Mixed results for insurers

At all cost, all financial institutions have published their 2012 statutory financial accounts in the public domain, unlocking this article to examine the performance of selected insurance companies in the context of roles and interests of insurance stakeholders.

Financial institutions are governed by the Financial Services Act 2010, as amended by relevant directives of the Registrar of Financial Institutions. More importantly, Section 2(1) of the said Act classifies insurance companies as non deposit – taking financial institutions.

In the context of annual accounts, Section 37(1) of the Act requires a prudentially regulated financial institution to submit to the Registrar of Financial Institutions a copy of its audited financial statements together with external auditor’s report within three months after the close of its financial year.

In the same vein, subsection (2) reads:

Unless exempted by the Registrar, a copy of the balance sheet and profit and loss account submitted under subsection (1) shall, within four months after close of its financial year to be published in at least two local newspapers of wide circulation.

In compliance with this provision, in April 2013, The Nation, like any daily newspaper, was awash with full – page advertisements for financial institutions’ extracts of audited financial statements, which were IFRS compliant.

IFRS, which stands for International Financial Reporting Standards, renamed the balance sheet as the ‘statement of financial position’ with the ‘statement of comprehensive income’ replacing the profit and loss account. Ultimately, the ‘statement of cash flow’ which was overlooked by the framers of the Act in subsection (2) stipulated above, makes the annual accounts holistic.

Perfomers

Within the general insurance market, Nico General defied all odds prevailing in the micro-economic environment by registering a phenomenal 3754 percent profit growth, thus, ‘breaking news’ in the industry.

From as little as K16 million (about $40 000) net profit in 2011, Nico General’s profit margin for 2012 soared to K611 million (about $1.5m), creating a K289 million (about $722 500) difference with second ranked General Alliance, in as far as the profitability barometer is concerned. However, the latter reigns in performance consistency, an element that credit rating agencies value most.

The term ‘net profit’ as used in this article entails the company’s profit for the year net of tax.

Improved performance is a critical success factor for Nico General at the moment, but its sustainability would give the company’s executive management sleepless nights. As a starting point, NICO General held a stakeholders briefing at Mount Soche Hotel barely a month after publication of its audited accounts.

Dominance of NICO General with a sustainable 40 percent market share spiced by the success story justifies the holding of the awareness campaign which was themed: general insurance clinic.

Unlike General Alliance, the incredible performance of the market leader would, probably, add value to the company’s credit risk rating which, for sometime, has been stagnant at double A minus (AA-)

A K61 million (about $152 500) excess income placed United General on third position followed by Reunion having generated K42 million (about $105 000) profit in the year under review. Prime, which posted K238 million (about $595 000) losses in 2011, has grown organically with K37 million (about $95 000) profit margin.

In any event, success is an output built around the collective inputs of various players: “stakeholders.” Lo and behold, one wonders whether all insurance stakeholders have been incentivised proportionately and fairly.

‘Investors’ always hunger for high return on capital employed. Similarly, the ‘shareholders’ of both Nico General and General Alliance deserved equitable dividends since their post- tax profits outsmart the benchmarks for 2013 regulatory capital reforms.

Notably, the consolidated financial statements of General Alliance includes a regulatory disclosure that its liquidity has spiked by K325 million (about $812 500) against the group net profit of K347 million (about $867 500).

Underperfomers

On a sad note, however, Charter and Real insurance companies underperformed by posting K25 million (about $62 500) and K157 million (about $393 000) pre – tax losses respectively. Though a bitter pill to swallow, ‘shareholders’ of these companies have no choice but persevering a little while longer.

The general public has the right to accurate information. The underperformance of the sole locally listed insurance company (Real) was somehow predetermined, even though the actual results surpassed the directors’ projection by K147 million (about $368 000).

Attributing Real’s dismal results to the K118 million (about $296 000) worth of cancelled policies sends wrong signal to investors since the premium payment directive applies equally to all service providers, some of whom have performed even better than the pre- directive era.

As part of their strategic drive for better results in the near future, United General and Real controversially swapped senior staff members in the January 2013 management crisis.

Poaching is a conventional tool in the industry. Vacancy advertisements mainly promote brand awareness other than intensifying recruitment competition in the labour market.

