Insurers hammered by the pandemic are turning to capital raisings to underpin their balance sheet as they race to see who will emerge strongest when the outbreak subsides.
In the last two years, the biggest insurers in Africa’s largest economy have approached their shareholders with plans to raise a combined N28.15 billion by way of rights issue, according to data gathered by MoneyCentral.
However, only AIICO Insurance Plc, Coronation Insurance Plc and Consolidated Hallmark Insurance have consummated the issue as their rights were oversubscribed, which shows investors have confidence in their growth potentials. The trio collectively raised a combined N11.64 billion.
Insurers were already under pressure to shore capital or merge before the coronavirus battered their balance sheets, with record low bond yields and difficult business environment chipping away at their earnings.
As the pandemic accelerates those trends and valuations are squeezed, there is a sense of urgency in meeting an unavoidable recapitalization dead line set by the regulator.
In an attempt to strengthen the sector and place it on a global competitive arena, the National Insurance Commission (NAICOM), the primary regulator in the industry, launched its recapitalization exercise in May 2019.
The fundamental aim of the proposed policy is to solve premium flight issues that have continued to plague the industry.
However, following the lingering impact of coronavirus, the deadline was adjusted from June 2020 to December 2020 to implement Phase I of the project while the deadline for the second phase’s performance was moved to September 2021.
Several insurance companies have bolstered their minimum paid up capital as they seek to strengthen their financial position so that they can provide additional capacity to underwrite more risk and deliver better returns to their shareholders.
Aiico Insurance, the largest listed insurer by total asset, had gotten the approval of shareholders to increase its authorized share capital to N18 billion from N10 billion and its rights issue of N3.50 billion was oversubscribed by 126 percent.
Wapic Insurance’s N4.03 billion rights were undersubscribed by 32 per cent from its target of N5.93 billion. It had increased its authorized share capital to N15 billion from N8.5 billion ahead of the offerings.
Consolidated Hallmark Insurance got 100 percent oversubscription for its N1.03 billon rights issue, as it mulls increasing its share capital.
Analysts say firms that are yet to meet the required capital threshold may likely lose out on the opportunities available on the supply side of the market.
While it was expected that the scramble to shore up capital would spur mergers and acquisitions in the industry (M and A), there has not been any deal in the past year as many companies were battling to survive the disruption caused by the coronavirus pandemic.
The pace of deal making had already begun to dwindle among Nigerian insurers even with the outbreak of the virus as they seem to lack the capital to undertake such strategic plans.
Analysts are of the view that the rollout of a vaccine and expectation of economic recoveries could invigorate M and A activities in 2021 as there are firms whose worsening financial conditions make it practically difficult for them to meet the capitalization deadline.
Investment banking firm Chapel Hill Denham had predicted that the number of insurers in Nigeria would be slashed to at most 20 from 57 currently as an outcome of higher capital requirements imposed by the insurance regulator, National Insurance Commission (NAICOM).
“Currently, only a small fraction of the sector has met the recapitalisation requirements while we note ongoing plans and discussions for the rest.” said analysts at Afrinvest Securities.
“We expect a flurry of mergers & acquisitions in the sector post-recapitalisation and a massive reduction in the number of players in a similar fashion to the banking precedent in 2004, for the sector to fully maximize its potential,’’
Analysts at Afrinvest Securities said insurers and reinsurers are now required to comply with 50.0 percent and 60.0 percent respectively of the new minimum threshold applicable to their respective businesses by the initial deadline of December 2020 while full compliance is slated for September 2021.
Some firms with huge accumulated losses and battered solvency ratio could be up for grabs or takeover by entities with robust working capital and excellent corporate governance structure.
Internal Energy Insurance and Africa Alliance Insurance are walking on rotten ice and touching the tiger by the tail as they have a combined negative shareholders’ fund of N25.68 billion, which means they are technically insolvent and can’t meet their long term financial obligations.
A breakdown of the figures shows International Energy or “IEI” has negative equity of N11.87 billion as at December 2019, while Africa Alliance has a negative figure of N13.86 billion as of September 2020.
Since the minimum regulatory solvency margin is N5 billion, it will be a herculean task on the part of the management and board of directors to invigorate these firms in the light of the current economic realities.
Spiraling obligations to policyholders, receding premium income, and rising management expenses are responsible for deteriorating underwriting conditions.