+

By Bismarck Rewane

CEO, Financial Derivatives Company Ltd

February 18, 2015

Economic Policies of Government Issues, Challenges, Prospects and

Implications for Insurance

CIIN

+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 shift in global insurance focus

65% of premiums from emerging markets

Insurance penetration also faster than

developed markets

+

+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

+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

3.23% in Structured

investments

14.6% in other assets

Nigeria Insurance

investments

67% in bond

14% in Real estate &

mortgage

7% in Cash at Hand &

Deposit

6% in other government

securities

4% in Policy and other loans

2% in Bill of exchange

+Portfolio mix of insurance Companies

+Global Insurance TrendLife insurance

declining due to increase in alternative life savings such as Current account

deposits Cash Pensions Investments (Retail) Non-current account

depositsTrend is projected to

continue

+Global Insurance TrendNon-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 IndustryHistorically 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 CompanyTotal 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 Ping An Insurance China 555.258

9American International Group (AIG) US 541.329

10 Prudential plc UK 537.629

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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 StoryForeclosures rose to record highEroding 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

Globally dominated by non-life

Life insurance is gradually losing grounds to alternative investments

Non-life insurance accounts for approx. 50% of insurance companies in Nigeria 27% in Life insurance 19% in Composite 3% in Re-insurance

Category Distribution in Nigeria

Life 27.12%

Non-Life 50.85%

Composite 18.64%

Re-insurance 3.39%

+Nigerian Insurance Industry

+Overview of the Nigerian Financial SystemThe financial sector is dominated by the

banking industry Banks account for over 87% of financial

sector GDP

+Nigerian Insurance IndustryGrowth rate of 7.75%Contribution to GDP: 0.18% Consists of 59 Insurance Companies, 2

reinsurance companiesA total of 24 listed on the Nigerian stock

exchangeRegulated by the National Insurance

Commission (NAICOM)

+Nigerian Insurance IndustryStructure 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

Insurance practitioners

Underwriters 57

Brokers 577

Loss Adjusters 54

Agents 1900

Reinsurance 2

Total 2600

+International Interest in Nigeria’s Insurance Industry

Growing presences of foreign investment in the insurance industry Import of international best practices Prospect of improved growth

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

+Sources of Nigerian Insurance Companies Income

+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%

+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

10-12% 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 rate at a record low of N205/$

Parallel market: N212/$

RDAS becoming ineffective

Devaluation of the naira cannot be put off for

long

To mitigate hemorrhage of external reserves

+Falling Naira, Declining External ReservesExternal reserves is now down to $33.18bn

Can 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

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IndicatorsQ1’15 Q2’15 Q3’15 Q4’15 FY’15

Real GDP Growth (%)

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)

Leading Economic Indicators (LEI’s)

41Source: FDC Research

+Policy Issues: Fiscal &

Monetary

+Broad Macroeconomic ObjectivesThe national budget aims to achieve:

Infrastructural development

Job creation

Growth

External sector balance

Domestic balance

+Revised Budget

Revenue

Benchmark oil price down by 16.13% Now $65pb for 2015

Naira devalued by 7.74% to N168/$

Budget revenue down by 8.85% Now $21.83bn for 2015

Expenditure

2015 fiscal Budget down to $26.41bn

12.40% from $30.15bn in 2014

50% cut on 2015 oil subsidy

Capex down by approx. 47.08% to $3.8bn From $7.18bn in 2014

Recurrent exp. increased by 0.83% to $15.89bn From $15.76bn in 2014

Decline in global oil prices by over 50% prompted the budget revision

+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

Source: FGN Budget Office

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 1Debt Service 943 712 32Recurrent Expenditure 2616.01 2468.83 6Capital 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

Fiscal Deficit (Based on Regular Budget) -755 -993.68 (24)DEFICIT/GDP -0.79% -1.24%

Sharing from Stabilisation Fund Account (ECA) 80 324.97 (75)New Borrowings 570 624.22 (9)SURE-P 102.5 268.37 (62)TOTAL FGN EXPENDITURE (Inclusive of SURE-P) 4460.46 4993.06 (11)

+3 Key Budget Assumptions

Oil Price $65pb

Production2.27mbpd

Exchange Rate

N165/$

+How Realistic are the Assumptions?- Price Oil price was revised downwards twice as the oil price

plunge continued

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 countries are allowed flexibility

To impose additional import adjustment tax on

177 tariff linesCET 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

+Monetary Policy ResponseCBN putting off the Inevitable

Next MPC meeting on March 23/24Monetary conditions and challenges cannot

waitThe meeting is 7 days to the presidential

electionBank of America describes current situation as

policy paralysisNaira has depreciated 16% since June In 2008 it fell 26% in total

+Monetary Policy ResponseCBN putting off the InevitableBank of America is forecasting an additional

7% depreciation from here to N202Expects the exchange rate band to be

devalued againRussia 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 JuneThe J.P Morgan index exclusion is a major

consideration for monetary policy

+Monetary Policy ResponseCBN 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 Assumptions- Exchange 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

Source: FDC Research

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What to Expect

+What to Expect

Reduction in fiscal revenue

Fiscal deficit will widen above 2% of GDP

Increased borrowing to fund revenue shortfall

Low debt to GDP ratio of approximately 12% of

GDP provides some headroom

Higher tax base

Subsidy removal

Wage pressures

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Constraints & Implications

+ConstraintsPoor corporate governanceHigh default ratesLow capitalLow capacity and skillsCultural factorsHigh level of consumers’ ignorance of the

advantages of insurance products. High rate of unemployment and low GDP

per capita figuresLack 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

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Opportunities

+Opportunities

Young and growing population of approx. 170m

people

Growth rate of 2.6% (4m)

Technological advancement

Stable 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