Nigeria’s insurance sector regulator, the National Insurance Commission (NAICOM), has increased the minimum paid-up share capital of insurance and reinsurance firms. The move though expected, sent shock waves around the insurance sector of Nigeria.

Breakdown: In a circular made available to insurance firms, NAICOM disclosed that under the new capital regime;

life insurance underwriting firms, which currently have a minimum paid up share capital of N2 billion, will compulsorily shore up their capital to N8 billion, representing a 200 percent increase.

By the new paid-up share capital regime, Insurance firms underwriting general business have been mandated to shore up their capital from N3 billion to N10 billion.

Composite insurance firms, that is, firms underwriting both life and general business will raise their capital from the current N5 billion level to N18 billion.
Reinsurance firms will move up from the current minimum capital of N10 billion to N20 billion.

Effective date: In the circular signed by Pius Agboola, Director, Policy and Regulation Directorate for Commissioner for Insurance, NAICOM disclosed that the new minimum paid-up share capital requirements shall take effect from the commencement date of the circular for new applications, while existing insurance and reinsurance companies shall be required to fully comply not later than June 30, 2020.

NAICOM stated, “The provision in respect of the requirement of statutory deposit as stipulated in part III, section 10 of the insurance Act 2003 shall apply on the effective date of commencement of this circular”

It was looming: Nairametrics had in April 2019, reported a possible increase in the capital base of insurance firms to about N15 billion. According to industry sources, NAICOM was to mandate insurance firms to recapitalise or merge in order to meet the new capital requirement.

Major U-turn: Last July, Naicom announced an increase in the capital base of Insurance Companies but suspended it. At the time it introduced a tier system where Life insurance firms were supposed to have three capitalization tiers. Tier one companies were required to have N6 billion as capital. Tier two life insurance firms N3 billion, while tier 3 firms were to remain at N2 billion.

Non-life insurance firms on the other hand also had three tiers. Tier one non-life firms are mandated to have a capital base of N9 billion. Tier two firms in this segment were expected to have a capital base of N4.5 billion, while tier 3 firms maintained the current capital base of N3 billion. This time around the regulator has decided to go without a Tier.

What this means: Insurance companies in Nigeria are now faced with an imminent race to raise capital. There is going to be a flurry of right issues, public offers, and even IPOs in the coming weeks. Just like it happened to banks in the Soludo era, most insurance firms will have to consider mergers and acquisitions to meet the capital requirements.

Bad timing: NAICOM is perhaps the winner in all of this as it finally gets to fix the insurance sector’s capitalization problem. However, this policy could not have come at the worst times for Insurance firms. There is a paucity of investors in the capital market with most focussed on buying MTN shares. Foreign investors that have for years been hoping to acquire insurance firms on the cheap in Nigeria may have a window of opportunity to do so. Most insurance firms will be willing to get bought out or partially acquired.

Who will benefit: FInancial advisory firms, private equity companies, stockbrokers, stock exchange, banks, accountants, lawyers are poised to earn huge fees from the spate of deals that will be consummated between now and June 30th, 2020.

What next: Insurance companies will have to consider complying with the rules or once again lobby the regulators to postpone the effective date of June 30, 2020. NAICOM suspended this requirement last year when it first issued it and could do so again if pressure is from the “top.” For now, the focus of all insurance firms in Nigeria will be geared towards raising capital.

About NAICOM: The National Insurance Commission was established by the National Insurance Commission Act No 1 of 1997 to ensure the effective administration, supervision and regulation of insurance business in Nigeria as well as regulate transactions between insurers and reinsurers within and outside Nigeria.



OUR TAKE:

This is further confirmation of our prediction that insurance shares like SUNU assurance, Regal, Courtville and others are about to go on significant bull run as they jostle for consolidation and acquisition in light of NAICOM's new capitalisation requirements

UMM stock pick of the week

SUNU Assurances plc

Based on fundamental analysis and recent trading volumes, this stock is projected to go on a significant bull run in the near future

SUNU Assurances Nigeria Plc has assured shareholders that recent corporate changes will lead to better performance in the years ahead.
At the annual general meeting yesterday in Lagos, directors of the insurance company said the rebranding of the company and appointment of new management reflected the company’s commitment to long-term growth