Chiamaka Ajeamo,[email protected]
Operators in the Nigerian insurance sector are fighting the greatest battle of their lives to stay in business as sourcing for funds to meet the June 2020 recapitalisation deadline appears more difficult than expected for majority of insurers.
Industry sources told Daily Sun that convincing investors to commit funds into the sector to boost the capital base of existing insurance and reinsurance firms has remained the greatest challenge of operators. At the root of the investor apathy is the insurance sector’s poor returns on investments record as well as its low penetration level in the country.
The National Insurance Commission (NAICOM) which set the recapitalisation directive, had hinged its reasons on the need to grow the capital base of the Nigeria insurance industry to boost its financial capacity to underwrite bigger risks in key sectors like oil and gas, aviation, and maritime where most risks continue to be ceded to foreign firms. Aside boosting the sector’s financial strength for bigger retention capacity, the Commissioner of NAICOM, Sunday Thomas, further noted that its essence is to have an industry with a positive image that can contribute significantly to the Gross Domestic Product of the economy with strong and solid assets base, diligent in prosecution of its assignments, able to support the government in its developmental initiatives, and create more employment opportunities for the youth.
Targeting fund from the Nigerian Stock Exchange
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 making most operators less optimistic that that window could provide the relief needed by the underwriters in the current capital raising exercise. The reason for such pessimism is not unconnected with the continuous bearish performance of the NSE in recent weeks.
During its recent visit to the NSE in Lagos, the Nigerian Insurers Association (NIA) had sought for assistance from the Nigerian Stock Exchange (NSE) to support the insurance companies in their bid to meet the new capital level prescribed by the National Insurance Commission (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.
While addressing the Chief Executive Officer of NSE, Oscar Onyema, and its management, Smart, implored the support of the exchange and other players in the capital market, while welcoming other initiatives by the NSE in their efforts to raising the new capital as required by NAICOM.
It was gladdening to note how the NSE DG assured the NIA of the willingness of the NSE to assist underwriters meet the new capitalization while ascribing the insurance sector as an important sector of the economy that is too critical to be ignored. He listed some initiatives of the exchange, noting that it will soon introduce some derivatives to take care of takaful insurance products, even as he urged the insurers to make use of their knowledge sharing platform in its capacity building and corporate governance training.
Without doubt, the NSE may have its challenges, but it still remains a viable source of hope for insurance operators seeking fresh injection of funds to meet the new capitalization requirement.
What this calls for is for insurers to make concerted efforts to meet the key requirements that may be stipulated by NSE in order to benefit hugely from it to realise their purpose.
Mergers and Acquisitions
In the last recapitalisation in 2007, the Nigerian insurance sector functioned on a low capital scale with the life companies 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 or acquire stakes in existing local insurance firms. Indeed, the post-recapitalisation era witnessed the birth of operators with foreign firms holding greater stakes in the companies.
According to data sourced from NAICOM, foreign equities in post 2007 recapitalisation rose to 62.8 per cent in at least seven insurance firms.
Then in 2014, the industry witnessed three foreign acquisitions; two in 2015; and five in 2016 respectively, some of these foreigners are; Prudential Africa, Axa Mansard, Allianz Group, Old Mutual among others that are still pending due to the ongoing exercise.
Also recently, a foreign investor InsuResilience Investment Fund from Germany, acquired a share in a local insurance firm. The foreign firm committed about N3.6 billion to acquired 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, Pius 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.
In an interview with Daily Sun, an Insurance expert, Mr Ekerete Gam-Ikon, however said the task of a successful recapitalisation of the sector lies with NAICOM.
Gam-Ikom linked the weak financial state of Nigerian insurance firms to mismanagement on the parts of insurance firms.
“Mismanagement is the problem and this is why NAICOM took over some companies,” he said. “If this issue is not addressed, how do you expect investors to confidently invest? Gam-Ikon queried.
According to him, foreign investors will require to see a serious level of good governance in any firm they intend to invest in and this good governance is lacking in many companies.
Gam-Ikon suggested that the way forward could be found in NAICOM instituting a culture of transparency in the industry as well as demanding expertise from foreign investors.
“NAICOM should make insurance firms as transparent as possible for investors. The responsibility of portraying the positive image of firms to investors lies with NAICOM because, many consultants are misinforming investors and the general public; they should embark on a road show to educate them.
“NAICOM should come up with an investment document for investors and a road map for the sector stating what is fundamental to the industry from information provided by firms.
“NAICOM must demand expertise from foreign investors in key areas like aviation, maritime for local firms, recapitalisation is pointless if all insurers including foreign ones continue to function without specialisation. This is the only way the sector can build capacity. Otherwise, foreign investors will continue to come with their names, attract the business of the world bank and take the profits back to their country”.