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African Alliance Insurance Plc is at risk of not being able to pay its obligation to policyholders as the company has failed to meet the minimum capital of N2 billion stipulated by the Insurance Act.
The insurer recorded a negative solvency ratio of 302 percent as at December 2023, raising concerns about the entity’s ability to absorb claims that are mounting due to inflationary pressures and currency volatility.
The solvency ratio in insurance is a measurement of how much an insurance company has in assets versus how much it owes. It is a basic measurement to assess how financially sound the insurance company is and its overall ability to pay claims.
It is a measure of the risk an insurer faces of claims that it cannot absorb. A low solvency ratio means that the insurer is not able to manage its monetary obligations and default payments well.
Drilling down the books of the insurer shows total admissible liabilities of N45.91 billion as at December 2022 exceeds total admissible assets of N43.86 billion, resulting in a negative solvency margin of N2.04, which is lower than the minimum capital requirement of N2 billion.
The deteriorating liquidity and capital of this company adds impetus to the argument of some stakeholders that there has to be a “banking sector kind of reforms” in the insurance industry which will spur mergers and acquisitions since most sector players do not have the capital to take on big ticket risks.
Of course, there is an ongoing recapitalisation exercise by the regulator that mandates players to increase their capital requirement to over 300 percent.
Under the recapitalisation exercise, NAICOM had mandated life insurance firms to meet a minimum paid-up capital of N8 billion, up from N2 billion while general insurance companies are expected to increase their paid-up capital to N10 billion, from the earlier N3 billion.
Composite insurance (life and non-life operators) were asked to recapitalise to the tune of N18 billion as against the previous N5 billion while reinsurance businesses are now required to have a minimum capital of N20 billion, from N10 billion obtainable in the past.
African Alliance posted a loss after tax of N2.90 billion as at December 2023, from a profit of N2.18 billion as at December 2022.
There is an accumulated loss of N37.18 billion, which means the company has been recording losses rather than profit throughout its existence.
The net loss is due to mounting claims and weak growth at the top lines (revenue). ‘
For instance, gross premium written (GPW) dipped by 4.88 percent to N6.81 billion as at December 2022 from N7.16 billion as at December 2021.
The Individual Life business (component of GPW) was down by 23.77 percent to N2.79 billion in December 2022 from N3.66 billion the previous year.
Group Life segment was down 4.23 percent to N2.71 billion in December 2022 from N2.60 billion as at December 2021.
The insurer is reeling from deteriorating underwriting performance as it paid out more in claims than the premium that it earned, a sign of financial instability.
Combined ratio stood at 188.33 percent as at December 2022, from 205.42 percent the previous year.
The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. A ratio below 100 percent indicates that the company is making an underwriting profit, while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.
Claims ratio reduced to 134.73 percent in the period under review from 137.55 percent the previous year.
African Alliance posted an underwriting loss of N4.75 billion from a profit of N8.13 billion the previous year.
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