Post on 21-Sep-2020
transcript
Afrinvest West Africa Page 2
Outline
Section 1 Executive Summary 03
Section 2
Global Insurance Industry: Emerging Markets to Drive Global Growth 08
• Global Insurance Market: Industry Growth Propped by Improvement in Global Economy 09
• Recent Trends: Digitalization – The Future of Insurance 09
Section 4 Nigerian Insurance Industry 10 • Macroeconomic Review – On a steady Growth Path 11
• Industry Analysis – ‘’A Sleeping Giant’’ with Low Penetration and Abysmal Density 11
• Motor Insurance: Riding on the Back of Regulation 12
• Oil & Gas Insurance: Underwriting Capacity Weighs Growth 12
• Fire and General Accident: A Game of Weak Regulation and No Regulation 13
• Marine Insurance: Stunted by Underwriting Capacity and Fake Insurance 14
• Life Insurance: Riding on the Back of Regulation 14
• Re-Insurance: Continental Re sits on Golden Re-insurance 14
• Nigerian Insurance Sector vs Global Peers: Emerging Markets Lead on Profitability 16
• Revenue: Leveraging on Penetration and Sophistication, US Maintain Top Spot 16
• Cost Efficiency: Nigerian Companies Lead 16
• Brazil and Egypt Outperform Other Markets in Profitability and Capital Efficiency Ratios 16
• Capital Requirement: Where is the Capacity to Underwrite 16
• Nigeria’s Insurance Sector: Poor Pricing Amidst Potentials 16
• Industry Valuation: Weak Sentiment Trail Sector 17
• Earnings: Upward Trajectory in Earnings as Macroeconomic Environment Improves 17
• Underwriting Capacity: Low Underwriting Capacity Weighs Heavily on Growth 18
• Underwriting Profitability: Underwriting Profit Suffers as Claims Rise 18
• Reinsurance Rate: Stable in the Midst of a Recovery 18
• Investment Income: High Interest Rate Environment Support Other Income 19
• Cost efficiency: Cost Rise Despite Drive to Maintain Profitability 19
• Margin and Profitability: Industry PBT and PAT Decline 5.6% and 4.2% Y-o-Y 19
• Capital Efficiency: Reduced Profitability Weigh on ROAE and ROAA in FY:2017 19
• Market Valuation and Insurance Sector Performance 20
• Regulatory Environment: NAICOM, Key Driver of Sector Growth 20
• Risk Based Supervision Model and Capitalization: Much Ado about Nothing 21
• Drivers of Industry Growth 21
Company Profiles 23
• AIICO Insurance Plc 24
• AXA Mansard Insurance Plc 28
• Continental Reinsurance Plc 32
• Custodian Investment Plc 36
• NEM Insurance Plc 40
• WAPIC Insurance Plc 44
Section 5
Afrinvest (West Africa) Limited 48
• Contact 51
• Disclaimer 52
Section 6
Section 3
Investment Thesis 06
The Nigerian Insurance Sector Report
Executive Summary
Section One
Page 4 The Nigerian Insurance Sector Report
Executive Summary
The recovery in the global macroeconomy trickled into the insurance sector in 2017.
According to Swiss Re’s (a leading global reinsurance firm) 2017 Review and 2018/19
Outlook Report, global non- life premiums increased moderately, growing by 3.0% in 2017,
driven by a 6.0% and 2.0% premium growth in emerging and advanced economies
respectively. Similarly, global life insurance grew by 3.0% Y-o-Y in 2017 (vs. 2.0% Y-o-Y in
2016). As expected, emerging economies were the main driver of global growth, with China
as the main lead. China accounted for 27.0% of emerging economies’ share of the insurance
market and premiums inched 23.0% higher in 2017.
In 2018 and 2019, premiums are forecast to rise 4.0% in each year according to projections
by Swiss re. This sustained uptick in premiums is expected to ride on the back of increased
premiums in emerging markets where stable economic growth, expanding populations,
urbanization and a rising middle class are occurring.
In the same vein, the positive traction the Nigerian economy garnered also reflected on the
insurance industry amongst other critical sectors as historical data suggest the industry
grows at a faster pace than GDP when the economy expands, due to rising disposable
income. Nonetheless, the sector suffered a setback in the last two quarters of 2017,
contracting 1.9% and 15.7% in Q3 and Q4 respectively despite growth recorded in the
overall economy. It however rebounded in Q1:2018, expanding 18.1% relative to 1.95%
growth recorded by the economy as a whole.
Despite growing at a faster pace than the economy, Nigeria’s insurance sector is still one of
the most underdeveloped compared to peers. With a population estimated at c.196.1
million people, a growing middle class and increased life expectancy rate for Nigerians (54.5
years average for men and women in 2017 from 53.4 years in 2016), the potential for
growth in the sector is significant. At optimal state, industry gross premium should be
comparable to overall consumption expenditure in the economy, since insurance is a risk
mitigating strategy. However, at 0.3%, Nigeria has the lowest insurance penetration level
(measured as insurance gross premium written as a proportion of GDP) amongst notable
African countries – South Africa (14.7%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%).
Similarly, the sector’s insurance density (a measure of industry gross premium per capita) is
still one of the lowest when compared to peers – South Africa (US$762.5), Egypt (US$22.8),
Kenya (US$40.5) Angola (US$30.5) and Nigeria (US$6.2).
The insurance industry in Nigeria is segmented into life, non-life and re-insurance, with non-
life insurance accounting for the bulk (48.7%) of total gross premium written (GPW) while
life and re-insurance account for 30.1% and 21.2% respectively. Further analysis of insurance
market structure shows de-concentration in what fits a monopolistic competitive market
structure in both life and non-life insurance while the re-insurance market structure
operates in an oligopolistic (duopoly) system.
In analyzing the sector, we identified factors that have the potential to drive or drag growth.
Although we highlighted the key role regulation plays in buoying the performance of the
industry, we believe increasing population size and growing middle class are factors that
support growth while weak underwriting, cultural and religious beliefs, premium leakages,
weak mortgage culture and slow pace of adoption & enforcement of compulsory insurance
may weigh performance going forward.
Furthermore, we took a closer look at the new risk-based capitalization requirements placed
on hold and concluded that the requirements might struggle to drive growth in the sector as
it permits fragmentation. We opined that a development similar to the consolidation
witnessed in the banking sector in 2005, where minimum capital base was raised from
N2.0bn to N25.0bn, is required to strengthen the insurance industry. We recall that during
...the positive traction the
Nigerian economy garnered
also reflected on the insurance
industry amongst other critical
sectors as historical data
suggest the industry grows at a
faster pace than GDP when the
economy expands, due to rising
disposable income.
Omoefe Eromosele
+234 1 270 1690 ext. 317
oeromosele@afrinvest.com
Analyst
Afrinvest West Africa Page 5
Executive Summary
the 2005 Nigerian banking sector consolidation, the number of banks reduced from 86 to 25
which has strengthened the industry to withstand tough economic periods as seen during
the recession in 2016.
Despite the underwhelming performance of the sector, we believe huge opportunities
abound. In our view, improved capital buffers to increase capacity, innovation in
microinsurance to deepen penetration, adoption of bancassurance by players and
investment in takaful insurance will drive performance of the industry. To bring our analysis
to a conclusion, we highlight a two-pillar requirement we believe is necessary to unlock
growth in the industry – higher capital requirement to raise underwriting capacity and
regulation to enforce compulsory insurance.
In our view, improved capital
buffers to increase capacity,
innovation in microinsurance to
deepen penetration, adoption
of bancassurance by players
and investment in takaful
insurance will drive
performance of the industry.
The Nigerian Insurance Sector Report
Section Two
Investment Thesis
Afrinvest West Africa Page 7
After careful analysis, we believe all segments of the sector are viable options for investments as all currently operate at sub-optimal
levels. In non-life, it is evident that players are largely undercapitalized to underwrite big ticket transactions in oil & gas, marine and
aviation; hence, forfeiting the opportunities in these segments. Whilst we note that the new capital requirements by NAICOM compel
companies seeking to play in these segments to raise capital, we believe there will be a need for mergers and acquisitions to strengthen
underwriting capacity to adequately capture ‘big ticket’ and profitable transactions.
Furthermore, technological disruption to insurance have begun in advanced climates with the introduction of various platforms such as
Auto Claims Direct, E-brokers in the US and Bima operating across Africa and Latin America. Insurance is going digital and technological
solutions – insurtechs – with abilities to increase penetration, eliminate brokers or fasten claims verification processes are investment
opportunities to position in. Insurance companies or insurtechs with a model to drive insurance operations through mobile technology are
positioned to be industry leaders in the near term.
We also believe microinsurance is a sweet spot in the industry as it possesses the ability to deepen penetration and produce positive
returns in the mid to long term. Fresh injection of patient capital and a model that encourages the use of mobile technology and
unconventional sales channels are likely to produce better results.
Lastly, our analysis show that the sector suffers from poor pricing as the local industry’s price to book at 0.7x is low relative to peers –
South Africa (2.9x), Egypt (1.3x) and Ghana (1.3x). Nonetheless, we believe value can be created within the current context while awaiting
the necessary reform to drive industry growth.
Investment Thesis
The Nigerian Insurance Sector Report
Section Three
Global Insurance Industry
Afrinvest West Africa Page 9
Global Insurance Industry: Emerging Markets to Drive Global
Growth
The global economy grew 3.8% in 2017 following the pickup in
trade after the recovery in global commodity prices, improved
investment spending in advanced countries and sustained growth
in emerging Asia and Europe. This trend was expected to continue
into 2018. According to the International Monetary Fund’s (IMF)
World Economic Outlook in January 2018, global growth is
projected to tick up to 3.9% in 2018, buoyed by a broad-based
expansion across regions. In Advanced Economies (AEs)
comprising the United States (US), Euro Area and Japan, growth is
projected to be faster paced, reinforced by the effects of
expansionary fiscal policy in the United States, supportive
monetary policy and stronger than expected domestic and
external demand in the euro area and Japan. Furthermore,
favourable market conditions for commodities are expected to
drive growth in most emerging and developing countries in 2018.
Moving into H2:2018, the IMF, Organisation for Economic Co-
operation Development (OECD) and the Paris-based Think Tank
(PTT) retained global growth at previous forecasts of 3.9% for
2018 amidst the protectionist bend of the US and the on-going
trade war between the former and China. Whilst we believe the
implementation of trade policies enacted by these countries is a
downside risk to global growth, we believe the global economy
will expand as trade is buoyant and commodity prices remain
elevated.
Global Insurance Market: Industry Growth Propped by
Improvement in Global Economy
The recovery in the global macroeconomy trickled into the
insurance sector in 2017. According to Swiss Re’s (a leading global
reinsurance firm) 2017 Review and 2018/219 Outlook Report,
global non- life premiums increased moderately, growing by 3.0%
in 2017, driven by a 6.0% and 2.0% premium growth in emerging
and advanced economies respectively. In emerging economies,
the increase in premiums was bolstered by a pickup in trade while
in advanced economies, rising motor sales in western Europe and
increased motor insurance in the US drove the regions premiums
northward. However, despite increased revenue across regions,
profitability declined due to an uptick in claims, low investment
yield and Natural Catastrophe (NatCat) losses in the US.
