The auditors of International Energy Insurance have warned that the existence of a material uncertainty may cast significant doubt on the company’s ability to continue as a going concern.
Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy.
International Energy Insurance may not have the resources to salvage itself from going bust as all key financial metrics are in the negative, and the precipitous drop in the crude price and the wrought caused by the virus paints a gloomier picture.
The company is technically insolvent as total liabilities of N19.46 billion as at December 2018 exceeded its total asset of N7.59 billion in the same period, resulting in negative total equity of N11.87 billion as at December 2018.
In addition, its negative equity is below the minimum regulatory requirement of N3 billion and the insurer did not have the regulatory solvency margin whilst there was a shortfall of N2.21 billion in the asset cover, according to Ernst and Young Audit Service.
“The company no longer carries out oil and gas business and this led to declining revenue over the years,” according to the auditors.
Just as Nigeria was gradually recovering from the drop in oil price of mid-2014 that resulted in the recession of 2016, the coronavirus pandemic that ravaged economies across the globe and dented oil demand has tipped the country back into a ditch.
Nigeria’s gross domestic product shrank 3.6 percent in the three months through September from a year earlier, compared with a 6.1 percent contraction in the previous quarter, according to the latest data from the National Bureau of Statistics.
International Energy Insurance’s gross premium income dipped by 41.62 percent to N667.22 million as at December 2018 from N1.14 billion as at December 2017.
It posted a loss after tax of N4.17 billion in the period under review from N2.24 billion the previous year.
The company has accumulated losses of N24.91 billion, which means it has been recording more losses than profit through its existence, and underwriting conditions are worsening.
Since revenues are too weak to absorb mounting obligations to policyholders and operating expenses, International Energy’s combined ratio stood at 468.60 percent as at December 2018, the highest of the entire industry.
The combined ratio is typically expressed as a percentage. 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.
Management expenses of N1.54 billion is 3.33 times net premium income, while claims expenses are 1.12 times revenue, which means the insurer is spending its way into the future.
Notable, the insurer 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.
Interestingly, finance cost spiked by 162.15 percent to N3.14 billion as of December 2020 from N1.20 billion the previous year.
A breakdown of finance cost shows interest on borrowing moved by 24.84 percent to N1.03 billion while foreign exchange loss on borrowing surged by 478.53 percent to N2.21 billion.
With less than two years to the recapitalization deadline by the regulator, analysts say it is easier for a camel to pass through the eye of a needle than for International Energy Insurance to meet the new regulatory requirement.
An expert who spoke to MoneyCentral on the condition of anonymity said a lot of insurance firms are beleaguered and technically bankrupt and they are due to be taken over by firms that have a robust balance sheet and stable working capital.