As the deadline set by the National Insurance Commission (NAICOM) for operating firms in the country to shore up their capital base finally arrives, insurers may have already expressed unpreparedness for the new regime.
With reports of uncertainty pervading the industry, majority of insurers have continued to express disapproval not with the recapitalization directive but instead with the late decision of the regulator, NAICOM to backdate the order from its January 1, 2019 date to October 1, this year.
It would be recalled that NAOCOM had in July, this year, increased the minimum capital requirement for insurers by threefold, in a bid to expand their capacity to handle risk in the country.
Subsequently, transitional guideline on the directive which was issued on August 3, was followed by the introduction of a 3 -tier based recapitalisation for the insurance industry.
According to NAICOM, the recapitalisation became desirable as inflation and interest rates have increased in the last 10 years, while insurers were still operations with the same capitalization of 2007.
”Interest rate has gone from single to double digit, interest rate has increased over time and with many macroeconomic and institutional factors on the upward trends, while the industry still maintain the same capitalisation in the last 10 years.
So, it is desirable for operators to now choose which tier they want to operate in. Some companies are finding it difficult to fulfill their obligations to their policyholders and shareholders because they are carrying risks above their limits,” stressed Commissioner for Insurance, Mohammed Kari, at a press briefing in August, in Lagos.
Stating further that this initiative will enhance soundness and profitability of insurers through optimal capitalization, he added that, the introduction of proportionate capital that supports the nature, scale and complexity of the business conducted by insurers.
”In this instance, there is no cancellation of license, but operators will be subjected to solvency control levels and no mandatory injection of fresh capital by insurers,” he pointed out.
Explaining further on the newly-announced levels of capital requirement for operators, MrRasaaq Salami, spokesman for NAICOM, said the regime takes effect from January 1, 2019, even though it has since been backdated.
“Limited deals or don’t want to take all the risks in their class of business do not need to raise capital. Life insurers wanting to take on annuity and group life are required to boost their capital to N6 billion from N2 billion, while non-life operators underwriting all risks including aviation and engineering should shore up their capital to N9 billion from N3 billion,” Salami said.
According to NAICOM, last year the ensured companies are not signing up more business than they can handle, so that the industry reduces its risk exposure and boosts liquidity and profitability.
Under the new industry risk based recapitalization, companies that want to do both life and non-life business, including oil and gas deals, should increase capital to N15 billion from N5 billion, Salami said.
However, last month after backdating the deadline from January 1, 2019 to October 1, 2018, NAICOM dismissed reports that it might soft-pedal on the date by allowing insurers some room, insisting that October 1 remains deadline for insurance companies to switch to Tier-Based Minimum Solvency Capital (TBMSC) based regime, despite calls for extension by operating firms.
The commission also debunked reports of a court order filed by some insurers restraining it from implementing the October 1 deadline.
While the apprehension continues, operators further face the threat of mergers and acquisitions.
According to financial experts, the forceful implementation of the TBMSC and recapitalization directive by NAICOM would be unwilling mergers of operating insurance firms in the country or their acquisition by bigger firms overseas, which itself is dependent on the positive assessment of the Nigerian market by these firms.
The experts’ assessment of the valuation of the insurance firms, when taken into consideration, further dampens hopes of any foreign acquisitions, as they conclude that over two-thirds of operating firms are valued below the minimum capital requirement as spelt out by NAICOM to operate in even the first tier of the TBMSC scheme.
According to them, only 15 percent of insurers meet the N15 billion requirement while 15 percent meets the N5 billion for the second-tier composite operator of the 27 insurance companies quoted on the Nigerian Stock Exchange (NSE).
Chief Operating Officer, GTI Capital, Mr. Kehinde Hassan, said market valuation remains one of the criteria for valuation of a company for any purpose of new share issuance or mergers and acquisitions.
According to him, corporate finance experts use market value, net asset value or book value, peer group analysis and scenario analysis to reasonably ascertain possible valuation for a company. The financial ratios tend to revolve around a range and any value significantly outside the range is usually treated as an outlier and removed in the calculation of the pricing average.