Nevertheless, industry players maintain a positive outlook for
global non-life insurance in 2018 and 2019. Swiss re estimates
yearly premiums will grow by 3.0% apiece in 2018 and 2019,
supported by improved macroeconomic conditions in both
emerging and advanced economies. Profitability is also
anticipated to trend higher as premium pricing is readjusted in the
face of NatCat expectations and rising motor claims.
Similarly, global life insurance grew by 3.0% Y-o-Y in 2017 (vs.
2.0% Y-o-Y in 2016). As expected, emerging economies were the
main driver of global growth, with China as the main lead. China
accounted for 27.0% of emerging economies share of the
insurance market and premiums inched 23.0% higher in 2017.
Across advanced markets, performance varied - insurers in the US
were largely affected by uncertainty around the implementation
of labour fiduciary rules ( a law that binds financial advisors to
apply the highest standard of care to customers), while in
Western Europe, premium level stayed flat in 2017. Overall, the
region recorded a 0.2% Y-o-Y decline in premiums. Furthermore,
the low interest rate environment witnessed across most
advanced economies weighed heavily on global life insurance
profitability.
In 2018 and 2019, premiums are forecast to rise 4.0% in each year
according to projections by Swiss re. This sustained uptick in
premiums will ride on the back of anticipated premium growth in
emerging markets due to stable economic growth, expanding
populations, urbanization and a rising middle class.
Recent Trends: Digitalization – The Future of Insurance
Insurance technology (Insurtech), a subsector of financial
technology (fintech), is aimed at simplifying and improving
insurance processes. Still in its infancy stage, insurtechs have
begun to disrupt all processes in the value chain; from policy
creation to claims management and then distribution. For
instance, in a bid to simplify decision making in buying policies,
Abaris, an e-broking platform that provides insurance quotes
emerged in the US.
In a similar fashion, Bima, has brought life and health insurance to
over 24 million low income earners across Africa, Asia and Latin
America using mobile technology. The company has leveraged the
high mobile penetration in these emerging markets and runs its
operations using a combination of mobile technology and agents.
As a result, customers can purchase and pay for insurance
products without walking into a physical office. Other companies
such as Auto Claims Direct assist auto insurance companies in the
US to assess claims using technology.
While these disruptions are unknown in some markets, there is a
need for insurance players in markets without disruptions to
review existing business models and align with fast changing
technological solutions. For companies operating in areas
susceptible to disruptions, we expect to see collaborations that
will drive growth in the industry. Overall, we believe traditional
insurance should adopt technological solutions across all levels of
operations to improve processing time, drive penetration, reduce
cost whilst improving customer experience. This will act as a
strategy to defend profitability as well as increase client base.
Global Insurance Industry
The Nigerian Insurance Sector Report
Section Four
Nigerian Insurance Industry
Afrinvest West Africa Page 11
Macroeconomic Review – On a Steady Growth Path
Without a doubt, the Nigerian economy has grown steadily since
its recovery from recession in Q2:2017 with recent GDP printing at
1.5% in Q2:2018. Although the recovery was largely oil sector
driven, activities in other non-oil sectors garnered traction, as
seen in the expansion of both manufacturing (0.7%) and
agricultural sectors (1.2%) in Q2:2018. Other macroeconomic
indicators also show a similar story with inflation declining to
11.3% in September 2018 from a peak of 18.7% in January 2017.
Also, the country’s currency has remained relatively stable against
the dollar despite headwinds to the currency market. The stability
has been driven by increased crude oil receipts and remittances
which have improved the ability of the CBN to defend the
currency. The external reserves level was recorded at US$43.0bn
on the 15th of October 2018 compared to a low of US$24.7bn
recorded in September 2016. In our opinion we believe with oil
prices still favourable and oil production volumes relatively
steady, outlook on Nigeria’s growth remains positive in the near
term.
Nigerian Insurance Industry: ‘’A Sleeping Giant’’ with Low
Penetration and Abysmal Density
The positive traction the economy garnered also reflected in the
insurance industry amongst other critical sectors as historical data
suggest that the industry grows at a faster pace than GDP when
the economy expands, due to rising disposable income.
Nonetheless, the sector suffered a setback in the last two quarters
of 2017, contracting 1.9% and 15.7% in Q3 and Q4 respectively
despite growth recorded in the overall economy. Insurance sector
GDP however rebounded in Q1:2018, expanding 18.1% relative to
1.95% growth recorded by the overall economy.
Despite growing at a faster pace than the economy, Nigeria’s
insurance sector is still one of the most underdeveloped
compared to peers. With a population estimated at c.196.1
million people and a growing middle the potential for growth in
the sector is significant. At optimal state, industry gross premium
should be comparable to overall consumption expenditure in the
economy, since insurance is a risk mitigating strategy. However, at
0.3%, Nigeria has the lowest insurance penetration level
(measured as insurance gross premium written as a proportion of
GDP) amongst notable African countries – South Africa (14.7%),
Kenya (2.8%), Angola (0.8%) and Egypt (0.6%). Similarly, the
sector’s insurance density (a measure of industry gross premium
per capita) is still one of the lowest when compared to peers –
South Africa (US$762.5), Egypt (US$22.8), Kenya (US$40.5) Angola
(US$30.5) and Nigeria (US$6.2).
The Insurance industry in Nigeria is segmented into life, non-life
and re-insurance, with non-life insurance accounting for the bulk
(48.7%) of total Gross Premium Written (GPW) while life and re-
insurance account for 30.1% and 21.2% respectively. Further
analysis of the structure of the insurance market shows de-
concentration in what fits a monopolistic competitive market
structure in both life and non-life insurance while the re-insurance
market structure operates in an oligopolistic (duopoly) system.
operates A total of 59 companies operate in the industry - 14
operate in life, 28 in non-life, 13 are composite insurers (licensed
to carry out both life and no-life insurance), 2 are reinsurers and 2
operate takaful insurance. A closer look at the industry using the
four firm concentration ratio reveals a medium concentration for
the life segment of the sector as the 4 companies control 63.7% of
the market. This indicates that the segment is tilting more
towards an oligopoly. On the other hand, the non- life segment is
Nigerian Insurance Industry
Chart 1: Insurance Penetration Across Select African Countries in 2016
Source: Sigma Research, Afrinvest Research
Page 12 The Nigerian Insurance Sector Report
comprehensive insurance (with premium rate of 3.0%).
Oil & Gas Insurance: Underwriting Capacity Weighs on Growth
The oil & gas segment is the third largest contributor to industry
GPW, given the high value of assets insured as against volumes of
transactions. Similarly, the growth of this segment has been
regulation driven, as NAICOM’s guideline for the conduct of Oil &
Gas insurance states that oil companies seeking to insure oil and
gas assets must exhaust local capacity before insuring abroad.
Despite the aforementioned, a closer look at total oil & gas
premium to total industry premiums in 2016 suggests that a
significant amount of oil & gas assets are ceded abroad due to the
weak capacity of local players to underwrite this class of risk.
Fire and General Accident Insurance: A Game of Weak Regulation
and No Regulation
Fire and general accident insurance contributed 4.5% and 3.9% to
total industry premium in 2016. While there is no regulation
covering general accident, the level of enforcement of compulsory
insurance for public buildings against fire, as stipulated in Section
Nigerian Insurance Industry
Source: NAICOM, Afrinvest Research
fairly fragmented with a low four firm concentration level of
33.9%.
Furthermore, the insurance business in Nigeria is titled towards
non-life given that it accounts for 48.7% of total Gross Premium
Written (GPW). Across this segment, the most prominent
insurance products are motor insurance, general accident, fire, oil
& gas and marine insurance.
Motor Insurance: Riding on the Back of Regulation
The motor insurance segment currently dominates Nigeria’s
insurance industry, accounting for 45.4% as at FY:2016. This
growth has been hinged largely on NAICOM’s compulsory third-
party insurance policy which mandates all vehicle users to insure
against damages caused to third party in cases of accidents.
Despite this, we believe the motor insurance segment of the
sector can be further explored. Using our estimates, the N154.9bn
annual GPW recorded in 2016 is 67.3% of the market assuming
that the 11.5m registered cars comply with third party insurance
and that 50.0% of these cars valued at N1.0m each possess
Chart 2: Structure of Nigerian Insurance Sector (2016)
Chart 3: Nigerian Insurance Market by Segment (2016)
Source: NAICOM Afrinvest Research
Afrinvest West Africa Page 13
65 (1) of the 2003 Insurance Act, has been rather weak, thus
failing to drive premium growth in this segment. NAICOM, the
Federal Fire Service of Nigeria (FFSN) and the National Insurers
Association (NIA) entered into agreement in 2017, aimed at
engendering full compliance with the law. The agreement
created a structure to fund the FFSN by contributing 0.3% of
premiums received on building insurance into a fund. Though
this is a step in the right direction, we believe efforts should also
be directed at ensuring public building insurance is also adopted
by states across the federation.
Nigerian Insurance Industry
Chart 4: Motor Insurance by Market Players (2016)
Source: NAICOM Afrinvest Research
Chart 5: Oil & Gas Insurance by Market Players (2016)
Source: NAICOM, Afrinvest Research
Marine Insurance: Stunted by Underwriting Capacity and “Fake
Insurance”
Marine insurance contributes the least to total GPW in the
industry at 2.2% (FY:2016) and similar to Oil & Gas, it is
characterized by high assets value as well as a higher probability
of risk crystallization. Consequently, it faces the same challenges
oil & gas insurance grapples with – insufficient underwriting
capacity by local underwriters. The segment has also been
plagued by forged marine insurance certificate which has led to
the loss of revenue for the sector.
Page 14 The Nigerian Insurance Sector Report
Nigerian Insurance Industry
Life Insurance: Riding on the Back of Regulation
The growth in life insurance premiums has maintained an upward
trend since 2011, on the back of population growth and
regulation, growing by 37.0% Y-o-Y to N124.6bn in 2016 (vs.
N91.0bn in 2015), using data from NAICOM. According to industry
practitioners, the compulsory group life insurance imposed on
companies with 5 or more employees has been a major driver of
growth; accounting for a significant proportion of GPW in the
industry. This growth has been supported by the growing middle
class (the new target for insurers), who have an understanding of
the benefits of life insurance.
Within the life business, the top five companies control 71.7% of
the market share by GPW. As at 2016, Leadway, AIICO, African
Alliance, Custodian and FBN life accounted for 25.4%, 17.8%,
10.7%, 9.8% and 8.0% respectively.
Reinsurance: Continental Re sits on Golden Re-insurance
In the reinsurance segment of the market, competition is primarily
between Continental Re and foreign players as Continental Re
accounts for 96.9% (FY:2016) of the total value of premiums
reinsured locally leaving 3.1% to the Nigerian Reinsurance
Corporation. Data reveals that there is a sizeable portion of
premiums ceded to foreign re insurers especially through Marine
and Oil & Gas insurance as 2016 industry numbers suggest that
contribution to total GPW by these classes of insurance at 7.4%
and 2.2% are far below potential compared to the number of local
oil and gas businesses and the level of imports shipped into the
country in 2016. From our analysis, the pillars of Nigeria’
insurance sector still remain Motor (45.4%) and life (36.5%)
insurance which cumulatively account for 81.9% of the industry’s
total GPW excluding premiums ceded to Re-insurers.
