Oyetunji: There is Need for Mergers to Create Bigger Insurance Firms

Femi Oyetunji

The Group Managing Director/CEO, Continental Reinsurance Plc, Dr. Femi Oyetunji, spoke to journalists on the company’s capital restructuring exercise, the insurance industry and other issues. Goddy Egene presents the excerpts:

Can you tell us about the recapitalisation process of Continental Reinsurance Plc?

We started some 30 years ago as a local Nigerian company. In 2006, we were able to recapitalise by injecting capital from a private equity called Emerging Capital Partners (ECP) from Washington, USA. Thankfully, 2006/2007 saw the transformation of Continental Re in terms of governance and process thanks to the ECP. I joined the company in 2011 and what I saw then was that we were a multinational company although we were seeing ourselves as a Nigerian local company.

However, we took a decision that there was need to close the gap in capital market across the continent and we felt strongly that Continental Re should fill that gap to create a strategy because we have a vision to be a premier insurance company. At the time I joined in 2011, we had a branch office in Duala, Cameroun, which we started in 2003, and a branch of in Nairobi, Kenya, which was started in 2008. However, new things evolved in terms of regulations, practices, etc, while you also need to have good capital.

For us, looking at the way regulations were going, we needed to be local in different regions. In Kenya, we moved from being a branch to create a subsidiary in 2013. In 2014, we created a subsidiary in Botswana. We intended to be local in those regions and be subjected to the local regulations and that entitled us to some benefits in terms of access to do business. Though, certainly, we are limited by capital and worth. Therefore, it is most important that for us to achieve a rating, which will give us the opportunity to transact the right kind of business and give us some exposure to better our quality risk, we should embark on capital raising and restructuring.

If you follow the rating agencies, the rating is directly or indirectly limited by your domicile head office. I used the word domicile because there a lot of misconception in what we are trying to do. Because of some of the things we have put in place, in 2012, we were upgraded to B+. In Africa, we have one company that is ‘A’, we have two that are B++ and we are B+. In terms of what we could do internally, in terms enterprise risk management and the quality of underwriting process, we have gone two notches above the re-sovereign rating of Nigeria and we cannot go higher. We cannot achieve what we want to do with the capital in Nigeria, even if we increase our capital to $500 million, it will not get us to where we are going. What have done, as it also works for international ratings agencies and consultants, is to look for an environment with higher ratings that will assist us to get to where we are going. After a careful selection and in terms of simplicity, we choose to set up a holding company in Mauritius.

We have been on this process for over a year. We have to go to NAICOM and the NSE to explain our intentions. However, before we can the transfer the shares from here to there, we have to do our valuations of the company. As a company, we did our internal valuation, our auditors, PWC did their valuation; we brought in Ernst and Young as the Accountants after which we engaged in an independent company, Coronation Merchant Bank to also do their own valuation. It was not that we decided on a number, we went through the process and at every stage, we consulted the board to get the necessary approval. The valuation we came up with from the various consultants range between N1.80 and N2.00 but Coronation Bank came up with N2.04K. We took it to the board and we got the approval, so it was not what we fixed by ourselves. On daily basis, we were reporting to the stock exchange because of the sensitivity of what we were doing. Everyone involved in the process signed a non-disclosure agreement not to discuss the matter until we got the necessary approval.

After we got the approval, we called a meeting of selected shareholders who are opinion leaders to explain to them, about 30-50 of them to explain what we are doing because one may read a document without understanding the spirit behind it. It was not an easy conversation but we tried to explain our intentions. We made them understand that we are as passionate as they are. Invariably, it gets to agitation about the reduced cost as against the cost at which they bought the shares. We explained that the drop in share prices, which affected everyone, affected us all. At the same time, the economy is no longer the same, the market no longer the same and the exchange rates are no longer the same. However, we promised to review the price offered in the scheme and get back to the shareholders. It took a lot to push it to N2.10. We had a meeting with the shareholders’ leaders and we expect they would have communicated with their members. At the court ordered meeting, everything was done by poll, 92.66 per cent of those eligible to vote, representing, 1, 158, 582, 972 shares voted for and the 7.84 per cent representing 91,801,465 shares voted against. Everything has been signed and delivered to the Nigerian Stock Exchange (NSE).

What is next step and is it true that the company would delisted from the NSE?

Let me emphasise that from the ongoing Scheme of Arrangement, we have no interest about delisting or not delisting. With the consequence of what we have done and because we could not take everybody or individuals to Mauritius, we now have only two or three shareholders and one of the shareholders being the nominee vehicle. Generally, the number of our shareholders should not be different if they elect to stay in the nominee vehicle. However, in terms of individual entities, the advisers would follow up with the NSE on that. The next step is for us to submit the document and the result of the Court Ordered meeting to Security and Exchange Commission (SEC) and once we get SEC’s final approval, we will go back to court to register it.

