Recapitalization of insurance companies in Nigeria: prospects of raising/attracting equity capital may prove difficult
There has been recurring clamour for recapitalisation of the Insurance sector in Nigeria owing to what has been perceived as declining public confidence in the sector’s integrity, ability to honour insurance claims and general state of well-being. In other to arrest this loss of confidence, NAICOM has introduced a Tier-Based Minimum Solvency Capital (TBMSC) framework for recapitalization of insurance companies. The TBMSC methodology is a multi-level capitalization structure which proposes proportionate capital requirement designed to support the nature, scale and complexity of the businesses conducted by insurance companies.
Consequently, NAICOM issued a Circular No. NAICOM /DPR/CIR/25/2019 dated May 20, 2019 on the minimum paid-up share capital requirement for insurance and reinsurance companies in Nigeria which, in effect, increased the minimum paid up share capital of both insurance and reinsurance companies (except those of Takaful and Micro-insurance companies) effective May 20, 2019 with respect to new applications for insurance licenses, while existing insurance and reinsurance companies were required to comply no later than June 30, 2020.
The table below shows the increased minimum paid up capital requirements vis-a-vis existing limits:
|S/N||CLASS OF BUSINESS||EXISTING MINIMUM PAID UP SHARE CAPITAL (N’BN)||REVISED MINIMUM PAID UP CAPITAL (N’BN)|
Circulars Extending Deadlines
Further to the Circular dated May 20, 2019, NAICOM issued Circular NAICOM/DPR/CIR/25-01/2019 dated July 23, 2019 making clarifications on how existing insurance and reinsurance companies could effectively be recapitalized. The salient directives in the Circular are summarized as follows:
- The minimum share capital recapitalization can be achieved through any or a combination of:
- The recapitalization can be achieved through merger and acquisition which shall be concluded not later than 60 days to the deadline for the recapitalization.
- Escrow account must be opened with the Central Bank of Nigeria for the deposit of cash payment of shares. Thereafter, deposited funds shall be released not later than 30 days after the confirmation and issuance of a new license.
- Shareholders fund as at the last date of recapitalization of existing insurance/reinsurance companies shall not be less than the minimum paid-up share capital.
- Statutory deposit in line with the provisions of the Insurance Act 2003 shall be made not later than 30 days to the deadline for the recapitalization.
On December 30, 2019, NAICOM issued a further Circular No. NAICOM/DPR/CIR/25-03/2019 which extended the deadline for recapitalization to December 31, 2020 due to the feedback from stakeholders.
Due to the incidence of the Covid-19 Pandemic that has and continues to disrupt economic and financial systems across the globe, including Nigeria, it became necessary for NAICOM to intervene once again, by relaxing the earlier deadline and conditions for recapitalization in the industry. Consequently, by virtue of Circular No. NAICOM/DPR/CIR/25-Q4/2020 issued on June 03 2020, NAICOM has directed the extension of the deadline and segmentation of the recapitalization process into two phases as follows:
- 50 % of the minimum paid up for insurance and 60 % for reinsurance shall be met by 31st December 2020;
- Insurance companies are required to fully comply with the approved minimum paid up capital not later than 31st September 2021.
In summary, insurance companies are now required to comply with a two-phase deadline in pursuit of ramping up their minimum share capital obligations in satisfaction of the recapitalization policy of NAICIOM, as shown in the table below:
|S/N||CLASS OF BUSINESS||EXISTING MINIMUM PAID UP SHARE CAPITAL (N’BN)||EXPECTED MINIMUM PAID UP CAPITAL BY Dec 31, 2020 (N’BN)||EXPECTED MINIMUM PAID UP CAPITAL BY SEPT 30, 2021 (N’BN)|
NAICOM has emphasized that insurance companies that fail to comply with the required minimum paid-up capital by the end of 31st December 2020 may be restricted on the scope of businesses they will be allowed to transact. All other terms and conditions contained in the previous circulars on recapitalization have been retained.
We are of the firm view that the decision to revise the recapitalisation conditions and extend the deadline is a well thought out one. Suffice it to reiterate that the Covid-19 pandemic has caused geo-political disruptions and ravaged economies across the globe, such that global economic and financial systems are still developing coping mechanisms to remain afloat. The capacity of businesses, especially those within an already unattractive insurance industry, to raise much required capital has only been made that much more difficult.
It bears mentioning that, with some industry players currently carrying negative book values of equity, the prospects of raising/attracting equity capital may prove extremely difficult, even as we note that a number of other stakeholders may have initiated the process of raising the desired additional capital from existing shareholders by means of right issues.
That being said, it would seem that a veritable avenue for helping industry participants ramp up their capital and satisfy the new minimum capitalisation requirements would be to consider the model of mergers, acquisitions and reorganisations. This methodology could help attract increased value generation, maximisation of cost efficiencies and increased market share. Expectedly, the Federal Competition and Consumer Protection Commission (FCCPC) would be required to play an active moderating and stabilizing role in this process in order to minimize the incidence of monopolies, higher cost of insurance products and abuse of dominant position. In creating a level-playing field for all players, the FCCPC would facilitate healthy competition in this space and prioritise consumer protection.
This article has been authored by Rose Adaji (Senior Associate) who practices at Alliance Law Firm