United Insurance Company S.C (UNIC) has reported a stagnant net profit as earnings per share contracted and income from insurance units slumped.
The company reported a slight increase in net profits after tax by less than one percent to 60.8 million Br. However earnings per shares (EPS) declined from 384.8 Br to 312.6 Br.
UNIC’s underwriting surplus, which accounts for 66pc of its income, sank to 70.8 million Br in twelve months from 92.1 million Br a year earlier. Smaller rivals, like Lucy Insurance separately reported a four percent surplus gain for the period as trading income offset declining price margins.
The ever-declining premium rate in the industry combined with the rise in motor claims was the major factor that contributed to the fall in income.
The underwriting surplus for motor insurance dropped to 51.3pc, though it still accounts for 38pc, the lion’s share of the total surplus.
United Insurance collected 314 million Br in premiums during the last fiscal year. This was an increase of 6.2pc compared to the 2014/15 fiscal year. 159.4 million Br was paid out for claims.
Out of the total written premiums 82.16pc were retained and the rest passed onto reinsurers. This shows that the retention rate has significantly improved from last year’s 73.5pc. However, the Company’s net claims rose to 159 million Br, an increase of 43.7pc. One of the reasons for this was the increase in premiums written for high risk customers. “It should investigate its risk management system so that high risk customers are adequately priced,” said Abdulmenan Mohammed Hamza, analyst at London Portobello Bank.
With written premiums worth 192.9 million Br, Motor Insurance accounted for 61pc of the company’s aggregate premium portfolio. It accounted for over 85pc of the company’s total incurred claims. “Inflationary pressure, foreign exchange crises and declining premium rates are the major reason behind the overall increase of net claims,” said Meseret Bezabih, chief executive officer of UNIC. “Escalating prices of spare parts and an increase in the rate of accidents forces us to earned a low amount from motor insurance.”
The rise in underwriting premiums also resulted in an expansion of technical expenses by 27pc, to over 17.7 million Br.
Agents’ commissions soared by 33.6pc in 2015/16 from the previous year’s figure of 17.6 million Br. This represents 5.6pc of gross written premiums, one percentage point higher than the preceding year, due to increased industry competition.
The insurance industry is made up of 17 companies; 16 private and one state-owned. No new company has joined the industry for the last half decade.
In the 2015/16 fiscal year, the insurance industry registered a premium income of 6.1 billion Br. United took a market share of 74.6 million Br, 5.1pc of the industry. The figures show that the company has not grown as much as expected from the previous market share figures of 5.7pc, 5.9pc and 5.5pc. However, the company’s market growth in 2015/16 was 16.2pc.
Commission earned from reinsurers dipped to 4.8pc from the previous year’s earnings of 22 million Br.
On the other hand, UNIC managed to reduce its provision for doubtful debt to negative 1.89 million Br from 4.1 million Br. This amount represents 3.1pc of its profit after tax.
Over the past few years, the company has been experiencing ups and down in its provisions.
“The insurance company should come up with a better method of calculating provisions to avoid financial distortion,” Abdulmenan commented.
Despite its losses in most of its insurance dealings, UNIC was profitable in the long term insurance business last year, which enabled it to collect over 16.5 million Br. The amount was zero last year.
Overall, the company generated a revenue of 106 million Br in 2015/16, 14pc lower compared to the previous year, while expenses have been almost constant at 51 million Br over the past two years.
Last year, following the Company’s annual shareholder meeting, it was decided to raise paid up capital from 175 million Br to 250 million Br, as of June 30, 2016. However the Company effort stopped at only 234 million Br at the end of the fiscal year. This was the second highest amount in the private insurance industry, next to Nyala Insurance.
Besides raising the company’s underwriting capacity, the decision to increase the capital was made due to the company’s engagement in two large investment projects and the acquisition of equity shares in Ethiopian Reinsurance.
Among the two investment projects, Qality Special Department Stores and Recreation Centre Project has reached over 97pc completion. The project cost United over 150 million Br. Another big project of the company, the construction of its headquarters at a total cost of 1.5 billion Br is expected to be completed in ten months.
Overall, United did well in investment activities, particularly in interest earning areas. Interest on savings has surged by 16.5pc to 17.5 million Br, dividend income has gone up only by 1.4pc to 9.4 million Br and rental income has increased by 13pc to Birr 7.9 million Br.
Return on investment at United deteriorated to seven percent from 7.8pc last year. This is largely due to huge capital expenditure for the construction of the two buildings.
Over the past two years, the company almost gave up short term investments. It didn’t earn any returns from almost all equity shares except those in United Bank S.C. As of June 2016, the company’s equity investment surged by 30pc to 96.8 million Br.
While the total assets of United expanded by 20.64pc to Birr 781.33 million. This expansion was mainly financed by increasing paid up capital and technical provisions.
Despite a surge in investment, United revealed that its liquidity showed a slight improvement. One of the parameters, cash and bank balance to total asset ratio, increased to 3.2pc from 2.5pc. However, Abdulmenan,suggested that UNIC take caution when using its liquid resources so as to combat liquidity crunch.
With almost five percent stake each, United Bank and Zafu Eyessuswork Zafu, Chairman of United Bank S.C., are the major shareholders of the company.
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