Transcript Presentation by Mr. Bismark Rewane

+
CIIN
Economic Policies of Government
Issues, Challenges, Prospects and
Implications for Insurance
By
Bismarck Rewane
CEO, Financial Derivatives Company Ltd
February 18, 2015
+
Audience Analysis
 Founded
in 1959 by Article of Association and
Memorandum

Became chartered via Decree in February 1993
 Has
been the rallying point for Insurance
practitioners in Nigeria
 Was
affiliated to the Chartered Insurance
Institute (CII), London in 1960
+
Audience Analysis
 Aimed
at promoting insurance education
 Promoting
the general development of insurance
by conducting, encouraging and assisting in
conducting research into insurance and allied
subjects
 Ensure
strict observance of industry codes of
conduct and ethics
 Creating
insurance awareness among members
+
Objectives of Presentation
 An
accurate & better understanding of the
macro-economic environment is a critical
success factor
 To
see the relative position of insurance in
Nigeria
 Identify
and understand opportunities for the
insurance industry
+
Benefits of the Presentation
At the end, the team will
 Have
a better understanding of contemporary
economic developments in the global, regional
and domestic space
 Be
better positioned to evaluate the implications of
the global developments
 Have
better understanding of insurance industry
opportunities in a downturn
+
Outline

Global Insurance Industry Trends

The Insurance Industry in times of Crisis

The AIG Story

Components of Insurance

Nigerian Insurance Industry

Nigerian Economic Conditions

Policy Issues: Fiscal & Monetary

What to Expect

Constraints & Implications

Opportunities
+
Global Insurance Industry
Snapshot
+Global Insurance Snapshot
 Growth
trajectory has been positive after
recovery from the 2008/2009 financial crisis
 It
underperforms the global economic growth
but outpace inflation
 Structural
 65%
shift in global insurance focus
of premiums from emerging markets
 Insurance
markets
penetration also faster than developed
+
+
Global Insurance Snapshot
 Life
insurance: Mixed

Down in US, Japan, UK and Korea

Euro area recovered, now positive

Up in China & South Africa
 Non-life: Positive

growth in all countries
Down in stressed euro zone countries
 Composite: Absolute
growth equal in developed
and emerging countries
+
Premium Paid by Category
Premium Paid
1%
34%
65%
Non-life
Life
Life
Non-life
Mortage Guaranty
5%
13%
22%
38%
21%
Retail
Institutional
Commercial Insurance
Consumer Insurance
Other
+ Commercial Vs Consumer Insurance
 Casualty


General liability
Commercial
automobile
 Specialty:
Aerospace
 Environment
 Political risk
 Trade credit

 Personal:



Automobile
Homeowners
Extended
warranty
insurance
+
Portfolio mix of insurance Companies

Global insurance investments



79% in bond
3.45% in Real estate
Nigeria Insurance investments


67% in bond
14% in Real estate &
mortgage
3.23% in Structured
investments



7% in Cash at Hand &
Deposit
14.6% in other assets

6% in other government
securities

4% in Policy and other loans

2% in Bill of exchange
+
Portfolio mix of insurance Companies
Global
Nigeria
Real Estate
3%
Structured
Investment
s
3%
Cash at
Hand
&
Deposit
Policy &
Other Loans 7%
4%
Other
Government
Bills of
Exchange Securities
6%
2%
Other
Assets
15%
Real Estate
& Mortgage
14%
Stocks
& Bonds
67%
Bonds
79%
+
Global Insurance Trend
 Life
insurance declining
due to increase in
alternative life savings
such as
 Current
account deposits
 Cash
 Pensions
 Investments
(Retail)
 Non-current account
deposits
 Trend
is projected to
continue
+
Global Insurance Trend
 Non-life
insurance was driven mainly by auto
insurance
 Contributing
about 50% of non-life insurance
 Emerging Asia and the US recorded high auto
premium
+
The Insurance Industry in
times of Crisis
+
Financial Crisis and the Insurance
Industry
 Historically
insurance industry is insulated from
crisis
 Solvency
was threatened by disproportionate
portfolio risk
 The
risk element of business was steady
 Investment
portfolios were exposed to financial
instruments
+
Financial Crisis and the Insurance
Industry
 AIG, Hartford
Financial Services, Lincoln National
Corporation were affected due to their financial
products exposure
 Top
five US insurance companies after the 2008/2009
crisis
Rank
Company
Total assets ($b,
December 31, 2013)
1
Metlife
885.296
2
Prudential Financial
731.781
3
American International Group (AIG)
541.329
4
TIAA-CREF
498.728
5
Berkshire Hathaway
484.931
+
Top Ten Global Insurance
Companies
Rank
Company
Country
Total assets (US$b)
1
AXA
France
1,045.62
2
Allianz
Germany
982.627
3
Metlife
US
885.296
4
Japan Post Insurance
Japan
862.088
5
Prudential Financial
US
731.781
6
Assicurazioni Generali
Italy
620.978
7
Legal & General
UK
599.043
8
China
555.258
9
Ping An Insurance
American International Group
(AIG)
US
541.329
10
Prudential plc
UK
537.629
+
The AIG Story
+
The AIG Story
 AIG, the
world largest insurance company was hit
by the global financial crisis in 2008
 CDO’s
in excess of capital adequacy
 Credit
default swaps for subprime mortgages
crystallized
 Profit
growth of over 300% with no buffers in 5
years
 Insured
CDO were mostly bundled mortgages and
subprime loans
+
The AIG Story
 Foreclosures
rose to record high
 Eroding revenue streams
 Leading
to over $25bn in losses
 Sharp fall in the company’s stock price
 Credit rating was lower
 AIG: too
big to fail, rescued by the Feds
A
loan of $150bn was issued to AIG for 79.9% of its
equity

