Capital inadequacy triggers M&A in insurance sector

Source Busines Day

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Pressure arising from the need to meet the capital adequacy stipulations of  the National Insurance Commission (NAICOM) is forcing insurance firms to embrace mergers and acquisitions as the best survival option, due to difficulty in raising funds from the capital market.

BusinessDay 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.

The solvency of an insurance company relates to its ability to settle liabilities. If the asset value of the company is inadequate (over indebtedness) or can never be accessed at the required moment (lack of liquidity) to settle claims, then the company is considered insolvent.

“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.”

Like in Nigeria, insurance companies in Europe are also under compulsion to align with the ‘Solvency 11’ requirement, which implies new capital adequacy, to enable them meet future obligations.

Consequently, discussions are currently going among some firms exploring common synergies as it has been confirmed that some smaller firms might find it difficult to meet the solvency margin.

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.

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