Only five insurers will meet the new capital requirements by the National Insurance Commission (NAICOM), the industry regulator, according to analysis by Chapel Hill Denham Limited, a leading investment house.
The five insurers are AIICO Insurance, Custodian and Allied, Zenith General, First Bank Insurance, and Wapic General.
Analysts at Chapel Hill Denham said they used share capital (plus premium) and retained earnings as qualifying capital in their analysis, but they added that if shareholders’ funds were used, 10 insurers (including Prudential Zenith Life, Custodian Life, Nem, Linkage Assurance and AXA Mansard) would have met the new minimum capital requirements.
“We expect these companies to comply with the regulatory minimum relatively seamlessly via capital injections from significant shareholders or strategic investors,” said analysts at Chapel Hill Denham.
“We believe the insurers that are able to meet the capital requirement well ahead of the deadline will be the winners in the recapitalisation exercise,” said the analysts.
NAICOM jacked up the capital bases of insurers so that they can take on more risk and accelerate contribution to the economy.
The minimum paid-up share capital requirement for life insurance companies is now N8bn ($22.2m) vs. N2bn ($5.6mn) previously; general N10bn ($27.8m) vs. N3bn ($8.3m) previously; composite N18bn ($50m) vs. N5bn ($13.9m) previously, and reinsurance N20bn ($55.4m) vs. N10bn ($27.7m) previously.
The new capital requirement took effect on May 20, 2019 (date the circular was issued) for new application, while existing insurance and reinsurance companies are expected to fully comply by June 30, 2020.
In a July 23 circular, the regulator mandated operators to submit their recapitalisation plan on or before August 20, 2019.
The Insurance Act 2003 stipulates the consequences of not meeting the minimum paid-up capital and actions to be taken by NAICOM. These include (i) cancellation of the registration of any insurer or reinsurer that fails to satisfy the capital provisions as it relates to the category of operations of such insurer or reinsurer, and (ii) publication of a list of insurers and reinsurers that comply with the capital provisions. Such list may be published not more than 30 days after the deadline stipulated by NAICOM, which is 30 days after June 30, 2020 if the date is not shifted for the new capital policy.
Insurers in Africa’s largest economy have begun a race to recapitalise ahead of the NAICOM deadline.
Wapic Insurance plc is seeking funds via capital injection from majority shareholders, but its general business is well capitalised, while life segment needs more money.
“The regulator could withdraw the operating licence of companies that fail to recapitalise,” said Seyi Olusi, chief finance officer at Wapic Insurance.
Ganiu Safiu, actuarial scientist at Cornerstone Insurance plc, said his company was trying to restructure from within and that they were planning to raise capital via the stock market.
Some insurance companies had been proactive as they had opted for equity capital raising.
Mutual Benefits raised N1.59 billion via rights issue in 2018 (79.5 percent of the N2bn offered) while Sovereign Trust Insurance also recently conducted a rights issue of 4.2 billion ordinary shares at 50 kobo/share (1 for 2) to raise N2.1bn.
Foreign investors from Europe, America, and South Africa are directing their reserve funds into Nigerian insurance market to take advantage of new capital regime and indigenous firms’ inability to tap the capital market for funds.
The introduction of the risk-based supervision model few years ago saw foreign insurers like AXA, Sanlam, AFIG Funds, Allianz, among others acquire stakes in insurance firms in Nigeria.
The foreign investors have since 2018 acquired stakes in NEM Insurance and Ensure Insurance, among others.
The industry consolidation of 2007 resulted in the reduction of insurance companies to 49 from 103 and reinsurers to two from five, but the industry continues to lag peers in sub-Saharan Africa.
Analysts at Chapel Hill said they see the recapitalisation as a step to strengthening regulations in the insurance industry, but they added that ultimate demand for key products was key to industry growth.
The investment house highlighted regulations, technology, and infrastructure investment as possible drivers of insurance demand in Nigeria, adding that tight regulatory framework such as risk-based capital model could also encourage trust in insurance companies as the risk of liquidation is minimised.
“We also think public education will be key in order to enlighten people on the benefits of owning insurance products, which should help break the cultural barriers to the demand for insurance in Nigeria,” said analysts at Chapel Hill Denham.
BALA AUGIE
