With June 30, 2020 deadline given to insurance and reinsurance firms to recapitalise fast approaching, insurers are already exploring equity investment and capital market options to source for funding to recapitalise. ZAKA ABD-KHALIQ writes
With the ongoing recapitalisation exercise in insurance industry, underwriting firms with composite license will now need to upgrade their capital base from N5 billion to N18 billion to continue to underwrite life and non-life insurance businesses in the country.
Life insurance firms were required to increase their minimum capital requirement from N2 billion to N8 billion, amounting to 400 per cent increase in their capitalisation.
Similarly, General insurance companies are to raise their capital base to N10 billion from N3 billion to continue to exist in insurance industry, even as reinsurance firms will now need N20 billion capital base to operate Reinsurance business in the country, unlike N10billion they were operating with, prior to now.
To this end, underwriting firms have begun the process of sourcing for funding through wooing equity investors while some are leveraging on the capital market to increase their capitalisation to the minimum threshold.
Market observers believe it is now time for industry players to be realistic and shun away sentiments, stating that, a situation whereby insurers were still operating with the same capital base of 12 years ago, when the business dynamics have long changed, will help no stakeholder.
The Recapitalisation Process
In a circular sent to all insurance and reinsurance companies and signed by the Director, Policy & Regulation Directorate, NAICOM, Mr. Pius Agboola, and made available to LEADERSHIP Sunday, NAICOM had said, the minimum paid up share capital, in the ongoing recapitalisation exercise, should be through any or a combination of; existing paid up share capital; cash payment for new shares issued; retained earnings; payment in kind (other than by way of cash) for new shares issues such as properties; treasury bills; shares; bond which must be converted to cash not later than three months to the deadline for recapitalisation and share premium.
The aforementioned recapitalisation avenue, it said, could be achieved through merger and acquisition.
Cash payment for new shares issued, it stressed, shall be deposited in the escrow account with the Central Bank of Nigeria (CBN), noting that, deposited funds must be released not later than 30 days after confirmation and issuance of a new licence.
“The commission posited that the shareholders’ fund as at the last date of recapitalisation for existing insurance/reinsurance companies shall not be less than the required minimum paid-up share capital. Payment of statutory deposit shall be in accordance with the Insurance Act 2003 and shall be made not later than 30 days to the deadline for the recapitalisation,” it stated.
To this end, the regulatory body has ordered insurance and reinsurance companies in the country to submit their recapitalisation plan to the regulatory body on or before Tuesday, August 20, 2019.
The recapitalisation plan, it said, should include capital status of the companies as at the last audited financial statements; board resolution on how to comply with the directives; detailed action plan on how the funds for the recapitalisation are to be sourced with timeline and deliverables.
It added that, any insurer intending to seek funds from the capital market is required to submit its plan of action on a file-and-use basis while those intending to merge or acquire another should submit their proposal after which they must have complied with Section 30 and 31 of the Insurance Act 2003.
Disclosing that, after the submission, it would review and provide response on the submitted plans on or before September 17, 2019, it added that, the review may require meeting the board and management of each of the insurance company on its recapitalisation plan.
The commission is engaging other regulatory bodies for possible palliatives in additional to those it is has considered, it pointed out.
As Insurers Explore Investment Options
In the opinion of Senior Financial Institutions Analyst, Agusto & Co, Ada Ufomadu, recapitalisation will be largely achieved through various options which include Mergers and Acquisitions(M&A), Foreign Direct Investments (FDI), private placements and rights issues.
Ufomadu said, stakeholders remain cautiously optimistic about foreign direct investments, given persistent weak investor sentiments on account of political and economic uncertainties, stressing 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 a probable M&A.
Ufomadu recognised that compared to the 2005/2007 recapitalisation where there was a booming capital market and banks were allowed to invest or outrightly acquire controlling interests in insurance companies, underwriters now have limited avenues to raise capital.
Therefore, recapitalisation, according to her, will be largely achieved through mergers & acquisitions, foreign direct investments (FDI), private placements and rights issues.
She said the industry remains cautiously optimistic about foreign direct investments, given persistent weak investor sentiments on account of political and economic uncertainties.
The Managing Director/CEO, Royal Exchange General Insurance Company (REGIC), Mr. Benjamin Agili, believes, the current operating environment in insurance industry favours equity investment over seeking funding from public shareholders.
He said public shareholders were not ready to invest in insurance companies, because of low returns on investment from their previous stake.
Moreover, he said, equity investment is easier to negotiate, while it brings in more liquidity into the system at a time the recapitalisation exercise is ongoing.
