As the Nigerian insurance sector awaits the commencement of Risk Based Supervision, RBS, this year, four insurance companies are in dilemma over a N14.8 billion shortfall in their shareholders’ funds, which are far below regulatory requirement. The companies are Royal Exchange Prudential Life, International Energy Insurance Plc, Guinea Insurance Plc and Goldlink Insurance. In 2007, the National Insurance Commission (NAICOM) jerked up the minimum capital requirement, specifically the shareholders funds, of the various categories of insurance companies. Consequently, non-life insurance firms were mandated to have a minimum shareholders’ funds of N3 billion; life insurance firms, N2 billion; composite insurance firms, N5 billion; and reinsurance companies N10 billion. Financial Vanguard analysis revealed that the shareholders’ funds of the four insurance companies are far below the regulatory minimum for the categories they belong. In the general business segment, International Energy Insurance, has negative shareholders funds of N2.1 billion, which is below the N3billion required for the category. Guinea Insurance on its part has shareholders’ funds of N2.9 billion, N100 million below the N3 billion required. In the composite business segment, Goldlink Insurance has negative shareholders’ funds of N4.2 billion, which is also below the N5 billion regulatory minimum. Furthermore, in the life business segment, Royal Exchange Prudential Life, with shareholders’ funds of N1.5 billion needs additional N500 million to meet the regulatory minimum of N2 billion. Risk Based Supervision With NAICOM set to commence implementation of Risk Based Supervision (RBS) this year, the four companies are under pressure to seek funds to comply with the minimum regulatory shareholders’ funds for their class of business so as not to suffer downgrade by the insurance regulator. According to NAICOM, the implementation of RBS implies that insurance firms would only be allowed to carry risks commensurate with their level of shareholders funds. “Risk based is being able to identify what your financial capability is”, said the Commissioner for Insurance, Mohammed Kari. Speaking in Lagos at the investiture ceremony of the Chairman of Nigerian Insurers Association, NIA, he said that the implementation of RBS would distinguish big and fringe players. “If your financial capability does not guarantee you to insure oil refinery or airline, you would not be allowed to do so. Your financial ability may be to insure Keke NAPEP, then you would be a specialist in Keke NAPEP insurance. That is what risk based is going to be. It requires that we review whether the minimum capital requirement is adequate. If it is not, we would require additional capital to meet that minimum. But if it is okay, we would just require the classification of companies’ assets plus the extra needed to get into the class of business one wants to undertake,” Kari said. Speaking to Financial Vanguard, Director General of Nigerian Insurers Association, NIA, Mrs. Yetunde Ilori said that companies should take a critical look at their financial position and make strategic decision on what they want to do because it is not going to be one cap fits all. Inadequate capitalization “Whether operators are ready or not, RBS is here with us. Companies with shortfall in capital should find out what could be causing the shortfall and to what extent they are not adequately capitalized. In essence, if it is necessary for shareholders to put in more money, then they should act accordingly.” On whether the insurance industry is ready to adopt the RBS, Ilori said that the RBS is a welcome supervisory system and the sector needs to get started. “RBS is something that has to be done in phases, not that you wake up one day and then you are there. I don’t think that the insurance sector is not ready because it is something that the regulator has been talking about for a while.” Fund raising efforts Financial Vanguard investigations revealed that while the management of the four companies desire to raise funds to shore up their shareholders’ funds, they are however at dilemma on how to do so. When contacted on the company’s effort in this regard, an official of Goldlink Insurance, who spoke on condition of anonymity, said the management will reveal its plans at the annual general meeting holding this month. For Guinea Insurance, Executive Director, Underwriting, Mr. Wole Fayemi, said that the company intends to increase its shareholders’ funds by capitalising profit. He said: “The board and management of Guinea Insurance are concerned and only recently there was a board retreat where this was seriously discussed. The shortfall in our shareholders fund didn’t impact much but it is always the best to operate at the level that is legally required. So injection of capital was considered at the operational level. What we are trying to do is ensure that we operate at high level of profitability and measures have been put in place towards this. By the time we operate at maximum profitability level and we add it to the capital injection which is being planned by the board, we will have adequate shareholders fund.” Royal Exchange and IEI were yet to respond to Financial Vanguard enquiries as at the time of going to press. Fund raising prospects Speaking to Financial Vanguard, industry operators and shareholders said it would be challenging for the four companies to raise the N14.8 billion needed to plug the hole in their shareholders funds, given the unattractiveness of the insurance sector to investors. An insurance chief executive officer, who spoke on condition of anonymity, said that going to the capital market might not really be the best option for now due to shareholders apathy for insurance stocks. “Capital market would have been another good option but it won’t work because people won’t buy insurance company shares. People buy shares when there is speculation that there will be better returns on investment. It is not so for a company that has been suffering losses for some time,” he said. In the opinion of Mr. Abayomi Obabolujo, a stocks analyst, it depends on how the companies package and market themselves. Obabolujo said: “Success of such companies depends on the primary market activity, the packaging as well as marketing. In other words it is even possible for a company that is not performing actively to come to the market and one or few people might just be interested in the company even when majority of the shareholders are not interested. So it is a function of marketing and happenings within the economy and the state of the market at that point in time. Probably one ‘money miss road’ may be interested in buying the stock and so when they come to the market to raise fund and the majority of the existing shareholders say they are not interested, one ‘money miss road’ will just come and pick up majority shares and the offer will become successful. Oando was not doing well when they came to the market, but at the end of the day they were oversubscribed, that is the way it works. “So, for insurance companies, if they did not package it well and market it well, it might be undersubscribed. But if they package and market it well, then it will fly depending on the state of the economy and the state of the market.” State of the market Ruling out the prospect of the insurance companies raising funds through the capital market, Chairman of the Trusted Shareholders Association of Nigeria Alhaji Mukhtar Mukhtar, noted that insurance stocks have been in dire state for some time especially after the capital market crisis. He said: “Insurance companies rely on premiums and most people take up insurance policies but don’t pay premium as at when due. Some others take up policies with intention to defraud the company. Such actions have put the insurance companies in very dire state. Such things affect the performance of the companies in the capital market. “Accordingly, the possibility of an insurance company successfully raising capital from the capital market is not very encouraging. If the performance indices were showing signs of good prospects, it would have been possible. More so, insurance stocks don’t go as high as other stocks and dividend payments have been in kobo. Unfortunately, shareholders prefer blue chip stocks because the capital appreciation for insurance stocks is slow.” Adebayo Adeleke, a shareholder activist and former General Secretary of Independent Shareholders Association of Nigeria (ISAN) added that when a company is troubled, the management has to take the risk of turning around the fortunes of the company. Accordingly, the management of insurance companies that are having challenges with their capital should look for investors to turn the company around.