A message from the chairman
Distinguished Shareholders, my Colleagues on the Interim Board, invited Guests and Gentlemen of the press; you are welcome to the 45th Annual General Meeting of our Company.
Dear Shareholders, I hereby present to you, an overview of the emerging issues in the global and domestic economy in 2015 as well as a summary of the activities and performance of our Insurance Company for the period 2012 to 2015.
THE GLOBAL ECONOMY
The global economy in 2015 showed contracting positions for major and emerging economies. While the Eurozone was in a fix, the Brazilian and Russian economies were in near recession. The United States struggled to rebound from a bad first half-year while the Chinese economy grew at a relatively slower pace.
While the United States GDP reduced to 1.5% in third quarter 2015 from 3.9% in second quarter 2015 as a result of lower government spending and business investments, growth in the Eurozone remained slow as it was yet to recoup output lost in the aftermath of financial crisis. The zone grew by 0.4% in second quarter 2015, down from 0.5% in first quarter 2015.
The United States and the Eurozone, however, made recoveries that accelerated moderate growth, which was greatly supported by a resilient consumer sector whose real incomes benefit greatly from the plunge in community prices.
India, an Asian economic giant and member of the G.20 nations, hosted African Heads of State to an Economic Summit as a strategy to bolster economic growth and strengthen investment while domestic problems plunged Brazil into serious economic crises as the country’s GDP contracted by 0.7% in the first quarter and 1.9% in the second quarter.
China’s economy struggled with too much debt and overcapacity in industrial sectors. Deliberate efforts were made to ease the monetary and fiscal policies with several cuts in interest rates and reserve requirements to avoid a negative economic performance, and thus allowed for a marginal growth by the end of the year.
Overall, the credit excesses, slower growth, producer-price deflation, and a plunge in profit margins of companies in the Emerging Markets brought financial instability that spread around the world for the better part of 2015.
THE DOMESTIC ECONOMY
2015 was an election year with so many uncertainties for the economic direction of the country. The economy contracted and witnessed a sluggish growth and rising inflation. The economy suffered declining growth in three quarters, namely: 3.96% in first quarter, 2.35% in second quarter and 3.29% for third quarter, all of which fell below projected GDP growth rate of 2% for the year.
The country, like other oil-exporting countries, suffered a sharp decline in oil revenues because of the fall in global oil prices which saw the price of crude oil dropped from its peak of US$118 per barrel (pb) in June 2014 to less than US$50 pb for the better part of 2015. This was as a result of low global demand, increased production in shale oil and gas, and OPEC’s decision to sustain production levels. Beyond these, oil production in the country also fell below the budget benchmark of 2.38 million barrels per day (mbpd) as a result of oil theft in the Niger Delta thus resulting in low external reserves and other negative impact on the economy.
The Central Bank of Nigeria (CBN) in its second quarter 2015 economic report noted that the gross federally collected revenue declined by 27.7%. This was attributed to shortfalls in oil and non-oil revenues. The report equally noted that the Nation’s external reserves also went down by 12.9%. The Nigerian stock market was also not insulated from shocks. The market lost 13.36% year-to-date while corporate earnings were below average: a reflection of declining disposable income, market and policy uncertainties.
The Naira, which appreciated shortly after the elections, suffered reversals creating a wide gap between the parallel market and the interbank rates. There was also volatility in the money market while power supply dropped from 4,500MW to less than 4,000MW by the end of the year.
JP Morgan Chase in the last quarter of the year phased out FGN Bonds from its Government Bond Index Emerging Market (GBI-EM). This action affected the local bond market.
All these had negative implications for the business environment as they increased the overhead cost and the ease of doing business in the country.
THE INSURANCE INDUSTRY
The insurance Regulatory Authority, National Insurance Commission (NAICOM), within the period under review took a number of measures to reposition the industry for greater capacity, market efficiency and consumer protection. The policies were meant to create good corporate governance culture for the industry and deepen insurance penetration in the country. Some of the policies are:
- A Mandate to Operators to transit to the International Financial Reporting Standards (IFRS) in preparing and presenting their financial statements.
- Introduction of a risk-based supervision that requires every Operator to establish a risk management department as part of their risk management strategy.
- A directive mandating insurance companies to comply with a “No Premium No Cover” provision in the Insurance Act 2003, which is expected to end accumulation of unpaid premiums.
