ETFs could provide improved returns to Nigerian insurers

Nigerian insurers could improve their return on investment by allocating part of their assets to exchange traded funds (ETFs) like their counterparts from across the globe, but this may only happen if the performance of Nigerian ETFs turns to the positive path.

Global institutional investors, including insurance companies, are taking advantage of the opportunities of cheaper and more complex products that ETFs present, to deliver appreciable returns to their shareholders, having allocated up to $50 Billion of premium to the mutual fund.

Whereas Nigerian insurance companies posted an average return on assets of 3.80 per cent and 6.68 per cent return on equity in 2015 as shown by information from the National Insurance Commission (NAICOM), Nigeria’s insurers’ regulator, their South African Counterparts booked an average return of equity of up to 18 per cent as shown by KPMG’s South African Insurance Industry Survey 2016.

Analysts have attributed the declining trend in returns to lack of options for improving performance, a gap that the ETF could have filled.

“Return on assets has declined from c.13% in 2009 to c.8% in 2013, primarily due to the jump in assets; the total asset size of doubled in2012”, said analysts at Cardinal Stone Partners, a Nigerian Investment firm, in their Nigerian insurance sector report, ‘beacon shining forth’.

Analysis of South African top ETFs showed a minimum 3-year total return of 14.38 per cent a year based on data from etfSA.co.za, an ETF performance monitoring outfit based in South Africa.

Meanwhile, data available to Businessday shows that leading Nigerian ETFs posted negative 3-year total returns averaging -11.84 per cent, a result that does not lend itself to any investment consideration by the insurers.

According to latest data from the Nigerian Insurance Digest, an industry publication of the Nigerian Insurers Association, underwriting business grew 9.59 percent to N293.54 billion, while gross premium income from non-life business was N184.97 billion and 2 billion for life business. Total non-life assets of the insurers were valued at N453 billion in 2014 while total assets of life insurers as at 2014 stood at N341 billion.

The Nigerian insurance companies held N42 billion of assets in cash and another N148 billion in financial assets, some of which could be allocated to ETFs while waiting to pay claims in line with the global trend but for the unimpressive performance of the Nigerian funds.

Having seen an 8-week decline of 8.75 per cent as at November 18 2016, the net asset value (NAV) of ETFs is currently valued at N3.9 billion, representing just 1.78 per cent of the Nigerian mutual funds industry that has NAV of N219 billion, according to NAV data obtained from the website of the Nigerian Securities and Exchange Commission (SEC).

Nigerian Exchange Traded Funds as at November 18, 2016

What is more, the 8-week prices of the funds deteriorated by an average of 6.39 per cent, while the 8-week average risk of the fund values declined by 2.27 percent during the period.

ETF offerings have also been demonstrated to be of benefit to life insurance companies in many climes such as the United States of America (US).

According to Dan Loewy, an investment manager with Alliance Bernstein Holding LLP, a US-based investment-management and research firm, “Life insurance companies have also been considering ETF offerings for variable annuities, which provide income to retirees”.

“If you’re an insurer with a variable annuity offering, you want to help manage the downside in those offerings. If market volatility is on the rise, ETFs are a quick and efficient way to cut that exposure. We do that for insurers in number of their portfolios,” Loewy said.

 

INNOCENT UNAH