Why the choice of Mauritius and capital mobilisation?

The name of the company is CRe African Mauritius Investment, which is a holding company. It is a company incorporated in the Republic of Mauritius as a private company limited by shares and duly registered and licensed by the Financial Services Commission, which holds 65.20 per cent of the issues. If you look at the prospectus, you will see the final structure we intend to operate. The subsidiary companies will each have a licence and be registered locally. CRe Nigeria, which is the licence we have now we will continue to operate in Nigeria, pays taxes in Nigeria, employs staff in Nigeria and does business in Nigeria. It is not about tax incentives.

The capital we require is not a fixed amount. What is done globally now is that the regulators use risk-based capital supervision and that means if I am writing just motor insurance, I do not need the same capital with somebody writing aviation. Therefore, what we are supposed to do is to look at the volatility of your portfolio and what capital you need to ensure that say a one in two-hundred event happens, in consideration for your ability to meet your liability in terms of an occurrence. Reinsurance companies do not wait for regulators to determine the amount of capital they need. You need to be continuously building up your capital. The more the companies write, the more successful they are, and the more capital they need. Our capital requirement can be from $50million to $100million based on the kind of business you want to do.

That is one of the problems that we have here in Nigeria. Most of our premiums from oil and gas are exported because we do not have enough capacity to retain them within the continent. At Continental Re, our mantra is that you must retain African premiums within Africa because those are the things we use to develop our roads, hospitals and build schools. For us, that is the reason for which we need to build capital to have competitive advantage. Our choice of Mauritius is not because the country is a tax haven. No. When you are looking at our (insurance) industry, there are two main places where multinational insurance and re-insurance companies park their capital: it is in either Mauritius or Bermuda. We thoroughly considered both options. However, we are not yet at the level where we could take on the requirement in Bermuda. Hence, our choice of Mauritius is because that is an environment that the rating agencies understand, with a sovereign rating that is higher than Nigeria. It will assist us in getting to our aim, so it has nothing to do with tax advantage or capital flight.

I must also say that in terms of business, we are already writing businesses in Mauritius. We have businesses in 50 countries in Africa, including Mauritius so we are not going there as a new company. The only thing that is new is that the registered holding company would be in Mauritius and it is because it is a sophisticated financial centre. So far, we have not seen any negative signal from Mauritius. Maybe I should just reemphasize that this decision is not about the people. We will continue to work from here. We are building our head office in Victoria Island, Lagos, so we are not physically moving to Mauritius. Hence, there will not be any loss of staff or loss of capital.

What are the prospects and challenges for the insurance sector in Nigeria?

Insurance sector in Nigeria is faced with the same issues like most other countries. We need well and highly capitalised companies. Personally, this is the same sentiment I expressed in 2005 and 2006. We must merge and build big institutions else, the insurance companies outside Nigeria will be picking up our businesses. Generally, it is a tough environment for us in Nigeria in the insurance and reinsurance business. As you know, the economic environment has been a bit down for the last couple of years and when there’s economic downturn insurance is the first to suffer. Therefore, it is tough for our environment.

So what is your final words on stay in Nigeria?

Let me repeat again, we have a strategy plan until 2020 which remains unchanged. What this arrangement gives us is ability to attract more capital into this company. We cannot carve out the assets of the company because we need to build more assets and capacity for us to be relevant going forward. Things are changing rapidly. I have heard some people say that we do not need the rating. I always implore people to check what happened to Kenya Re. Kenya Re has been downgraded and we know what businesses they are doing now. Tunis Re was downgraded but now the rating has been removed entirely. For Tunis Re, the future is left to be imagined. Rating is the cornerstone of our business. Without having the relevant rating, we would not be relevant in the future. For the management team and the board, it is important for us to do things that would get us that rating.

Such effort means bringing and retaining more capital, writing profitable business to be able to retain more capital. So there is no way capital or asset is going out of this company. For the stock market, it depends on what the rules of the SEC dictates in terms of number of shares. Nigeria is 40 pe cent of our business across Africa, it is the most significant, it is the second largest insurance market in Africa, and our focus is strictly Africa. Our interest in Africa is a permanent interest and not a long interest. Nigeria continues and will always be the largest element. Our focus and amount of capital to be dedicated to Nigeria will only continue to increase. We are not exiting, because we want to write more businesses in Nigeria.