Nigeria’s credit rating agency, Agusto & Co. Limited has assigned an ‘A-‘ rating to Linkage Assurance Plc. The rating assigned to Linkage Assurance Plc, according to the rating agency, is reflective of an insurer with good financial condition and strong capacity to meet its obligations as and when they fall due.
The rating is underpinned by good capitalisation, good investment return and good liquidity profile. Linkage’s investment in Stanbic IBTC Pensions Limited (the largest pension fund administrator) which accounted for 50 per cent of its investment portfolio has supported the insurer’s performance and liquidity position. The rating is, however, constrained by elevated underwriting expenses, sub-par risk management, concentration in the investment portfolio & investment income, sub-par underwriting performance and the fragile state of the economy.
As at 31 December 2017, Linkage’s shareholders’ funds stood at N20 billion, significantly above the regulatory minimum for non-life insurers. Retained earnings also swung to positive territory on account of high profit retention rate. This should pave the way for dividend payment and strengthen relationship with shareholders. The Insurer prioritises liquid assets in its investment management in a bid to maintain strong ability to meet obligations as and when they fall due. As a result, money market securities which are highly liquid represented about 45.5 per cent of the investment portfolio as at 31 December 2017. As at the same date, liquid assets accounted for 39.5 per cent of total assets and covered outstanding claims 9.6 times. We consider the Insurer’s liquidity to be adequate for current business risks.
During the financial year ended 31 December 2017, Linkage’s performance in the core insurance business was constrained by high underwriting expenses.
“As a result, underwriting profit margin plummeted to 0.1 per cent from 14 per cent in the prior year. The Insurer’s investment income which was bolstered by dividend from Stanbic IBTC Pensions Limited (accrued over two years), augmented the impact of the high underwriting expenses on profitability,” the agency explained.
In FY 2017, Linkage recorded post-tax return on average assets (ROA) and post-tax return on average equity (ROE) of 13.3 per cent and 15.8 per cent respectively.
“While we consider the Insurer’s profitability ratios to be good by industry standard, we are concerned about the vulnerability of income to dividend from an investee company. In the same vein, weak underwriting income remains a rating negative,” it added.
The Nigerian Insurance industry has contended with multiple challenges which has been aggravated by the lingering macroeconomic slowdown. As a result, the insurance penetration ratio is below 0.5 per cent and premium per capita is one of the lowest in Africa, according to the Agusto & Co 2018 insurance Industry report.
In spite of growing confidence in insurance products, the appetite of Nigerians for insurance remains abysmal. Nonetheless, potential for the industry remain strong. Nigeria’s vast economy and population (the largest in Africa) if harnessed could support the insurance industry. Although the tier- based capitalisation policy has been cancelled, the capital raising exercise by some insurers will increase risk underwriting capacity and spur initiatives to deepen insurance in Nigeria.