By ROSEMARY ONUOHA

Cornerstone Insurance Plc and Linkage Assurance Plc have notified the Securities and Exchange Commission (SEC) of their intention to merge into one corporate entity. In this interview, Group Managing Director of Cornerstone, Mr. Ganiyu Musa, disclosed that the merger is in the interest of all stakeholders.

Why are you merging with Linkage Assurance?
I mentioned that the African Capital Alliance consortium had worked with the management of Cornerstone to put in place a robust strategy to reposition the company to play a very key role in the emerging insurance industry landscape in Nigeria. One conclusion that was reached at the strategy session is the fact that the insurance industry today in its current structure is still very fragmented.

Even though we have had significant progress with the successful recapitalisation that was midwifed by NAICOM in 2007, you still discover that the 49 insurance companies put together write roughly N200 billion of premium in a country of 160 million people that is really very poor.

The penetration ratio is very low, it is  less than one per cent. Of the 49 companies, you probably have less than half writing premium income equal to or higher than their share capital which is usually a measure of the efficiency of capital utilisation by insurance companies.

One of the consequence of the fragmentation is the fact that very few individual insurance companies have the necessary financial capacity to  invest  in human capital, technology and infrastructure to be able to really provide the type of service that will appeal to and attract the 90 million or so adults out of the 160 million population.

On the other hand, your capacity to underwrite and retain risk is also dependent on the level of capital that you have. When you are small and fragmented, there is only very little that you can write and retain. We therefore concluded that, to really play a key role, we needed to have a minimum size to be relevant. Individual companies have different areas of strength.

In choosing Linkage, we took a lot of  things into consideration. We looked at the strength and the relative position of Cornerstone as well as the strength of Linkage. We believe linkage gives us complimentary advantage in a number of areas. One thing we hold very dearly here at Cornerstone is our commitment to operating at a very high level of professional standard and ethics.

It was a key requirement and a defining factor in reaching the first stage of considering a merger partner and interestingly in this area we share a lot in common with Linkage. And we have looked at the records of the two businesses and concluded that coming together is in the interest of all stakeholders including our staff, the shareholders and more importantly the insuring public.

We believe the combination will give us the opportunity to come up with the appropriate products, engage the right skills and invest in the right technology that will enable us to deliver our services seamlessly to many people. The necessary applications have been made to the Securities and Exchange Commission (SEC) and as soon as we receive the necessary approval from SEC, we will now go to our shareholders to request for their approval.

What will be the financial Strength of the combined entity?
At the moment, we are at about N6 billion capital at Cornerstone and N3 billion at Linkage, but by the time we account for the fair value adjustment resulting from the first time adoption of the International Financial Reporting Standard (IFRS) the combined entity is expected to have a shareholders fund of up to N12 billion, which is way beyond the N5 billion minimum capitalisation for composite companies.

What is your Position on capital base for insurers?
It is difficult to make a definitive pronouncement. It is not unusual to have niche players. The regulatory requirement is N5 billion, but the truth is that if you have N5 billion there is only so much that you can do because you have to look at what you need to invest in infrastructure, technology, people, etc. If in a number of these things you have to make the investment up front before the income flow will come in, you probably require to have more than N5 billion.

Secondly, if you are going to play in some segments of  the market,  corporate, oil and gas, multinational sector, if you have a capital of N5 billion  and you want to insure a major industrial risk for instance, they are not going to take you serious.

At N5 billion, you have to make heavy use of Reinsurance which will reduce your retained income and the rest. So while it is possible to operate as a niche player with minimum capital, if you want to be broad -based and essentially play in the corporate, oil and gas as  well as the multinational sectors and also to make the investment necessary to roll out a broad based strategy, I would think you need more than N5 billion.

Relationship between capital and current market volume?
Looking at the technical solvency at the moment, you are likely to conclude that there is gross under-utilisation of capital if you compare theN200 billion annual industry premiums to the total industry shareholders’ fund of about N347 billion. One of the objectives of the Market Development and Restructuring Initiative (MDRI) being midwife by NAICOM is to attain one trillion naira industry premium income in the short to medium term. I don’t believe it is an unrealistic target if you look at the current level of insurance penetration.

So, the question is, why have we not been able to move from the N200 billion to N1 trillion or more. There are only few individual companies on a standalone basis with the financial muscle to invest in developing those areas of the business that will move us from the N200 billion as an industry to the trillion Naira mark.

We all run after the same NNPC business; head of service account and such major accounts. So the investment in infrastructure, technology that is needed to build a sustainable business model is not focused on because we don’t have the money to do that. So, there is the potential for business volume far beyond the level of capital that we have.

New strategic focus
Pursuing the strategy that we have set for ourselves in Cornerstone is not a sprint, it is a marathon and we need a lot of upfront investment and especially if we take it together with what I will call the radical departure that we set out to introduce into the way we do business.