M&As top options for insurance recapitalisation

• Shareholders fault government on emergency policy
A significant number of insurance operators are currently considering mergers and acquisitions (M&As), in their quest to meet regulators new recapitalisation requirements.

This is because available 2018 financials of about 12 insurance companies, only WAPIC Insurance Plc meets the new minimum capital requirement.

The Guardian reliably gathered that many under-performing firms may close shop, while others would rather merge or seek Foreign Direct Investment (FDI).

Already, some operators, including Sunu Insurance Plc, and Allianz Insurance, have attracted foreign firms, which are now collaborating and initiating new products to beat the required financial base and the standard operating procedures.

The National Insurance Commission (NAICOM), had in May, announced a compulsory recapitalisation exercise for operators, 12 years after the last exercise.

This policy, according to NAICOM was borne out of the fact that the sector is currently contributing less than one per cent to the Gross Domestic Product (GDP), as well as recording 0.04 per cent insurance penetration.

Also, indigenous underwriters are estimated to be losing a whopping N2.8trillion yearly to foreign counterparts due to low capacity to absorb big risks in petroleum, telecommunications, maritime, aviation and others, while some still struggle to pay genuine claims, a pointer to the need to recapitalise to make the required impact on the economy.

Under the new directive, companies with composite licence are to raise their capital base from N5 billion to N18 billion to continue to underwrite life and non-life businesses in Nigeria.

Life insurance firms are required to move from N2 billion to N8 billion about 400 per cent increase.

General insurance will muster N10 billion from current N3 billion to continue to exist in insurance industry, while Reinsurance firms will now need about N20 billion instead of the N10 billion they were operating with.

Director, Policy and Regulation Directorate of NAICOM, Pius Agboola, in the circular, gave insurers up till June 30, 2020, to recapitalise, while new ones will have the required amount before they are licensed to transact underwriting business in Nigeria.

The Coordinator Emeritus, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, told The Guardian that the recapitalisation exercise would only further heightened the tension in the sector, as investors are sceptical of putting their money in insurance under the current regulatory atmosphere.

He argued that by the new policy, NAICOM is only making the operating environment more difficult for insurers, adding that there is nowhere in the world where recapitalisation exercise is done under one year, as prescribed.

He noted that currently, shareholders investments in insurance have not yielding good returns; as such it will be difficult for them to invest more in the Industry.

He charged insurers to unite and oppose the move, as most underwriting firms are not in a good financial position to pay dividend, without the additional burden of recapitalisation, adding that it will take years to convince investors to raise the amount prescribed.

But the Managing Director/Chief Executive Officer, Consolidated Hallmark Insurance Plc, Eddie Efekoha, told The Guardian that NAICOM means well for the industry, and that operators are already engaging the regulator to reach a consensus that will benefit all stakeholders.

“We cannot fight the regulator, but we will engage them to see things from own point of view. I believe they have the interest of the Industry at heart. It is a new development and discussion will continue to reach a common ground,” he pointed out.

Senior Financial Institutions Analyst, Agusto & Co, Ada Ufomadu, said recapitalisation would be largely achieved through various options, which include M&As, FDIs, private placements, and rights issues.

Ufomadu said stakeholders remain cautiously optimistic about FDIs, given persistent weak investor sentiments on account of political and economic uncertainties.

She noted that NAICOM’s intention is largely aimed at consolidating the highly-fragmented industry through M&As, hence, many insurance companies would need to raise additional capital as a prerequisite for the process.

“Consolidation will involve major mergers comprising up to five insurance companies to form new companies with stronger capital. To ease the financial burden of the recapitalisation exercise, NAICOM obtained palliatives and concessions from other related authorities such as the Corporate Affairs Commission (CAC), Securities Exchange Commission (SEC), and the Nigerian Stock Exchange (NSE), on application processing fees on M&As and other associated activities.

“However, it took the industry up to two years to adopt the new capital standards. Although the recapitalisation exercise in 2005/2007 strengthened the insurance industry’s underwriting capacity, there were major notable hitches during the process”.

“Due to uncertainties that surrounded identities of the recertified insurance companies, brokers withheld premiums paid by clients as against transferring same to the underwriting firms. The resultant effect was a decline in premiums available for investments,” she said.

She recalled that a similar trend played out in 2018, following the introduction of the Tier Based Minimum Solvency Capital (TBMSC), where some players were adversely impacted by large corporate (particularly in the oil & gas sector) demanding immediate payment of outstanding claims due to uncertainties on the insurers that qualified as Tier 1 companies.