Insurance

Recapitalisation: A live and let live initiative, case study of the Nigerian insurance industry

Gbadebo Olamerun

Recapitalisation is a financial strategy used by a company to change its financial structure in order to weather through a rough financial situation or to help improve the company’s financial stability. It is usually done by altering the debt/equity ratio of the company to increase either the contribution of debt or equity to the overall capital of the company. Recapitalization can be internally done or controlled by the regulator of a sector.

To this effect, National Insurance Commission NAICOM in a recent circular announced a new capital requirements for operators in the insurance industry; life insurance companies’ capital was raised from N2bn to N8bn a 400 per cent increment, General insurance companies got a raise from N3bn to N10bn a 333 per cent increment, while composite insurance companies’ capital was raised from N5bn to N18bn a 360 per cent increment. The regulator also increased the capital of reinsurance companies from N10bn to N20bn a 200 per cent increment.

Its important to note that the percentage increment in this 2019/2020 recapitalization exercise is far operator friendly thanthe percentage increment in 2003 – 2005 insurance recapitalization process. Recall that in 2003 Increase in Percentage Life Insurance was from N150 million to N2 billion which is a 1,233.0% increment, General Insurance was from N200 million to N3 billion which is a 1,500.0%, Compositeinsurance companies which was from N350 million to 5 billion naira 1,429% and Reinsurance companies from N350 million to N10 billion which was 2,857.0% increment which has no bases of comprising.

The need for recapitalization is very expedient because of the high foreign exchange rate and low capacity of some underwriters, the truth of the matter is that the exchange rate that applied in 2003/2004 is not the same in 2018/19. So if you relate N2b, N3b, N5b and N10b for life, general, composite insurancecompanies and reinsurance respectively the average capital base for the industry was N5billion in 2004 and exchange rate was N100 to a dollar, hence N5bn was about 50m dollars. Today if you relate N5billion at N360 to a dollar you will see that it is a little lower than 14m dollars.
Going by this, it therefore means that the value of the capital of each insurance company has been reduced by 36m dollars.Based on the number of insurance companies we have which stands at 58, the total value of the capital base may have been eroded by about 2billion dollars.

Secondly, since the exchange rate has changed, our ability to retain businesses has weaken, hence the urgent need to change our capital base else we will be having half baked insurance companies that will not be able to undertake large risk hencereduce the confidence of the public in insurance, which will inturn lead to a reduction in our GDP and insurance penetration.

It is very pivotal for every stakeholder of the industry, which includes Operators, NAICOM, NIA, NCRIB, ILAN, ARIAN, policy holders, shareholders, investors to see the hidden opportunity of massive growth in the nearest future and hence embrace this recapitalization exercise with open arms to succeed. From my wide experience in this industry I have never seen a policy that only has the good side and no bad side and also no timing can be right because it is only God’s time that can be the best. I think that the more we are positive about this recapitalization exercise, the more chances we would have on overcoming some of the challenges that comes with it.
The Litmus test of this recapitalisation is not on the recapitalization process itself but the options available for recapitalisation . In line with the popular options which includes merger and acquisition, sourcing funds from the capital market, borrowings etc. There is a saying that says that to be successful in a process do what the successful did to be successful both in the short and long run. Citing first bank of Nigeria as an example, this is one of the oldest banks in Nigeria and have passed through so many recapitalisation processes and are still very successful today. In their recapitalisation processes they have always used the merger and acquisition option.
First Bank of Nigeria Limited (“First Bank”), established in 1894, the Bank commenced business on a modest scale in Lagos, Nigeria under the name, Bank of British West Africa (BBWA).

In 1912, the Bank acquired its first competitor, the Bank of Nigeria (previously called Anglo-African Bank), In 1957, the Bank changed its name from Bank of British West Africa (BBWA) to Bank of West Africa (BWA). In 1966, following its merger with Standard Bank, UK, the Bank adopted the name Standard Bank of West Africa Limited and in 1969 it was incorporated locally as the Standard Bank of Nigeria Limited in line with the Companies Decree of 1968. Changes in the name of the Bank also occurred in 1979 and 1991 to First Bank of Nigeria Limited and First Bank of Nigeria Plc, respectively. In 2012, the Bank changed its name again to First Bank of Nigeria Limited as part of a restructuring. First Bank had 1.3 million shareholders globally, was quoted on The Nigerian Stock Exchange (NSE).

As the global operating environment evolves, First Bank has kept pace, responding to the dynamic needs of its customers, investors, regulators, host communities, employees and other stakeholders. Through a balanced approach to plan execution, First Bank has consolidated its industry leadership by maintaining trans-generational appeal. Thus, the Bank has continuously boosted its customer-base, which cuts across all segments in terms of size, structure and sectors.

From above illustration you will agree with me that in my honest opinion, merger and acquisition could be the best way route for this present recapitalization process, putting into consideration again the time required for this exercise which is May 20th 2019 to June 30th 2020. Also worthy of note is that, the Banking industry coming into insurance industry to disrupt the process is no longer a reality because they have been indoctrinated into the efficacy of the vibes of the insurance practice.

Also note that in today stock market, insurance shares are one of the penny priced instrument in the capital market. A number of the companies were not paying dividend, while those paying were offering something very low.