He said most of the insurers who have, in the past, gone to the Nigerian Stock Exchange(NSE) to raise money are regretting it, noting that, this was one of the reasons his underwriting firm opt for equity investment.
To this end, InsuResilience Investment Fund (IIF) has acquired 39.25 per cent stake in REGIC, thereby, injecting N3.6 billion in the company.
The acquisition, according to Agili, was to abide by the National Insurance Commission’s (NAICOM) directive for insurance companies to increase their share capital in line with the new regulatory requirements recently introduced.
The proceeds of the investment, he said, will equally help REGIC to spur growth by increasing its risk capital and supporting its underwriting capacity in agriculture, hereby extending its outreach to low income farmers.
To the Executive Director, Leadway Assurance Company Limited, Ms Adetola Adegbayi, had said, the aim of companies going for listing in the capital market is to raise money but that if an underwriter is already in a good financial condition, there won’t be any need to trade on the floor of NSE, pointing out, that her company is comfortable with its present financial situation, hence, it is not ready to be listed.
Last year, as well, shareholders of Great Nigeria Insurance Plc (GNI), unanimously approved the delisting of all the ordinary issued shares of the company from the Daily Official List, as well as trading on the main board of the Nigerian Stock Exchange (NSE).
While speaking at its Annual General Meeting(AGM) then, the Chairman of the company, Mr. Bada Aluko, said, the decision to delist the company from NSE was the result of ‘no trading’ on its shares since five years.
”Neither our company nor you, our esteemed shareholders, are benefiting from the continued listing, as shares are not getting any exit opportunity and the investments have been locked up and they find it difficult to dispose of their shareholders,” he said.
A member of the Independent shareholders Association of Nigeria (ISAN), Sunday Solomon Akinsoye, said that the continued fining of the company by NSE is destroying the investments of minority shareholders. He noted that the shareholders are not pleased with the regulator, adding that if such funds paid as fines are channelled as dividend or for investment, shareholders would be better off.
The company has since been looking for equity investors to recapitalise the firm to the approved threshold in the ongoing recapitalisation exercise.
Meanwhile, the shareholders of WAPIC Insurance Plc has authorised the company to raise its authorised capital base to N15 billion. The company embarked on the capital raise, following the directives of the sector regulator, National Insurance Commission (NAICOM). Currently, the company has N8.5 billion authorised capitalisation and will require N6.5 billion to move to the new threshold.
Following this development, Wapic Insurance created additional 13 billion units of shares of 50kobo to rank pari passu with the existing ordinary shares in the capital of the company.
Moreover, the shareholders of Sovereign Trust Insurance(STI) had, last week, at its 2018 Annual General Meeting(AGM) in Lagos, approved that the company raise additional N5 billion through Rights Issue in a bid to successfully recapitalise.
Consolidated Hallmark Insurance(CHI), Linkage Assurance, Sunu Assurances, Mutual Benefits Assurance Plc, NEM Insurance Plc, AIICO Insurance Plc, among others, are equally looking for either equity investors, floating of rights issue through the capital market or both, while few are beginning to explore mergers and have commenced negotiation process with the interested parties.
Stakeholders Support The Excercise
The Commissioner for Insurance, Nigeria, Alhaji Mohammed Kari, said, the ongoing recapitalisation exercise will allow local insurers to retain huge risks in the country.
This, according to him, was to avoid premium flight, which will, in the long run, increase the profitability of the sector and its impact on the nation’s economic growth and development.
He noted that, Nigerian Insurers must be responsible in meeting and surpassing customers expectation in the area of product delivery and prompt claims payment, saying, the low risk retention capacity of the sector would be addressed with the current recapitalisation exercise.
While stating that the recapitalisation is long overdue as foreign exchange rate, asset replacement values as well as claims volume have increased in the last 12 years, he added that, operating with the current capital base is putting insurance firms at risk.
He said, insurance operators are fond of resisting recapitalisation exercise, whenever the idea is mooted, saying, some insurers prefer to continue to write huge risks in aviation and marine sectors, with small capital, a development, he said, was responsible for why some underwriting firms are struggling to pay claims.
“All over the world, there is usually, an entry point, which is the minimum capital requirement for an insurer to underwrite risk in a country. Other decisions whether to increase the minimum capital or maintain it, is taken thereafter. So, even under risk based, the minimum capital still exists.,” he pointed out.
