Continental Reinsurance’s profit slumps on foreign exchange movement
The impacts of foreign exchange movements have dealt a blow on Continental Reinsurance Plc’s profit despite efficient underwriting performance.
For the year ended December 2017, Continental Re’s net income dipped by 20.57 percent to N2.47 billion as against N3.11 billion the previous year.
The drop in profit was due to a 71.92 percent decline in foreign exchange gains to N1.14 billion in the period under review.
The devaluation of the currency by the central bank in mid-2016 was a boon for the Nigerian insurer as gains in foreign exchange income supported that year’s profit.
However, starting from the first quarter of 2017, foreign exchange gains in the books of the firm began to shrink, therefore, earnings took a one or two punches.
Continental Re’s targeted underwriting actions during the year including increased underwriting discipline has yielded fruit as underwriting profit surged by 211.59 percent to N1.29 billion as at December 2017.
Combined Ratios (CR) dipped to 94.37 percent in the period under review from 98.07 percent the previous year.
CR is a measure of profitability used by insurance companies to gauge how well it is performing in its daily operations.
A ratio below 100 percent indicates that the company is making underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.
The CR is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.
While Continental Re has an efficient underwriting capacity amid a tough and unpredictable macroeconomic environment, its N0.50 share price is lower than the N1.92 share price of small and midsized lender, Diamond Bank.
Investors are becoming increasingly worried about the continued stagnation of insurance stocks on the floor of the bourse as they have called on regulators to find a way to formulate policies that would invigorate these firms.
Experts identified the problems of these firms to include: lack of transparency, a weak balance sheet, huge debt, lack of research and development, and a dearth of skilled employees.
To further exacerbate the already anaemic position of these insurers is the new rule by regulator that states that stocks can now trade at a minimum of one kobo from an initials of 50 kobo.
Like a climber that fell off the clip due to a failed hanger, stocks of firms started nose diving to the extent that most of them traded below N0.50.
The insurance stocks trading below 50 kobo are African Alliance Insurance, Cornerstone Insurance, Equity Assurance, Goldlink Insurance, Guinea Insurance, Consolidated Hallmark Insurance, Lasaco Insurance.
The gross premium collected by insurance companies in Nigeria is about $1.9billion compared to the $3.8billion collected in South Africa.
Nigerian insurance industry contributed a mere 0.73 percent to the nation’s economy.
This compares with Kenya’s and South Africa’s 17 percent and 3.40 percent contribution to their Gross Domestic Product (GDP) respectively.
Despite the challenges bedevilling operators in the sector, Continental Re’s gross premium written, gross premium revenue and net premium revenue increased by 32.11 percent, 4.31 percent, 5.90 percent to N29.67 billion, N26.41 billion and N23.13 billion as at December 2017.
Continental Re has a solvency ratio of 89.09 percent as at December 2017, which is lower than the 90.61 percent recorded last year.
This means the insurer’s assets are 0.89 times liabilities.
A solvency ratio measures the extent to which assets cover commitments for future payments, the liabilities.
Different countries use different methodologies to calculate the solvency ratio, and have different requirements. For example, in India insurers are required to maintain a minimum ratio of 150 percent.
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