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Sunday, August 14, 2022

International Energy, Africa Alliance Ripe for Takeover as Bankruptcy Looms

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It is easier for the camel to pass through the eye of the needle than for some insurers who are reeling from huge losses to continue as going concerns, which makes them acquisition targets for firms that have a strong balance sheet.

Internal Energy Insurance and Africa Alliance Insurance are walking on rotten ice and touching the tiger by the tail as they have a combined negative shareholders’ fund of N25.68 billion, which means they are technically insolvent and can’t meet their long term financial obligations.

A breakdown of the figures shows International Energy or “IEI” has negative equity of N11.87 billion as at December 2019, while Africa Alliance has a negative figure of N13.86 billion as of September 2020.

Since the minimum regulatory solvency margin is N5 billion, it will be a herculean task on the part of the management and board of directors to invigorate these firms in the light of the current economic realities.

Spiraling obligations to policyholders, receding premium income, and rising management expenses are responsible for deteriorating underwriting conditions.

There are indications that the troubled firms are in more precarious situations because the ultra-low interest rates on the back of central bank accommodative policy has cast a pall over future investment income growth.

While insurers use income from short term government securities-which forms the chunk of investment income- to compensate for weak underwriting position; yields have tumbled or crashed to unprecedented lows as the central bank cut interest rates and barred non-financial companies from its official Open Market Operations (OMO).

Africa Alliance’s investment income reduced by 20.55 percent to N1.89 billion as at September 2020, as against N2.38 billion the previous year.

Another elephant in the room for the beleaguered insurers is the precipitous drop in the price of crude oil brought on by  the coronavirus pandemic that paralyzed economic activities across the globe,  and Nigeria wasn’t spared the pang of the crisis.

For instance, International Energy Insurance no longer carries out oil and gas business and this led to declining revenue over the years.

The external auditors (Ernst and Young Audit Service) had already cast doubts over the existence of the company as they expressed a qualified report on the financial statement.

Notably, International Energy Insurance has also not been unable to meet its loan repayment obligation to Daewoo Security (Europe) Limited now Mirae Asset Management Securities (UK) Limited which has resulted in additional interest charges on unpaid principal and interest, according to notes to the account.

Of course, the slow economic recovery is discouraging as Nigeria- a country that has over 50 percent of its 200 million people living on less than $1.98 a day- slipped into its second recession in 5 years.

It’s crystal clear that insurers operate in a different business environment, but the big firms have the capital buffers to ride the waves and stay afloat.

However, International Energy and Africa Alliance, who have very weak balance sheet and deteriorating cashflows will have to bank on a savvy management team to evade a tsunami of insidious bankruptcies.

Disappointingly, Nigeria, despite its huge population that crave for consumption, lags peer rivals in Sub Saharan Africa in premium penetration.

Perhaps more worrisome is that the industry contributes less than 1 percent to the economy, which means the regulator has to think out of the box and formulate policies that will help unlock the potentials in a sleepy sector.

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