Are insurance companies ripe for mergers?

With pressure arising for the need to meet the capital adequacy stipulations of  the National Insurance Commission (NAICOM) insurance firms  are being forced to embrace mergers and acquisitions as the best survival option, due to difficulty in raising funds from the capital market.

Investigations  show that the only viable option for some of the firms, given this scenario, is to pull resources together. This is so, as most of the firms are planning to expand their businesses, a prospect  that requires higher capital adequacy ratio, which is a direct function of the amount of risks being carried, otherwise called the solvency margin.

However, Managing Director/Chief Executive, NICON Insurance Limited, Mr. Samuel Bayode said the development may not necessarily have negative impact in the insurance industry.

He said the injection of fresh funds and change of ownership structure would help make insurance companies more competitive in the country and in Africa in general.

“Section 24 of the Insurance Act 2003 states that an insurer shall maintain at all times, a margin of solvency in respect of its general business; being the excess of the value of its admissible assets in Nigeria over its liabilities in Nigeria.”

Analysts say that insurers already under NAICOM monitor for capital adequacy issues, may be up for the taking  by some enthusiastic foreign firms looking to come into the Nigerian market.

Reviewing the economy and the insurance industry in 2014, a CEO managing one of the top insurance firms said the signs are not very good for the economy.

The capital market lost 60 percent in 2014 and the run is still not over. There is the falling oil price, dwindling government revenue, as well as volatility in the financial markets, which suggest it will not be easy to raise funds this year.

“This does not only affect insurance companies, it cuts across other industries that would need funding to grow operations and all that,” the CEO said.

He further observed that some insurance companies already having capital adequacy challenges, might begin to sell off majority stake to foreign firms seeking to come into Nigeria, unless they  take to mergers.

“Mergers will be good because consolidation will strengthen the insurance industry for better growth and value creation to the economy.”

Thompson Barineka, director, inspectorate, NAICOM, had said the commission carries out monitoring and evaluation of the stability and health of insurance companies on a regular basis,  to ensure that they are alive and capable of meeting their obligations to policy holders.

Barineka also said  that measures have been put in place to enable the commission oversee the activities of operators, adding that its portal for daily monitoring of the activities will soon come on stream.

The Economist Intelligence Unit, in a report titled: ‘Insurers and society: How regulation affects the insurance industry’s ability to fulfil its role’notes that the demands of the new regime threaten to disrupt the key role played by insurers as investors in the capital markets, by pushing them towards ‘safer’ assets with lower capital charges, and away from the equities and non-investment grade debt on which much of the private industry depends for financing.

This could be a particularly troubling outcome for businesses seeking to raise capital, given that banks remain reluctant to lend because of their own balance sheet constraints, the report said.

The boards of SA Insurance Plc and SA Life Assurance Limited has recently  approved the merger of both companies to form a composite insurance company.

According to the organisations’ spokesman, Nelson Egboboh, the boards’ corporate decision of combining the existing strengths of both companies was spurred by their desire to “create a bigger and financially strong composite insurance company with stronger capacity to serve its various clients and play a more dominant role in the insurance sector.”

He said corporate action was further being taken with a focus on “delivering superior returns to the shareholders, provide much higher level of satisfactory service to our clients and to save cost of operations.”

He explained that to give the merger plan the necessary regulatory backing, “the management has applied for and secured a”no objection consent” from the regulator, the National Insurance Commission (NAICOM).

He said the companies are engaging the services of appropriate financial and merger experts to drive the transactions, stating that “it is our plan to complete the process before the end of the third quarter of this year.”

Egboboh assured that “the composite company to emerge will continue to build on the success of the transaction in the months to come, providing more innovative products and delivering on its promises to clients,” noting that “with the company’s formidable management team as well as its professional and result-oriented workforce, the company was sure of achieving its set merger goals.”