Initial loan was $85bn from the Feds
 Repaid
over two year at the “LIBOR rate + 0.85%”
+
Components of Insurance
+
Components of Insurance

Insurance can be categorized
into two main categories
 Life and Non-life insurance
Category

Globally dominated by nonlife
Life
27.12%

Life insurance is gradually
losing grounds to alternative
investments
Non-Life
50.85%

Non-life insurance accounts
for approx. 50% of insurance
companies in Nigeria
 27% in Life insurance
 19% in Composite
 3% in Re-insurance
Composite
18.64%
Re-insurance
3.39%
Distribution in
Nigeria
+
Nigerian Insurance Industry
+
Overview of the Nigerian Financial
System
 The
financial sector is dominated by the
banking industry
 Banks
account for over 87% of financial sector
GDP
12.7%
87.3%
Banking
Insurance
Nigerian
Insurance
Industry
+
 Growth
rate of 7.75%
 Contribution to GDP: 0.18%
 Consists of 59 Insurance Companies, 2 reinsurance
companies
 A total of 24 listed on the Nigerian stock exchange
 Regulated by the National Insurance Commission
(NAICOM)
Insurance Contribution to Nigerian
Economy
188,755.74
258,402.31
Total Net Premium
Total Gross Premium
+ Nigerian Insurance Industry
Structure
 Industry
is consolidating
 There
have been M&As,
 Crusader insurance Vs Custodian & Allied
 AXA Insurance acquired Mansard
 FBN Life acquired OASIS insurance
 Growth
rate of Industry premium is estimated at
18% per year
 Two types of income; Investment and Technical
income
 Increasing level of foreign ownership
+
Nigerian Insurance Industry
Type
Category
Number
Insurance Company
Life
16
Non-Life
30
Composite
11
Re-insurance
2
Total
59
Underwriters
57
Brokers
577
Loss Adjusters
54
Agents
1900
Reinsurance
2
Total
2600
Insurance practitioners
+
International Interest in Nigeria’s
Insurance Industry
S/No.
Name of Company
Foreign Investor
Status
1
Old Mutual Nigeria
Old Mutual Group (SA)
Wholly Owned
2
FBN Life/Oasis Insurance.
Sanlam Group (SA)
Subsidiary
3.
UBA Metropolitan Life.
Metropolitan Momentum Holdings (SA)
Subsidiary
4
Prestige Assurance.
New India
Subsidiary
5.
Mansard.
AXA Insurance
Private Equity
6
Leadway Assurance
IFC
Private Equity
7.
Law Union.
ACAP, Swede
Private Equity
8.
ADIC Insurance
NSIA Holdings
Private Equity
9.
Cornerstone Insurance
African Capital Alliance (ACA)
Private Equity

Growing presences of foreign investment in the insurance industry

Import of international best practices

Prospect of improved growth
+
Sources of Nigerian Insurance
Companies Income
Sources of Nigerian Insurance Companies Income
Others,
7.84%
Fire, 14.22%
Oil & Gas, 21.22%
Accident, 17.47%
Marine, 12.84%
Vehicle, 25.84%
Liabilities, 0.57%
+
Nigerian Insurance Industry
 Total
premium of N200.40bn and N232.70bn in
2010 and 2011 respectively
 Total
assets of N5.85bn and N6.21bn in 2010
and 2011 respectively
 Only
1.5% of the adult population (about 1.3m
adults) have an insurance policy
+
Nigerian Insurance Industry
 Positive
correlation between economic growth &
insurance
 Insurance
industry usually outperforms real GDP in
most economies
 But
underperforming real GDP growth in Nigeria
 Average
annual growth of 1.41% relative to GDP growth
of 5.55%
 An evidence of the huge investment potential in
Nigeria
+ Growth Expectation
 Economic
growth expected remain positive and
average 4.8% in 2015
 Growth in the insurance sector will also remain
positive
 Likely to be driven by
 Automotive
policy
 Oil
& gas
 Housing sector
 Opportunity
for growth in the insurance sector in
the next four years is estimated at $105.24bn
 If
it grows at par with South Africa (12% of GDP)
+
Nigerian Economic Conditions
+ Declining Growth Trajectory
 The
NBS is projecting a lower growth rate of 5.97% in
Q4’14

