Although AIICO Insurance’s 2024 profit increase was spectacular, a closer examination exposes significant difficulties in its basic operations.
Growing claims and insurance-related costs hurt the company’s underwriting performance.
AIICO’s main insurance businesses reported losses despite investment income helping to increase overall profit.
The key concern is whether AIICO can turn things around or if its reliance on investment returns will continue to conceal its underwriting flaws, even though a rebound is anticipated in the first half of 2025.
Underwriting challenges persist
In 2024, AIICO reported N108.268 billion in insurance income, a 49% YoY increase. However, insurance service costs increased 33% YoY to N87.241 billion.Â
The primary offender was the N75.327 billion in claims payments, of which N58.092 billion came from life insurance claims alone.
With a noteworthy N51.911 billion in life insurance income, the corporation paid out more claims than it made from this market, which is concerning for profitability.
Nevertheless, this segment was comparatively more stable, as non-life insurance revenue (N55.151 billion) exceeded non-life claims (N16.468 billion). Overall underwriting results, however, continued to be poor.
This caused AIICO’s net insurance earnings to drop to -N3.520 billion, even though policyholder assets had a N7.168 billion foreign exchange gain.
Underwriting margins were further strained when net expenses from reinsurance contracts increased by 180% yearly to N24.547 billion. Although reinsurance is supposed to assist insurers in risk management, it became a significant financial burden for AIICO.
To make matters worse, net finance costs from insurance contracts increased by 115% yearly to N19.733 billion.
These costs, most likely related to delayed payments or obligations within AIICO’s insurance operations, reduced the company’s net insurance results to -N22.556 billion.
This highlights a growing concern: AIICO’s core insurance business is struggling. The company would not have been profitable without its investment income, which provided a much-needed boost.
AIICO ought to be able to turn a profit while still paying claims. It is a problem if it continuously pays more in claims than it makes.
AIICO might have to reevaluate its pricing policy, enhance its risk assessment, or look for methods to lower claims costs. Otherwise, its profitability could remain under pressure in the long run.
Profitability fuelled by capital gains
Despite these underwriting challenges, AIICO reported a 21% YoY increase in profit before tax (PBT) to N15.139 billion, thanks to a 69% YoY surge in net investment income to N45.296 billion.
This was principally powered by investment income of N41.980 billion, +35% YoY, and foreign exchange gains (N11.148 billion, +1.18% YoY). The company’s bottom line would have been far worse without this investment increase.
Good cash flow, but there are still hazards
AIICO Insurance had a robust positive cash flow from operating activities of N43.828 billion, representing an exceptional 223% year-on-year (YoY) growth despite its underwriting difficulties.
This indicates that the business had enough revenue from operations to maintain operations, even if it was paying out large claims and dealing with growing expenses.
Prospects for 2025: A road to recuperation?
AIICO forecasts N27.880 billion in insurance income and N50.545 billion in gross written premiums for the first quarter of 2025.
Although net insurance finance results are still predicted to be -N9.617 billion, insurance service results are anticipated to be positive at N138 million.
- With a projected N11.975 billion, investment income continues to be a significant profit generator, driving pre-tax profit to N2.660 billion.
- AIICO anticipates a positive insurance service result N6.679 billion for the first half of 2025, indicating an anticipated improvement in its core insurance business. This indicates that the business is trying to enhance underwriting performance and better handle claims.
- Even still, net insurance finance results are predicted to be extremely negative at -N14.490 billion, indicating that AIICO would continue to be severely impacted financially by its insurance-related financing expenses.
- These difficulties are far from ended, as this estimated amount now represents 76% of the business’s net insurance finance loss in 2024.
Although the improvement in insurance service outcomes is positive, the extent to which this reversal truly leads in increased total profitability may be constrained by the ongoing high finance losses.
A profitable tale with red flags
Investment income is primarily responsible for AIICO’s robust profit growth in 2024, which conceals significant underwriting difficulties.
- The company’s reliance on investment earnings raises concerns over long-term profitability, particularly if claims and reinsurance costs continue to be high.
- Investors should keep an eye on whether the core insurance business strengthens or continues to be a weak point concealed beneath investment-driven profits, even though AIICO predicts a rebound in 2025.
- Investor confidence is demonstrated by AIICO’s share price, which has increased 11.9% year-to-date despite these worries.
However, over the last four weeks, the stock has dropped 6%, indicating that the market is becoming increasingly wary of its fundamental issues.
