African Alliance Insurance: expect a turnaround despite profit drop

African Alliance Insurance is expected to achieve a turnaround in its 2013 operations despite that the company closed the third quarter with a lower profit figure than it posted in the second quarter. Revenue growth slowed down in the third quarter and costs grew generally, which caused a decline in profit margin.

Despite the drop in profit in the third quarter, the insurance company is confident of a major recovery in 2013 from a loss position in the preceding year. Its turnaround is propelled by a surge in underwriting profit, which multiplied more than four times at the end of the third quarter over the corresponding period in the preceding year.

Net underwriting income grew by 76.7% to N4.43 billion in the third quarter over the corresponding quarter in 2012. This is a slow down from the growth rate of 93% the company achieved in the second quarter. Based on the third quarter growth rate, the company is expected to earn N6.3 billion in net premium income at the end of 2013.

The company’s after tax profit dropped from N811 million in the second quarter to 764 million in the third quarter. It however remains a big turnaround from the loss of over N50 million in the corresponding period in 2012. Based on the third quarter growth rate, the company is expected to post an after tax profit of N1.1 billion for the 2013 financial year ended December31.

Profit margin declined in the third, as premium income slowed down and operating expenses accelerated during the period. Net profit margin declined from 28% in the second quarter to 17.2% in the third. This is still a major recovery from a loss margin the company recorded in the preceding year.

The profit drop in the third quarter follows accelerated growth in major operating expenses during the period. Expenses grew at a faster pace than they did in the second quarter. Total underwriting expenses rose by 48% in the third quarter compared with 31.8% in the second quarter. That caused a considerable slow down in the growth of underwriting profit from 472.8% in the second quarter to 325.7% in the third.

Net insurance claims grew by 30.3% in the third quarter against 20.1% in the second. The same applies to administrative and other expenses, which accelerated at 24.6% from 16.6% over the same period. While administrative expenses grew marginally at 3.9% in the second quarter, it expanded by 32% in the third quarter.

Despite the accelerated growth in major expenses, the company is out of the red and is expected to close the year on a strong recovery note. Its turnaround in 2013 is driven by an exceptional growth in underwriting profit from N370 million in the corresponding quarter in 2012 to N1.5 billion at the end of the third quarter.

Other developments that contributed to the improved fortunes of the company include a sharp drop in interest expenses. Interest cost dropped by 81.5% to N5.0 million in the third quarter from the N26 million it expended in the corresponding period in 2012.

The drop in interest expenses follows the complete pay-off of the company’s borrowings. It balance sheet is now completely free of interest bearing debts.

An improvement in investment income has also helped the company’s bottom line. Investment income rose by 16.1% year-on-year at the end of the third quarter. The improvement happened within the third quarter during which investment income rose from N83.3 million in the second quarter to about N173 million.

The company earned 3.71 kobo per share at the end of the third quarter compared to a loss per share of 0.24 kobo in 2012. Earnings per share is expected to come to 5.0 kobo for African Alliance Insurance in 2013. Profit volume will have to expand considerably for the company to be able to improve earnings per share reasonably on its 20,585 million shares in issue.

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