- Operators panic over possible takeover by foreign investors
- Banks’ recapitalisation efforts may affect insurers’ search for investors – Shareholders
- Why past recapitalisation exercise failed
- We remain resilient, focused – NAICOM
Recent statistics from the Nigerian insurance sector revealed a sustained positive performance and market deepening capacity in the first quarter of 2024, indicating yet, its ability to adapt and grow despite the prevailing macroeconomic challenges.
The sector recorded a market expansion in terms of premium generation of about N470.7 billion during the period, representing a 50 percent increase, year on year.
The sector closed the 2023 financial year with a landmark performance as it crossed the N1 trillion gross premium marks which the National Insurance Commission attributed to the consistent implementation of regulatory measures aimed at fostering market deepening.
“This was largely influenced by the Oil & Gas business in the Non-Life segment of the market. The non-life as a whole grew by 35.1% accounting for about N615.1 billion in gross premium written while the Life business increased by 16.1% during the year,” NAICOM explained.
But the acclaimed success celebrated among industry players is seen in some other quarters as a drop in the ocean as members of the Nigerian National Assembly are of the opinion that the industry is still performing below its capacity, especially when compared with other sectors of the economy and its peers in Africa and globally.
For example, only four Tier-1 banks; Access Holding, GTCO, UBA, and Zenith Bank, saw their gross earnings grow by 114.40 percent Year-on-Year, reaching N7. 988 trillion in 2023.
This impressive growth contributed to a cumulative 233 percent YoY increase in pre-tax profit, totaling N2. 892 trillion.
“There is apathy for insurance because they have disappointed many people around. They will always go to court and claim that the occurrence for which you want to make claims is not true.”
The gross earnings of the top four banks were eight times bigger than the aggregate insurance sector premium in the financial year ended 2023.
According to Senator Adetokunbo Abiru, Chairman, Committee on Banking, Insurance and Other Financial Institutions, low patronage of insurance services in Nigeria, despite being one of the oldest industries in the nation’s financial services sector still limits its growth.
Abiru puts the patronage rate of insurance in Africa’s most populous nation at 0.5 percent, noting that the Nigerian insurance sector ranked 70th in the world and 5th in Africa.
To drive speedy growth in the industry and make it more competitive, the Lagos Senator who also was a former banker seeks to apply legislative tools to transform the sector in Nigeria.
Hence, a bill sponsored by Abiru seeks an Act to repeal the Insurance Act, Cap 117 2004, the Marine Insurance Act, Cap M3 Laws of the Federation of Nigeria 2004, the Nigeria Reinsurance Corporation Act, Cap, N131, Laws of the Federation of Nigeria. This bill is set for the second reading on the floor of the Senate.
“The bill seeks to provide for a comprehensive Legal and Regulatory Framework for Insurance Business in Nigeria and Related Matters,” Abiru explained.
But while the Senate seeks to reform the Insurance Act to foster meaningful growth in the ‘underperforming’ sector, big wigs in the Nigerian financial industry are looking ahead to legislation to boost the capital base of players to be able to drive business and boost the sector’s contribution to the national economic growth.
Speaking on the next phase after legislation, the Founder/ Chairman, Heirs Holdings Group, Tony Elumelu, at a gathering of Insurers recently, proposed an increase in the capital base of insurance companies to enable them to create a much-expected impact in the economy as well as deepen penetration.
Elumelu specifically advocated for an increase in Life insurance to N20 billion as well as N30 billion for Non-life insurance – as well as raising the capital base of insurance brokers to N1 billion.
The Chairman of Zenith General Insurance, Jim Ovia, is also of the opinion that the sector must be deepened in Nigeria by exploring the potential of technology.
This was just as the Minister of Finance and Coordinating Minister for the Economy, Wale Edun, said the administration of President Bola Tinubu will continue to support market development initiatives of NAICOM and ensure budget provision for the insurance of strategic national assets as well as considering insurance in all national development planning.
Reactions from industry analysts
The Managing Director of Globalview Capital Limited, Aruna Kebira, is of the view that the insurance sector will need to make a lot of changes if it must come to the capital market to raise funds.
Kebira argued that the sector is bedeviled with a lot of challenges including self-inflicted and policy- induced.
