Mergers and acquisitions: Consolidation and divestment are set to boost competition

The year 2012 has been a time of significant change for Nigeria’s insurance sector, as a majority of banks divest from their insurance subsidiaries and underwriters prepare for the transition to new regulations, such as International Financial Reporting Standards (IFRS). The entry of a number of foreign players will likely spur higher growth in the retail segment, while domestic underwriters seek to gain the scale necessary for future growth. “Divestment by banks and IFRS implementation are set to increase foreign participation and consolidation of our industry,” SO Oyefeso, the managing director and CEO of Staco Insurance, a Nigeria-based firm, told OBG. “One particular trend to be observed in the coming years will be the merger between general and life insurers.” Highlighting the regulatory impetus for consolidation, ratings agency Standards & Poor’s expressed optimism in a June 2012 report that such consolidation would foster the emergence of a smaller number of insurers with high capacity and more scope for growth, thus alleviating pressure on the regulator.

REGULATORY DRIVEN: Several regulatory movements are having an impact on the structure of the industry. The implementation of IFRS in 2012 for listed companies and 2013 for all others will force underwriters to mark assets to market and segment their risk provisioning in a more efficient manner. NAICOM came up with guidelines for the development of a risk management framework in February 2012 with which the industry was to comply by the end of 2012.

Ironically, however, the near-term regulatory impetus for the large number of sales witnessed in 2012 has come from the Central Bank of Nigeria (CBN), which published new rules in 2010 that govern the structure of the banking industry. Ending the universal banking model, the CBN mandated all banks to either divest from their subsidiaries in non-banking services or restructure into a non-operating holding company. Following consolidation in 2007 when National Insurance Commission (NAICOM) raised underwriters’ capital requirements, banks played a key role in recapitalising and taking over a number of insurers. By 2010, 12 banks held interests in the sector – either through equity stakes or full ownership. While local banks Oceanic, Zenith and Intercontinental all had composite insurance subsidiaries, the other nine maintained only one subsidiary. The new bank guidelines were thus always going to have a substantial impact on the insurance sector.

BANK DIVESTMENTS: While the original deadline for banks’ divestment was set for May 2012, the CBN extended this by one year to allow banks to finalise sale negotiations. A crucial hurdle was the abolition of double taxation on holding companies and their subsidiaries in early 2012. By the time of the deadline, only five sales had been concluded, while eight were still in progress. Yet the pervasive effects of the regulation have already started to appear. NAICOM established an advisory committee in May 2011 to assist underwriters with their sales. Four banks have opted for a holding company structure, allowing them to preserve their insurance operations: FBN Life, UBA Metropolitan Life, Union Assurance and Fin Insurance.

Two of the Asset Management Company of Nigeria-nationalised banks, Bank PHB (now Keystone) and Spring Bank (now Enterprise Bank), have announced plans to divest from their subsidiaries – non-life for PHB and life for Spring. While both divestments were still being completed by mid-2012, it seemed likely that Insurance PHB would attract the most attention, having written some N3bn ($19.2m) in premiums in 2010, while the struggling Spring Life remained a marginal player. First City Monument Bank (FCMB) decided to adopt a holding company structure and maintain its interests in insurance, while other acquiring banks, such as Ecobank and Access Bank, have moved to divest. By buying out Oceanic Bank, Ecobank inherited two underwriters, while Access inherited a composite underwriter, Intercontinental WAPIC. Meanwhile, Diamond Bank, Zenith Bank, Skye Bank, Unity Bank and GT Bank are moving at varying paces to dispose of subsidiaries, either through a management buy-out or a sale to local or foreign underwriters.

FOREIGN EXPANSION: Foreign underwriters have been the most visible in their movements in the past year. The first recent foreign entrant was South Africa’s Sanlam, entering the market in September 2010 by establishing a joint venture with First Bank, FBN Life.

The next to move was NSIA, a regional financial group based in Cote d’Ivoire with insurance and banking operations in 11 countries throughout the African continent. It purchased 96.15% of ADIC Insurance from Diamond Bank in July 2011. This is a significant departure for the underwriter, which operates mainly in West and Central African countries that have a common treaty of insurance regulation. ADIC is a composite insurer and adds an important component to the Ivorian firm, which was already the leading insurer in francophone West Africa.

Another new entrant to the market has been Assur Africa Holding, a Mauritius-incorporated special-purpose vehicle formed by two private equity funds and development finance institutions from Germany, France and the Netherlands. Acquiring a 67.68% stake in GT Assurance from GT Bank for N11.91bn ($76.22m) in October 2011, the firm was renamed Mansard Insurance in July 2012. Concluding a bancassurance deal with FCMB, the firm is also in talks with other banks and should capitalise on its lead in the retail segment.

In life, Old Mutual’s entry may have the most extensive impact. The UK’s third-largest insurer, the life underwriter also holds a commanding stake in South Africa’s fourth-largest bank, NedBank, and its largest insurer. Given NedBank’s 20% stake in Ecobank, acquired in February 2012, it was logical for the underwriter to rebrand the life subsidiary of Oceanic Bank which Ecobank took over in October 2011. Inheriting a market share of 1.8%, the UK-based firm plans to expand by focusing on the under-developed retail segment, most likely by leveraging its connection to the newly enlarged Ecobank to drive customer acquisition through bancassurance and telemarketing.

African Capital Alliance (ACA), a Nigerian private equity fund, has also been driving mergers. Having recapitalised Union Bank by leading a consortium injecting $750m in late 2011, ACA inherited the bank’s composite insurance subsidiary. ACA has also held a controlling stake in Cornerstone Insurance, a leading underwriter, since investing N4.3bn ($27.52m) in 2007.

Existing underwriters are preparing for the new competition. Although brokers’ hold on the commercial segment is likely to remain, improved competition in the retail segment should help to drive growth. “The entrance of foreign technologically advanced underwriters will be good for all underwriters,” said Godwin Odah, the managing director of Union Assurance. “Whereas competition is currently focused on price, it may evolve towards competition in quality of service with these new entrants.” In the meantime, several mid-sized underwriters, such as Union Assurance, are looking to recapitalise and boost their capacity.

LOCAL MERGERS: A number of divestments were still in progress as of mid-2012. Some underwriters were being sold to consortia of domestic investors, such as Skye Bank’s sale of Law Union & Rock to the US-based Alternative Capital Partners and Swede Control Intertek. Others were opting for management buy-outs, such as Wema’s sale of Great Nigeria Insurance. Unity Bank was selling Unity Kapital Assurance to individual shareholders of the parent bank, while Zenith’s life and non-life subsidiaries are likely to be sold back to shareholders or management, given the close connection with the bank’s core operations.

With such drastic movement and over seven deals still in the air, local underwriters are taking notice. Among the non-life underwriters, Custodian & Allied was close to concluding a deal to buy a composite insurer in mid-2012, thereby diversifying its risk portfolio. While most underwriters have been of similar size in the years since the 2007 consolidation, 2012 is a chance for many of them to achieve the scale necessary to underwrite larger risks in other sectors, such as oil and gas. The wave of mergers is by no means over, and the increasing foreign appetite for Nigeria’s insurance market bodes well for medium-term growth.