Economic downturn scuttling insurance industry recapitalisation

One of the major problems currently facing underwriting businesses is their inability to raise their capital base to meet the proposed requirement. This is becoming a source of worry for many industry stakeholders.

Although the Coronavirus outbreak is flattening, the pandemic has set the global economy spiraling, with recovery in some countries predicted to remain sluggish for the next few years.

The Nigerian economy is not isolated from this development as its revenue continues to shrink. Many companies are closing businesses while those still in operation are struggling to survive. Investment is shrinking just like other areas of the economy.

This poses a serious challenge to insurance industry recapitalisation, an exercise that started long before the pandemic struck. Though the insurance industry regulator, the National

Insurance Commission (NAICOM), has extended the deadline to September 2021, most underwriters are facing herculean task sourcing funds to meet the new recapitalisation deadline.

The Managing Director/Chief Executive Officer, Universal Insurance Plc, Ben Ujuatuonu, said: “With companies closing down globally coupled with increasing financial challenges, it will be difficult for the sector operators to attract foreign investment to scale up their capitalization.

He noted that investors who initially showed interest in the sector wanted to invest in Nigeria before now requiring bailout themselves, adding that “the recapitalisation exercise is going to be tough, especially for those contemplating foreign investments.”

The second option, he said, is the local investment market. He expressed concern about this, saying the local investors might not have the financial muscle to bailout an industry as big as Nigeria’s insurance sector.

“The performance of the capital market has not been too convincing. So, where else will the funding come? It is going to be a challenging year for insurance operators, no doubt,” he said.

NAICOM had earlier extended the deadline for insurance industry recapitalisation from December 31, 2020 to September 30, 2021. According to the new guideline, insurance companies will have to meet 50 percent of the new capital base by December 31, 2020 and comply fully on September 30, 2021.

According to the Commission, the extension was necessitated by the global pandemic, which has made the earlier deadline unrealistic. NAICOM, in the circular, said, a review of the recapitalisation deadline, became necessary to mitigate likely negative consequences of the pandemic on the exercise.

It added that the Commission has extended and segment the recapitalisation process into two phases: “50 percent of the minimum paid-up capital for insurance and 60 percent for reinsurance shall be met by 31 December 2020 while Insurance Companies are required to fully comply with the approved minimum paid-up capital not later than 30 September 2021.

Following the new development, life insurance companies are required to raise their capital base to N4 billion by the end of the year.

Similarly, non-life insurance firms would beef up their capital to N5 billion by December 31, 2020 and be fully re-capitalise to the tune of N10 million next September. Composite insurers require to raise their to N9 billion by the year while hit the N18 billion benchmark in September next year.

There have been mergers and acquisition discussions that have been ongoing among operators to meet the new capital adequacy requirement.

Director, Policy, and Regulation, NAICOM, Pius Agboola, had disclosed that some underwriters were also scouting for partners to merge with. He said that only six companies indicated interests in mergers and acquisitions.

“Only six companies have indicated an interest in mergers and acquisitions out of 44 companies reviewed,” he said.

The director stated that NAICOM had restricted the insurance companies from taking loans to meet their recapitalization. He said while some of the companies that borrowed funds during the last recapitalisation exercise were doing well, the majority of the companies have been acquired by foreign investors.

“If any of them wants to bring in money, they must become owners and become part of the management. Nobody will give them money and sit back waiting for returns. When they are owners, they will have directors; they will know how the company is being run. If the person at the helm of affairs is not doing well, they will fire him and employ another person,” Agboola said.

Unitrust Insurance Company Limited is considering a merger with another local underwriting firm to increase its capital base to N10 billion new capital benchmark for general business underwriting.

Speaking on the development, the Managing Director/Chief Executive Officer of the Company, Mr. John Ijerheime, said the firm has met 67 percent of the required capital, implying that it has surpassed the December requirement.

“Currently, we have 67 percent of the N10-billion new capital requirement which is 17 percent higher than what the regulator required by December. So, what our shareholders are considering is whether we want to merge or stand alone? If we want to stand alone, we should be able to do that. But if we want to merge, we are already discussing with an insurance firm for a business combination,” he said.

Most of the companies have planned to raise funds through share premium, capitalization of retained earnings, Initial Public Offerings (IPOs), right issues or private placement, or a combination of these avenues.

AIICO Insurance Plc has submitted an application to the Nigerian Stock Exchange (NSE) for an approval for a right issue of 4,357,770,954 ordinary shares of fifty kobo each at eighty kobo per share, based on five new ordinary shares for every 13 ordinary shares held.

This will allow its shareholders to increase their stake and position themselves for higher returns on their investments. A statement from the company stressed that the move was to implement its recapitalisation plan ahead of the deadline given by the regulator.

Linkage Assurance Plc, on its part, has assured shareholders that despite the challenges posed by the impact of Covid-19, the company is on course to meet the deadline. The company disclosed that it is concurrently exploring all available options including rights issues, private placement, and internal capital sourcing to raise the required funds.

The Managing Director/CEO of Linkage Assurance Plc, Daniel Braie, had assured the industry earlier in the year that his company will meet the new capital base.

Meanwhile, industry experts, who spoke to The Guardian at the weekend advised NAICOM to suspend the plan recapitalisation, arguing that it is coming at the wrong time.