African Alliance Plc has paid more in claims to policyholders than premium it generates, which severely degraded its expense ratio as well as eroding investor capital.
Of course, a weak revenue growth combined with spiraling operating expenses means the insurer does not have the financial strength to meet long term obligations, which indicates there is a need for capital injections into the business.
For instance, the company posted a loss after tax of N582.33 million in the first six months through 2023, from a loss position of N3.51 billion as at June 2022.
It is interesting to note that total claims expenses of N3.33 billion is 1.05 times premium income according to MoneyCentral calculations.
The deteriorating underwriting was laid bare by a combined ratio of 112 percent in June 2o23 from a ratio of 105 percent the previous year.
The combined ratio is a quick and easy way to assess an insurance company’s profitability and financial health. To calculate the combined ratio, sum the loss ratio and expense ratio. A financial basis combined ratio of 100% indicates the company is breaking even on revenues versus payouts. A trade basis combined ratio below 100 percent suggests the company is retaining more premium revenue than it pays out in claims and expenses.
African Alliance posted an underwriting loss of N137.09 million, from a loss of N2.98 billion it incurred the previous year.
The company’s gross premium written (GPW) dipped by 4.22 percent to N3.63 billion in the period under review from N3.79 billion the previous year.
Net premium income reduced by 9.15 percent to N3.15 billion in June 2023 from N3.46 billion as at June 2022.
Perhaps more worrisome is that the firm risks technical insolvency as it doesn’t have the capital to meet future financial obligations, an unimpressive  financial performance that discourages investors who could dump shares of the company.
African Alliance is not well capitalised as it has got weak buffers against claims and gyrations in the capital market as the solvency margin ratio stood at -93 percent as at June 2023 , according to data from the company’s financial statement.
Simply put, the company has a short fall in solvency margin of N1.86 billion (which is excess of admissible assets over admissible liabilities), which is nowhere near the minimum paid up capital of N3 billion.
A strong solvency margin ratio indicates an insurer has the financial strength to meet its obligations to policyholders or other liabilities without undermining its capital position.
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