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Tuesday, March 21, 2023

Solvency Ratio for Leadway Assurance Remains Strong at 978%

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Leadway Assurance Limited continues to be well capitalised relative to risks taken, maintaining comprehensive solvency ratios above 900 percent as at year end 2020.

Despite the low yield environment and the coronavirus pandemic that crippled the economy across the globe, Leadway Assurance’s solvency ratio increased to 978 percent in December 2020 from 439 percent as at December 2019.

The benchmark ratio for most countries is 100 percent but in India the Regulatory and Development Authority or IRDAI expects insurance companies to maintain a solvency ratio of 150 percent.

Technically put, the solvency ratio of a company is a measurement of its ability to meet its debt obligations and other financial commitments. Basically, a solvency ratio gives insight into the company’s cash flow as well as whether this cash flow is capable of meeting the company’s liabilities – both long-term and short-term.

The understanding with this metric is that the lower a company’s solvency ratio, the higher the likelihood that the company will default on its financial obligations. Conversely, a company with a high solvency ratio indicates its financial trustworthiness. It is more capable and hence more likely to fulfill its debt and other commitments.

The improvement in solvency ratios for Leadway Assurance reflects the ongoing product shift toward more profitable protection-type products, as well as slower declines in the reserving rate leading to more available capital, and higher investment income supporting earnings. Since the insurer is well capitalized, it is in a position to weather macroeconomic headwinds just as it surmounted the Covid-19 crisis that tipped the country into its second recession in five year.

Leadway Assurance’s total admissible asset of N507.71 billion as at December 2020 exceeded admissible liabilities of N453.38 billion, which led to excess funds of N54.32 billion.

In the wake of the coronavirus pandemic, so many questions have been asked about the solvency position of insurance companies.There were fears that spiraling mortality rates and claims related to event cancellation would undermine earning to the extent that jeopardized the going concerns of some entities.

Analysts had expected that the volatile financial markets and the central bank’s dovish stance and the policy makers decision to bar individuals and corporate from its Open Market Operations that sent yields crashing would be impacting insurers’ asset side.

Amid the low yield and interest rate environment, Leadway Assurance realized N37.27 billion in investment income such on both short- and long-term government bonds, and that compares with 2019’s N31.80 billion.

The impressive investment returns added impetus to the bottom line as it helped compensate for unfavorable underwriting conditions. Net income spiked by 21.72 percent to N11.18 billion in December 2020 from N9.19 billion the previous year.

However, the small and midsized insurers with thin capital bases are vulnerable to macroeconomic shocks.

Guinea Insurance Plc can no longer meet its long term and other obligations as recurring losses brought on by continuous slump in revenue combined with rising costs has tipped the insurer over the cliff.

The company’s admissible net asset or shareholders fund of N2.172 billion as at December 2020 is lower than the regulatory capital of N3 billion, which led to a negative solvency margin of N827.47 million.

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