The harsh regulatory environment is spending a predawn chill down the spine of operators in the insurance industry.
National Insurance Commission (NAICOM) has jerked up the minimuim capital requirement for insurers in all categories of business, a new rule that has forced companies scampering to raise money either from their owners or the capital market.
A lot of insurers have a very weak capital that prevents them from taking on more risks, as a torrid operating macroeconomic environment makes it practically difficult for them to deliver higher returns to shareholders in form of share appreciation and robust dividend payment.
Experts identify factors militating against the growth of the industry to include: low consumer purchasing power, poor regulations, apathy towards insurance, high cost of doing business, and systematic risks.
Little wonder the industry contributes less than 1 percent to the country’s GDP and its penetration remains low when compared with some sub Saharan African countries.
While other insurers are struggling to meet the new minimum requirement set by regulator, Leadway Assurance Limited has effortlessly scaled the hurdles.
Leadway is arguably the most successful insurance company in Nigeria as it has the largest total assets, total equity, and premium incomes, thanks to a robust product portfolio, focus and market penetration strategies, and a talented workforce.
A recent report by Chapel Hill Denham Limited shows Leadway is the only composite insurer with a surplus after deducting the new capital requirement from total equity and qualifying capital.
According to NAICOM, qualifying capital is the summation of share capital, share premium and retained earnings, while according to accounting principles, the shareholders funds is the summation of owners’ capital in the balance sheet.
According to the investment house, Leadway shareholders’ fund of N46.49 billion as at December 2018 exceeds the new minimum capital requirement of N18 billion, resulting in a surplus of N28.49 billion. This means it is not under financial stress and it doesn’t necessarliy have to meet shareholders to raise money.
According to the same report, Leadway Assurance’s qualifying capital of N29.96 billion in the same period under review is more than new capital requirement, hence a surplus of N11.96 billion, while other peer rivals in the composite business fell off the cliff.
For instance, AXA Mansard’s shareholders’ fund of N18.17 billion and qualifying capital of N12.0 billion are less than the minimum requirement, resulting in deficits of N570 million and N6 billion.
AIICO Insurance has a shareholders’ fund of 16.01 billion and qualifying capital- as at June 2019- of N16.01 billion and N8.43 billion, which are lower than the requirement and resulted in shortfalls of N2.92 billion and N9.56 billion.
Lasaco Assurance shareholders’ fund and qualifying capital of N8.97 billion and N6.10 billion are less than the minimum capital, resulting in short falls of N7.43 billion and N11.82 billion.
Cornerstone Insurance has a shareholders’ fund of N9.37 billion and qualifying capital assets of N5.33 billion, resulting in short falls of N9.51 billion and N12.67 billion.
Niger Insurance has shareholders’ fund of N7.41 billion and qualifying capital of N3.91 billion, which is lower than minimum capital requirement, and resulting of short falls of N14.09 billion and N10.85 billion.
Gold link insurance’s negative shareholders’ fund and qualifying capital- as of September 2018- of N6.33 billion and N3.90 billion is lower than the regulatory requirement hence resulting in shortfalls of N24.35 billion and N25.93 billion.
Analysts at Chapel Hill are of the view that the well capitalized insurance companies have the capacity to acquire the small players with shortfalls of less than N3 billion while they added that it will be quite difficult for listed insurers with shortfalls of over N5bn to raise additional equity capital from the weak stock market.
“Thus, we expect the insurers that are unable to raise capital the required capital to seek mergers and acquisitions, in the absence of strategic investments, as against losing their investment,” said analysts at Chapel Hill.
Leadway maintains efficient underwriting capacity
LeadWay is one of the most efficient insurer in Nigeria, thanks to an efficient underwriting capacity as it continues to meet obligation to policy holders.
For instance, the insurer has a combined ratio of 64 percent as at December 2018, that compares with Zenith Insurance, (125.89 percent); AIICO Insurance, (1.12 percent);AXA Mansard, (1.08 percent); Wapic Insurance, (1.33 percent), Consolidated HallMa (2.35 percent), Law Union Rock , (1.16 percent), and Sovereign Trust Insurance, (91.25 percent).
The combined ratio is the summation of underwriting expenses, management expenses and claims expenses divided by net premium income and a ratio below 100 percent means the insurer earns more in premiums than it pays out in claims.
As a result of a steady increase in premium income, and efficient expense management, leadway recorded an underwriting profit of N2.96 billion from a loss of N10.40 billion the previous year.
The management and boards of directors of the company have been taking advantage of a high interest rate by investing money in bonds and equities as investment income stood at N22.90 billion in December 2018, which represents a 36.15 percent as against N16.36 billion.
Because underwriting profit is most times slim after accounting claims and expenses incurred in generating premium income, insurers (including the foreign players) use the investment income to underpin profit.