- A mandate to Operators to key into the Federal Road Safety Corps (FRSC) Database Scheme by aligning theirs with that of the FRSC. This is aimed at eradicating fake insurance motor certificates
- A directive to Operators to put in place anti-money laundering processes in their systems to curb money laundering.
There is a bright future for the insurance industry as the reforms are being successfully implemented.
The renewed strong supervisory mandates compelled Operators to institute global best practices in their operations.
The competitive landscape also witnessed the entrance of a number of new foreign investors into the insurance market. This increased the competition for available business and raised the bar for ethical practices.
The period also saw the appointment of a new Commissioner for Insurance in the person of Alhaji Mohammed Kari having taken over from Mr. Fola Daniel whose tenure ended in June 2015 after serving for eight meritorious years.
REGULATORY INTERVENTION OF 18TH MAY, 2015
Distinguished Shareholders, our Company went through one of its most trying moments in the period under review. The continued losses made by the Company year-on-year before and after the unbundling of the group structure negatively affected the financial position by eroding the Shareholders’ Fund of the Company to a negative number. Beyond the issue of losses and the inability of the previous Board to hold Annual General Meetings (AGM) as and when due, there were serious cases of corporate governance breaches and squabbles on the Board.
This necessitated NAICOM to dissolve the former Board on the 18th May 2015 and appointed an Interim Board in its stead. The Board was replaced by an Interim Board (IB) to pave way for the new team to reposition the Company. It is in this regard that the NAICOM appointed me as the Chairman of the Interim Board of Directors with Mr. Peter A. Irene, FCA, FCII as the Interim Managing Director. I also welcome the newly appointed Non-Executive Directors, Ms. Daisy Ekineh and Ms. Ibiyemi B. Adeyinka as well as our Company Secretary, Mr. Adeyinka Hassan representing H. Michael & Co.
The Interim Board was mandated, among other things, to:
- Take actions that are necessary to stabilize and ensure sound management and growth of the Company.
- Engage a reputable firm of Chartered Accountants, to carry out a forensic investigation of the Company’s financial affairs from 1st January 2007 to 18th May 2015 with a view to identifying the factors and persons responsible for the erosion of the Shareholders’ Funds.
- Determine the true and fair financial position of the Company as at 31st December 2014.
The Board adopted a four-pronged strategy to stabilize the Company:
- Engaged stakeholders to rebuild confidence in the brand.
- Grew revenue and adopted cost optimization initiatives.
- Conducted an audit into the finances of the Company to determine the factors and persons responsible for the erosion of the Shareholders’ Funds.
- Continued to settle long outstanding claims and statutory payments.
After a painstaking evaluation of five top audit firms, KPMG Professional Services was appointed to conduct the forensic audit. The audit has been concluded and the Report, which identified both the factors and persons responsible for the erosion of the Shareholder’s Funds, has been presented to National Insurance Commission (NAICOM) for further actions.
However, for the information of the Shareholders the following factors, among others have been identified to be responsible for the capital erosion:
- A 20-year bond of JPY1.8 billion with very onerous and unfavourable terms and conditions was taken in 2008 in spite of the proceeds from private placement of about N6.8 billion in 2007 which ballooned the Shareholders’ Funds to more than N10 billion which was three times the minimum required paid-up share capital of a General Insurance Company.
- Investment in subsidiaries, quoted and unquoted equities, investment properties etc. were made without proper analysis and approval from the Board as well as the Regulator, which eventually became unprofitable.
- Insurance claims flowing from big ticket businesses including Oil & Gas, Aviation and others led to a high claim ratio which impacted negatively on the underwriting results some of which were as a result of inappropriate underwriting.
- Management expenses were very high and Regulatory Authorities imposed fines for non-compliance with relevant requirements.
- Portfolio of litigations some of which were not accrued for in the financial statements as at the time the Interim Board took over.
I wish to assure the Shareholders that the Board would ensure that the institutions and persons are held accountable for their actions sooner than later. I appeal to the Shareholders for their support, as the process of recovery will be slow and painstaking.
Despite the challenges in the operating environment, the Interim Board was determined to post a good performance at least in the period it presided over the affairs of the Company. Unfortunately, the effects of the gross mismanagement of the Company in the recent past affected the efforts of the Board. Nevertheless, we present the extract of the report below.
The Company recorded a decline in gross premium at an average rate of 2.69% with yearly growth rate of 30% in 2012, -16.77% in 2013, -3.63% in 2014 and -20.35% in 2015, translating to N6.022 billion, N5.012 billion, N4.830 billion and N3.848 billion respectively. The decline was as a result of loss of participation in major businesses due to drop in the Company’s financial fundamentals below the required threshold as well as the economic vagaries.