2015 GDP growth: 4.8%
Quarterly GDP Growth Rate (%)
7
6.8
6.77
6.54
6.6
6.4
6.23
6.21
6.2
5.97
6
5.8
5.6
5.4
Q4'13
Q1'14
Q2'14
Q3'14
Q4'14
+ Stable or Higher Inflation Rate
 Contrary
to global trends
 Growth
in insurance sector will remain subdued to
higher inflation expectations
 Headline
inflation expected to range between 1012% in 2015
 The
projected spike is due to

Likely increase in annualized money supply (M2)

High interest rate environment

Political and policy uncertainties
Source: NBS, FDC Research
+Falling Naira, Declining External Reserves
 Market
uncertainty heightened demand pressure
for the dollars
 Interbank
 Parallel
 RDAS
rate at a record low of N205/$
market: N212/$
becoming ineffective
 Devaluation
 To
of the naira cannot be put off for long
mitigate hemorrhage of external reserves
+Falling Naira, Declining External Reserves
 External
 Can
reserves is now down to $33.18bn
cover 4.94months of imports and payments
 Aggregate
depletion of reserves in February is
$1.1bn
 Compared
to a depletion of $190m in January
Source: CBN, FDC Research
+Leading Economic Indicators (LEI’s)
Indicators
Q1’15
Q2’15
Q3’15
Q4’15
FY’15
5.75
5.45
5.91
6.16
5-6
Oil Price ($’pb)
55
60
65
65
55-60
Exchange Rate (N/$
- Inter-bank)
195
200
200
195
195-200
Inflation Rate (% ave)
9.14
9.65
10.49
10.54
10-12
MPR(% p.a.)
13
13
12
11.50
11-11.50
External Reserves
($’bn)
30
28
28
30
28-30
NSE ASI Decline (%)
-5
(-10)
(-15)
(-5)
(-8-9)
Real GDP Growth
(%)
Source: FDC Research
41
+
Policy Issues: Fiscal & Monetary
+
Broad Macroeconomic Objectives
 The
national budget aims to achieve:
 Infrastructural
 Job
development
creation
 Growth
 External
sector balance
 Domestic
balance
+ Revised Budget
Decline in global oil prices by over 50% prompted the budget revision
Revenue

Benchmark oil price down by
16.13%

Now $65pb for 2015
Expenditure

2015 fiscal Budget down to $26.41bn

12.40% from $30.15bn in 2014

Naira devalued by 7.74% to N168/$

50% cut on 2015 oil subsidy

Budget revenue down by 8.85%

Capex down by approx. 47.08% to
$3.8bn

Now $21.83bn for 2015


From $7.18bn in 2014
Recurrent exp. increased by 0.83% to
$15.89bn

From $15.76bn in 2014
+Budget Difference: 2014 Vs 2015
 Counter

cyclical budget relative to current global trends
Fiscal deficit is projected to decline to 0.79% compared to 1.24%
in 2014
 High
government spending in the face of revenue
uncertainties


Oil prices down by approx. 50% from a peak of $116pb in 2014
Benchmark oil price currently 6.02% above the spot rate of
$61.09pb
 Reduction



in fuel subsidy and capex to sustainable levels
Oil subsidy down 79%
Capex reduced by approx. 59% in spite of huge infrastructure gap
Recurrent exp. is 58.65% of the budget compared to 49.45% of
budget in 2014
+Monetary Breakdown of Budget Assumptions
Decline in global oil prices by 50% prompted the budget revision
Proposed 2015
Budget
Approved
2014 Budget
(%) Change
FGN Retained Revenue
3602.96
3731
(3)
Total Federal Government Expenditure
4357.96
4724.69
(8)
Statutory Transfers
411.84
408.69
1
943
712
32
Recurrent Expenditure
2616.01
2468.83
6
Capital Expenditure (including SURE-P)
633.53
1552.99
(59)
Share of Capital As % of Total Expenditure
18.01
36.28
Share of Capital As % of Non-Debt Expenditure
14.2
31.1
-755
-993.68
-0.79%
-1.24%
Sharing from Stabilisation Fund Account (ECA)
80
324.97
(75)
New Borrowings
570
624.22
(9)
102.5
268.37
(62)
4460.46
4993.06
(11)
Debt Service
Fiscal Deficit (Based on Regular Budget)
DEFICIT/GDP
SURE-P
TOTAL FGN EXPENDITURE (Inclusive of SURE-P)
Source: FGN Budget Office
(24)
+
3 Key Budget Assumptions
Oil Price
$65pb
Production
2.27mbpd
Exchange
Rate
N165/$
+ How Realistic are the Assumptions?Price

Oil price was revised downwards twice as the oil price plunge
continued
$78pb
$73pb
$65pb
$40pb???



