The National Insurance Commission (NAICOM), the regulator of Nigeria’s insurance industry, in a 20 May 2019 circular reviewed upwards the capital requirement of insurance companies in Nigeria. The Insurance Act empowers NAICOM to increase the minimum paid-up share capital of insurance and reinsurance companies from time to time. Although this recent upward review does not affect Islamic insurance (takaful) and micro-insurance companies, it covers the four major classes of mainstream insurance companies in Nigeria which include; life, general, composite and reinsurance.
Life, General, Composite and Reinsurance companies with previous minimum capital requirements of N2bn, N3bn, N5bn and N10bn were reviewed upwards to N8bn, N10bn, N18bn and N20bn marking percentage increments of 300 percent, 233 percent, 260 percent and 100 percent respectively. As per the guidelines in the circular, existing insurance and reinsurance companies, have until 30 June 2020 to comply with the new capital requirement while new applications will be evaluated based on the new capital requirement.
Typically, increment in capital requirements are met in any of three ways: mergers, acquisition or direct injection of funds and each of these methods come with their own set of challenges. Hence, the onus is on the insurance companies to critically evaluate the feasibility of each of the option in order to determine their most viable action step.
In a follow-up circular of 23 July 2019, NAICOM directed all the affected insurance and reinsurance companies to submit details of their recapitalization plan to the commission for review on or before 20 August 2019. Their submissions are to include, amongst others, board resolution on how to comply with the directives, detailed plan on how the funds for the recapitalization are to be sourced with timelines and deliverables, etc.
This certainly adds a bit of complexity as insurance companies that are yet to formulate how they intend to boost their share capital now have less than one month to decide on their recapitalization strategy.
This hike in the required minimum share capital is arguably an attempt to mirror the success of the upward review of the capital requirement of commercial banks in 2004, from N2bn to N25bn, which led to the mergers of banks and ultimately resulted in the stabilization of Nigeria’s banking sector.
However, this is not the first time that a recapitalization of the insurance sector has been proposed. In August 2018, NAICOM sought to increase the minimum share capital for life, non-life and composite insurance companies via its Tier Based Solvency Capital Policy (TBSCP). The policy was withdrawn after some shareholders of the insurance companies filed a suit against NAICOM for its insistence on implementing the policy.
On 16 April 2019, the lawsuit was struck out by the court after the plaintiff (the shareholders) applied to withdraw the suit on the basis that it had been overtaken by events and this was not opposed by the defendants (NAICOM). Hence, the new policy is not in breach of the injunction as the case has been voluntarily dismissed.
On announcement of the new capital requirements, some shareholders of the insurance companies have once again kicked against this new hike, the proposed implementation deadline, is too short, they argue. According to the Chairman Emeritus of the Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, “anywhere in the world, 18 months is the most recognised timeframe for recapitalization exercise.” This is further compounded with the new directive to submit recapitalization plans on or before 20 August for the commission’s evaluation.
Issuing new shares to raise the capital may impractical given the perceived lack of enthusiasm of new investors in the industry.The low returns on investments earned by current shareholders of insurance companies may be one reason. .
For instance, as at 2018, out of the 26 insurance stocks listed on the NSE, 50 percent had not paid dividends in over a decade. Many factors have been identified as being responsible for this poor return on investments some of which include; huge fines by regulatory bodies for avoidable offences, high cost of management expenses, prevalence of negative reserves as well as alleged multiple taxation. Hence, the path of mergers and acquisition may be the most viable option for these companies.
For instance, all but four (83 percent) of the final twenty-four banks that emerged from the 2014 recapitalization were through mergers and acquisition. Where the M&A option is explored, potential merging companies will also seek to conduct relevant due diligence exercises on their proposed targets to ensure there are no hidden pitfalls that would affect the new entity post-merger/acquisition.
Some mergers may fall through based on findings of the due diligence exercises or failure of the merging entities to come to terms. Hence, the specific details of the recapitalization plan may eventually not be strictly adhered to as. Will affected insurance companies be allowed to resubmit their recapitalization strategy or will such revised plans be subject to fines and penalties upon resubmission? Presently, there are no specific clarifications available for such possible scenarios. Hence, the proposed implementation procedure and timeline by NAICOM may need to be modified to address these concerns and possibilities.
The goal of the upward review is laudable indeed as the current share capital of insurance companies does not reflect the current market realities and cannot absorb the risks inherent in the Nigerian marketplace today. By insisting on proceeding with the current implementation timetable, NAICOM may indirectly encourage additional insurance companies to seek legal action against the move, which in the end does not portend well for the Nigerian economy.
If insurance companies win an injunction the industry will benefit from the expected growth and stability an increase in capital will bring. On the other hand, if NAICOM obtains a favourable ruling that compels insurance companies to comply, several insurance companies may be unable to meet up with the deadline, thereby resulting in an eventual takeover by NAICOM. As with most of NAICOM takeovers in the past, these companies may end up being liquidated, with the shareholders ending up as the biggest losers. This will further erode investors’ confidence in advancing new funds to the Nigerian insurance sector.
As a result, the commission may consider extending the deadline by 18 months, whilst adopting the phased capital increment currently being utilized for microfinance banks. For example, the insurance companies may be required to attain at least 60-70 percent of the minimum share capital in twelve months and then 100 percent by the end of 18 months.
While the upward review of the minimum capital requirement of Nigeria’s insurance sector is long overdue, there are far more critical challenges confronting the industry, from investors’ apathy to poor insurance culture among Nigerians. All need to be addressed for the companies to grow, attract investment and boost share capital.
In conclusion, the timeline for the implementation must take into consideration the current market realities and regulatory requirements to ensure a successful recapitalisation.
Joshua Uzu