During the period, the Company expressed determination to meet its obligations to Policyholders through claims settlement. Claims expenses increased to N1.932 billion in 2014 from N1.533 billion in 2012 translating to 26% increase due to unfavourable claims experience in the oil & gas portfolio. However, due to some risks management measures put in place, claims expenses dropped by 37% to N1.225 billion in 2015. Loss before tax was at 137% or N1.871 billion in 2014 from N0.787 billion in 2012 due to high claims experience in 2015 the loss dropped by 63% to N0.698 billion due to the effect of various costs control measures put in place by the Interim Board.
While we remain committed to repositioning the Company and appreciate your continued support over the years, we are constrained to report that with such huge losses over the years, your Company would require large capital injection to meet up with the capital requirement.
IEI remains a good brand in spite of the current vicissitude and the Board is confident that it will be an investor delight.
The Board has also started discussing with Daewoo Securities and other major creditors on the way forward. I appeal to the Shareholders to support the steps being taken by the Board towards amicable resolution of the debt.
KEY ACHIEVEMENTS OF THE INTERIM BOARD
- Audited Financial Statements
At the time the Interim Board took over the affairs of the Company, 2013 Audited Financial Statements had been submitted but not yet approved while 2014, which had been outstanding was approved before 2015 ended. The 2015 account was approved before NAICOM due date of 30th June 2016. Therefore, the Interim Board got approval for the 2013, 2014 and 2015 Audited Financial Statements.
For the first time in the last seven years, the Audited Financial Statements of the Company was approved by NAICOM before the regulatory deadline of June 2016.
- Risk Underwriting
There were cases of inappropriate underwriting. The underwriting techniques applied before the intervention of NAICOM exposed the Company to huge losses. However, the Interim Board introduced the following measures to correct the position:
- Improved underwriting techniques.
- Formulation of policy on Bonds.
- Formulation of policy on Aviation.
- Reduction of participation on Oil & Gas insurance to reasonable and manageable level.
- Centralization of Claims administration.
- Identification and control of high loss prone businesses such as Goods-In-Transit, Trucks used for haulage, Fare-Paying-Passengers buses, etc.
- Effective branch underwriting.
- Other Achievements of the Interim Board include:
- Strengthening the Internal Controls.
- Embarking on strategic cost optimization.
- Strategic recruitments towards refocusing the company.
- Implementing policies towards establishing good governance and industry best practice.
Our economy has continued to struggle and by the end of the first half of 2016 it has slipped into recession with the quarterly GDP growth for the second quarter 2016 at negative 2.06 percent. Also, other major economic indicators are troubling: Global oil prices have remained depressed; rising inflation, declining value of the Naira; double digit unemployment rate and very low government revenues. All these portend negative outlook for the Nigerian economy in the short term.
However, with the relative growth in the Non-Oil Sector especially Agriculture and ICT, possible resolution of the crisis in the Niger Delta and government renewed efforts and commitment in seeking to fast-track the reform process and jumpstart the economy, the future outlook is bright. It will create a corresponding growth and opportunities in the insurance sector and contribute a higher percentage to the Nation’s GDP.
IEI will leverage on the opportunities created by the anticipated growth in the economy to grow its business. We will constantly re-evaluate our processes to ensure we deliver on our commitments to our stakeholders.
Also, we will leverage on Enterprise Risk Management (ERM) in our operations to close gaps and enhance our risk management strategies.
We will be disciplined on execution and ensure our Company becomes the brand of choice in the Nigerian insurance industry. Our Business Model will be professionally driven by a structure that analyzes its strengths, weaknesses, opportunities and threats for appropriate responses.
The Board is unrelenting and is committed to repositioning the Company for market leadership. We shall benchmark global best practices in our operational strategies and risk management initiatives and aim for excellence in all our deliverables.
Distinguished shareholders, ladies and gentlemen, our profound gratitude goes to our Customers who have stood by us all through the trying moments and purchased our products. Our gratitude also goes to our Staff for their unalloyed commitment to our great organization. To our Shareholders, once again, we are profoundly grateful for your support and understanding.
On behalf of the Board and Management, I assure you all that we will ensure strong corporate governance and pursue measures to quickly return the Company to profitability. I therefore seek your patience and understanding.
I thank you and may God bless you all.
Muhammad K. Ahmad OON