Insurance Sector Recapitalisation and Foreign Takeovers

As Insurance sector regulator considers fresh round of recapitalisation, local investors  are worried of losing their stakes in existing insurance firms to their foreign counterparts, writes Ebere Nwoji  

Recent trend in Nigerian insurance sector seems to suggest that recapitalisation period in insurance sector is a period operating firms in the system are much exposed  to foreign investors take overs, starting with  equity investments, which would later metamorphose to buyout.

Indeed, a good number of successful or intended recapitalisation exercise in the insurance sector have been marked by subsequent take over of indigenous firms by investors from European market, South Africa and others.

The development has no doubt inflicted fears in the mind of Nigerian investors against  imminent take over of their stakes in various insurance firms by their foreign counterparts.

As the National Insurance Commission(NAICOM) mutes another round of recapitalisation in the industry, investors in insurance market are already fidgeting over possible loss of their stakes in the remaining insurance firms.

But NAICOM is more interested in seeing the operating firms doing well with robust capital than foreign or indigenous ownership structure.

NAICOM Consider fresh recapitalisation

The commissioner for Insurance Mr. Olorundare Sunday Thomas recently announced his intention to embark on another round of recapitalisation that must be brought to a peaceful conclusion.

This is coming on the heels of previous two attempts presided over by his predecessor, Mohammed Kari who during his tenure announced increase in minimum operating capital of operating firms under  the tier base capital regime that graded the industry’s capital into tier one, tier two and tier three.

But this met a major resistance from both the operators and local investors under the various shareholders associations.

After this the commission came up with another capital increase exercise tagged minimum share caprital which mandated life operating firms to upgrade their capital from N2 billion to N8 billion, firms on General business were mandated to upgrade their capital from N5 billion to N10 billion while composite firms were to upgrade from N5 billion to N18 billion.This again met serious resistance as most firms felt the margin of the increase was too high.

But big operators like Leadway Assurance, Custodian, AIICO were very comfortable with the development.

Aftermath of past recapitalisation

But one of the fallouts of this was that foreign investors looking for where to stake their funds saw  this as opportunity  to take up positions in Nigerian insurance firms looking for how to meet the new capital regime.

This was when insurance firms like FBNInsurance, NEM Insurance, Royal Exchange Assurance married new investors.

As NAICOM  adjusts its seat under Thomas for another round of recapitalisation, the remaining few local investors in insurance are jittery that they wmay lose their stakes in the existing firms .

Thomas had recently made known his intention to bring back the risk base capital exercise which was initially rejected by the industry under Kari.

According to him, “We are making progress but looking at our economy, these, to me, are small numbers. I will also say that our methodology is also changing. Inspection used to be compliance-based with a checklist. But now, the world has moved to risk-based supervision. We started that last year. Some companies have tasted what it means to have risk-based supervision environment.

“It has been quite revealing about the operations of these institutions. We are taking it to a new level, risk-based capital. If you know the history of capital in this country, it has been an issue and we want to remove that. You can trade, for instance, as a motor third party insurance company, based on your capital. Then, if you want to trade in the highly volatile business environment of oil and gas, you also must provide the needed capital to be able to run at that level. That is where we are going now.”

Shareholders’  Reaction

But in what looks like a swift reaction to this, the Independent Shareholders Association of Nigeria (ISAN) recently described as pathetic the acquisition of local insurance firms by foreign conglomerates under the aegis of Foreign Direct Investment (FDI), saying it portends bad omens for sustainable growth of the Nigerian insurance industry as well as the investment interest of shareholders.

National co-ordinator of ISAN, Moses Igbrude who expressed worry about the development in a recent interview with the media, lamented that the foreign investors were taking advantage of the nation’s bad economy, undervalued insurance stocks and poor exchange rate.

The ISAN boss said: “Our economy is so bad that most of our insurance stocks are undervalued, our exchange rate is so poor, such that only a million dollars will translate to N700-million and, if you have N700-million, you can buy and have a major stake in insurance companies.”

Stating that not all FDI was good for the Nigerian economy, he noted that some of the portfolio investors come to take advantage of weak laws and economy.

“What they do is to buy into insurance firms and delist them from the Stock Exchange, hence becoming a private business, and then hide them from the eyes of the government and the next thing, you wouldn’t hear about the companies again,” he said.

Acknowledging the fact that there are still good investors, he appealed to the insurance industry regulatory body, NAICOM to allow only genuine investors into the industry, even as he urged the Commission to put in place processes to checkmate activities of fake foreign investors to protect the local insurance sector.

