‘Why 33 insurers may not meet December recapitalisation deadline’
In a quest to make insurance industry viable among other sectors of the economy and to also give directions to the regulator, African credit rating agency, Agusto & Co has said that only 26 out of 59 insurance companies in Nigeria might meet December 31, 2020 deadline as 33 firms may have to explore the merger and acquisition option in the country.
According to the report, a major reduction in the total number of players in the industry by at least 50 per cent is expected by December 31, 2020.
The report predicted that at least 26 out of 59 insurance firms licensed to underwrite risks in the non-life, life and composite business segments, would be able to meet the new minimum capital requirement stipulated by the National Insurance Commission (NAICOM) for the operation of insurance business while 33 firms may be left with nothing than to merge or be acquired.
The report also predicted a stable outlook and anticipated 26.5 per cent growth in total assets of the industry between now and December 31.
“We expect marginal improvement in the near term and significant growth in the medium term on the back of the recapitalisation. However, the fragile macroeconomic environment remains a constraint,” the report added.
The new minimum capital requirements stipulated by NAICOM increased the capital base of four categories of insurance licenses from N3 billion to N10 billion for non-life insurance; N2 billion to N8 billion for life insurance; N5 billion to N18 billion for composite insurance and N10 billion to N20 billion for re-insurers. The deadline for meeting the new minimum requirement is December 31, 2020.
The report on the Nigerian insurance industry, titled, “Recapitalisation: The Journey to Consolidation,” was unveiled in Lagos, by the Senior Analyst, Financial Institutions Ratings, Agusto and Co., Ada Ufomadu.
Ufomadu, stressed that 13 insurers out of 28 players in the non- life segment of the industry would comply before the December 2020 deadline through private placements, rights issuances and business combinations.
She also tipped eight life insurers to meet the new capital base before the December 2020 deadline.
Similarly, “we expect five composite insurers to comply before the December 2020 deadline,” she maintained.
The report stated that three out of the 28 non-life insurers and three out of 14 players in the life insurance sector had met the new minimum capital requirements. However, the report stated that only one out of 13 players in the composite insurance has met the new minimum capital requirements.
Ufomadu, identified low returns on equity (RoE) as a major hindrance on the way of many insurance firms to be able to meet the new minimum capital base. According to her, the RoE has remained, “lower than the return on 365-day treasury certificates of 13.9 per cent and the banking industry’s estimated RoE of 22.9 per cent in 2019.
She added: “The return on equity of Nigeria’s insurance industry is significantly below the cost of equity and less than the average yield on Federal Government of Nigeria’s 365-day treasury certificates. It is also below the average inflation rate.
“This is attributable to a lack of scale and a low return on investments, which adversely impacts profitability. A lot of equity investors, therefore, shun the industry, which is in dire need of additional capital to increase its underwriting capacity.”
The Agusto report also showed that the Gross Premium Income (GPI) in the insurance industry was driven by life business, particularly annuities while the oil and gas business line dominated the non-life segment of the industry.