Nigerian Insurance Sector vs Global Peers: Emerging Markets Lead
on Profitability
To further assess the depth of the industry and its position
relative to other economies, we analyzed key industry ratios
across select countries – USA, BRICS - Brazil, Russia, India, China,
South Africa, and similar African markets - Kenya, Egypt and
Ghana.
Revenue: Leveraging on Penetration and Sophistication of
Citizens, US Maintains Top Spot
The insurance sector remains shallow in terms of Gross Premium
Written when placed beside select countries with similar
structures and demographics. As at 2017, US and China raked in
US$801.8bn and US$469.7bn respectively, cumulatively
accounting for 88.9% of total GPW in our universe while
US$159.2bn is shared among other countries including Nigeria.
While GPW is largely supported by the general awareness of
Chart 6 Fire and General Accident Insurance by Market Players (2016)
Source: NAICOM Afrinvest Research
Chart 7: Marine Insurance by Market Players (2016)
Source: NAICOM Afrinvest Research
Fire Insurance
General Accident Insurance
Afrinvest West Africa Page 15
Nigerian Insurance Industry
Chart 8: Life Insurance by Market Players (2016) Chart 9: Reinsurance by Market Players (2016)
Source: NAICOM, Afrinvest Research
Chart 11: FGN Loss and Combined Ratios in the Non-life Segment of Select Countries (2017)
Source: Bloomberg, Afrinvest Research
Chart 10: Gross Premium Written Across select Countries in 2017
Source: Bloomberg, Afrinvest Research
Page 16 The Nigerian Insurance Sector Report
insurance and insurance products in the US (penetration level at
7.3%), in China, the increasing GPW growth can be tied to
improving macroeconomic conditions which has resulted in an
expansion of the country’s middle class. Taking these two outliers
out of our comparison, Nigeria still lags in terms of GPW when
compared with similar African countries – Egypt, South Africa and
Kenya – which despite having smaller populations relative to
Nigeria and are economically at par, are able to drive revenue in
the insurance sector.
Cost Efficiency: Nigerian Companies Lead
Despite Nigeria’s relatively weak insurance revenue, the sector’s
companies are relatively cost efficient, outperforming several
countries with higher GPW in the period under review. In the non-
life segment, Nigeria’s claims ratio settled at 41.5% ( FY:2017)
lower relative to peers such as , South Africa with 444.5% , Egypt
with 78.1% and Kenya with 72.3%. Similarly, combined ratio which
shows the ratio of total expenses to gross premium earned settled
at 71.5% lower than universe average of 97.8% in FY:2017
indicating the local industry recorded a profit.
Brazil and Egypt Outperform Other Markets in Profitability and
Capital Efficiency Ratios
Nigeria’s insurance industry remained largely profitable, with net
margin printing at 7.0% in FY:2017. This, combined with other
factors such as Nigeria’s low penetration level and high cost
efficiency ratio relative to peers, explains why international
interest in the sector has increased in recent times. However,
Brazil and Egypt outperformed all countries in terms of
profitability, with profit margins at 19.8% and 17.1% respectively.
Return on Equity: While Brazil and Egypt maintain the lead in key
profitability metrics, Nigeria’s insurance sector emerged 6th,
posting a return on equity (ROE) of 12.1%, compared to 45.5%
and 30.9% in the aforementioned countries. The low interest
environment in most countries – in particular, advanced
economies – weighed heavily on return on equity, with some
companies in the US recording figures as low as 3.2% at FY:2017.
However, in emerging and frontier markets, the interest rate
environment improved, with interest rate hitting new peaks in
2017. In Nigeria, the high interest rate environment between
2016 and 2017 bolstered the ROE of insurance companies despite
the pressure on operating profit such as increased underwriting
costs and higher claims.
Return on Assets: Return on Assets (ROA) is less significant in
measuring performance in the industry because revenue is
derived from insurance contract liabilities. Nonetheless, we
analyzed ROA to measure return on investible assets as interest
bearing assets account for a large proportion of total assets. In
FY:2017, Brazil and Egypt maintained the lead posting 12.8% and
5.8% respectively, while the Nigerian insurance industry trailed
with 3.2%.
Capital Requirement: Where is the Capacity to Underwrite?
The level of capital stipulated for players across regions largely
determines the type and volume of risks an insurer is permitted to
undertake. This in turn translates to the depth of coverage
especially in high risks sectors such as Oil &gas, Aviation and
Marine Insurance. For instance, in China, the capital required to
operate two product lines in the non-life segment of the industry
stands at N30.0bn ($83.3m), a far cry from what is obtainable in
Nigeria (N9.0bn or US$25.0m for tier 1 non-life companies) as well
as other African counties we sampled (Egypt - N2.5bn or US$6.9m
and Kenya – N2.1bn or US$5.8m).
Nigerian Insurance Industry
Chart 12: Net Margin, ROAE and ROAA of Select Countries (2016)
Source: Bloomberg, Afrinvest Research
Afrinvest West Africa Page 17
Nigeria’s Insurance Sector: Poor Pricing amidst Potentials
Despite the potential of the Nigerian insurance sector, it suffers
from unfavorable pricing and dampened market sentiment. At a
Price-to-Book value (P/BV) of 0.7x compared to similar African
countries – South Africa (2.9x), Egypt (1.3x), Ghana (1.3x) and
global industry average of 5.1x - Nigeria’s insurance sector is
undervalued; a case which is reflected in the pricing of insurance
stocks on the local bourse. Sentiment towards the industry has
remained poor due to investor’s perception of value creation in
the industry with penetration level, and inadequate underwriting
capital dampening sentiments Although the recent risk-based
capitalization model introduced by NAICOM aligns the sector with
global best practices, , we do not foresee a knee jerk reaction as
we believe that investors confidence in the ability of the tier
based capital structure to drive the needed change in the sector
may be weak.
Industry Valuation
In valuing the industry, we took a critical look at key companies in
the industry listed on the Nigerian Stock Exchange (NSE). To select
these companies, we screened based on market share by
revenue, price to earnings ratio and growth potential– hence, the
emergence of AIICO, MANSARD, NEM, WAPIC, CUSTODIAN &
CONTINENTAL RE.
Earnings: Upward trajectory in Earnings as Macroeconomic
Environment Improves
Following the recovery of the macroeconomy in Q2:2017 and the
steady growth recorded in subsequent quarters, the insurance
sector received renewed interest in 2017 as Gross Premium
Written grew 21.5% Y-o-Y to N154.9bn in 2017 (vs N127.5bn in
2016). The growth in GPW was largely broad based as both life
and non-life segments of the market grew significantly, although
life insurance remained the backbone of the sector.
In 2017, the battle for premium continued, as premium growth in
a low penetration sector implies that competition is primarily
centered around pricing; to retain existing contracts and acquire
new ones. As a result, we believe AIICO and CUSTODIAN
leveraged long-standing presence in the market to drive revenue,
as both companies emerged the largest contributors to industry
GPW. More so, we believe AIICO’s aggressive sales plan paid off,
hence buoying GPW growth. Cumulatively both companies
accounted for 44.5% of premiums written across companies
under coverage.
Underwriting Capacity: Low Underwriting Capacity Weighs Heavily
on Growth
Due to the group structure of CUSTODIAN, we excluded the
Holdco from our analysis. Thus, by underwriting capacity,
MANSARD took the lead with total shareholders fund of N20.3bn
while CONTINENTAL RE, WAPIC and AIICO followed suit with
N19.4bn, N18.0bn, N10.5bn and N9.7bn respectively.
Underwriting Profitability: Underwriting Profit Suffers as Claims
Rise
The year proved to be an outlier, in terms of claims amongst
companies we cover. Higher replacement costs, rising incidences
of death in the north of the country, and fake insurance claims
drove gross claims 13.2% higher to 60.6% from 47.4% in 2016. In
2017, AIICO recorded the most claims, with claims ratio surging to
109.3% (from 49.8%in 2016), above the industry average.
Nigerian Insurance Industry
Chart 14: Classification of Coverage Companies
Source: NAICOM, Afrinvest Research
Chart 13: Earnings Multiples of Select Countries in 2017
Source: Bloomberg Afrinvest Research
COMPOSITE NON-LIFE REINSURANCE
AIICO NEM CONTINENTAL RE
MANSARD
WAPIC
CUSTODIAN
Page 18 The Nigerian Insurance Sector Report
Excluding AIICO, the industry average settled at 48.6% in
2017.Despite the general rise in claims, WAPIC and NEM recorded
declines in claims ratios, suggesting an improvement in the risk
strategies of these companies.
Against this backdrop, combined ratio was pressured upwards to
102.3%, 6.4% higher than in the preceding year. AIICO and WAPIC
were the major drags to industry performance, as the companies
recorded ratios of 149.2% and 136.1% respectively.
Reinsurance Rate: Stable in the Midst of a Recovery
Average industry risk transfer rate – reinsurance and retrocession
rate remained largely the same printing at 28.7% in 2017 from
27.0% in 2016 as companies under our coverage increased
reinsurance rates slightly in the period under review. In our
opinion, the rise in claims was not envisaged by companies, hence
reinsurance rates remained at similar levels in 2017.
Nevertheless, we anticipate a rise in reinsurance and retrocession
rate in 2018 as companies align with present day realities.
Investment Income: High Interest Rate Environment Support
Other Income
All companies under our coverage save for WAPIC took advantage
of the high interest environment of 2017 as interest income from
investment securities inched higher Y-o-Y. AIICO was the most
aggressive, deploying more funds to investment securities as we
saw a 16.4ppts increase in its interest income margin, the highest
in our coverage. On the flip side, WAPIC lagged, as its interest
income margin declined to 32.7% from 49.3% in 2016.
Cost Efficiency: Cost Rise Despite the Drive to Maintain
Profitability
Companies under our coverage pushed aggressively to drive
revenue which translated into higher administration and
marketing costs in 2017. As a result, we observed higher cost to
income ratios, which on the average inched 7.4% higher to 66.9%
from 59.5% in 2016. Although costs moderately increased across
the industry, improved revenue across companies partly offset
Nigerian Insurance Industry
Chart 16: Company Ranking by Gross Premium Written
Source: Company Filings, Afrinvest Research
Chart 15: Industry Gross Premium Written (2013 -2017)
Source: Company Filings, Afrinvest Research
Afrinvest West Africa Page 19
the impact thus supporting profitability.
Margin and Profitability: Industry PBT and PAT Decline 5.6% and
4.2% Y-o-Y
Although profitability declined slightly in 2017, the industry
remained largely profitable as all companies under our coverage
reported profits in the period under review. Industry PBT margin
contracted 5.6ppts to 16.2% from 21.8% recorded in 2016 while
PAT margin fell 4.2ppts to 12.6% from 16.8% recorded in 2016.
