Naira Depreciation: Insurance Industry Capital Base Crashes To $1bn
Naira’s depreciation has taken a toll on the capital base of the insurance industry. The capital has dropped to $1 billion from $2.2 billion.
This was contained in the Agusto & Co. 2021 Nigerian Insurance Industry Report: “Forging ahead despite headwinds”, released at the weekend.
The report by the pan-African credit rating agency, said that as at December 31, last year, the industry had an estimated capital base of $1 billion, significantly lower than $2.2 billion recorded as at 31 December 2007.
The naira was at the weekend exchanging at N485/$1 at the parallel market and N415/$1 at the Investors’ & Exporters’ (I&E) Forex window but remained stable at N379/$1 on the Central Bank of Nigeria (CBN’s) official rate, a check at the apex bank’s website showed.
The local currency has lost over 30 per cent of its value in the last one year, despite regular dollar interventions by the CBN to stabilise the local currency.
According to the report, insurance industry is also burdened with other challenges, including the urgent need to raise new capital.
Although, some insurers have strengthened their capital base through earnings retention, the ability of most industry operators to solely underwrite large ticket transactions has dwindled, based on the lower value of the capital in dollar terms.
The report said the on-going insurance recapitalisation is expected to change the structure of the industry.
Industry regulator – the National Insurance Commission (NAICOM) – has therefore, raised the minimum capital to N8 billion (from N2 billion), N10 billion (from N3 billion), N18 billion (from N5 billion) and N20 billion (from N10 billion) for life insurers, non-life insurers, composite insurers and reinsurance firms respectively.
The report said: “In addition to the benefits accruing from a larger capital base from a risk underwriting perspective, improved investment management practices will be upheld by a larger investment portfolio driven by a need to generate adequate returns. The recapitalisation has elicited mergers and acquisition transactions in the Industry.”
According to Agusto & Co., the recapitalisation has suffered some setbacks, particularly as the COVID-19 pandemic ravaged global economy, including Nigeria’s.
Agusto & Co. hoped the industry’s recapitalisation could be a watershed despite the setbacks.
It said: “Consequently, NAICOM postponed the deadline for the recapitalisation exercise, which was later stratified into two phases; December 2020 and September 2021. In addition, litigation by some Industry operators and aggrieved shareholders resulted in the postponement of the December 2020 deadline for the first phase of the recapitalisation exercise.”
Also contained in the report is a review of the coronavirus pandemic on the insurance industry and the strategies adopted by insurers to minimise the associated disruptions while optimising the opportunities provided by the pandemic.
The firm anticipates an uptick in these transactions as the recapitalization deadline draws near.
It said: “The shareholding structure of most insurers is expected to change in the near term as some investors leverage the exercise to either gain or increase exposure to the Industry.
“With the gradual rebound of the global economy, more foreign investors are expected in the industry, given that the naira devaluation has reduced the value of insurance companies (in dollar terms), despite the undisputed opportunities in the Nigerian insurance industry.
Also, the entry of new players after the embargo that lasted over a decade was a key point in the Industry. In November 2020, six new operators were licenced in the life, non-life and reinsurance segments of the Industry. The firm anticipates the entry of more players, particularly from existing financial institutions seeking opportunities for diversification of income.”