THISDAY notes that in  recent times, Nigerian insurance sector, despite its low returns on investment, has become the toast of foreign investors. Indeed,NAICOM confirmed to the media that in the past 10 years, no less than 15 investors have ventured into various firms for investments.

Foreigners Stake in Nigerian  

A head count of Nigerian firms enjoying foreign investment goes as follows    a leading African Private Equity Fund Manager, Advanced Finance and Investment Group(AFIG Funds) took 29.9 per cent stake in NEM Insurance Plc which now positions the group as the majority shareholder in the progressive 60 year-old NEM Insurance. Sanlam’s group in South Africa has currently taken over full ownership of FBNInsurance from FBN Holding.

 Also within this ten-year period, Ensure Insurance  has been taken over by the Allianz group just as there are on-going enquiries on the fundamentals of other insurance firms in Nigeria by foreign investors.

Others leading in the race of foreign investment in Nigerian insurance sector are NSIA which acquired  ADIC Insurance, a former subsidiary of Diamond Bank Plc; Mutual & Federal Insurance Company, South Africa, which acquired  Oceanic Insurance Company Limited, formerly owned by Oceanic Bank Plc; Old Mutual Nigeria Services Company (Old Mutual Nigeria)also acquired 70 per cent of Oceanic Life Assurance Limited, a subsidiary of Oceanic Bank.

Others are UBA Capital Holding Limited/MMI Holdings, which had 50/50 per cent of UBA Metropolitan Life, formerly owned by United Bank for Africa Plc; FBN Holdings/Samlam Group SA, which initially had 65/35 ownership of FBN Life, formerly owned by First Bank of Nigeria  but has now taken over 100 percent ownership of the company. Assur Africa Holding which initially acquired 67.68 per cent of Mansard Insurance, formerly owned by GTBank; while New India Assurance Company had 51 per cent stake in Prestige Assurance Plc.

With these developments, the Nigerian insurance sector, seems to have become an object of scramble and partition for investment by investors from both European and other African markets.

Indeed, foreign investors are really taking advantage of huge market position of Nigeria due to population, low prices of insurance stocks and apathy of indigenous investors towards insurance stocks due to low yields to corner the existing firms to their side and if possible, chase indigenous investors out of the market.

A close look at what is trending in the industry in these past 10 years shows that dilution of ownership structure of the existing firms is becoming so customary in this time that choice of insurance firms that will underwrite their big time businesses by the insuring public is almost dependent on the stake of one foreign investor or the other in existing indigenous firms.

As a result, some insurance firms, especially the hitherto big old firms, which because of some kind of conservative attitude to investment, have remained stand alone are now turning back on their own to woo foreign partners to come and take stakes in their firms to not only inject fresh ideas but also position them on the same pedestal with new generation companies with foreign investor partnership in order to win certain high ticket businesses.

Between two of such firms, Niger Insurance Plc and RoyalExchange General Insurance plc at the on set told THISDAY that they were looking for foreign partners that would help reposition and consolidate on their positions as market leaders.

Along the line both Royal Exchange Life and General Insurance were successful in this regard, as foreign investors invested in them thereby repositioning them as strong firms with fresh ideas.But  Niger Insurance wasn’t fortunate enough as the management continued in this search for foreign partners until the regulator became impatient and landed its regulatory hammer on the company alongside SA Insurance last year.

The sudden interest in Nigerian insurance market by the foreign investors dated back to 2012. But the tempo rose higher in 2013 after the regulator the National Insurance Commission launched “no premium no cover policy”, which made the business more attractive by putting more money in the vault of insurance firms.

In 2013, the then Commissioner for Insurance, Mr. Fola Daniel, had disclosed that foreign equities rose to 62.8 per cent in at least seven insurance firms, while many investors were also negotiating with other local underwriters on how they could invest in them.

Few years after, more and more foreign interests were brought to bear in the activities of these companies .For instance, AXA SA acquired majority stake in Mansard Insurance in 2014 and changed the firm’s name to AXA Mansard Insurance; Metropolitan International Holdings (Proprietary) Limited acquired 100 per cent of UBA Metropolitan Life and changed it to United Metropolitan Nigeria Life Insurance Limited; Old Mutual completed the firm’s acquisition from Ecobank Group (after the bank acquired Oceanic Bank) and changed its name to Old Mutual Nigeria.

