Zenith General Insurance is efficient as combined ratios remain favorable
by BALA AUGIE
December 12, 2017 | 2:08 am| | | Start Conversation
Zenith General Insurance Company Limited’s favorable combined ratio in an industry fraught with huge management expenses validates the insurer’s efficient underwriting capacity.
For the year ended December 2016, the Nigerian insurer’s combined ratio (CR) of 62.70 percent, though higher than the 56 percent recorded in 2015, is lower than the 100 percent threshold.
The CR is calculated by taking the sum of incurred losses and expenses and then dividing them by earned premium.
The ratio is typically expressed as a percentage. A ratio below 100 percent indicates that the company is making underwriting profit while a ratio above 100 percent means that it is paying out more money in claims that it is receiving from premiums.
Zenith General Insurance operating expenses ratio increased to 26.02 percent in December 2016 as against in the period under review, from 24.80 percent recorded the previous year.
The Nigerian insurer’s operating expenses are not overwhelming revenues as it are with most firms in the industry where huge management expenses are eroding profitability.
The cumulative management expenses ratio of the 43 firms that have released 2016 audited financial statement on the website of the National Insurance Commission (NAICOM) stood at 83.41 percent, which means they have spent N83 on operating expenses for every N100 of premium income generated.
Experts attribute huge operating expenses to the acquisition of new technologies, energy costs, and salaries of highly skilled workforce. They however said it is imperative for firms to control costs in order to bolster margins.
“We are trying to cut down on management expenses; however, there are costs you cannot control. The cost of diesel oil to power head office and branches is on a high side. Personnel costs are rising because we trying to recruit talented staff,” said Jide Orimolade, managing director and CEO of Law Union Rock Insurance Plc
“Companies should try to put cost control in their front burner and see how expenses can go down as profit margin continues to remain suppressed,” said Orimolade.
Zenith General Insurance falling Net Premium Income (NPI) /Shareholders’ fund suggests headroom for otherwise known as premium to surplus ratio gives headroom for NPI growth.
The Nigerian insurer’s premium to surplus ratio fell to 31.19 percent in December 2016 from 37.50 percent as at December 2015.
In general, a low premium to surplus ratio is considered a sign of financial strength because the insurer is theoretically using its capacity to write more policies.
However, a low ratio may also arise when an insurer is not charging enough premiums for its policies. A higher premium to surplus ratio indicates that the insurer has lower capacity. When premiums increase without a corresponding increase in policyholders’ surplus, the capacity of the insurer to write new policies is decreasing.
Analysts are of the view that a possible consolidation will strengthen Zenith General Insurance’s balance sheet and expansion plans.
The Nigerian insurer’s improved ratios make it a possible target by foreign investors as analysts foresee a lot of acquisitions in the industry next year.
Further analysis of the financial statement of Zenith General Insurance shows net premium income spiked by 2.28 percent to N11.18 billion in December 2016 from N10.93 billion as at December 2015.
Loss ratio otherwise known as claims ratio increased by 44.80 percent in December 2016 as against 38.60 percent as at December 2015.
Claims expenses were up 12.50 percent to N3.33 billion in December 2016 as against N2.96 billion as at December 2015.
Zenith General Insurance has a total shareholders’ fund of N23.33 billion as at December 2016, which represents a 14.77 percent increase from 2015 figure of N20.31 billion.
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