Nigeria’s insurance firms “ripe” for foreign acquisition

Commissioner for Insurance Fola Daniel

By Irene Madongo

Nigeria’s insurance sector is growing rapidly and has low levels of penetration in a young society inhabiting Africa’s largest economy. Add to this what a recent Fitch Rating report calls an environment "ripe for consolidation" and it becomes easy to see why foreign insurance groups are eyeing the market keenly.

The March 2014 Fitch report says "foreign investors in the Nigerian insurance market have shown a preference for acquisition or partnership above setting up new insurance operations". This preference is down to a need for local knowledge, a good distribution footprint and the ability to achieve scale quickly.

The opportunity is boosted by the fact that foreign investors are allowed to own a 100 per cent share in Nigerian insurance companies. Notable acquisitions in 2013 included the acquisition of Oasis Insurance by FBN Life Assurance (FBN), jointly owned by First Bank of Nigeria and South African insurer Sanlam. Old Mutual Plc, through its emerging markets business, also completed its acquisition of Oceanic Insurance Company and Oceanic Life Insurance.

The industry remains highly fragmented, with 58 companies in operation, down from 140 registered insurers in 1994. Much of this consolidation has come since 2005 when the National Insurance Commission (Naicom), the regulator, introduced new capital requirements, whittling down the number of insurers to 49 in 2007 from 97 in 2005.

But Fitch thinks the consolidation has further to run. "We believe that foreign capital in particular will aid this process," says Willem Loots, Fitch’s insurance group director.

Reinsurer Swiss Re puts the size of the Nigerian insurance market at US$1.64bn in 2012 and predicts it will grow to US$6.5bn in 2024. The company projects annual average growth rates over the next ten years of 9.5 per cent in non-life and 13.5 per cent in life. The key companies and their business breakdowns in gross written premiums (GWP) are shown in the chart below.

According to Swiss Re managing director for Africa and Middle East, Frank O’Neill, spending on infrastructure development and continued oil and gas activity will drive growth in the Nigerian insurance sector in the short term. "In the medium to longer term, the emerging middle market will drive demand for personal lines products and life insurance, which should be a significant growth driver," he adds.

Some of the profit margins are already impressive.

However, the Nigerians will have to work harder on tackling hindrances to projected growth, considering the Fitch report’s remarks that thorough due diligence will remain a challenge to the acquisition of existing insurers.

"As of 2013, compliance with IFRS (International Financial Reporting Standards) has been a requirement for all insurers, but companies have been slow to respond, with a number of companies either submitting poorly prepared financial statements or missing the 30 June 2013 reporting deadline. Transparency across the industry is limited, as some insurance companies are behind on their financial reporting requirements deadlines," the Fitch report says.

Earlier this month, Nigeria announced that following a re-calculation process, its economy was 89 per cent bigger than previously stated at $509bn in 2013 GDP – making it comfortably the continent’s biggest economy.

"The low insurance penetration in Nigeria does set the scene in terms of a low base and simply improving penetration can be a significant source of growth in the industry," said Fitch’s Loots. "Economic growth in Nigeria is strong…and the overall growth rate of the population itself is around 2.8 per cent per annum, which bodes well for the insurance industry."

He added that there is an established growth trend within the insurance industry, with industry premium growth of around 18-19 per cent estimated for the year 2013.




Source Financial Times