“A major problem with the insurance sector in terms of investment relations is the status of government policies placed on them. In Nigeria, the insurance sector is classified as other financial services not ranking shoulder to shoulder with the banking sector. The implication is that they are perceived to be lower in status than the banks. Unfortunately, the operators have not shown any reasons to make people see them as financial institutions that rank at par with banks,” he stated.
He noted that in other climes, insurance companies own the banks, and the policies there rank them higher but here the reverse is the case.
“At the Nigerian Exchange Limited (NGX), the insurance sub-sector is listed as part of other financial services, implying that they are less than banks which are the key players in the financial services,” he explained.
Meanwhile, he added that the banks are rated higher because they are trusted to deliver value to all stakeholders.
“First to the depositors who are sure of always retrieving their deposits whenever they wish and the safety of their money. For investors, they are sure of dividend payment.”
Kebira further explained, “Looking at the money paid for an insurance policy from the accounting perspective, money at the bank is certain that you will get it back, so it is reflected in the balance sheet as an asset, the worst that can happen is that you will pay charges. But for insurance money paid to them is recorded as expenses and is usually written off in the profit and loss accounts. What it means is that every money you pay to insurance as a premium is an expense, and people don’t like engaging in expenses.
“Take for instance, a company that insured its fleets of cars for 10 years and from the first year till the ninth year, nothing happens. Nevertheless they pay the premium and its claim as expenses. At a point in time, they are likely going to decide to do a third party which is N15, 000 when comprehensive is 10 percent of the cost of the vehicle. At the end of the day, these structures reduce patronage. People will always ask, why would you insure your car? The reason is not valid as the likelihood of having an accident is remote.
“The only place where insurance can prosper is in factories, filling stations, goods in transit, maritime, oil and gas but for vehicles which is the dominant product people insure here, the best they can get is a third party, no thanks to the operators’ altitudes.
“There is apathy for insurance because they have disappointed many people around. They will always go to court and claim that the occurrence for which you want to make claims is not true,” he said.
Recapitalisation prospects
Kebira is also of the opinion that insurance companies have a very slim chance to raise money from the capital market at the moment because of their outrageous outstanding shares.
“That is why when they release their results their Earnings per Share (EPS) are usually very small, say 3 kobo per share. As of now, their earnings are not in tandem with their shareholding. If they further increase it, it will further reduce what their earning per share would be.”
“As an analyst in the market, when a company releases its results, I may not look at the turnover, I may not look at the profit before tax but I would go to Earnings per Share which will tell me if this company folds up today and wants to distribute everything to the investors, what would come to an investor. If you discover that it is 3 kobo when the banks are doing like N3, why should I buy an insurance company stock?
“The only time insurance stocks rally in the Nigerian capital market is when the banks have climaxed, when their prices have been driven so high and the market now believes that the share is overpriced, investors will now invest in the other financial institutions. And in such times people look at the insurance companies that are consistent in paying dividends to investors.
“So, increasing their shareholding is going to lead to dilution of ownership and would bring down their earning per share. The question then would be, can they make justifiable earnings to justify investor interest in the increase in their shareholding? Unfortunately, that is what the market is looking out for.”
Also speaking, a financial expert and the Executive Director of the African Centre for Leadership, Strategy and Development, Monday Osasah, noted that the problem with the insurance sector in Nigeria is their mode of operations and the employees.
“When corporate entities insure their properties such as vehicles, they do so by buying into the comprehensive package. What that means is that the insurance company will run down the value of the vehicles for 10 years. By implication, if you bought a car for N50 million you will be paying the premium over 10 years so that if anything happens the insurance company can pay you the value of that car. The insurance operators would have sat down and done their analysis and are confident that if a company insures say 10 cars for 10 years, the probability of incurring debt or accident is 1 out of 10 which means only one car can have such misfortune.
“So what they do is that they will collect the money but they will not pay to the insurance company. They will only do one policy and leave it open if anything happens. This is done in conjunction with everybody in the company, so it is only when there is a problem that they will quickly fix the car particulars, and then they will come and pay. However, the entire premium they have been paying over the years goes into private pockets.”
Failed recapitalisation exercise
The insurance industry witnessed a failed recapitalisation exercise in 2020 when the regulator, NAICOM ordered that players in the sector recapitalize in two tranches.