These contractions were largely due to higher claims and
operating expenses witnessed in the period under review.
Capital Efficiency: Reduced Profitability Weigh on ROAE and ROAA
in FY:2017
Given the cost pressures that weighed on profitability in FY:2017,
the sector witnessed a decline in ROAE and ROAA. Industry ROAE
declined 19.6ppts from 36.0% in 2016 to 16.4% in 2017 despite
the upticks from WAPIC (3.7% in FY:2016 to 8.9% in FY:2017) and
NEM (26.7% in FY:2016 to 32.4% in FY:2017). The decline was
primarily dragged by AIICO - ROAE fell 102.0ppts to 13.6% from
115.6% in 2016. From the company’s fillings, the 2016 spike in
ROAE rode on the back of a surge in earned premiums in 2016 and
a corresponding decline in equity.
Similar to ROAE, Return on Average Assets (ROAA) of the industry
declined Y-o-Y, shedding 1.6ppts from an average of 8.5% in
FY:2016 to 7.0% in FY:2017. Profitability across companies
moderated period under review despite the increase in total
assets hence, the decline in ROAA. On the flip side, WAPIC and
NEM bucked industry trend as both companies recorded an
increase in ROAA. While WAPIC’s ROAA rose to 5.6% from 2.4% in
FY:2016, NEM’s ROAA grew to 17.3% from 13.5% in FY:2016.
Nigerian Insurance Industry
Market Valuation and Insurance Sector Performance
In line with the broader benchmark index, investors rallied in
insurance stocks in the first quarter of the year but remained
unscathed during the sell offs witnessed in Q2:2018 as the
insurance index posted the highest gain in H1:2018 – 7.9%,
7.8ppts above 0.1% recorded by the benchmark index. However,
in Q3:2017, the sector began to shed gains with investors booking
profit in counters which had gained significantly. By the end of the
third quarter, the index closed in the red, down 16.7%.
Despite these performance in 2018, sentiments to the stocks in
the sector remains weak. Volumes of trade on stocks in the
insurance index totaled 5.6bn units in 2018 relative to 35.0bn
units traded on constituents of the banking index, with 5.6bn
units been the highest since 2007. Furthermore, of the total
trades YTD, 5 companies – NEM, CUSTODIAN, MANSARD, AIICO
and LINKASSURE account for 44.4% of the volume traded, leaving
55.6% to the 26 other listed entities.
Regulatory Environment: NAICOM, Key Driver of Sector Growth:
NAICOM is responsible for ensuring the effective administration,
supervision and control of insurance business in Nigeria and
amongst other things, is tasked with the goal of deepening market
penetration. In an effort to deepen the market, the Commission
has brought forward several initiatives which include, the Market
Development and Restructuring Initiative (MDRI). The MDRI was
introduced in 2009 with the primary objective of promoting
insurance culture in the country. Its focus spanned - enforcement
of compulsory insurance, sensitization and modernization of the
sector’s agency system, eradication of unlicensed insurance
institutions as well as the introduction of risk-based supervision.
For compulsory insurance, the body planned to enforce this
Chart 17: Company Ranking by Shareholders Funds (2017) Chart 18: Ranking of Companies by Claims 2016 vs 2017
Source: Company Filings, Afrinvest Research
Page 20 The Nigerian Insurance Sector Report
Nigerian Insurance Industry
through five major policies – Motor Third Party Liability Insurance,
Builders Liability Insurance, Occupiers Liability Insurance, Health
Care Professional Indemnity Insurance and Group Life Insurance.
We believe it has largely driven the sector’s growth since
implementation in 2011.
In a similar move to deepen penetration in oil & gas insurance, the
Commission collaborated with the Nigerian Content Development
and Monitoring Board (NCDMB) to ensure compliance with the
provisions of the Nigeria Oil & Gas industry Content Development
Act 2010, by making it compulsory for all companies operating in
the sector to insure assets first with local insurers before seeking
permission from the body to insure with a foreign firm. In our
opinion, this has been the driver of growth in that segment
although performance still remains underwhelming. Furthermore,
NAICOM issued microinsurance guidelines in 2013 to deepen
penetration among low income earners. Since the release of these
guidelines, penetration levels have still remained low at 0.3%
according to Efina. Efina believes that through sensitization and
the use of unconventional means the microinsurance segment can
grow to become a major contributor to total industry GPW.
Risk Based Supervision Model and Capitalization: Much Ado about
Nothing
In its continuous effort to align the industry with global standards,
NAICOM in a press briefing on the 26th of July, 2018 released
guidelines for the new risk-based capital requirement in a bid to
align the local industry with the use of solvency II in determining
capital and risk levels. The new system classifies insurers of
different categories – life, non-life and composite into tiers, based
on the amount of capital required and acceptable class of risk. For
life insurance, the minimum capital base remained at N2.0bn,
however, companies operating with the minimum capital base
will be classified under tier 3 life insurers, while firms with
intentions to underwrite higher levels of risk are required to shore
up capital to N3.0bn and N6.0bn to be classified as tier 2 and tier
Chart 19: Reinsurance and Retrocession Rate by Companies 2016 vs 2017 Chart 20: Ranking of Companies by Claims 2016 vs 2017
Source: Company Filings, Afrinvest Research
Chart 21: ROAE Ranking in 2016 vs 2016 Chart 22: ROAA Ranking in 2016 vs 2017
Source: Company Filings, Afrinvest Research
Afrinvest West Africa Page 21
Nigerian Insurance Industry
1 insurers respectively.
In non-life insurance, tier 1 grade with a minimum capital required
of N9.0bn was created for operators with intentions to underwrite
oil & gas and oil related projects, explorations & production and
aviation assets whilst tier 2 non-life underwriters with intents to
underwrite engineering, marine, bonds credit guarantees and
suretyship insurances are required to shore up capital base to
N4.5bn. The current N3.0bn minimum capital requirement for non
-life insurers will form the tier 3 grade for insurers with
underwriting business in fire, motor, engineering, general
accident and agriculture policies. In the same vein, minimum
capital requirements for composite insurers was increased from
N5.0bn to N7.5bn and N15.0bn for tier 2 and tier 1 classifications
respectively.
Whilst we believe the move to a risk-based capital model places
the industry in line with global practices, we are of the opinion
that the new capital requirements might struggle to drive growth
in the sector as it permits fragmentation. We believe a
development similar to the consolidation witnessed in the
banking sector in 2005, where minimum capital base was raised
from N2.0bn to N25.0bn, is required to strengthen the insurance
industry. We recall that during the 2005 Nigerian banking sector
consolidation, the number of banks reduced from 86 to 25 which
has strengthened the industry to withstand tough economic
periods as seen during the recession in 2016.
Drivers and Drags to Nigeria’s Insurance Sector
In analyzing the sector, we identified factors that have the
potential to drive or drag growth. Although we have highlighted
the key role regulation plays in buoying the performance of the
industry, we believe the factors listed below play an important
role in shaping industry performance.
1. Increasing Population Size:
Nigeria is home to over c.196.1 million people, making it the
largest African country by population. According to the UN,
Nigeria is expected to be the third largest country in the world by
2050. With our current population, immense opportunities still
exist especially in the microinsurance and takaful segments of the
market
2. Growing Middle Class:
Since private sector activities across banking,
telecommunications, energy, and retail services blossomed from
2000, Nigeria’s GDP in nominal terms has expanded 5.0 times
between 2000 and 2011. This increased activity coupled with
improved FDI inflow within this period translated into real sector
growth which supported macroeconomic improvements. This
resulted in an emergence of the middle class and this class has
grown to account for 30.0% of the population according to African
Development Bank (AfDB) report titled “The Middle of the
Pyramid: Dynamics of the Middle Class in Africa”.
While the middle class continues to expand, the rising
sophistication and increased consumer spending among this
group has been a major driver of the growth in retail insurance.
Despite this, the retail market is still largely underdeveloped; a
further exploration of that market will drive growth in the sector.
As we cited possible drivers of growth above, we highlighted
possible drags to market performance in the near and long -term.
1. Weak Underwriting Capacity Still Dampens Performance
Weak capital levels in the industry continue to undermine the
ability of insurance companies to underwrite risks, especially in
high value and high-risk segments of the economy as seen by the
contribution of Oil & Gas, Marine and Aviation to total industry
GPW. With the new capitalization model which requires insurers
to shore up capital base from N3.0bn to N9.0bn in order to
underwrite certain risks, we expect to see a decline in foreign
insurance of oil & gas assets in the near term although we
maintain a conservative view on the level of decline as most
insurers underwriting oil & gas currently possess capital above
N9.0bn.
2. Cultural and Religious Beliefs
The cultural and religious beliefs of the average Nigerian have
been an impediment to the growth of the sector. Consequently,
over the last decade, the sector’s growth has been driven by the
Chart 23: Risk Based Capitalisation Requirements
Source: NAICOM, Afrinvest Research
Page 22 The Nigerian Insurance Sector Report
Nigerian Insurance Industry
enlightened but minority middle class who are captured by the
formal system, while the informal sector - traders, fishermen,
artisans – which according to the UNDP contributes ca.57.9% to
GDP hardly take up insurance products. Nonetheless, as
awareness for microinsurance strengthens, we foresee the
informal sector propping growth in the long term.
3. Premium Leakages
Despite the growth of motor insurance in Nigeria, the
proliferation of fake insurance documents in motor as well as
marine insurance is still a barrier to growth. In a statement
released by the Nigerian Insurance Association, of the 17.0m cars
estimated to be on Nigerian roads, only c.4.3m cars were
registered in its database as at January 2018.
4. Poor Mortgage Culture
Home insurance is not popular culture in the country given that
most home owners typically build through savings or take up
loans at commercial rates on their monthly salary. However, if the
mortgage system is gradually developed, it will translate to an
improvement in the sector’s growth, as financiers will need to
insure the underlying asset for the period of the mortgage.
5. Slow pace of Adoption and Enforcement of Compulsory
Insurance
The slow pace at which states have adopted and enforced
compulsory insurance has also contributed to the drag in
performance. Penetration level has largely increased on the back
of compulsory insurance and such collaborations between the
states and NAICOM will effectively drive growth across board and
sustain it in the near term.
Untapped Potentials — The Way Forward
Despite the underwhelming performance of the insurance sector,
we believe huge opportunities abound in the sector. However,
some factors will dictate performance in the near term:
Higher Capital Requirement: A Move to Increase Capacity
The After analyzing the industry, we believe regulation that
significantly raises capital requirement is necessary to drive
growth. While we are in support of the Commission’s stance to
align the industry with global best practices by transitioning to a
capital-based requirement, we believe the capital raise for Tier 1
(100.0% of base capital) and Tier 2 levels (50.0% of base capital) is
weak and inadequate to buoy growth.
