Recapitalisation: Insurance companies consider merger, acquisition
Recently, the National Insurance Commission announced new capital requirements for operators in the insurance industry.
In a recent circular to its regulated entities, life insurance companies’ capital was raised from N2bn to N8bn, general companies got a raise from N3bn to N10bn, while composite insurance companies’ capital was raised from N5bn to N18bn.
The regulator also increased the capital of reinsurance companies from N10bn to N20bn.
NAICOM stated that the commencement date for the circular was May 20, 2019, while the deadline was fixed at June 30, 2020.
After the announcement, some stakeholders in the sector had a meeting on how to scale the hurdle of recapitalisation.
As they still planned to meet again, they considered issues such as how to more than triple their capital within one year, merger and acquisition, and if possible, get an extension of deadline from their regulator.
Some operators, who spoke on condition of anonymity, said that the development was a big challenge for them as the specifications in the new recapitalisation circular were far stricter than the tier-based recapitalisation which was cancelled last year in the sector.
An operator said, “We have to just find a way to meet the requirement whether by acquisition or merger. It is better for a company to be acquired or merge with another and have maybe, one or two seats on the board than to be liquidated.
“This recapitalisation is different from the tier based because any company that does not recapitalise after the one year given will go down.”
Another operator said that the new development was of great concern but the management of the companies would meet with their boards on the way forward.
He noted that it might be very challenging for the companies to get the capital they needed from the capital market, and that merger and acquisition might be the way out.
“But merger and acquisition also come with their own problems too, as the parties involved may not totally disclose all their liabilities,” he said.
The Chairman, Independent Shareholders Association, Mr sunny Nwosu, said the association would continue to look at the legal aspects of the new law.
While saying that the recapitalisation was not necessary at this time, he observed that the capital market was not progressing and it would be difficult for the underwriters to raise money from the market.
“That is another way of trying to sell up the insurance companies to those who did not work for it,” he said
According to him, insurance shares were the least priced instrument in the capital market. Most of the companies were not paying dividend, while those paying were offering something very low.
He said, “But it is not yet clear, whether they are talking about shareholders’ funds or real equity capital. It has to be spelt out for us to understand what they mean by increasing capital to that amount.”
He said that any company that wanted to merge should do so voluntarily, but not being compelled to do so.
The Chairman, Progressive Shareholders Association, Boniface Okozie, said he did not feel that recapitalisation was the issue affecting the insurance sector’s non-performance.
He said what should have been done to develop the sector had yet to be done.
Okozie said, “Today, insurance sector should be contributing better to the Gross Domestic Product and not the less than one per cent contribution that it has now. In developed countries, insurance companies buy over banks but not here.”
He worried that investors had not been getting good returns from their investment from the sector which would make it difficult for the firms to approach them to raise fresh capital.
“I don’t think that one year is enough based on performances and inadequacies in the sector. There is a need to recapitalise but you must give them some more time so that they can improve and attract investors,” he said.
The Chairman, Constance Shareholders Association, Shehu Mikail, said that it was time to increase capital of insurance companies because it was good to have insurance companies that were strong and could underwrite big risks.
He said that strong insurance companies would gain the confidence of the public.
According to him, if the companies were not well recapitalised, they would not be strong backbone of the economy.
However, he said that NAICOM should have had an interaction with the operators before deciding on the issue of recapitalisation.
Mikail noted that the time the insurance companies were being asked to recapitalise was a challenging time because the economy was not yet viable to help the business environment.
“I would rather ask the regulator to extend the tenure whereby the recapitalisation will be more effective and more companies will be able to plan how they would recapitalise,” he said.
Under the present scenario, he said, the insurance companies would either merge or go for acquisition.
Mikail said, “But recapitalisation is good. They will have more income and be able to write more policies and it will give guarantee to policyholders. The regulator should support them on how to go about it.”