Insurance companies in race to meet new capital rules

At least 10 insurance companies are locked in a race to raise a total of nearly Sh3 billion or seek mergers in the next 24 months to meet the industry’s new capital requirements.

The list of companies that will have to raise new capital or seek mergers based on their December 2015 financial results are Metropolitan Cannon, which had Sh65 million in shareholder funds and Resolution Insurance with Sh199 million.

While Metropolitan will seek nearly 10 times its current capital, Resolution will need three times its present level of shareholder funds.

Under the new law, general insurance companies are required to have at least Sh600 million as capital while life insurers must be capitalized to the tune of Sh400 million.

A company combining both life and general businesses (composite insurers) must raise its level of capitalization to at least Sh1 billion.

Though most of the insurers said their capital raising plans were ongoing, industry experts said mergers offered the industry the best way to reform and long- term strength.

“We have no choice but to have mergers in order to make the industry stronger. It is no use having small companies that cannot do big deals, giving way to foreigners to monopolise big contracts,” said Nelson Kuria, who retired as CEO of CIC Insurance a few years ago.

Mr Kuria said Kenya should go the Nigeria way where the number of insurers dropped from 100 to about 50 , which are well-capitalised and able to undertake big transactions, including looking for business abroad.

The list of companies that must raise new capital or find merger partners includes Monarch, a composite underwriter, with Sh785 million – short of Sh275 million.

The company was capitalized to the tune of Sh344 million and Sh440 million for life and general insurance respectively by the close of last year.

READ: Mergers seen rising in insurance sector

Saham Assurance had Sh155 million in shareholder funds devoted to life insurance and Sh463 million for general insurance, meaning that it was short of the new thresholds by Sh245 million and Sh137 million, respectively.

The company had total capital of Sh617 million, well below the Sh1 billion needed for a composite insurer – meaning it needs an extra Sh383 million to be in compliance.

Capex Life Assurance had Sh242 million as capital as at the end of last December, but it will now be required to have at least Sh400 million. That means it must raise the remaining Sh158 million in two years’ time.

So far, general insurance businesses are required to have capital of Sh300 million, but now this has been doubled as part of the new rules. Companies that carry more risk must however hold capital commensurate with it.

Kris Lutchmenarraidoo, the managing director of Phoenix of East Africa Assurance Company, said the new capital requirements were bound to force mergers and acquisitions acknowledging that industry players have been asked to get ready for the changes.

Phoenix has Sh1.6 billion in capital and is not among those affected by the new capital requirements.

Mr Lutchmenarraidoo, however, reckoned that the increase in risk-based capital requirements meant all players must reorganise their operations “in order to ensure that companies can honour their commitments to policyholders.”

Mr Kuria said that the current capital requirements are such that they prevent firms from pursuing innovation and get technologically up to date. They are then merely forced to concentrate on offering traditional products.

“You have a situation where innovation and development are not moving. We still have the old products. When you have bigger companies, they can devote resources to innovation,” said Mr Kuria.

READ: Fitch says insurers ripe for foreign investment

The former CIC chief executive said that the current situation where we have nearly 40 insurers is untenable noting that the underwriters are double the number in South Africa, a much bigger economy.

Once implemented the new capital requirements will be the steepest in the East Africa. While a composite insurer in Kenya will need Sh1 billion, in Uganda the requirement still stands at Sh120 million, while in Tanzania the threshold stands at Sh380 million and Sh135 million in Rwanda.

James Ngunjiri, the CEO of APA Life, said that with good returns, shareholders will not mind increasing capital if needed. The shareholders can also re-organise their assets to segments that do not attract high capital charges. Risky assets such as equities require higher capital.

“Investors are driven by returns and shareholders are investors. The understanding is that if shareholders have been earning from their investments, they will have no challenge beefing up their investment,” said Mr Ngunjiri.

While saying that mergers did not necessarily have to be done, he however added that some challenges would come in meeting the new capital requirements.