To make a case for a higher increase in capital raise compared to
NAICOM’s proposal, we delved into the banking sector
recapitalization exercise of 2005 - as both sectors fall under the
broader financial services sector – and its effect on the banking
system. Nigeria’s banking sector pre-consolidation was largely
dependent on public sector funds and it lacked the ability to
finance large transactions in oil & gas, energy to mention a few-
owing to a weak capital base of N2.0bn. However, the
introduction of new capital rules which resulted in a 1,150.0%
increase to N25.0bn. This created the need for mergers and
acquisitions with the total number of banks declining to 26 from
89 and improved the capacity of banks to finance big-ticket
projects. As a result, the banking sector is bigger, stronger and
resilient, sustaining profitability even during the economic
recession of 2016.
In our view, the Tier based recapitalization is the right step in the
right direction, however, the Commission needs to increase
capital requirements higher than the stipulated amount despite
the calls by some stakeholders to stop the process. We believe
that to create stronger, larger and more resilient entities an equal
measure as done with the banking sector is paramount.
Micro Insurance: Microinsurance Penetration to drive growth of
Sector
Although The much-needed market penetration can be driven by
capturing the informal sector – which NAICOM rightly identified.
In its identification of the informal group as a key determinant in
increasing penetration levels, NAICOM created a guideline for and
issued microinsurance licenses to standalone companies as well
as microinsurance window licenses to existing mainstream
insurance companies. While this is laudable, there is still room for
innovation and creativity in driving the much-needed penetration
and growth in the large informal sector; new distribution channels
such as specialized kiosks can be created to bring insurance a step
closer to those who work in the informal sector. More
importantly, for local players, the need to leverage on mobile
technology to drive penetration is now apparent as is the case of
Bima, an Insurtech company which utilizes mobile technology to
reach over 24million low income customers across Africa, Asia
and Latin America.
Bancassurance and Takaful Insurance
Human The introduction of bancassurance and takaful insurance
has set the stage for newer distribution channels to grow the
sector. With Bancassurance (a partnership between a bank and an
insurance company that allows a bank refer clients to the
insurance company for a fee), the insurer is positioned to grow
revenue through referrals which may not have been captured
through its existing sales channel. Hence, banks will earn a referral
fee for this service which makes the partnership mutually
beneficial to both parties. Furthermore, takaful insurance as
defined by NAICOM, is insurance that incorporates elements of
mutuality and ethical finance in its operations. With takaful
insurance, certain segments of the population can comfortably
participate in the insurance sector hence driving financial
inclusion and overall growth.
The Nigerian Insurance Sector Report
Section Five
Company Profile of Listed Insurance Companies
Page 24 The Nigerian Insurance Sector Report
AIICO Insurance Plc
Repositioning to Soar
Overview
AIICO Insurance Plc (“AIICO” or the “Company”), one of the biggest players in life
insurance segment in Nigeria was established in 1963 as an agency of American Life
Insurance Company (ALICO)- a subsidiary of American International Group. The company
was incorporated, registered and licensed in 1970, and was later listed on the Nigerian
Stock Exchange in 1990.
The company acquired NFI insurance and Lamda Insurance company limited in 2007 as
the companies were asked to consolidate to strengthen capacity. This resulted in the
company re-certifying as both a General Insurance and Life Assurance entity. AIICO has
gone further to diversify its earnings through stakes in AIICO Pension Managers Limited,
Multishield Limited Healthcare, Healthcare International Limited and AIICO Capital
Limited (a wholly owned subsidiary).
Financial Performance
Profitability and Earnings Growth
In its FY:2017 result, AIICO recorded an 18.6%Y-o-Y growth in Gross Premium Written
(GPW) to N32.1bn from N27.1bn in FY:2016, largely driven by growth in 3 of its 4
business segments – Life, Non-life and Health Management. Life insurance was the major
driver of growth (up 24.4% Y-o-Y to N18.5bn from N14.8bn in 2016). AIICO has been
primarily known for its life insurance business; with the contribution of life insurance to
total GPW accounting for was 50.0%,
Similarly, non-life insurance which accounts for 27.2% of GPW gained traction, rising
14.7% from N7.6bn in FY:2016 to N8.7bn in FY:2017. Similarly, AIICO’s health GPW
spiked 165.8% to N1.7bn in FY:2017 from N0.6bn in 2016 as health insurance continued
to enjoy patronage due to the increasing awareness among corporates in Nigeria.
As expected, premium contribution from annuity declined in 2017, as all annuity
requests were put on hold following PENCOM’s directive to insurance companies
operating life annuity business. More so, AIICO’s Gross Premium Earned (GPE) which is
Company Profile of Listed Insurance Companies
BUY
0.71
1.09
53.5%
1.00
0.51
6.9
9.0%
5.2
14.4
2016 2017E 2018F
Underwrit ing Margin (%) 46.6% -23.0% 29.7%
Net Margin (%) 34.1% 6.0% 15.7%
Combined 80.4% 149.2% 101.6%
EPS (N) 1.48 0.19 0.55
P/E (x) 0.4 2.9 2.0
P/BV (x) 0.5 0.3 0.6
ROAE (%) 115.6% 13.6% 32.8%
ROAA (%) 13.0% 1.5% 4.0%
Div Yield (%) 8.5% 9.4% 7.5%
109.3%
17.8%
12.2%
9.41x
Source: Company Filings, NSE
Chart 24: Trading Data - October, 2018 (AIICO)
Rating
Share Price (N)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Source: Company Filings, Afrinvest Research
Chart 25: Shareholding Structure (AIICO)
12.8%
22.0%
65.2%
AIICOBahamasLimited
DF Holdings
Others
Chart 27: AIICO Composition of Business Segment to Total Revenue( 2017)
Source: AIICO, Afrinvest Research
Chart 26: One Year Price Trajectory of NSEASI, NSE-BNK 10 & AIICO
Source: NSE
50
100
150
200
250
Oct-17 Dec-17 Feb-18 Apr-18 Jun-18 Aug-18
NSEASI NSE-INS10 AIICO
Afrinvest West Africa Page 25
Chart 28: AIICO Gross Premium Written Vs PAT (2013-2017) Chart 29: AIICO Gross Premium Earned (GPE) vs PAT (2013-2017)
Source: AIICO, Afrinvest Research
Company Profile of Listed Insurance Companies
the amount of revenue attributed to 2017, fell 29.1% Y-o-Y to
N21.3bn due to an increase in unearned premium. As with other
years, the company’s GPE showed no regular pattern with GPW.
Underwriting costs and Claim Ratio Analysis
Notwithstanding the growth in GPW’s in 2017, AIICO’s claims ratio
increased significantly, up 109.0% to N23.3bn from N14.9bn
recorded the previous year. This spike was majorly driven by what
we suspect to be a one-off payment in the life business as the
company’s claims ratio in the last 5 years averaged 47.2%
excluding 2015, another outlier year. However, for a lack of
management guidance, we could not ascertain how diversified the
company’s life customers were to estimate skewness and risk.
Efficiency and Margin Analysis
AIICO’s expense ratio also increased in line with the growth in
GPW, advancing to 51.6% in 2017 (vs 36.8% in the preceding
year), driven by an uptick in maintenance costs as other cost items
declined Y-o-Y. Although expense ratio increased in 2017, it fell
below the 5-year average of 60.9%, reflecting the company’s
efficient management of operations.
Furthermore, AIICO remained profitable in 2017 although this
declined Y-o-Y; profit before tax (PBT) margin moderated to 14.3%
in 2017 from 39.4% in 2016 following the underwriting loss
recorded in the year while Net margin declined significantly, down
to 6.0% from 34.1% in 2016.
Liquidity, Contingency and Solvency Analysis
The company’s liquidity position, which is measured by using the
quick, cash and current ratios, improved slightly in the year as
quick ratio inched slightly to 9.41x from 8.71x in 2016 while
current ratio increased to 10.0x from 9.9x in the prior year.
However, the company moved to holding less cash, increasing its
investment in short term assets, which resulted in the cash ratio
moderating to 0.7x in 2017 from 1.1x in 2016.
As obligated by NAICOM, AIICO maintained a contingency reserve
in line with guidelines while surpassing the criteria for solvency.
Chart 30: AIICO Historical Performance Analysis 2013 - 2017
Source: Company Filings Afrinvest Research
Page 26 The Nigerian Insurance Sector Report
Company Profile of Listed Insurance Companies
With a solvency margin of 144.0% in 2017, a 2.3ppt improvement
from the previous year, AIICO remained solvent i.e. in the case
100.0% of total risk insured crystallizes, admissible assets cover
total risks 1.43x times.
Profitability Outlook
In the coming year, we are optimistic about AIICO’s continuous
profitability. We expect to see a rise in the contribution of AIICO’s
annuity business in FY:2018 following the renewal of its license by
the National Pensions Commission (PENCOM) and NAICOM. This
coupled with the company’s new approval to underwrite
agricultural risks is expected to translate into increased
profitability if better risk management techniques are put in place
to reduce claims ratio. Furthermore, plans to raise additional
capital are underway, hence, we anticipate an increase in GPW in
2018 if the capital raise holds before year end.
Valuation and Outlook
Against the backdrop of our positive outlook for the
broader sector, we believe AIICO is well positioned to reap
the benefits of industry growth prospects. We believe the
company will grow at a sustainable rate of 3.0% based on
the outlook of the economy as well as the sector. In valuing
the company, we applied the use of absolute – Gordon
Growth (NAV approach), Residual Income Dividend
Discount Model (DDM) & Free Cash Flow Equity Method –
and relative valuation methodologies and arrived at a
target price of N1.09 (53.5% upside against current price of
N0.71 (31/10/2018).