Hassan said low market valuation might have strong influence on the overall valuation of a company as strategic investors may only at best offer slight premium on market value of a company. In a hard-pressed situation, large investors may demand for market-based value or offer price around the pricing range.
On his part, Managing Director, Sofunix Investment and Communications Limited, Mr Sola Oni, said low valuation is a possible trigger for aggressive mergers and acquisitions as low-capitalised companies may find it difficult to raise required capital in the event of massive capital raising exercise by many companies.
“If a company is struggling to meet shareholders’ expectation, such a company is a target for acquisition. Strategic investors usually look for low valuations and synergies and for a company under pressure of minimum capital requirement, the market valuation may play a big role in the negotiation,” Oni said.
He noted that one of the immediate expectations from the implementation of the new tier-based capital by the National Insurance Commission (NAICOM) is mergers and acquisitions, which may lead to historic consolidation of the insurance sector.
Citing the example of the Nigerian banking industry, Mr Oni said consolidation, though somewhat a bitter pill may be the much-needed tonic to boost investors and customers’ confidence in the sector, adding that capitalisation is a major requirement for global competitiveness.
“Investors’ confidence in the insurance sector is low, so there is the need for a turnaround of the sector. Consolidation may lead to such turnaround. However, the current low valuations also present good opportunities for discerning investors who can see into the future, who know that Nigeria as a growing country cannot exist without a viable insurance sector, to take positions ahead of the repositioning of the sector,” Oni said.
Most of the insurance companies are trading below their 50 kobo nominal value. Investment experts agreed that boards of insurance companies may find it difficult a decision to offer shares below nominal value.
In the face of this emerging scenario, industry investors have called on the National Insurance Commission (NAICOM) for extension.
They posited that NAICOM should be seen to be supportive of the growth of the Industry as a regulator, saying the commission’s recent actions were not indicative of an interest to see the Industry grow.
President of Greenish Shareholders’ Association, Pastor Williams Adebayo, said the commission’s TBMSC is good except that it was evolved at the wrong time.
”The regulator pushed out right polices for insurance industry; however, I plead with the commission to extend the deadline till after 2019 election. After the elections, the companies would have ascertained the economy’s direction and would be comfortable to raise funds if they deem it fit.”
President, Constance Shareholders Association of Nigeria (CSAN), Alhaji Shehu Mikahil, urged NAICOM to review the deadline to enable the management of the companies to brainstorm on the perfect Tier-Based they fit in.
He stressed that the unfavourable economy had prevented many insurance companies from paying dividends to investors in the last five years.
“So the investors may not be buoyant enough; in view of this, we pleaded with the commission to extend the deadline.” he said.
On his part, Deacon Tom Ogboi, a retired director in Unic Insurance, said the commission should be seen to be supportive of the growth of the industry that it regulated
“The commission’s recent actions are not indicative of an interest to see the Industry grow while this may be their intention. The timing for the new TBMSC is not right and that it is adversarial of majority of the industry.
“For Shareholders, their investments have lost value by N15 billion in the past four weeks as reported in the press. The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) recently said that the economy is still very fragile and that the fundamentals are not there.
“Members of the Manufactures Association of Nigeria (MAN), who are the major customers of the industry, said manufacturers are still in recession and have lost a lot of value. It is advisable to say that timing and due process are necessary for these initiatives to make the desired impact.”
Similarly, the Association of Registered Insurance Agents of Nigeria (ARIAN), in a statement, called on NAICOM to extend the deadline and include stakeholders’ input in the new initiative.
President of ARIAN, Ademola Ifagbayi, who spoke on the sidelines of a press briefing organised by the association, in Lagos, said such extension would create more time for underwriters to explore the best option to recapitalise.
“ARIAN is in total support of NAICOM on the new tier based insurance recapitalisation exercise. However, we will like to appeal to NAICOM to consider the position of Nigerian Insurers Association (NIA), to make the process easy and convenient for all stakeholders,” he said.
Ifagbayi, who is also a General Manager at Mutual Benefits Assurance Plc, said insurance agents are partners in progress and will always support any development aimed at deepening insurance penetration, acceptability, profitability and contributions to the Gross Domestic Product (GDP) of the country.