It is surprising that only 72.47 percent of the 22 listed insurers have not met the minimum capital requirement even as the second phase deadline expires on the 30th of September 2021.
The analysis carried out by CSL Stock Brokers is based on the first quarter (Q1) 2021 financial statement of companies, and the threshold is based on (Share Capital + Share Premium + Retained Earnings).
The National Insurance Commission (NAICOM), the body that regulates insurance activities, mandated operators in the industry to shore up their capital so they are well capitalized to undertake big-ticket transactions and be able to compete with peer rivals across the globe.
Notably, the advert of the Covid-19 caused fear and trepidation because a sit at home order by the government made it difficult for companies to raise capital.
Analysts are optimistic and sanguine that the exercise will help bolster low local underwriting capacity, curb capital flight as firms in crucial sectors like the oil and gas, aviation, and Marine insure their risk abroad.
Of course, a lot of insurers do not have the ability to retain risk, and they are not able to pay out claims to customers, a precarious situation that exposes them to insolvency.
In June, the National Insurance Association (NIA) expelled Industrial and General Insurance, Niger Insurance, Standard Insurance Plc for failing to meet their obligations to policy holders thus negating the basic principles of insurance.
In April 22, NAICOM revoked the operating license of UNIC Insurance Plc, and it appointed Hadiza Baba Gimba, as the receiver/liquidator to wind up the affairs of the company.
There are many insurers who can not meet the new capital requirement come rain and sun, and they are marking time like a condemned prisoner who awaits the hangman. This is because they are paying out more in claims than they earn from premium income, lacking the capacity to take on more risk.
For instance, Goldlink insurance Plc, African Alliance Plc, and International Energy Insurance Plc are technically insolvent as their total assets cannot cover liabilities, which means they could be acquisition targets for firms that have strong capital bases.
Auditors have issued warnings that some of them are on the brink of bankruptcy, issuing a qualified report, signaling their financial statements have been stigmatised.
The 2018 audited financial statement of International Energy Insurance (IEI) showed total assets of N7.59 billion is way below total liabilities of N19.46 billion, resulting in a negative shareholders fund of N12.06 billion.
Also, it has negative retained earnings of N24.19 billion and posted a loss after tax of N4.17 billion.
The company had not been able to meet its obligations Daewoo securities (Europe) Limited, now Mirae Asset Management (UK) Limited which had resulted in additional interest charges on unpaid principal and interest.
Goldlink Insurance suffers from technical insolvency as total liability of N9.03 billion as of December 2018 exceeded total assets of N1.78 billion, which resulted in negative retained earnings of N7.25 billion, according to MoneyCentral Calculations.It has accumulated losses of N11.69 billion in its balance sheet while net loss for the ended 2018 stood at N1.06 billion.
African Alliance Plc is reeling from recurring losses as it has negative retained earnings of N40.52 billion as of September 2020 in its capital structure.
It is not surprising that the insurer’s total liabilities of N57.80 billion exceeds the total asset of N40.91 billion, which resulted in negative retained earnings of N13.86 billion, according to MoneyCentral calculations.
Niger Insurance, beset by mounting obligations, had sold off a property to bolster its balance sheet and meet capital requirements.
In a 2019 report by Chapel Hill Denham, based on the qualifying method, only 5 insurers meet capital requirement, (Life: FBN Insurance, Non-Life: Custodian and Allied, Zenith General, Coronation, and composite: Leadway).
Analysts at the research house, however, said if the shareholders’ funds were used, 10 insurers, including (Prudential Zenith Life, Custodian Life, Life, Linkage, AXA Mansard) would meet the new capital requirement.
“We expect these firms 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 requirement well ahead of the deadline will be winners in the recapitalization exercise.
There are indications that the recapitalization exercise will spur merger and acquisitions as such deals busies the capital market.
For Instance, Verod Capital had acquired Law Union and Rock Insurance Plc in 2020.
With the exercise, it is expected that foreign insurance companies will make an inroad into the Nigeria insurance space while the current foreign investors will increase their stake.
Notably, AXA, Allianz, and Prudential (some of the biggest insurers in Europe) have invested in Nigeria insurance space, following their acquisition of Mansard, Ensure, and Zenith Life respectively.
“Currently, only a small fraction of the sector has met the recapitalisation requirements while we note ongoing plans and
“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. discussions for the rest,” said analysts at Afrinvest Securities,” said the analysts.
While the country’s low penetration rate is a boon as it shows there are immense potentials to be tapped, investors’ apathy towards insurance, cultural beliefs, lack of trust for claims process, and poor regulations have continued to hobble the sector.
The insurance sub-sector contributes 12.1% of the financial services sub-sector GDP, which contributes 3.2% of Nigeria’s Gross Domestic Product (GDP), according to analysts at CSL Stockbrokers.
“We note that beyond improving underwriting capacity in the industry, the recapitalization exercise would eliminate operationally weak firms that have been a drag to the entire industry over time,” said the analysts.