Foreign Investors’ interest

On the reason for the ongoing interest and scramble for equities in Nigerian insurance firms, capital market operators in their analysis said even as at present, investment talks between foreign investors and Nigerian insurance firms are on-going because the outlook for the sector is positive. One of the capital market operators who spoke to THISDAY on the development attributed this to low prices of Insurance stock and foreseen brightness of the sector’s future.

“As you are aware, insurance stocks are very affordable now since the Nigerian Stock Exchange (NSE) introduced a new pricing methodology and par value rule. Some foreign investors had targeted some insurance firms to acquire before the new recapitalisation policy of the National Insurance Commission (NAICOM) stopped them. However, after the recapitalisation was cancelled, the investors are making their way back to the negotiation table,” the operator said.

He explained that some of the investors were prior to the botched recapitalisation exercise, actually waiting to see firms that would meet the recapitalisatioon policy before it was cancelled by the industry regulator.

“Now they are preparing to return because the recapitalisation burden has been removed and their value on the stock market looks very attractive. That is why investors are now looking at some of the companies for possible acquisition,” he said.

Discounted Insurance Stocks

THISDAY checks on prevailing prices of insurance stocks reveal that some  insurance stocks   on the Nigeria Exchange Group Plc (NGX) are  trading below 50 kobo par value. Market analysts said although the lower prices offered new entry opportunities in some of stocks, investor apathy for insurance stocks were basically caused by two major factors, which are low returns on investment and unawareness of problem of insurance in Nigeria.

Another reason for the sudden interest, according to industry analysts, is  improvement on the capital base of the industry which positioned the industry as becoming more serious than ever.Before the 2007 mandatory recapitalisation exercise in the sector, most of the insurance companies were indigenous underwriters, they had less capital, they suffered neglect by both investors and the insuring public as well as suffered negative perception and operated on a low scale.

Before the exercise, the sector’s minimum operating capital ranged from N150m, for life underwriters,N200m for non-life and N350m for composite firms. After the 2007 exercise, it was upgraded to N2bn, for life,N3bn, for non life N5bn for composite firms and N10bn for reinsurers. After the exercise, which reduced the number of operating firms to 59 , some the existing firms like Leadway and Custodian and Allied among others have successfully raised their operating capital far ahead of the required minimum.

This new status began to not only to attract big ticket businesses; it also attracted foreigners into the sector, who started by buying small equities in the companies and graduated to taking over the insurance firms. Both management and board of the affected firms were optimistic that their new status will leverage them to operate optimally.

Speaking on the deal, Group Managing Director of NEM Insurance, Mr Tope Smart, said: “We are delighted to welcome AFIG Funds as a significant shareholder in NEM at such an exciting time in the company’s evolution. This partnership with AFIG Funds is the outcome of several years of constructive engagement, as well as a thorough internal strategic process to identify and engage with the best long-term institutional partner for our company. We look forward to continue to benefit from AFIG Funds’ extensive experience investing in strong African companies particularly in financial institutions. We believe this partnership will accelerate the realisation of our growth ambitions within Nigeria and across the continent. We are confident this will be a fruitful and mutually rewarding partnership.”

Analysts’ views

Some industry analysts said though the intended, but botched increase in minimum solvency capital of the industry by the regulator is likely going to attract more foreign investors into the country.

This is because, according to the  former president of the Chartered Insurance Institute of Nigeria(CIIN)  and Managing Director Consolidated Hallmark Insurance , Eddie Efekoha, the increase in minimum solvency capital exercise though was cancelled has opened the eyes of members of the insuring public as some now bench their choice of firms that will underwrite their businesses on N9 billion capital.

This being the case, industry analysts said the industry’s capital has automatically been upgraded and with the upgrading, more foreign investors will come into the country through partnership deals and acquisitions. According to a stockbroker, who said his company is currently facilitating investment talks between foreign investors and a Nigerian insurance firm, the outlook for the sector is positive.

“As you are aware, insurance stocks are very affordable now since NGX introduced a new pricing methodology and par value rule January last year. Some foreign investors had targeted some insurance firms to acquire before the new recapitalisation policy of the National Insurance Commission (NAICOM) stopped them. However, after the recapitalisation was cancelled, the investors are making their way back to the negotiation table,” the operator said. As NAICOM plans another recapitalisation, negotiation for equity take up in the remaining local firms are springing up but the commission is being warned by sector observers to read in between the lines to be able to differentiate between genuine investors and fake ones.