He explained that SA Insurance Plc which became quoted on the NSE in 2003 currently has shareholders’ funds of N4.7billion and asset base of N8.8billion while its affiliate company, SA Life Assurance Limited has shareholders’ fund of N2.1billion and a total asset base of N6.9billion.

Nigeria with a population of about 166 million people has only 0.5 percent insurance penetration. This suggests that insurance in Nigeria is in an early stage. It also means Nigeria is a potential hub for expanding into West Africa; more so that Nigeria and Ghana together account for over 75 percent of the region’s GDP. There are about 1.3 million Nigerians that have insurance cover, according to a 2012 report by Enhancing Financial Inclusion & Access (EFInA). Most Nigerians have vehicle insurance while life assurance, medical, critical illness cover and livestock/agriculture insurance have extremely low uptake.

The insurance industry in Nigeria consists of 59 insurance companies and two reinsurance companies; 24 of them are currently listed on the Nigerian stock exchange. Although, the industry has two main types of income, investment and technical income, it contributes a mere o.56 percent to GDP, but the growth rate of the industry premium is estimated at about 18 percent per year. And the level of foreign ownership is increasing. The industry is still consolidating; there have been some mergers and acquisitions, for instance, Crusader Insurance merged with Custodian & Allied Insurance, and Assurance African Holdings acquired GT Assurance, now Mansard Insurance.

In terms of peer country comparison in Africa, Nigeria with a population of about 166 million has 59 insurance companies, while South Africa with a population of about 52 million has 184 insurance companies; and Ghana with a population of about 25 million has 47 insurance companies. The insurance industry in South Africa and Ghana contributes 12.9 percent and one percent to their respective GDPs.

Compared to advanced economies, the total insurance premium as a percentage of GDP for US is 14.5 percent, UK, 15 percent, Ireland 22 percent and Germany 8.9 percent. The major constraints to the Nigerian insurance industry are poor corporate governance; high default rates; low capital; low capacity and skills; cultural factors; high level of consumer’s ignorance of the advantages of insurance products; high rate of unemployment and low GDP per capita figures as well as lack of genuine property ownership documents.

Insurance analysts said there is the need to have the practice and business of insurance penetrate the nook and crannies of the country. They said it could by doing so contribute meaningfully to the nation’s economic growth process.

Viewed from that prism, experts and stakeholders in the industry again recently raised the issues of mergers and acquisition within the industry; a move which the National Insurance Commission (NAICOM) once promised to encouraged in the latter part of last year.

Insisting mergers and acquisitions remains the only way by which the insurance sector in Nigeria can fully penetrate the consciousness of Nigerians, while fully becoming appreciated as an effective business support and growth strategy, other observers told our correspondent that the industry regulators should also ensure it (NAICOM) lives up to its pledge by making sure operators come together to form alliances, mergers and even acquisition that can drive the sector forward.

Nsugbe pointed out that though NAICOM has said it was constantly encouraging mergers and acquisitions in the industry in order to breed stronger firms that can underwrite bigger risks and do business professionally, that there has been nothing much to show as having been achieved in that aspect.

Taking the blames and challenge of low response to mergers and acquisitions proposals within the insurance sector and placing them on the shoulders of the sector, regulators, the Executive Director of City Insurance Brokers Limited, Mr. Rocky Igunbor, said the much the industry regulator can do is what it has done by attempting to create an enabling environment to make those kind of mergers/acquisitions arrangement a smooth sailing affair.

Igunbor also blamed the operators. Some of them he said include the directors and owners of small time insurance firms responsible for drawing back the hands of the clock with their “narrow view of things”. He added those types of operators mainly play to the gallery of being in support of mergers or acquisition when there is the need to do so, while holding on, at the same time strongly to their firm’s own little space within the sector when they have to.

The former President of the National Council of Registered Insurance Brokers (NCRIB), Mrs Liade Osijo, told journalists recently for the nation’s insurance industry to survive the current world economic recession, that stakeholders needed for further consolidation of insurance institutions into bigger and stronger underwriting firms.

