BY EMEKA EJERE
Barely six months into the June 30 recapitalisation deadline set by the National Insurance Commission (NAICOM), it is unlikely that many of the operators in the insurance sector who hope to find a lifeline in the capital market will succeed.
Business Hallmark has learnt that convincing investors to commit funds into the sector to boost the capital base of existing insurance and reinsurance firms is hard. The industry suffers high investor’s apathy owing to a record of poor returns on investments as well as its low penetration level in the country.
However, last week, a member of the insurers’ reconstituted committee, Mrs Ebere Nwachukwu, in a chat with journalists revealed that not less than 10 insurance companies have so far approached the capital market to seek assistance towards raising funds for the recapitalisation exercise.
She assured that the Commission has equally promised to render the necessary assistance within its regulatory powers to support the companies, stressing that insurers should take advantage of the capital market long term investment fund to boost their finances.
Insurance stakeholders in Nigeria were thrown into a pandemonium earlier this year when the regulatory body issued a circular mandating insurance firms to raise their minimum paid-up issued share capital.
According the circular, life insurance companies are to raise their minimum capital base from N2 billion to N8 billion; General Business underwriters from N3 billion to N10 billion; Composite Insurers, from N5 billion to N18 billion, and reinsurance firms from the current N10 billion to N20 billion.
Since the announcement in March this year, many of the insurance companies have been scrambling to raise the needed capital in order to meet the deadline. Some of their plans include rights issues, mergers and acquisitions, and more. These plans were reviewed by NAICOM and approvals given accordingly.
In its editorial of August 30, 2019 titled, ”Recapitalisation: Tough decision for the insurance sector”, The Punch notes: “NAICOM says 90 per cent of oil and gas premium in the country is ceded to foreign reinsurers as a result of weak domestic capacity despite the noble intentions of the Nigerian Local Content Act.
“Recapitalising can help reduce this. Insurance contributes only about 0.4 per cent to Nigeria’s GDP, says NIA, while the financial and insurance sector contracted by -7.6 per cent in the first quarter of 2019, from -1.76 per cent in Q4 2018 said the National Bureau of Statistics.
The editorial further avers: “Yet, a robust insurance sector offers tantalising hopes of low interest long term investible funds, sorely needed in Nigeria today, beset with dwindling public revenues, mounting public debts, poor infrastructure and high unemployment. The highly coveted life assurance segment is dismal, unlike in South Africa where life insurance, at 12 per cent penetration, is one of the world’s highest.
NSE to the rescue?
In 2007 when the insurance sector was first ordered by NAICOM to recapitalise, the Nigerian Stock Exchange (NSE) played a pivotal role in assisting operators meet their targets. Most of the firms ran to the NSE to source for funds through listings and Nigerians responded positively to their Initial Public Offers. (IPOs) .
“Unfortunately events in the last few years are making most operators less optimistic that that window could provide the relief needed by the underwriters in the current capital raising exercise”, Philips Ikekwe, a regular investor observed
“The reason for such pessimism is not unconnected with the continuous bearish performance of the NSE in recent weeks.
“Unlike in 2005-2007, when the bourse was hyperactive, a general disinterest by investors makes recapitalisation tense at this time.”
According to the NSE, the value of equities dropped by 13.9 per cent, representing about N1.9 trillion, in 2018 to close at N11.72 trillion by December 2018, compared to N13.6 trillion by December 2017..
Total Foreign Direct Investment in Nigeria dropped to $2.2 billion in 2018 compared to Ghana’s $3.3 billion.
Even portfolio investors have been taking flight, pulling N1.87 trillion from the market in the four years to June 2019, the report also revealed.
“Investor confidence, in the face of the glaring incompetence of the Muhammadu Buhari government, unstable oil prices and insecurity in the country, is still low”, a source who pleaded unanimity noted.
However, during its recent visit to the NSE in Lagos, the Nigerian Insurers Association (NIA) had requested for assistance from the Exchange to support the insurance companies in their bid to meet the new capital level prescribed by the NAICOM.
The chairman of NIA, Tope Smart, at the visit, said that out of 59 insurance companies comprising 14 specialist life insurance companies, 28 general insurance companies, 13 composite insurers, two takaful insurance companies and two reinsurance companies, about 32 of them are listed on the exchange.
Addressing the chief executive officer of NSE, Oscar Onyema, and his team, Smart also solicited the support of other players in the capital market, while welcoming other initiatives by the NSE towards raising the new capital base.
Responding, Onyema assured the NIA of the willingness of the NSE to assist underwriters meet the new capitalization, describing the insurance sector as an important sector of the economy that is too critical to be ignored.