The decisions made by the operators during this recapitalisation process will remain historic in their life. Some will never have the opportunity again to own or lead an insurance company, while some it will just be in their CV and some will move to the next level. That why it’s an important decision because some operators will take a short time decision over a life time adventure. Merging is better than losing out totally, its better to be the hand of a lion than the head of a wall gecko. Option merger in the history of time has always been the resort to spice the stew of recapitalisation , But merger and acquisition also come with their own problems too, as the parties involved may not totally disclose all their liabilities.

Another thing that will occur during this process is that Loyalty of brands will be tested. Some boards will be over loyal to a struggling brand that requires a first aid medication in the name of merger and acquisition to keep the brand and the legacies of the founders instead of aligning into a bigger picture that reckoning will still remember in the test of time, they rather prefer to hold onto an ice cream cone under the sun that will soon melt away in a matter of little time. More so some mergers and acquisitions will be stalled because of unquestioned loyalty to some struggling brand. Whereas, facing the reality is the only option available to such brand to go through the eye of the recapitalization. In this regard the name of the 2019/2020 insurance recapitalisation is called live and let live initiativefor operators.

In as much as The initial exercise made by Naicom on August 27, 2018, via a circular titled,“Tier Based Solvency Capital Policy for Insurance Companies in Nigeria” (“TBSC Policy”), to raising the capital adequacy requirement across the industry was not as successful as NAICOM would have hoped, even though what followed were protests by some stakeholders in the industry and a resultant order of the Federal High Court restraining the TBSC Policy from being enforced. It is worthy of note that the on-going reforms in the insurance industry through the process of this present recapitalisation and consolidation are to restore the confidence of the public in the industry and enhance the international competitiveness of local operators.

Comparing the tier based recapitalization system and this full pledge recapitalization process you will discover that this new development is a bigger challenge to operators as the specifications in the new recapitalization circular were far stricter than the tier-based recapitalization. This recapitalisation is different from the tier based because any company that does not recapitalize after the one year given will have to be rebirthed!
Advantage of tier based over this full fledge recapitalization isthat it would have accommodated everyone, Segmented the market, no insurance company would have gone down, Shareholders will still have their stake on a smaller pie while the big players will continue to eat the big fishes in a monopolistic market.

The advantages of this full fledge over the tier based is that; It is envisaged that it will bring about a stronger and more vibrant insurance industry, bigger risk written in Nigeria instead ofcapital flight especially aviation, oils and gas risk. other benefits includes premiums retention in the economy, new technology with increased investment, better positioning, contribution to GDP increases, international companies the bigger and stronger insurance companies will also be able to extend their frontiers into African countries, knowledge/expertise increases, rating with stronger financials increases, market penetration increases, claims settlement with availability of more funds claim settlements can be more effective and higher risks can be written with confidence as claim settlements, with proper management of the company will not be an issue.

Quite fortunately the rest of Africa is using the Nigerian insurance recapitalization dynamics as a lesson and better positioning ahead of their recapitalization plans and strategies.

The strong ideology of this full fledge recapitalization is that the number of operators will reduce drastically, in fact myself and my team over several round table discussion has ‘Predicted 17 strong insurance companies out of the 58 operators from the entire exercise’ but if not the industry await another close range recapitalization in the nearest future

CONCLUSION

It seems the industry is still in a dilemma over the recapitalisation because the percentage of increment in 2003 was 1,400 per cent compared to 2019/2020 recap which is just 300 percent averagely. More importantly the industry needs to harness its opportunity by considering its price mechanism which is a major pitfall for the growth and development of the Nigerian insurance industry, the banking industry would rather collectively increase tariff, interest, levies in collaboration with its regulatory authorities but insurance industry would rather cut down on its premiums, tariffs, rates and still be faced with therealities of paying more claims.

2. Product Review – Insurance industry needs to start to sell need-based products and provide succor and solution to the teeming population of Nigeria rather than running after profit margins that is depleted with the operation of the industry.

3. Diversification of the market – We grew to understand and agree that the future of the insurance industry in Nigeria is a retail hub for its development but till date the penetration of insurance in Nigeria is still range between 0.3percent and 1 percent thereabout out of a teeming 200million population and out a working insurable population of over 90million. Much still has to be done on diversification of the market.

4. Claims Payment – This recapitalization is needed so that insurers can take bigger risk and pay claims. Also insurers don’t pay claims because of cost of high over head cost. For example a company makes N3b and spends N2.3b on expenses amidst other deductibles

5. Regulatory Frame work – The major constrain of our regulator overtime is their inability and political will to regulate the industry accordingly. This is the bitter truth but I think it’s the right time for all the stakeholders, big, small, relevant and irrelevant to join hands together and speak the same language required for each stakeholder to move our industry forward and gain back the respect and laurels expected of a growing sectors in d annals of the Nigerian economy.

6. Technicality challenges – Another reason for this recapitalisation is not just to increase capital base but will help some companies grow in their technicality base and general business acumen after the merger, So companies should not just look at merging for the sake of funds, because if the funds is available and the merged company lack technical know how coupled p with great marketing strategies, it’s just a matter of time, the merger will result in a weak company. Some insurance companies will value quantity over quality in the drive for the merger and the acquisition for this recapitalisation. Some brands are big with large clientele base but with decaying processes and systems covered in their books but the reality will forestall a new market capital that will show the true state of such organisation.
History will remember the heroes and the valiant of this recapitalisation for a very long time.

Former President, Association of Registered Insurance Agents of Nigeria

Gbadebo Olamerun

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