Moreover, insurance stakeholders, comprising of; the Chartered Insurance Institute of Nigeria(CIIN), the Nigerian Council of Registered Insurance Brokers(NCRIB) and the Institute of Loss Adjuster of Nigeria (ILAN) have backed the insurance industry regulatory body over the ongoing recapitalisation exercise in this sector.
The stakeholders, who applauded the move at the 2019 Insurance Industry Consultative Council (IICC) Media Retreat in Ijebu Ode, Ogun State, recently, believe the industry is more than ripe for another wave of recapitalisation, 12 years after the previous one.
The President, CIIN, who also doubles as the Chairman of IICC, Mr. Eddie Efekoha, commended NAICOM for initiating the recapitalisation, pledging operators’ support for the exercise which he believes will help grow the sector.
According to him, “The wind of recapitalisation is blowing. When we came back from the AIO in South Africa, we heard that of Ghana and the Central Bank of Nigeria (CBN) and I think the insurance regulator should be commended for setting the pace.”
While assuring that insurers will not go against its regulator because the consequences of that was too grievous, he said, however, there is a limit at which operators can control other stakeholders like the shareholders and investors.
We cannot stop them from speaking their minds, but whatever they have said do not represent the operators’ or managers’ decision, he pointed out.
Saying that high foreign exchange rate and low capacity of some underwriters necessitated the exercise, he added that, “If these are the main reasons for the recapitalization exercise, the truth of the matter is that the exchange rate that applied in 2005/2007 is not the same in 2018/19. Secondly, if the exchange rate has changed, our ability to retain businesses has weaken. Should we enhance it? yes! I think we should enhance it.”
“I have never seen a policy that only has the good side and no bad side and no timing can be right because it is only God’s time that can be the best. I think that the more we are positive about this recapitalisation exercise, the more chances we would have on overcoming some of the challenges that comes with it,” he pointed out.
On his part, the President, Institute of Loss Adjuster of Nigeria (ILAN), Mr. Femi Hassan said, Loss Adjusters want the recapitalisation to take place because it would allow operators to put some structures in place that will help to grow the industry.
To him, “I know the operators want this recapitalisation to take place, but the investors who have put their money into the insurance companies are the ones kicking against it. But nevertheless, I am optimistic that, in the long run, every party will see reasons for it.”
Moreover, the Executive Secretary, Nigerian Council of Registered Insurance Brokers(NCRIB), Mr. Fatai Adegbenro, stated that the industry really need sufficient capital to meet the present business realities, while meeting their respective civic responsibilities, which is, settlement of genuine claims.
In the wake of the recapitalisation exercise, the President, NCRIB, Mr. Shola Tinubu, had stated that insurance brokers cannot pretend that the ongoing recapitalisation will not affect broking business as brokers are part of the insurance industry, adding that, as a proactive council, NCRIB is critically examining the implications and possible solution to the effect the implementation of recapitalisation exercise would have on members.
Market observers believe stronger underwriters will emerge after this recapitalisation exercise which will increase the capacity of the insurance industry to absorb large risks, thereby, avoiding premium flight in which foreign insurers dominate the big ticket risks because of their huge capitalisation.
Moreover, they expect the recapitalised insurance firms to have enough financial buffer to pay genuine claims when they arise, while giving good returns on investment to their respective shareholders.
The Managing Director/CEO, Access Bank Plc, Mr. Herbert Wigwe, therefore, charged insurance companies to recapitalise as well as seal strategic alliances and partnership with Insuretech to deepen insurance penetration in the country.
Wigwe, who stated this at the 2019 National Insurance Conference in Abuja, noted that, with only one per cent of Nigerians holding an insurance policy, there is clearly an untapped opportunity in the country.
Relative to the size of the Nigerian economy and the opportunities it offers, he said, the insurance sector needs serious capitalisation to increase its capacity to underwrite transactions in sectors, such as; Oil and Gas, Marine, Aviation, Technology, among others.
In terms of product offerings and customer experience, he said, the sector must grow big enough to provide cover for huge exposures.
While calling for Strategic partnership and alliances with tech partners, Wigwe said, with the advent of innovation, traditional insurance companies must partner with upcoming insurtechs so as to explore the technological and growth opportunities therefrom and give customers better and more innovative product offerings.
Claim verification processes must also be reviewed to foster trust and partnership with the Banks for viable Bancassurance opportunities are a formidable route to growth, he pointed out.
According to him, “Insurance companies should make more use of the new media and ‘digital’ to deepen insurance at the retail segment of the market. Furthermore, the need for the implementation of a robust compulsory insurance policy cannot be overemphasised.”
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