expected given the company’s abysmal profit margin of 3.56 percent.
The low profit margins of Equity Assurance is peculiar to the Insurance business in Africa’s largest economy as huge operating and reinsurance expense swallow up profit which explains their low market capitalization.
Of the 15 quoted Insurance firms tracked by BusinessDay, only Custodian and Allied, Mansard Insurance and Aiico Insurance have market price per share of N4, N2.87 and N1 respectively, an abysmal figure that calls for urgent mergers and acquisition in the sector.
Analysts say consolidation, mergers and acquisitions have become necessary in order for the sector to meet the new and challenging environment given the industry’s unimpressive contribution to the Nigerian economy.
“We expect the small players to shore up their capital base or embark on mergers and acquisitions (M&A) to be able to compete with big players,” said Kayode Omosebi an equity analyst with United Capital Plc a Lagos based investment bank.
“This will enable them benefit immensely from the great potential as insurance penetration (premiums earned/GDP) of 0.57 percent compared with the average of 3.38 percent for African peers portends a great prospect in this industry,” said Omosebi.
Nigerian insurers are underperforming their African peers with regards penetration levels despite having a market of over 170 million people and economy valued at $503 billion.
Equity Assurance’s underwriting capacity was however stellar as gross premium written increased by 5 percent to N4.84 billion compared with N4.61 billion the previous year.
The company attributes the growth in gross premium written to increasing marketing network via the various agency outlet spreads across the country and Ghana.
Gross profit margin moved by 23 percent to N4.92 billion in the period under review while net premium income jumped by 18.20 percent to N3.78 billion. Net premium income grew by 16.70 percent to N3.93 billion in 2014, as against N3.37 billion in 2013.
Equity Assurance total operating expenses were down by 13 percent to N2.14 in 2014 from N2.46 billion last year. Total reinsurance and claims expenses increase by 27 percent to N1.69 billion in 2014 as against N1.33 billion in 2013.
Total assets moved slightly by 1.80 percent to N9.50 billion in the period under review.
Equity Assurance recurring loses resulted in a negative reserves of N2.66 billion which calls for a capital reduction strategy.
The company’s share price closed at N0.50 on the floor of the exchange while market capitalization was N4.42 billion.