Universal Insurance Plc is one of the underwriters that aren’t that far from meeting the new minimum paid-up capital for its class of business. However, it isn’t going to be easy for directors of the company to convince investors to give them new money in the face of dwindling fortunes. The company may resort to capitalizing reserves but that is to the extent that significant equity impairment can permit.
The general insurance business underwriter already has got N8 billion of the N10 billion share capital prescribed by National Insurance Commission to be in place by the end of June 2020. In order to raise the balance of N2 billion at current market price of 20 kobo for the company’s traded stock, directors will have to issue 10 billion additional shares and sell every unit of it.
For the market to clear the shares and give the company the money it is looking for, management needs to show good earnings prospects, which it isn’t doing yet. Universal Insurance is on the way to reporting a loss position for the second year in 2019. Last year, it closed with a net loss of N45 million – which had already multiplied close to four times in the first half of the current financial year.
At present, 16 billion shares are in issue and the company has to earn N800 million to record as low as 5 kobo earnings per share. Yet, it is moving on the opposite side of growing losses. To be able to pump such a huge volume of equities into the market in the face of rising losses and succeed will appear to require more smartness than needed to sell ice blocks to the Eskimos.
The possibility of dividend is clearly out of the way even if the company rides on the back of a windfall in the second half of the year to turn a half year loss into a full year profit. Losses have accumulated so much that the path to cash dividend pay-out has blocked for long. The company ended 2018 trading with retained deficits in excess of N3 billion.
Universal Insurance is one of the oldest insurance companies in Nigeria with an asset base of close to N14 billion at the end of 2018.
The company is recording an impressive performance in respect of revenue this year but the challenges are coming from the expenditure side of the cost-income relationship. While net premium income more than doubled year-on-year at the end of June 2019 as it did at the end of last year, losses are on the rise.
Three problem spots are creating the losses. These include net claims expenses, which multiplied more than four times year-on-year at half year and underwriting expenses, which multiplied more than seven times over the same period. Also, operating cost grew rapidly and consumed an increased share of earnings.
Both net claims and underwriting expenses have far exceeded the 2018 full year figures at the end of half year operations in June 2019.
The company ended half year operations in June 2019 with net premium income of N961 million, which is an increase of 134 percent year-on-year. This marks another year of strong growth in revenue after a leap of 97 percent in 2018 to N1.15 billion.
The company could not however convert any part of the increase in total underwriting income of N985 million into profit during the period. Three hurdles have stood on the path of profitability so far this year. The first is net claims expenses, which soared by 262 percent year-on-year to N246 million at the end of half year.
The second is underwriting expenses that multiplied more than seven times to N539 million over the same period. The third leg of the rising cost tripod that undermined profit performance in the first half of the current financial year is operating cost, which grew by 29 percent to N420 million over the review period.
The cost increases exceeded the gain in revenue, leading to a drop of 25 percent in underwriting profit to N200 million at the end of June 2019.
Investment income maintained a moderate increase but at less than N54 million, the figure was insufficient to make up for the drop in underwriting profit. A drop of 19 percent in net income to N254 million was compounded by the rise of 29 percent in operating expenses at half year.
Net income was insufficient to meet operating expenses during the period, which produced a net loss of N173 million for Universal Insurance at the end of half year 2019. That was equally the operating story in 2018 that resulted in a net loss of N45 million at the end of the year.
The company scaled through the 2007 recapitalisation and seems quite confident to make the list again as the June 2020 deadline continues to tick. This time around it has an edge with its total equity standing of over N10 billion with net reserves of N2.2 billion. It could recapitalize the reserves for scrip dividend as may be possible within the regulatory rules.
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