BY EMEKA EJERE
The Nigerian Stock Exchange (NSE), last week placed Law Union & Rock Insurance Plc (LUR), on full suspension, implying a total cessation of trading activities on the shares of the company, with effect from October 16, 2020.
The NSE had earlier approved application by the underwriter seeking voluntary delisting of its shares from the main board of the Exchange. The voluntary delisting was part of ongoing acquisition of LUR by Anglophone West Africa private equity firm, Verod Capital Management. Verod had offered N5.3 billion for the acquisition of the entire share capital of LUR in a major bid that further opened up mergers and acquisitions in the insurance industry.
Insurance companies are in a hot race to raise new equity capital to meet new minimum capital requirements for various insurance businesses as directed by the industry regulator, the National Insurance Commission (NAICOM).
NAICOM had in May 2019 released new capital requirements for insurance businesses with a 13-month compliance period for operators to shore up their minimum capital base to the required level.
The minimum paid-up share capital of a life insurance company was increased from N2 billion to N8 billion, non-life insurance from N3 billion to N10 billion, composite insurance from N5 billion to N18 billion while re-insurance companies were directed to raise their capital base from N10 billion to N20 billion.
But the inability to raise their capital base to meet the proposed requirement is a major problem currently facing underwriting businesses in the country. This is becoming a source of worry for many industry stakeholders. Although the curve of 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 with declining oil price and increasing debt-servicing obligations. 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 has continued to pose a serious challenge to insurance industry recapitalisation, an exercise that started long before the pandemic struck.
Although NAICOM has extended the deadline to September 2021, most underwriters are facing herculean task sourcing funds to meet the new recapitalisation deadline.
Commenting on the situation, 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 foreign investors who showed interest in the sector are now requiring bailout themselves, adding that “the recapitalisation exercise is going to be tough, especially for those contemplating foreign investments.”
Ujuatuonu regretted that the second option, which is the local investment market, cannot solve the problem as 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.
According to the new NAICOM 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. The commission, 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 segmented 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 September 30, 2021.
The difficulties operators are facing in meeting the new capital adequacy requirement have expectedly prompted mergers and acquisition discussions in the industry. 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.
Agboola 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.
He said the ongoing recapitalisation exercise would give companies in the industry the capital base and improved capacity to underwrite more risks.
Clearing the air on his firm’s transaction with Verod Capital Management, the managing director and chief executive officer, Law Union, Ademayowa Adeduro, explained that his company has informed all necessary regulators on the development.
“The crucial phase of our recapitalisation exercise was crossed on February 27, 2020, with the signing of Transaction Implementation Agreement between Verod Capital Management Limited and the majority shareholders of Law Union & Rock Insurance”, he said.
“We had subsequently informed the National Insurance Commission, the Securities and Exchange Commission and the Nigerian Stock Exchange about this development.”
He explained that the TIA gave legal backing to Verod Capital to buy 100% stake in LUR, recapitalise the company to a minimum N10bn and also delist its share from the Nigerian Stock Exchange through Scheme of Arrangement.
In a related development, Unitrust Insurance Company Limited is considering a merger with another local underwriting firm to increase its capital base to N10billion new capital benchmark for general business underwriting.
Speaking on the situation, 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.
Accordingly, AIICO Insurance Plc has submitted an application to the NSE for an approval for a right issue of 4,357,770,954 ordinary shares of 50 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.
On its part, Linkage Assurance Plc 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.