Oil prices are currently at $62pb, 5% below the revised benchmark
of $65pb
Implying that there will be no accretion in the fiscal and external
buffers
Likelihood of a further downward revision if oil prices fall further
+
Volatile Oil Market and Need for ECA
+ Fiscal Policy
 Common
external tariff in West Africa adopted
January 1
 Member
 To
countries are allowed flexibility
impose additional import adjustment tax on 177
tariff lines
 CET
adoption means that West Africa is a customs
union
+
Fiscal Policy
 No
further reduction in PMS price
 Reduction
in FAAC further in February and
March
 Increase
in electricity MYTO
+ Notable Events Since November
Reversal of roles between policy makers and the
markets
 Markets are initiating, while policy makers are reacting
 Confidence erosion in policy implementation

Oil price
rebounds
to $57pb
1.2
Petrol
pump
price
reduced
to N87
1
Naira
devaluation
0.8
BDC
weekly
sale
NOP
increased
to 0.5%
0.6
0.4
Naira
drops to
record
low
Reserves
down to
$33.52bn
CET
Tariff
0.2
0
24-Nov
04-Dec
14-Dec
24-Dec
03-Jan
13-Jan
23-Jan
02-Feb
12-Feb
+ Monetary Policy Response
CBN putting off the Inevitable
 Next
MPC meeting on March 23/24
 Monetary conditions and challenges cannot wait
 The meeting is 7 days to the presidential election
 Bank of America describes current situation as
policy paralysis
 Naira has depreciated 16% since June
 In 2008 it fell 26% in total
+ Monetary Policy Response
CBN putting off the Inevitable
 Bank
of America is forecasting an additional 7%
depreciation from here to N202
 Expects the exchange rate band to be devalued
again
 Russia another oil exporter is in a worse position
than Nigeria
 It is already in a severe recession and faces
currency and market volatility
 Its currency has fallen 83.88% since June
 The J.P Morgan index exclusion is a major
consideration for monetary policy
+ Monetary Policy Response
CBN putting off the Inevitable
 FDC
diverges with Bank of America on the
possibility of another 200bp hike in MPR to 15%p.a
 Our
view is that MPR will be reduced by 1%p.a and
CRR will be shaved at the next meeting
+ Impact of Banking Balance Sheets and
Portfolios
A
movement in interest rates in addition to
exchange rate adjustments
 Will threaten asset quality and compress
margins of companies
 Also collateral values in shares, real estate or
debentures will be eroded
+
How Realistic are the AssumptionsExchange Rate
 Official
exchange rate was devalued by 7.74% to
N168 in November 2014

Below benchmark exchange rate of N165
 There
is a 30% likelihood of another devaluation
 Last time oil prices were this low (2008-09),
 The naira was devalued twice by 24% overall to
N146 from N118
Oil Price & Exchange Rate
90
150.00
155.00
160.00
165.00
170.00
175.00
180.00
185.00
190.00
195.00
200.00
80
70
60
50
40
30
20
10
0
Source: FDC Research
Oil price ($'pb)- LHS
Interbank rate (N/$)- RHS
+
What to Expect
+
What to Expect
 Reduction
 Fiscal
deficit will widen above 2% of GDP
 Increased
 Low
in fiscal revenue
borrowing to fund revenue shortfall
debt to GDP ratio of approximately 12% of
GDP provides some headroom
 Higher
tax base
 Subsidy
 Wage
removal
pressures
+
Constraints & Implications
+
Constraints
 Poor
corporate governance
 High default rates
 Low capital
 Low capacity and skills
 Cultural factors
 High level of consumers’ ignorance of the
advantages of insurance products.
 High rate of unemployment and low GDP per
capita figures
 Lack of genuine property ownership
documents
+ Implications for Insurance Industry
 Insurance
premium likely to increase as
devaluation leads to higher replacement cost
 Premium
on foreign re-insurance higher
 Revenue
decline increases fiscal deficit
 To
be funded by fixed income securities
 Low
debt to GDP ratio of approximately 12% of
GDP provides some headroom
 Consolidation
is expected with more M&A’s
+
Opportunities
+ Opportunities
 Young

and growing population of approx. 170m people
Growth rate of 2.6% (4m)
 Technological
 Stable

advancement
economic growth
Projected at 6.2%
 Mobile
phone ownership is 84.9% in urban areas
and 55.6% in rural areas

Sale of life insurance using mobile phone network to
126million active lines
+
Thank You