The NAICOM’s circular to all insurance companies on June 3, 2020 was titled, ‘Segmentation of minimum paid-up share capital requirements for insurance companies in Nigeria.’ Deadline for the first batch of the recapitalistion was December 31, 2020.
Life insurance companies were ordered to raise their capital from N2 billion to N4 billion at the end of the first phase and N8 billion at the end of the second phase.
General insurance companies were ordered to increase their capital from N3 billion at the end of the first phase to N5 billion and N10 billion at the end of the second phase.
Composite underwriters were ordered to raise their capital from N5 billion to N9 billion at the end of the first phase, and to N18 billion at the end of the second phase.
The reinsurance firms were ordered to raise their capital from N10 billion to N12 billion at the end of the first phase, and to N20 billion at the final phase.
However, litigation by some aggrieved companies allegedly using their shareholders against the commission forced NAICOM to suspend the recapitalisation exercise after the first phase.
Osasah who sheds more light on the failed exercise, alleged that insider dealings was a major reason why it could not fly.
“There was a time when the insurance companies were asked to recapitalise and most of them could not meet the recapitalisation. Most of the Managing Directors of the insurance companies wanted to have all the shares in their pocket. I was contacted but I told them that the regulation is that there is no way you can convert one name to another.
“The insurance policy in Nigeria is very complicated, and it is so structured that there are clauses that make it almost impossible for insurance companies to pay claims. For instance, the Filling Station near the Airport Hotel in Ikeja got burnt recently due to an explosion from a gas cylinder; the insurance company will tell you that it is due to negligence so they are not liable. The implication of such an act is the loss of trust in the public. The truth is that they have not given anybody the reason why you have to insure. If a thunder strikes and causes a fire accident, the insurance companies will say it is force majeure, that it is caused by nature so they cannot pay claims, if somebody strikes matches and it catches fire, they say it’s negligence.
Shareholders speak
Meanwhile, shareholders of insurance companies are of the view that operators should begin to fashion strategies to raise funds ahead of any regulatory pronouncement.
Advocating for a proactive approach ahead of the passage of the proposed bill on the insurance industry in the Senate, Sunny Nwosu, Shareholder Emeritus of the Independent Shareholders Association of Nigeria who spoke at an insurance company’s annual general meeting held in Lagos said, “You must start to plan on how to raise your capital because it must come with what I have read concerning the new proposed bill.”
Nwosu said it will not be easy for insurers to enter the same market with banks in search of investors, noting that insurers must get their strategies right.
The National Coordinator of the Progressive Shareholders Association of Nigeria, Boniface Okezie, identified the need for insurers to begin to build reserves for a stronger capacity.
“Insurance companies must begin to look into the future concerning recapitalisation so that no one is taken unaware when the time comes,” he said.
“Indeed, a good number of successful or intended recapitalisation exercises in the insurance sector have been marked by subsequent takeover of indigenous firms by investors from European markets, South Africa and others.”
Palpable fear
Recent trend in the Nigerian insurance sector seems to suggest that recapitalisation period is the 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 exercises in the insurance sector have been marked by subsequent takeover of indigenous firms by investors from European markets, South Africa and others.
The development has no doubt inflicted fears in the minds of Nigerian investors against imminent takeover of their stakes in various insurance firms by their foreign counterparts.
Regulatory stance
The Commissioner for Insurance/Chief Executive, NAICOM, Sunday Thomas, maintained that under his leadership, the commission remained resilient and focused on implementing initiatives that will foster the development of the Nigerian insurance industry and align its fortune with that of the nation as the Africa largest economy.
He said in terms of its performance, the industry premium income grew at an average of 13.6 percent from a premium income of N282 billion to N726.2 billion between 2014 and 2022.
Total assets of the sector also grew at an average of 12 per cent from N827.5 billion in 2014 to N2.33 trillion in 2022.
Thomas, however, pointed out that notwithstanding the growth that had been sustained; the roadmap enumerated some of the challenges affecting the desired growth of the industry which had persisted.
These include talent gap, comparatively low public awareness, insurance affordability, lack of trust and confidence in insurers, cultural and religious bias, inadequate distribution channels, and low enforcement of insurance, among others.