Meanwhile, shareholders of Niger Insurance Plc have given their approval to a proposed plan by the company’s board to raise additional capital to the tune of N15 billion. The approval was one of the key decisions taken during the company’s 49th Annual General Meeting held recently in Lagos.
A statement sent by the company to the Nigerian Stock Exchange noted that the company’s directors would, henceforth, raise the additional capital through all necessary means, including (but not limited to) rights issue.
“That the directors of the company be and are hereby authorized to take all necessary steps to raise additional capital of up to N15,000,000,000 (Fifteen Billion Naira) whether by way of rights issue, private placement or to negotiate merger and acquisition or any other form of business combination or other arrangement or a combination of methods with insurance companies and that the rights issue be executed at such price, time and on such other terms and conditions as the directors may deem fit,” the statement read in part.
Who acquires who merges?
The last recapitalisation in 2007 came when Nigerian insurance sector was functioning on a low capital scale. The life companies were operating with a capital base of N150 million which was reviewed to N2 billion; non-life was N200 million which geared up to N3 billion; composite firms operated with N350 million and it was increased to N5 billion while reinsurance firms recapitalized from N350 million to N10 billion.
Majority of the insurance firms then were local operators, but the recapitalisation exercise opened doors for foreign investors who saw the policy as an avenue to merge with or acquire stakes in existing local insurance firms. Little wonder the post-recapitalisation era witnessed the birth of operators with foreign firms holding greater stakes.
According to data from NAICOM, foreign equities in post 2007 recapitalisation rose to 62.8 per cent in at least seven insurance firms.
In 2014, the industry witnessed three foreign acquisitions, two in 2015; and five in 2016. Some of foreign entrants are: Prudential Africa, Axa Mansard, Allianz Group, and Old Mutual.
Also InsuResilience Investment Fund, a foreign investor from Germany, recently committed about N3.6 billion to acquire 39.25 per cent stake in Royal Exchange General Insurance Company, a subsidiary of Royal Exchange Plc.
The 39.25 per cent acquisition of Royal Exchange General Insurance by the foreign investor was part of the local firm’s measures to meet the recapitalisation target, findings revealed.
According to the director, Policy and Regulation Directorate, NAICOM, Pius Agboola, foreign investors were being attracted to the Nigerian industry because of the inherent potential.
As existing operators struggle to meet the new recapitalisation deadline by NAICOM, Agboola also suggests that they explore seriously the option of mergers and acquisition.
“During the 2007 exercise, four companies merged to have Custodian; four merged into Veritas Kapital; two merged to form LASACO Assurance; two firms merged to be Linkage Assurance; and three firms merged to be NEM Insurance.
“Also, three companies formed to be Regency; three formed Sterling; two merged into Consolidated Hallmark while another two formed African Alliance”, Pius said while highlighting the prospect that mergers still hold for existing underwriters.
However, the chairman of Mutual Benefits Assurance, Akin Ogunbiyi, sees the on-going recapitalisation exercise in the insurance industry as the greatest de-service to the firms and industry. Ogunbiyi said the exercise has created confidence problem in the industry as it could kill the industry if it is not reversed or given a longer-term period as deadline.
He said, “In fact, something drastic needs to be done to reverse this new capital exercise. It has created a lot of confidence problems.
“Even the people doing insurance don’t know what will happen. If an industry is working with N5bn and they are not able to use it for profitability, and you say increase it to N18bn, what are we insuring?
“Government should hear it from me; it is killing the industry. If nothing is done quickly, either to reverse this or to give a three-year or long-term period for the recapitalisation, the industry is gone. Today, the insured doesn’t even know what to do. I can tell you that only five insurance companies have passed that recapitalisation stage out of 49 companies. Is that the kind of industry that we want.”
He alleged that insurance companies are being acquired with peanuts by foreigners and the owners do not last more than two years before they exit the market.
“How do you take people’s sweat because of this issue of recapitalisation and give to the foreigners? He queried.
“I don’t know whether the policymakers have compromised. Foreigners are buying the insurance companies for peanut”.
But the acting-commissioner for Insurance, Mr. Sundssy Thomas, maintains that the ongoing recapitalization in the insurance industry will be completed in the year 2020, pointing out that business may be slowed down but confidence will be rebuilt.
In a telephone interview with Business hallmark, Thomas said, “In the insurance sector where I work, we’re going to conclude our recapitalization “, he said.
“I want to believe that business will slow down a bit, but confidence will be rebuilt.”
Contrary to widespread claims that the ongoing recapaitalisation process would trim down the number of insurance companies operating in the industry, Thomas assured stakeholders that the process would be beneficial for the sector. He explained that the aim of recapitalisation is to strengthen the insurance sector and aid economic development.