Selling the message

JUST A WEEK AFTER the insurance regulator, the National Insurance Commission (Naicom) announced the result of the mandatory recapitalisation exercise, a headline in the one of Nigeria's newspapers read 'Insurance Stocks Dominate Price Table'. According to the report, a dozen insurance stocks had made the 36-strong price-gainers' list during the previous day's trading.

This was a rare occurrence for Nigeria's insurance industry, but these are new times for an industry with a long history of chronic investor apathy. The recapitalisation exercise saw the industry shrink from 104 companies and five re-insurers to 71 insurers, made up of 49 companies, and two re-insurers.

Naicom's measures had also boosted industry capitalisation by 666% from N30bn ($244m) to N200bn ($1.62bn). Investors seeking decent returns had previously shied away from insurance stocks, earning the industry the reputation of being a perpetual under-performer.

Insurance services have historically not been popular with the Nigerian public. Less than 1% of the country's population of 140m, according to the available statistics, has any form of insurance policy. Poor public awareness regarding the principles of insurance has not helped, and even among those Nigerians that do know the benefits of insurance cover, there remains a widespread perception that Nigerian insurers are reluctant to settle claims.

According to the Swiss Re Global Report for 2004, the Nigerian industry had only 0.02% of the global market. The report ranked Nigeria 62 out of 88 countries in terms of annual premium volumes; 69th on life funds and a dismal 86th on insurance density.

With such a low insurance penetration level, it is hardly surprising that the industry's contribution to the country's GDP has remained below 1%. While South Africa's industry's premiums as a percentage of GDP amounted to 15.8% in 2004, Nigeria's was just 0.77%.

Previous efforts to raise the industry's capacity through increased capitalisation had barely achieved anything. Most insurance companies seemed to believe that remaining a small operator was the preferable strategy and organic growth through mergers and acquisitions was generally avoided.

In the past, the regulatory framework had had little effect with scant compliance with recapitalisation directives. Many companies adjudged to have met the 2004 mandatory capital increase had, in reality, attracted little or no fresh injections of funds into their operations.

Not so the latest capitalisation exercise. It had dawned quickly on the fringe players that the merger option was the surest way to avoid imminent liquidation. As frontline players such as IGI, Leadway, Cornerstone, AIICO, Niger and others embarked on private placements, rights issues and IPOs to meet the new capital requirements, merger arrangements mushroomed. A dozen merger deals were concluded, with the groups usually adopting the name of the lead brand in the merger.

Encouraged by the seriousness of the insurance companies to transform themselves into key players, investors responded with enthusiasm. Official figures have not been revealed but consensus feelers from the industry have revealed that a couple of IPOs were greatly oversubscribed whilst most rights issues and private placements recorded high success rates.

Even the international financial community gave its endorsement to the reform process. The International Finance Corporation (IFC), the private sector arm of the World Bank, injected $14m as equity investment into the top player, Leadway Assurance, saying that the investment would enhance the insurer's institutional building programme.

According to IFC's director for sub-Saharan Africa, Thierry Tanoh, "IFC's investment in Leadway is our first in a composite primary insurer in Nigeria and it signifies our belief in the country's insurance industry and on-going reforms in the sector." He added: "It is becoming increasingly important for primary insurance companies in Nigeria to reach globally competitive levels and we believe that our investment in Leadway will be a catalyst for such growth."

The industry itself is responding to the momentum of this flurry of investment. Many companies are planning a fresh round of capitalisation. Remi Olowude, executive vice-chairman of IGI, believes "the biggest insurance company must not be smaller than the smallest bank" and has outlined his strategies for the company. IGI was the first Nigerian insurer to operate offshore with the company's June 2005 acquisition of a controlling interest in the National Insurance Corporation (NIC) of Uganda.

Olowude forecasts his company's capitalisation reaching N25bn ($203m) - the minimal capital for Nigerian banks - by year end 2008. A number of players (Leadway, AIICO, Royal Exchange, Cornerstone, Crusader and others) who, like IGI, have exceeded capitalisation levels may also be planning return trips to the capital market.

Even so, insurance operators are very much aware that fatter capital will not necessarily herald the era of mega companies that can compete at the global level. The industry's future will be determined largely by what it makes of the enormous growth potentials at home and on the continent and the post-consolidation challenges it faces in its immediate operating environment.