Chart 31: AIICO Revenue and PAT Forecast Chart 32: AIICO Valuation Assumptions
Source: AIICO, Damodaran, Afrinvest Research
Our blended target price leaned towards DDM as we
anticipate stable dividend payouts in the forecast years as
the company’s earnings capacity improves due to the
impact of a rise in capital. While we are optimistic of
growth in the forecast years, possible downside risks to our
projections in the near term are externally driven - polity
instability after the general elections and a revenue shock
to the macroeconomy will adversely affect GPW growth
due to the relationship between the GPW and
macroeconomic environment. Nonetheless, we
recommend a “BUY” rating on the stock
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 0.7 0.7 0.7 0.8 0.8
Cost of Equity (COE) 21.8% 23.2% 23.1% 23.6% 24.4%
Return on Equity (ROE) 19.6% 18.2% 20.4% 19.3% 19.3%
Sustainable Growth Rate 3.0% 3.0% 3.0% 3.0% 3.0%
Weights Prices
Gordon Growth (NAV Approach) 5.0% NGN 2.00
Dividend Discount Model (DDM) 25.0% NGN 0.46
FCFE Method 5.0% NGN 4.30
Residual Income 0.0% NGN 1.77
Relative Valuation 65.0% NGN 1.02
Blended Target Price (NGN) 1.09
Upside/(Downside) 55.9%
Blended Valuation
Afrinvest West Africa Page 27
Company Profile of Listed Insurance Companies
AIICO Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOME STATEMENT
Gross Premium Earned/Gross Premium Written 98.79% 62.20% 31.63% 110.96% 66.33% 73.98% 69.02% 70.38% 78.13% 71.57%
Solvency Ratio 1.23x 1.37x 2.12x 3.08x 5.93x 5.99x 5.68x 4.65x 4.00x 4.34x
OPEX Margin 29.44% 29.52% 63.32% 25.92% 37.03% 36.95% 37.39% 37.49% 37.23% 37.57%
Net margin -1.83% 19.93% 17.72% 38.36% 7.33% 19.99% 32.47% 30.16% 26.69% 26.61%
Underwriting Margin 14.98% 38.36% -81.48% 46.64% -22.98% 29.65% 37.98% 35.57% 38.27% 35.89%
Statutory Deposit/Paid-Up Capital 14.43% 15.30% 15.30% 15.30% 15.30% 16.36% 17.24% 17.86% 18.61% 19.33%
Investment Assets/Total Assets 69.54% 82.04% 85.32% 84.60% 86.51% 84.94% 85.10% 85.52% 85.19% 85.27%
Investment Properties/Total Assets 2.83% 2.06% 1.39% 1.28% 0.63% 0.63% 0.63% 0.63% 0.63% 0.63%
Loans to Policyholder/Total Asset 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Investment in Associate/Total Assets 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Statutory Deposit/Total Asset 1.19% 0.91% 0.66% 0.68% 0.57% 0.57% 0.57% 0.57% 0.57% 0.57%
Cash&Cash equivalent/Total Asset 20.29% 13.63% 10.55% 9.67% 5.63% 8.64% 8.00% 7.43% 8.03% 7.82%
Short term Investments/Total Asset 45.24% 65.43% 72.72% 72.97% 79.68% 75.10% 75.89% 76.88% 75.96% 76.24%
Yield on Investment Assets 10.26% 8.49% 9.41% 11.43% 12.15% 10.87% 11.48% 11.50% 11.29% 11.42%
BALANCE SHEET
Liquidity Ratios
Current Ratio 9.05x 9.45x 13.97x 9.85x 10.07x 12.05x 11.23x 11.68x 11.51x 11.57x
Quick Ratio 6.25x 7.83x 12.21x 8.71x 9.41x 10.81x 10.17x 10.65x 10.41x 10.50x
Cash ratio 2.80x 1.62x 1.76x 1.14x 0.66x 1.24x 1.07x 1.03x 1.10x 1.07x
Underwriting Ratio
Claims Ratio 43.69% 50.02% 125.31% 49.75% 109.31% 58.83% 50.57% 52.29% 52.86% 53.64%
Expense Ratio 73.31% 42.58% 98.66% 36.78% 51.61% 50.81% 53.02% 52.68% 50.48% 52.28%
Opex Margin 29.44% 29.52% 63.32% 25.92% 37.03% 36.95% 37.39% 37.49% 37.23% 37.57%
Combined Ratio 102.40% 86.06% 201.13% 80.39% 149.18% 123.83% 128.12% 136.53% 123.61% 132.25%
Re-Insurance Rate 21.82% 22.49% 35.18% 11.13% 17.80% 21.68% 21.66% 21.49% 18.75% 20.28%
Reinsurance Recovery Rate 14.6% 6.5% 22.8% 6.1% 11.7% 12.37% 11.93% 13.00% 11.04% 12.02%
Other Income Margin 14.05% 20.35% 134.26% 26.66% 71.37% 40.25% 47.48% 47.46% 41.05% 45.74%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.55x 0.36x 0.13x 0.39x 0.23x 0.25x 0.25x 0.25x 0.25x 0.25x
Cost to Income(Opex/Net Operating Income) 114.27% 58.94% 77.75% 38.05% 70.56% 58.21% 48.41% 49.74% 51.60% 50.53%
PBT margin -3.75% 20.43% 17.28% 39.41% 14.28% 25.34% 38.25% 36.60% 33.71% 35.41%
PAT Margin -1.43% 15.45% 11.48% 34.09% 6.03% 15.66% 25.44% 23.68% 21.69% 21.21%
ROAE -3.07% 29.75% 11.51% 115.61% 13.59% 19.73% 18.20% 21.29% 17.68% 19.12%
ROAA -0.87% 6.44% 1.73% 12.99% 1.51% 5.67% 5.47% 6.41% 4.77% 5.58%
ROE -3.23% 28.35% 12.76% 122.75% 12.17% 19.61% 18.20% 20.38% 19.29% 19.34%
ROA -0.8% 5.5% 1.5% 13.2% 1.4% 5.41% 5.37% 6.35% 4.63% 5.44%
Page 28 The Nigerian Insurance Sector Report
AXA MANSARD Insurance Plc
Toast of Investors
Company Overview
Mansard insurance Plc (“Mansard” or “the Company’) is a member of the AXA Group, the
largest insurance company in the world. In 1989, what is known today as Mansard was
born out of Heritage Assurance Company Limited. However, in 2002, Guaranty Trust Bank
Plc (GTBank) acquired controlling interest in the entity, changing the name to Guaranty
Trust Assurance (GTAssurance). The entity further metamorphosed into Manasard
Insurance Plc 10 years later, following a directive by the CBN mandating all banks to divest
from all non-banking activities or operate a holding structure. As a result, GTassurance
was acquired by a consortium of investors and rebranded to Mansard.
The entity continued to evolve and was acquired by AXA in 2014 and today, Axa Mansard
has grown to be a leading provider of both life and non-life insurance products in the
Nigerian market. The company has continued to enjoy positive sentiments in the capital
market, which has contributed to the company’s equity being one of the best priced in
the sector on the Nigerian Stock Exchange.
While providing insurance services, AXA mansard also offers asset management, health
management and pension fund administration services through its subsidiaries AXA
Mansard Investments Limited, AXA Mansard Health Limited and AXA Mansard Pensions
Limited.
Financial Performance
Profitability and Earnings Growth
In line with the improvement in the economy, Mansard’s FY:2017 result came in positive,
with Gross Premium Written rising 29.5% to N26.8bn from N20.7bn in 2016. This was
largely bolstered by the growth in its non-life business - the key driver of premium growth
- which inched 22.0% higher to N17.0bn. Mansard continues to remain a top player in non
-life insurance, ranking 4th in GPW by NAICOM’s grading in 2016. Furthermore, total
premium written in Health Management spiked 83.9% in 2017 to N6.2bn from 3.4bn in
2016 in line with industry trend.
Company Profile of Listed Insurance Companies
Chart 36: MANSARD - Composition of Business Segment
Source: Mansard, Afrinvest Research
ACCUMULATE
1.90
2.18
14.7%
2.94
1.80
10.5
21.7%
2.0
5.5
2016 2017E 2018F
Underwrit ing Margin (%) 27.3% 18.7% 24.4%
Net Margin (%) 12.7% 10.2% 12.6%
Combined Ratio 71.1% 71.8% 67.9%
EPS (N) 0.20 0.19 0.26
P/E (x) 8.4 10.1 8.4
P/BV (x) 1.0 1.0 0.9
ROAE (%) 15.1% 14.2% 16.5%
ROAA (%) 5.0% 4.4% 5.3%
Div Yield (%) 1.2% 2.6% 3.2%
60.5%
47.4%
10.3%
2.47x
Source: Company Filings, NSE
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Chart 33: Trading Data - October, 2018 (M ANSARD)
Rating
Share Price (N)
Source: Company Filings, Afrinvest Research
Chart 34: Shareholding Structure (MANSARD)
76.5%
5.3%
18.3%
Assur Afr icaHoldingsLimited
StanbicNominees
Others
Chart 35: One Year Price Trajectory of NSEASI, NSE-BNK 10 & MANSARD
Source: NSE
50
100
150
200
Oct-
17
No
v-1
7
Dec-1
7
Jan
-18
Fe
b-1
8
Ma
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NSEASI NSE-INS10 MANSARD
Afrinvest West Africa Page 29
Furthermore, Mansard’s life insurance segment was ranked as the
7th largest by revenue according to NAICOM’s 2016 ranking as it
inched 5.2% higher to N3.3bn in 2017 from N3.2bn in 2016.
Similar to industry trend, Mansard’s annuity maintained a decline
due to the suspension of annuity license by PENCOM in 2016.
However, we expect a turnaround in the firm’s annuity growth in
subsequent years due to the subsequent renewal of the license by
PENCOM in August 2017. In FY:2017, Mansard earned 97.7% of its
revenue as it has historically posted in the last 5 years (average of
90.0%)
Underwriting costs and Claim Ratio Analysis
Underwriting costs as a percentage of GPW increased marginally,
by 0.9ppts Y-o-Y to 10.9% in 2017 from. We are particularly
impressed with the firm’s ability to keep costs at bay, seeing that
GPW grew at a pace faster than the costs used to drive this
growth (GPW increased 29.5% in 2017). While acquisition costs
drove the increase in underwriting costs, maintenance costs
declined to 6.7% in 2017 from 10.4% recorded in 2016.
Company Profile of Listed Insurance Companies
Nonetheless, claims ratio advanced by 15.2ppts to 60.5% in 2017,
the highest it has recorded since 2008. We observed a steady rise
in claims from 2015 despite the growth in reinsurance and
reinsurance recovery rate, which may indicate that Mansard may
be taking on more uncalculated risks.
Efficiency and Margin Analysis
Mansard remained largely efficient in FY:2017 with expense ratio
settling at 35.4% from 38.1% in FY:2016. Combined ratio increased
marginally to 71.8% from 71.1% due to the uptick in claims, hence
- profit margins (underwriting profitability, PBT margin and net
margin) declined. Underwriting margin fell 8.6ppts to 18.7% from
27.3% in 2016 while net margin fell 2.5ppt to 10.2% from 12.7% in
2016 on the back of higher tax incurred and a decline in other
income margin.
Investment Assets and Yield Analysis
We In line with trend, MANSARD increased its proportion of short-
term assets to total assets up 1.0ppt to 39.0% in 2017.
Surprisingly, the company deployed more funds to cash and cash
Chart 39: MANSARD Historical Performance 2013 - 2017
Source: Mansard, Afrinvest Research
Chart 37: MANSARD - Composition of Business Segment Chart 38: MANSARD GPE TO PAT 2013 - 2015
Source: Mansard, Afrinvest Research
Page 30 The Nigerian Insurance Sector Report
equivalents as it rose 1.6ppts to 8.0% in 2017 from 6.4% in 2016.
Nonetheless, there was an overall increase in interest yielding
assets Y-o-Y – investment assets to total assets grew by 1.8% to
74.7% in 2017 while yield on investments grew to 10.3% from
9.6% in 2016.
Liquidity, Contingency and Solvency Analysis
In compliance with Insurance Act 2003, the company continued to
meet its statutory obligation to credit its contingency reserve.
However, the company’s liquidity levels have remained a source
for concern, as Mansard’s liquidity using the quick current and
cash ratios show a worrisome position compared to industry
average. In 2017, the company’s quick ratio remained flat as with
other years; 2.5x against industry average of 7.3x. while
Mansard’s current ratio settled at 2.9x – a slight improvement
from 2016 levels (2.5x).
Mansard passed the solvency test, in line with NAICOM’s
directive, as its solvency margin settled at 233.9% in 2017. This is
positive for the company, even though the solvency test takes into
consideration fixed assets that may not be easily disposable.