According to her, with close to 100 life, non-life and reinsurance companies operating in the country, there was no doubt that such figure is too large for optimal performance. That is why the commission should encourage mergers and acquisitions among operators in the industry.

Making reference to the merger between Custodian & Allied Insurance Plc and Crusader Nigeria Plc, and that between African Alliance Insurance Plc with Universal Insurance Plc, as the only notable merger that took place last year despite the encouragement from the regulators, former Managing Director of Great Nigeria Insurance Company Plc, Alhaji Sani Abdulrahman, said such poor performance in the area of mergers and acquisitions was not good enough for a sector that is struggling to become more relevant in the scheme of things.

In Nigeria AXA has made a significant inroad into the insurance market. AXA in July 2015 reincorporated Mansard Insurance Plc as AXA Mansard Insurance, to complete the acquisition and brand essence change that started late last year. The company also bought 77 per cent majority equity stake in Mansard Insurance Plc, in a major market-entry push that promises to profoundly impact the Nigerian insurance industry and already has a substantial presence in Africa including Cameroon, Gabon, Ivory Coast, Morocco, Senegal and Algeria.

According to him, “consolidation, mergers and acquisitions have become necessary in order for the sector to meet the new and challenging environment. Companies must increasingly compete globally, they must be learn and efficient, while offering an expanding array of products to ever more discerning and demanding consumers.”

He explained that mergers and acquisitions have remained viable options for insurance companies to remain in business, and that Nigeria insurance operators should quickly embrace the concept, if many of them are to remains afloat and continue their operation in the years to come.

Managing Director of Global Insurance Risk Brokers Limited, Chief Rufus Kupi, said he is of the opinion “ that the number of insurance companies operating in Nigeria are too many and should be reduced not by forcing any company to close-shop, but by encouraging insurance companies to come together through mergers and acquisitions”.

Also the Stakeholders recently urged insurance companies quoted on the Nigerian Stock Exchange (NSE) to seek mergers and acquisitions to remain competitive in the industry.

The stakeholders said that mergers and acquisitions would help the companies to a build formidable force in the industry and enhance investor confidence in insurance products.

They also called for effective regulation of the sector by the National Insurance Commission (NAICOM) to eliminate activities of illegal operators and ensure strict adherence to good corporate governance.

Mr Boniface Okezie, National Chairman, Progressive Shareholders Association of Nigeria (PSAN), said that many insurance companies were under-capitalised and needed to seek mergers and acquisitions.

Okezie said that many insurance companies were yet to improve after the financial meltdown and should seek business combination.

“The industry is still under the burden of heavy receivables and return on investment in the sector is very low,” Okezie said.

He said that there was a need for business combinations for the industry to grow instead of growing under heavy debts.

Okezie urged stakeholders in the industry to map out strategies aimed at addressing negative public perception and lack of mass participation.

Alhaji Gbadebo Olatokunbo, founding member, Nigeria Shareholders Solidarity Association, said that investors had lost confidence in insurance stocks because of poor performance and non-declaration of dividends over the years.

Olatokunbo said that the main aim of investment was to maximise return.

He noted that the sector was performing below expectation in spite of huge opportunities in the country.

Olatokunbo said that shareholders had nothing to show for their investment in insurance companies for years, adding that it contributed to foreign investors’ apathy in the stocks.

He said that the industry had failed to contribute its quota to economic growth and development due to investors’ apathy to their products occasioned by poor payment of claims in the past.

According to him, “investors will continue to shun insurance stocks on the Nigerian Stock Exchange (NSE) if NAICOM fails to beef up surveillance and ensure proper sanctioning of erring and illegal operators.

He called on the commission to engage insurance directors on the need to scrutinise expenses to control excesses of managerial capitalists in line with present realities in the industry.

Olatokunbo said that there was a need for NAICOM to do more on supervision and formulation of policies in line with the global best practice, to make the industry attractive.

Source: TheNation