Mergers, Acquisitions Loom in Insurance Sector

By Obinna Chima

Following the tier-based minimum solvency capital structure (TBMSC) that was introduced by the National Insurance Commission (NAICOM), analysts have predicted the adoption of mergers and acquisitions to scale the hurdle.

Other corporate actions expected in the industry include rights issues; initial public offering and listing on the Nigerian Stock Exchange (NSE).

Analysts at Anchoria Asset Management Limited, that stated this, based their view on the fact that a lot of insurers presently have low solvency capital or ratio.

“We anticipate several corporate actions within the insurance space. Corporate actions ranging from mergers & acquisitions (M&A); rights issues; initial public offer; public offers and introductions to the NSE,” the firm stated.

The new NAICOM guidelines would become effective on 1st January 2019 with a stipulated deadline of 14th September 2018 for insurers to notify NAICOM on their choice of tier level.

The current minimum required capital for Life Insurance Business is N2 billion, non-Life Insurance Business is N3 billion while Composite Insurance business is N5 billion.

According to the report, with the introduction of tier-based minimum solvency capital, there is a shift of focus from shareholders’ fund to solvency capital as the basis for the minimum required capital.

Also, Life, Non-Life and Composite Insurance businesses now have different tiers.

However, the present review does not extend to Reinsurance Companies as the minimum capital base remains N10 billion.

For Life Insurance Business, the minimum solvency capital for tier 1 – N6 billion, tier 2 – N3 billion and tier 3 – N2 billion; for Non-Life Insurance Business, the minimum solvency capital for tier 1 – N9billion, tier 2 – N4.5 billion and tier 3 – N3 billion; while for Composite Insurance Business, the minimum solvency capital for tier 1 – N15billion, tier 2 – N7.5billion and tier 3 – N5billion (For companies that decide to play in similar Tier of Life and Non-life insurance business i.e. Combination of Tier 1 of Life Insurance and Tier 1 of Non-Life Insurance).

According to the report by Anchoria Asset Management, the new regulation introduces four control levels based on the solvency ratio of the insurer and different actions required by the insurer and NAICOM at each level is established.

In its assessment of firms likely to operate in composite insurance business segment, the report stated: “Leadway Assurance can operate within the tier 1 space as a result of its high solvency capital and a post implementation solvency margin of 282 per cent. However, despite a high shareholders’ fund of N16.6 billion for AXA Mansard which is above the proposed regulatory requirement for tier 1 minimum solvency capital, the firm can only play within tier 3 space due to a low solvency capital of N6.2 billion as at 31st December 2017.

“Meanwhile Cornerstone Insurance and Great Nigerian Insurance Plc will have to inject additional capital to enhance its capital base regardless of the tier they decide to operate. Their Solvency margin as at 31st December 2017 is 104 per cent and 111 per cent respectively.

“AIICO, Lasaco Assurance and Niger Insurance Company fall within the control level of 1, hence no special action is required. However, in order not to lose big transactions in the oil & gas, aviation and annuity space the company may decide to shore up their capital to play in the tier 1.”

For non-life insurance business, it noted that regardless of the tier they wish to adopt, due to low solvency margin, Royal Exchange (103%); Equity Assurance Plc (108%); and Guinea Insurance Plc (116%), would have to shore up their capital.

“Based our anticipation, NEM Insurance Co.; Wapic Insurance; Custodian Investment Plc; and Zenith General Insurance will play within the tier 1 space. “NEM has to shore up its capital to operate in tier 1 due to a low solvency margin of 101 per cent.

“Top insurance firms like Law Union & Rock Insurance; Prestige Assurance Company; Linkage Assurance; Sovereign Trust Insurance; Veritas Kapital Assurance; Mutual Benefit Assurance and Regency Alliance Insurance Company might need to play within the tier 2 space hence losing big transactions in Oil & Gas and Aviation business.

“Life Insurance Business: ARM Life; United Metropolitan Life Insurance and Mutual Benefit Assurance Plc may have to play within the Tier 2 space. ARM Life has a post implementation solvency margin of 108 per cent, hence would have to shore up its capital base.”