We recall that in May 2019, NAICOM re-introduced the previously suspended recapitalization exercise albeit with more stringent capital requirements. Under the new capitalisation provisions, life insurance firms are required to have a minimum paid-up capital of N8.o billion from N2.0 billion previously while firms who engage in general insurance business must now have a new minimum paid-up capital of N10.0 billion from N3.0 billion previously.
Composite insurance firms must have a new regulatory capital of N18.0 billion from N5.0 billion previously while reinsurance businesses are now required to have a minimum capital of N20.0 billion from N10.0 billion previously.
In our opinion, the extension of the deadline was anticipated as many of the concerned insurance operators are struggling to put together a proper plan to raise the needed capital given many of them are struggling to convince investors to inject new funds in businesses that are largely underperforming.
Furthermore, many operators, who have submitted their proposed plans, are yet to get “No Objection” approvals from the commission. We highlight that the length of time required to close capital raise transactions in Nigeria also made the initial deadline untenable.
On the positive side, we think this provides most insurance operators adequate time to fashion out plans as well as convince investors to put more funds into their businesses particularly as 2019 scorecards would be available to pitch performance and future prospects.
Nevertheless, we still think many insurance operators would struggle to raise the necessary capital as several of them currently have negative book value of equity while industry fundamentals do not portend the possibility of unlocking the potentials in the industry at least in the short to medium term.
That said, we anticipate that in 2020, there would likely be a flurry of mergers and acquisitions in the insurance industry while some players who are unable to get the backing of their shareholders may lose their licenses or face hostile takeovers. Meanwhile, we believe operators who manage to scale the recapitalization process will have better growth prospects as they would be in a better position to undertake big ticket transactions.
CSL STOCKBROKERS LIMITED CSL Stockbrokers,
Member of the Nigerian Stock Exchange,
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