The former general manager operations (GMO) of United General was roped in as the new Chief executive officer (CEO) for Real Insurance Company. And Real’s former chief operation officer (COO) has returned to his former employer, taking over the post of GMO.

Consequently, there is a tug of war between the two companies and their rivalry has stiffened as Real’s directors are leaving no stone unturned to improve the company’s performance and restore investors’ confidence.

The customer base of United General is therefore at stake unless the ‘three lines of defence model’ is consistently applied to manage the emerging business risks. Insider dealings could also be a threat but whistle- blowing becomes a defending tool for the company.

Turn around strategy

According to media reports, the visionary leadership of Real’s newly appointed CEO with his five point plan is already making headway with 64 percent organic growth in the first quarter of 2013 but the best is yet to come, as long as the much touted growth is consolidated until end December.

Claims cost management is central in the five point framework. To sustain this turn around strategy, the newly appointed CEO and his strategy team must revisit the company’s claims philosophy of 48 hour- claim settlement. This promotional ideology works better in advanced markets with a broader insurance penetration that generates adequate risk funding: claims reserves.

Certainly, Real’s K336 million (about $840 000) capital top up would make a difference.

In the long term insurance sector, Nico Life continued from where it stopped in 2011 by generating K2.25 billion (about $5.6m) net profit in 2012. Old Mutual is another star performer within the sector.

While Nico Life ‘employees’ earned uncommon bonuses recently, management of Old Mutual decided also to reward outstanding ‘staff’ in various business units in addition to ‘sales agents’. Conversely, thirteenth cheque – plus and/or performance rewards are just a drop in the ocean. Salary increment is a long term motivating factor.

A sit – in that Nico Life staff staged in December 2012 signifies the importance of putting the welfare of staff as ‘stakeholders’ at heart. In 2011, Nico Life had produced after tax profit of K1 billion (about $2.5m).

Job security is another motivator. Imagine some ‘employees’ of Nico Life have been on temporary employment for over a year, contravening labour laws. This has been the trend for many years and it contradicts Nico Life’s motto of ‘creating wealth for all’.

Social responsibility culture

The corporate social responsibility (CSR) in the insurance industry is not as robust as in the banking sector.

For example, National Bank allocates one percent of its annual profits for CSR and on 31 December 2012, the company donated assorted items worth K1 million (about $2 500) to SOS Children’s Village in Blantyre out of its K3.5 billion (about $8.7m) profit realised in 2011.

At least K7.5 million (about $18 750) worth of charitable activities would be anticipated this year from National Bank having netted K7.5 billion profit in 2012.

Assuming Illovo, which earned K20 billion (about $50m) profits in 2012, emulates the National Bank’s one percent CSR policy, then Malawians would have directly benefitted from the K20 million developmental projects, among others.

TNM leaflets inserted in the same newspapers last June captured the scenario where wealth was strenuously created and fairly distributed among stakeholders. But the mobile phone operator’s promotional material failed to specifically allocate the CSR portion despite government being the highest beneficiary with 61 percent of the K8.36 billion (about $20.9m) net profit for 2012.

Profit leader in 2012

Of all the financial institutions in the country, Standard Bank is the profit leader with K7.9 billion (about $19.7m) after tax profit in 2012. No wonder publication of its financial statements covered four full pages of two daily newspapers, costing thousands of kwachas for the benefit of ‘media houses’ as stakeholders.

Banks generate stable income through service charges. Yet, revenue for insurers is premium – based and part of the collection builds up claims reserves.

In a layman’s eyes, insurance business is profitable but technically, insurance companies hardly make profits since, on the balance sheet date, outstanding claims could outweigh revenue generated. The reviewed financial statements are supportive of this argument.

It is also unethical for one external auditor to audit and prepare financial accounts for most of the financial institutions. Let the small cake be shared even to other local but eligible auditing firms to promote entrepreneurship.

In conclusion, economics always advocate for fair distribution of resources and this can be achieved if all business stakeholders are considered on merit. Staff needs good salaries and government must impose discriminatory tax on all astronomical profits earners.

—The author is a Chartered Insurance practitioner and programme director for GISC Insurance Career Centre