Insurance companies in Nigeria have commenced restructuring of their assets to enhance liquidity and boost solvency margins required for underwriting risks.
The development, which has become necessary, in view of the skewed nature of insurance assets in favour of real estate properties and other long term investments, is expected to make them achieve portfolio balance, so as to be competitive for the dynamic industry.
BusinessDay investigations reveal that some of the companies have resorted to asset restructuring as the only viable option to boost liquidity, since the chances of raising fresh funds from the nation’s capital market are becoming increasingly difficult as a result of poor performance of the equities markets.
Besides, the National Insurance Commission (NAICOM) expects insurance companies underwriting risks to maintain a certain level of solvency margin to enable them meet claims obligations when they arise, and engender confidence in the industry.
The implication is that insurance companies are expected to remain financially strong, even after meeting their obligations to customers, a system regarded in the industry as the ability of an insurance company to have admissible assets over admissible liabilities.
Section 24 of the Insurance Act 2003 states that ‘an insurer shall maintain at all times, a margin of solvency in respect of its business; being the excess of the value of its admissible assets in Nigeria over its liabilities in Nigeria. And this must be at least 15 percent of total premium or shareholders’ fund, which ever one is higher.’
Solvency margin in insurance is about the difference that a company has after it has subtracted all the admissible liabilities from the admissible assets.
Analysts who spoke to BusinessDay, said the capital market crises in the financial services market, between 2008/2009, exposed the insurance sector to a lot of ‘asset structural imbalance,’ as most of the investments in the stock market, which was major source of market liquidity, was swept away, exposing many insurance companies to low level liquidity, but more long term assets.
Rotimi Fashola, group managing director/CEO, Industrial and General Insurance Company(IGI) plc said that his organisation was restructuring its assets and selling some of its landed properties.
“This is aimed at boosting our liquidity and enhancing our capacity to promptly meet our obligations. The restructuring has generated over N2 billion in the last one year, part of which has been ploughed into repositioning the company.”
Fashola further said that “currently, our investment in real estate/landed properties and subsidiaries is huge and concentrated. It is worth about N22 billion, which far exceeds the threshold stipulated by law.”
The concentration, he said, was largely due to the crash of the quoted equities market. “However, we have started restructuring our assets and offering some of our properties for sale, Fashola observed.
“IGI remains the most endowed insurer, not only in operational spread, but in asset base”, the Fashola said, while selling the company to insurance brokers in Lagos.
A top executive in NICON Insurance Company Limited, said the former government owned company had a lot of investments, within and outside Nigeria, running into millions of dollars.
“There is a plan to strategically restructure these assets and put them in more viable investments where they will begin to yield quality returns for investors,” the source told BusinessDay
Fola Daniel, commissioner for Insurance, said the issue of solvency was being misinterpreted in the insurance business. “There is financial insolvency and technical insolvency. The bad one is financial insolvency, and that is when a company is completely on the ground, and we don’t have such a problem in insurance sector today.”
According to the Commissioner, “a few companies had issues in their asset structure and we asked them to rebalance their assets, and I am happy that they are complying.
“Let me say this clearly, we don’t have serious problems of insolvency in the insurance sector. We wrote to a few companies that have resemblance of insolvency and we gave them 60 days and we are happy that many of these companies are able to squeeze out water from the rock,” Daniel said.
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