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Monday, March 27, 2023

Leadway Assurance’s Assets Can Absorb Above Average Losses

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Leadway Assurance Limited, the largest insurer in Africa’s largest economy by asset, total equity, and revenue can absorb above average losses as it has the financial strength to underwrite new policies.

The insurer’s operating leverage measured by its year-end 2019 premiums-to-surplus ratio was 1.63 percent, according to MoneyCentral calculations.

This means that gross premium income of N88.89 billion is 1.63 times N54.29 billion shareholders fund, which means total assets can cover short term obligations as there are no threats to going concerns.

The low financial leverage and moderate operating leverage reflects Leadway’s disciplined underwriting culture, conservative balance sheet, strong independent agency relationships, and market driven products that are adding strength to earnings.

It is worthy to note that the company’s total asset of N394.76 billion is greater than total liabilities of N340.47 billion, and the difference is a shareholders’ fund of N54.29 billion.

Gross premiums income to policyholder surplus is a measurement of how much losses an insurer can absorb from claims.

Premium to surplus ratio is gross premiums written divided by policyholder surplus. Policyholder surplus is the difference between an insurance company’s assets and its liabilities.

The greater the policyholder surplus, the greater assets are compared to liabilities. In insurance parlance, liabilities are the benefits that the insurer owes its policyholders.

If an insurer has more assets than liability, then it can undertake big ticket transactions that will give it the leeway to invest the premium to achieve a return while maintaining liquidity.

Regulators pay attention to the premiums written to policyholders’ surplus ratio because it is an indicator of potential solvency issues, especially if the ratio is high. According to the National Association of Insurance Commissioners (NAIC), the usual range for the ratio can be up to three hundred percent.

Notably, solvency levels for insurers have been topical issue among investors and market participates who bemoan the abysmally poor contribution of the industry to the economy, and perhaps more is that industry operators are missing in big oil and gas deals because foreign investors have a perception that a lot of companies have very weak capital compared to their peers in emerging markets.

It is noteworthy that the National Insurance Commission (NAICOM), the body that regulates insurance activities in the country, is nimble enough to address the issue of solvency and place the industry in a global competitive environment as it has hiked the minimum capital requirement for all insurers at different business segments.

In May 2019, the regulator shored up the minimum paid up share capital of Life insurers from N2 billion to N8 billion. Insurance firms underwriting general business were mandated to shore up their capital from N3 billion to N10 billion.

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