Profitability Outlook
In the past 5 years, MANSARD has maintained double digit growth
in GPW save for 2014 when GPW declined. We believe the
company has continued to leverage on its strong brand presence
to support growth over the years. Based on GPW growth in the
year, we project a 15.0% increase Y-o-Y for FY:2018. In the same
vein, we maintain a positive outlook for profitability, although we
opine that net margin can improve with better cost reduction
techniques.
Valuation and Outlook
In line with trend, we employed both absolute and relative
valuation methodologies in arriving at a blended target price for
MANSARD. We blended Gordon’s Growth, Dividend Discount
Model, Free Cash Flow to Equity method and Relative valuation
methodologies leaning to relative valuation and DDM. Due to the
firm’s international affiliation and strong financial track record,
Company Profile of Listed Insurance Companies
Chart 40: MANSARD Forecast GPW, GPE and PAT
Source: Company Fillings, Afrinvest Research
Chart 41: MANSARD Valuation Assumptions
Source: Damodaran, Afrinvest Research
MANSARD is positioned to receive significant interest from
both foreign and domestic investors, hence we assigned a
weighting of 40.0% to relative valuation. In the same vein,
the company has consistently paid out dividends to inves-
tors, with an average payout ratio of 32.8% in the last 5
years. As a result, we project that MANSARD will consist-
ently maintain a dividend payout in the forecast period
(average of 26.5%), hence, we allocated a 25.0% weighting
on DDM. We arrived at a target price of N2.18 against the
current price of N1.90 ( 31/10/2018), hence we recom-
mend an “ACCUMULATE” rating on the stock as it pre-
sents an upside potential of 14.7%.
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 1.2 1.2 1.2 1.1 1.1
Cost of Equity (COE) 27.9% 21.3% 21.8% 22.2% 22.6%
Return on Equity (ROE) 15.1% 19.0% 21.2% 17.2% 17.1%
Sustainable Growth Rate 3.0% 3.0% 3.0% 3.0% 3.0%
Weights Prices
Gordon Growth (NAV Approach) 20.0% NGN 1.63
Dividend Discount Model (DDM) 25.0% NGN 0.52
FCFE Method 20.0% NGN 2.59
Residual Income 0.0% NGN 1.75
Relative Valuation 35.0% NGN 3.45
Blended Target Price (NGN) 2.18
Upside/(Downside) 14.7%
Blended Valuation
Afrinvest West Africa Page 31
Company Profile of Listed Insurance Companies
MANSARD Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOME STATEMENT
Gross Premium Earned/Gross Premium Written 92.09% 86.14% 101.91% 99.82% 97.66% 95.53% 96.21% 98.23% 97.49% 97.02%
Solvency Ratio 4.15x 3.41x 3.31x 2.73x 2.34x 2.38x 2.33x 2.19x 2.33x 2.42x
Solvency Margin 415.31% 340.68% 331.17% 273.49% 233.86% 238.38% 232.57% 219.37% 233.34% 241.63%
OPEX Margin 35.87% 29.45% 30.44% 28.12% 24.20% 24.37% 24.37% 24.23% 24.34% 24.41%
Underwriting Margin 32.51% 35.95% 30.12% 27.33% 18.74% 24.41% 30.26% 29.43% 27.96% 29.26%
Statutory Deposit/Paid-Up Capital 10.00% 9.52% 9.52% 9.52% 9.52% 10.37% 11.46% 12.19% 14.02% 15.51%
Investment Assets/Total Assets 83.35% 81.02% 78.78% 72.93% 74.68% 76.67% 75.67% 76.17% 75.92% 76.05%
Investment Properties/Total Assets 24.20% 18.52% 17.98% 21.87% 21.14% 21.14% 21.14% 21.14% 21.14% 21.14%
Loans to Policyholder/Total Asset 0.22% 0.22% 0.36% 5.78% 5.77% 5.77% 5.77% 5.77% 5.77% 5.77%
Statutory Deposit/Total Asset 1.38% 1.11% 0.98% 0.91% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Cash&Cash equivalent/Total Asset 17.07% 18.25% 12.62% 6.41% 8.01% 8.61% 7.85% 8.24% 8.19% 8.11%
Short term Investments/Total Asset 40.48% 42.92% 46.85% 37.96% 39.01% 40.39% 40.16% 40.27% 40.07% 40.27%
Yield on Investment Assets 6.25% 7.00% 8.79% 9.57% 10.30% 10.30% 10.06% 10.22% 10.19% 10.15%
BALANCE SHEET
Liquidity Ratios
Current Ratio 5.41x 5.31x 7.70x 2.55x 2.94x 3.08x 2.62x 2.67x 2.83x 2.85x
Quick Ratio 3.82x 3.75x 6.10x 2.20x 2.47x 2.57x 2.22x 2.24x 2.37x 2.40x
Cash ratio 1.59x 1.57x 1.60x 0.36x 0.47x 0.51x 0.40x 0.43x 0.45x 0.45x
Underwriting Ratio
Claims Ratio 37.58% 31.58% 42.93% 45.29% 60.50% 49.57% 45.93% 47.75% 47.75% 47.14%
Expense Ratio 48.72% 40.91% 41.36% 38.14% 35.41% 38.09% 37.85% 36.99% 37.70% 37.59%
Opex Margin 35.87% 29.45% 30.44% 28.12% 24.20% 24.37% 24.37% 24.23% 24.34% 24.41%
Combined Ratio 76.92% 68.35% 73.46% 71.10% 71.82% 67.92% 65.40% 65.70% 66.40% 65.91%
Re-Insurance Rate 39.79% 39.59% 41.36% 47.05% 47.37% 47.37% 47.26% 47.33% 47.32% 47.31%
Reinsurance Recovery Rate 9.4% 4.1% 10.8% 12.3% 24.1% 19.74% 18.37% 19.04% 19.05% 18.82%
Other Income Margin 29.71% 24.04% 27.22% 30.91% 28.16% 28.05% 26.79% 26.07% 27.06% 27.74%
interest income margin 15.03% 16.99% 20.99% 18.55% 19.54% 19.42% 18.16% 17.45% 18.44% 19.12%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.35x 0.33x 0.33x 0.38x 0.39x 0.41x 0.42x 0.45x 0.42x 0.40x
Cost to Income(Opex/Net Operating Income) 72.79% 64.37% 67.82% 61.96% 63.64% 59.60% 57.00% 58.28% 58.24% 56.55%
PBT margin 11.32% 13.45% 11.98% 15.12% 12.34% 15.15% 16.99% 15.94% 16.08% 17.35%
PAT Margin 12.14% 10.80% 9.84% 12.74% 10.21% 12.59% 14.16% 13.25% 13.37% 14.44%
ROAE 10.71% 10.98% 10.19% 15.13% 14.19% 16.54% 19.14% 20.63% 19.76% 18.34%
ROAA 4.46% 3.99% 3.46% 4.96% 4.40% 5.33% 6.23% 6.09% 6.00% 6.13%
ROE 10.65% 10.64% 9.55% 15.13% 13.19% 15.10% 18.95% 21.20% 17.23% 17.06%
ROA 4.2% 3.6% 3.2% 4.8% 4.0% 5.12% 5.93% 5.91% 5.61% 5.83%
Page 32 The Nigerian Insurance Sector Report
Continental Re-Insurance
Waxing Stronger as the Re-Insurer of Choice
Company Overview
Continental Reinsurance (“Continental Re” or “the Company”) – the giant of Nigeria’s
reinsurance was incorporated in 1985 as a private reinsurance company. The company
grew from operating as a non- life reinsurer to a composite reinsurer in 1990 as demand
increased. Upon recapitalization in 2007 (company increased its capital base to N10.0bn
from N2.0bn) the company became a listed entity on the Nigerian Stock Exchange. It has
continued to expand its tentacles across African markets, opening regional offices in
Cameroon, Cote d’ivoire and Tunisia, while maintaining subsidiaries in Kenya, Botswana
and South Africa.
In 2016 according to industry analysis, Continental-re stands as the major player in the
reinsurance space, accounting for c.97.0% of the market. The company has carved a
niche for itself in Nigeria’s motor reinsurance market, as the bulk of premiums are
realized from motor reinsurance.
Financial Performance
Profitability and Earnings Growth
Continental reinsurance – the giant of Nigeria’s reinsurance has maintained a steady
growth through the years. In 2017 GPW jumped 32.4% to N29.6bn from N22.4bn in 2016
following an expansion in the insurance sector. Although the average re-insurance rate
remained rather stable in 2017, the value of premiums improved, boosting revenue of
the re-insurer. The company has witnessed tremendous growth in the past three years -
growing at an average rate of 22.7%.
Underwriting Costs and Claim Ratio Analysis
Underwriting expense to GPW fell to 25.5% in the reported year, from 33.7% in 2016,
largely due to the jump in GPW in 2017. Unsurprisingly, claims ratio also increased in line
with industry trend to 54.2% from 46.2% in 2016. From industry analysis, continental
reinsurance underwrites c.97.0% of risks insured in the Nigerian market, hence as
insurance companies witnessed an uptick in claims in 2017, continental re followed suit.
Company Profile of Listed Insurance Companies
Chart 45: CONTINENTAL RE GPW vs PAT (2013 -2017)
Source: Company Fillings , Afrinvest Research
BUY
1.48
1.93
30.4%
1.94
1.33
13.4
41.4%
15.4
42.6
2016 2017E 2018F
Underwrit ing Margin (%) 13.3% 18.6% 21.2%
Net Margin (%) 13.3% 18.6% 21.2%
Combined Ratio 87.2% 85.8% 83.4%
EPS (N) 0.30 0.24 0.32
P/E (x) 3.5 5.2 6.1
P/BV (x) 0.6 0.8 0.9
ROAE (%) 19.0% 13.1% 15.7%
ROAA (%) 8.9% 5.9% 7.3%
Div Yield (%) 12.1% 10.0% 9.6%
54.2%
12.4%
7.8%
7.39x
Source: Company Filings, NSE
Chart 42: Trading Data - October, 2018 (CONTINENTAL RE)
Rating
Share Price (N)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Source: Company Filings, Afrinvest Research
Chart 43: Shareholding Structure (CONTINSURE)
58.5%
6.4%
35.2%
C-Re Holding
STANBICNominees
Others
Chart 44: One Year Price Trajectory of NSEASI, NSE-INS 10 & CONTINSU
Source: NSE
50
100
150
200
Oct-
17
No
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Dec-1
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NSEASI NSE-INS10 CONTINSU
Afrinvest West Africa Page 33
Chart 46: CONTINENTAL RE GPE vs GPE (2013-2017)
Source: Company Fillings , Afrinvest Research
Efficiency and Margin Analysis
As at FY:2017, the company’s expense ratio increased slightly to
45.5%; 1.5ppt higher than 44.0% in 2016 given increased levels of
admin and personnel cost. On the flipside, the company’s
combined ratio declined (down 1.3ppts to 85.8% in 2017) hence,
the company remained profitable in FY:2017.
