Recapitalisation: Challenges before insurance companies

As the race towards the June 30, 2020 recapitalisation deadline for insurance companies, begins, SULAIMON OLANREWAJU looks at the hurdles the underwriters have to scale to remain in business.

In a circular dated May 20, 2019, which was signed by the Director, Policy and Regulation Directorate of the National Insurance Commission (NAICOM), Mr. Pius Agboola, insurance companies were directed to raise their capital base by as much as 400 per cent by June 30, 2020.

According to the circular, the minimum paid-up share capital of a life insurance company moved from N2 billion to N8 billion, non-life insurance from N3 billion to N10 billion, composite insurance from N5 billion to N8 billion and re-insurance companies from N10 billion to N20 billion.

The circular reads further, “In 2005/7, the insurance industry witnessed its last capitalisation and despite the astronomical increase in value of insured assets, consequent exposure to higher level of insured liabilities and operating cost of insurers, the same capital continued to rule in the industry.

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“In the exercise of the powers conferred on the commission by the enabling laws, the minimum paid-up share capital requirement of insurance and reinsurance companies in Nigeria is hereby reviewed. The circular shall apply to all insurance and reinsurance companies except Takaful and microinsurance companies.”

Throwing more light on the rationale for the raised capital base, immediate past Commissioner for Insurance, Mohammed Kari, said the intendment of the exercise was to develop and apply appropriate tools which would factor in the nature, scale and complexity of insurers, as well as non-core activities of insurance groups, to limit significant system risk and achieve soundness of companies and contribute to the achievement of stability of the financial system.

NAICOM opined that the new directive would allow insurers to focus on their areas of strength, improve settlement of claims, enhance local retention, encourage market discipline, prudence and appropriate pricing, encourage innovation and deepen market penetration, encourage voluntary mergers, and build investors’ confidence, and build a stronger and more vibrant insurance industry.

NAICOM’s position can hardly be faulted given the state of the industry in the country. The industry has recorded a mere 0.04 per cent penetration in the country while it contributes less than one per cent to the Gross Domestic Product (GDP).

Annually, it loses N2.8 trillion to foreign insurance companies due to low capacity of local insurers to absorb huge risks. Many observers are of the view that to save the industry and make it deliver value to all stakeholders, the capital base review is sine qua non.

Although insurance companies, as well as other stakeholders, viewed the call for recapitalisation with cynicism as some stakeholders described it as unwarranted, many of the companies have started mapping out strategies to raise their capital to the appropriate level.

The Consolidated Hallmark Insurance (CHI) recently disclosed its plan to raise its capital to the required N10 billion before the due date.

According to a statement by its Managing Director, Eddie Efekoha, the company, whose current capital base is about N6.1 billion, based on its last audited financial report as of December 31, 2018, is working hard to raise the balance of N3.9 billion before June 30, next year.

The options being considered include issuance of additional shares by way of a rights issue, private placement, public offer, as well as merger and acquisition.

While CHI may have an easy ride to recapitalization based on its stated strategy, the story is not the same for all the companies basically because of the low rate of return on investment in insurance stocks.

According to statistics provided by the Nigerian Stock Exchange (NSE), most of the insurance companies quoted on the floor of the exchange have been depreciating in value to the extent that more than 70 per cent of them have dropped below the previous floor price of 50 kobo.

The drop is a consequence of the implementation of the amended pricing methodology, the Par Value Rule of the NSE, which took effect on January 29, 2018 to reflect the true value of stocks. According to the rule, the price of every share listed on the exchange shall be determined by market forces and equities may trade below the previous price floor of 50 kobo per unit.

Subjecting share prices to market forces has exposed insurance stocks as very weak. At the close of trading on the exchange last Friday, only six stocks were valued at 50 kobo and above. These are Custodian and Allied, N6.30; AXA-Mansard Insurance, N1.71; Continental Reinsurance N1.50; NEM Insurance, N1.78; AIICO Insurance, 68 kobo and Linkage Insurance, 50 kobo.

Similarly, on the sub-sector indexes, the barometers that measure the performance of each sector, the insurance index ranked the worst.

Commenting on the state of insurance stock on the exchange, Sir Sunny Nwosu, Chairman Emeritus, National Coordinator of the Independent Shareholders Association of Nigeria (ISAN), said insurance shares were the least priced instrument on the capital market because most of the companies were not paying dividend, while those paying were offering something very low.

Also commenting on this, Nike Oshiyemi, a stockbroker, noted that insurance stocks do not attract investors principally because of poor operational performance, which results in low dividends. “Since investors are in business to make money, they naturally put their money in stocks with promising dividend payment. While I will hesitate to tar all insurance companies with the same brush, quite a good number of them lack strong fundamentals and that vitiates their performance and, of course, dividend payment.”

But an insurance practitioner who pleaded for anonymity disagreed that the low dividend paid by insurance companies stemmed from poor management or non-adherence to business principles. According to him, insurance companies pay low dividends because of the peculiarity of the industry.

He said, “The technical nature of the insurance business makes it mandatory to keep a huge percentage of revenue in reserves. This makes low dividend payment inevitable for insurance companies.”

He explained that while the operation of a business in previous years may be distinct from that of the current year in other sectors, for the insurance company, the operation in the current year is contingent on the previous years because just one claim can knock an insurance company out of business. “So, you cannot really say that because you had a good outing in a year, you will pay huge dividend in that year because you do not know what the newyear would bring,” he said.

Talking about the recapitalisation exercise, Nwosu said given the previous investment of retail shareholders in insurance companies across the country not yielding good returns, it would be very difficult for shareholders to further invest in the industry.

While Oshiyemi was not gong-ho on the prospect of insurance companies attracting huge investment in the event of public offer issuance, she said given the nature of investors, some would still stake their money on insurance sector.

According to her, “No one can say for certain what the response of the investing public would be should insurance companies approach the market to raise fresh capital, but what is certain is that no matter how bad, some investors will still put their money in insurance sector. Some see opportunities where others see gloom. So, it is not unlikely that the stocks would attract investors.”

She added that what most investors do is to have a mixed basket of investment. “So, for some investors, the missing piece in their basket will be insurance stocks. So, the recapitalisation demand placed on insurance companies by NAICOM provides the opportunity to complete the mix.”

She, however, opined that many of the insurance companies are likely to rely on private placements, mergers and acquisitions as well as rights issue rather than public offers to shore up their capital.

Going forward, analysts are of the view that to improve their performance and hike the interest of the investing public in their stocks, insurance companies need to be more creative and innovative with their products.

Joseph Adigbe, a financial analyst, said, “Many of the insurance companies parade the same products that have been with us for ages. You don’t get to see new products. Many of them are not innovative with their offerings. As a result, their revenue opportunities are limited to what is already available. To create new wealth and improve their chances of scaling up their revenues with the opportunity of increasing dividend payment, they need to come up with new products.”

He also called on insurance practitioners to engage the public more as a way of increasing awareness and deepening insurance culture in the country.

Oshiyemi called on the industry regulator, NAICOM, to deploy more effective strategy in regulating the industry so as to make the industry deliver more value to policyholders and shareholders.