Continental Re’s risk management skill paid off in 2017, as
underwriting margin improved in the year despite the uptick in
claims. Underwriting margin climbed 5.3ppt to 18.9% in 2017,
while revenue from investments surprisingly moderated despite
the favorable yield environment in 2017. Other income margin
(which measures investment income to premium earned) declined
to 11.8% from 19.2% in 2016 and resulted in a contraction in net
margin as PBT and PAT moderated to N3.5bn and N2.5bn in 2017
from N4.6bn and N3.1bn respectively in 2016.
Investment Assets and Yield Analysis
Continental re investments to total assets surprisingly declined Y-
o-Y as investment in interest bearing asset declined to 58.7% in
2017 from 62.9% the prior year. A closer look at total investment
assets shows a decline across all constituents – cash and cash
equivalent, short term investments, statutory deposits and
investment properties. However, yield on investment assets grew
to 7.8% in 2017 from 5.9% in 2016.
Liquidity, Contingency and Solvency Analysis
As with other years, the company remained solvent at 210.0%
solvency margin and in the last 5 years its solvency margin
averaged 240.5%, implying a relatively strong balance sheet
capable of withstanding 100.0% risk crystallization 2.1x times. In
the same vein, Continental re met regulatory requirement to set
Company Profile of Listed Insurance Companies
Chart 48: CONTINENTAL RE Historical Performance (2013 -2017)
Source: CONTINENTAL RE, Afrinvest Research
Chart 47: CONTINENTAL Forecast GPW, GPE and PAT
Source: Afrinvest Research
Page 34 The Nigerian Insurance Sector Report
aside a certain percentage of its earnings in its contingency
reserve in 2017.
Furthermore, the company showed a strong liquidity position,
with quick ratio at 5.7x compared to industry average of 7.3x
reflecting its ability to meet short term liabilities in due time. Our
7.3x industry average includes AIICO, an outlier with a quick ratio
of 10.0x. Without AIICO, industry average settled at 5.4x,
supporting our earlier view of Continental Re’s strong liquidity
position. Employing other ratios; current and cash, positions
improved to 8.3x and 3.1x in 2017 from 5.7x and 2.6x in 2016
respectively.
Profitability Outlook
Based on the structure of the reinsurance market, reinsurance
GPW is shared between Continental re and foreign firms. In our
forecast years, we expect this structure to be sustained
(controlled by Continental Re and foreign players) in the first
three years and thin out towards the latter period. Nonetheless,
we believe the company will remain a major player in the near to
medium term.
As a result, we project earnings to sustain a double-digit growth –
15.0% in FY:2018 and moderate in later years as new entrants into
the reinsurance market compete for market share. We expect
profitability to be maintained in FY:2018 and other forecast years
on the back of controlled cost levels (5-year cost to income ratio
average settled at 50.9%) and sustained risk management
techniques ( 5-year claims average stands at 46.4%).
Valuation and Outlook
As with other companies, we adopted a blend of valuation
methodologies in arriving at our 12-month target price. We
Company Profile of Listed Insurance Companies
Chart 49: CONTINENTAL RE Valuation Assumptions
Source: CONTINENTAL RE, Afrinvest Research
employed the use of Net Asset Valuation using
Gordon’s Growth Model, Dividend Discount Model
(DDM), Residual Income Model (RIM) and Free Cash
Flow to Equity method while assuming a terminal
growth rate of 5.0%. We also took into consideration
the relative valuation of the stock and used a blend of
P/E, P/BV and P/FCF multiples to estimate target price.
Our methodology gives a harmonized target price of
N1.93 against the close price of N1.48 (31/10/2018),
presenting an upside of 30.4%. Our recommendation is
therefore a “BUY”. Our BUY recommendation on
Continental re is for the long term although we expect
the counter to continue to enjoy a positive sentiment in
the short to medium term.
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 0.6 0.7 0.7 0.7 0.8
Cost of Equity (COE) 21.3% 22.7% 22.7% 23.3% 24.1%
Return on Equity (ROE) 14.8% 16.2% 15.0% 19.1% 17.5%
Sustainable Growth Rate 3.0% 3.0% 3.0% 3.0% 3.0%
Weights Prices
Gordon Growth (NAV Approach) 30.0% NGN 1.80
Dividend Discount Model (DDM) 30.0% NGN 1.33
FCFE Method 20.0% NGN 1.87
Residual Income 0.0% NGN 1.91
Relative Valuation 20.0% NGN 2.36
Blended Target Price (NGN) 1.79
Upside/(Downside) 20.7%
Blended Valuation
Afrinvest West Africa Page 35
Company Profile of Listed Insurance Companies
Continental Re 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOME STATEMENT
Gross Premium Earned/Gross Premium Written 100.00% 100.00% 104.77% 112.97% 89.01% 101.35% 101.11% 97.16% 99.87% 99.38%
Solvency Ratio 2.43x 2.32x 2.48x 2.70x 2.10x 1.96x 1.82x 1.77x 1.70x 1.72x
OPEX Margin 12.72% 14.55% 13.90% 14.14% 16.82% 16.82% 16.82% 16.82% 16.82% 16.82%
Net margin 11.66% 5.30% 10.36% 12.32% 9.35% 9.20% 9.04% 7.99% 9.00% 8.52%
Underwriting Margin 21.38% 19.47% 19.03% 13.28% 18.58% 21.15% 21.81% 19.00% 20.80% 19.69%
Statutory Deposit/Paid-Up Capital 19.28% 19.28% 19.28% 19.28% 19.28% 20.80% 22.67% 24.57% 25.66% 27.61%
Investment Assets/Total Assets 57.84% 62.10% 64.26% 62.88% 58.71% 60.57% 63.95% 68.27% 72.17% 75.95%
Investment Properties/Total Assets 5.92% 10.38% 9.05% 7.13% 6.62% 6.62% 6.62% 6.62% 6.62% 6.62%
Statutory Deposit/Total Asset 3.39% 3.55% 3.37% 2.48% 2.32% 2.32% 2.32% 2.32% 2.32% 2.32%
Cash&Cash equivalent/Total Asset 19.24% 17.17% 25.96% 23.22% 21.05% 23.40% 24.06% 25.98% 28.00% 29.44%
Short term Investments/Total Asset 29.29% 31.01% 25.88% 30.05% 28.72% 28.23% 30.95% 33.35% 35.23% 37.57%
Yield on Investment Assets 5.87% 5.37% 5.88% 5.93% 7.81% 7.81% 7.18% 7.60% 7.53% 7.44%
BALANCE SHEET
Liquidity Ratios
Current Ratio 11.01x 8.48x 8.39x 5.71x 8.33x 11.36x 12.92x 11.31x 11.42x 11.25x
Quick Ratio 9.17x 7.30x 9.58x 5.92x 7.39x 11.76x 15.68x 14.04x 15.49x 15.96x
Cash ratio 3.64x 2.60x 4.80x 2.58x 3.12x 5.33x 6.86x 6.15x 6.86x 7.01x
Underwriting Ratio
Claims Ratio -42.40% -45.62% -43.73% -46.22% -54.15% -46.10% -46.91% -47.18% -47.94% -48.29%
Expense Ratio 38.49% 40.36% 40.53% 43.97% 45.49% 44.67% 45.34% 46.74% 44.77% 45.51%
Opex Margin 12.72% 14.55% 13.90% 14.14% 16.82% 16.82% 16.82% 16.82% 16.82% 16.82%
Combined Ratio 80.13% 82.95% 82.85% 87.15% 85.82% 83.37% 82.50% 85.23% 83.31% 84.62%
Re-Insurance Rate 11.21% 12.13% 12.01% 13.71% 12.42% 12.30% 12.51% 12.59% 12.71% 12.51%
Reinsurance Recovery Rate 0.8% 3.0% 1.4% 3.0% 13.8% 4.41% 5.14% 5.56% 6.40% 7.07%
Other Income Margin 6.20% 4.91% 8.96% 19.24% 11.76% 9.11% 8.63% 9.41% 9.25% 9.62%
Interest Income 6.66% 5.82% 5.42% 5.93% 7.49% 6.20% 5.71% 6.49% 6.33% 6.71%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.51x 0.57x 0.70x 0.63x 0.61x 0.25x 0.25x 0.25x 0.25x 0.25x
Cost to Income(Opex/Net Operating Income) 46.14% 59.68% 49.65% 43.48% 55.44% 55.56% 55.26% 59.20% 55.96% 57.37%
PBT margin 14.85% 9.83% 14.10% 18.38% 13.52% 13.45% 13.62% 11.59% 13.23% 12.50%
PAT Margin 11.66% 5.30% 10.36% 12.32% 9.35% 9.20% 9.04% 7.99% 9.00% 8.52%
ROAE 12.74% 6.09% 15.20% 19.01% 13.06% 15.74% 16.45% 15.21% 19.01% 18.26%
ROAA 7.13% 2.97% 7.40% 8.92% 5.92% 7.29% 7.58% 6.64% 7.89% 7.44%
ROE 12.27% 6.20% 14.88% 16.95% 12.71% 14.79% 16.22% 14.99% 19.08% 17.52%
ROA 5.9% 3.0% 7.2% 7.7% 5.7% 7.02% 7.27% 6.38% 7.73% 7.18%
Page 36 The Nigerian Insurance Sector Report
Custodian Investment Plc
The Strong and Bold
Company Overview
Custodian Investment Plc (“Custodian” or “the Company”) formerly Custodian and
Allied Plc is a financial services group comprising of Custodian and Allied
Insurance, Custodian Life Assurance, Custodian Trustees and Crusader Sterling
Pensions. Custodian and Allied Insurance provides insurance across Auto, travel,
Household, Personal and other general insurance. As at 2016, the company ranked
3rd in market share as Gross Premium income hit N16.2bn. On the other hand,
Custodian life assurance, formerly Crusader life insurance limited, started off as a
foreign office of Crusader insurance company UK. It became a public company and
was listed on the Nigerian Stock exchange in 1990. Upon the merger between
Crusader Nigeria and Custodian and Allied insurance, the company was rebranded
to Custodian Life Assurance and has grown to become the 4th largest life
assurance company by market share according to NAICOM’s 2016 classification.
Financial Performance
Profitability and Earnings Growth
Custodian’s FY:2017 result came in positive as has been the case in the last 5 years.
Gross revenue grew 11.7% to N43.1bn from N38.6bn in 2016 due to upticks in its
key revenue lines - gross premium earned (GPE), investment income and fees &
commission income which cumulatively account for 96.9% of total revenue all
increased Y-o-Y. As was the case with all insurance companies we cover,
Custodian’s GPI – a combination of life and non-life insurance, expanded by 12.8%
Y-o-Y to N32.0bn from N28.4bn in 2016.
In the same vein, fees and commission income from its Pension and Trustees
subsidiary improved, inching 28.9% higher to N3.4bn in FY:2017 from N2.7bn in
FY:2016. Investment income, a revenue line from all the business segments also
expanded, up 48.2% to N6.3bn in FY:2017 from N4.2bn recorded the prior year
following the favourable interest rate environment in 2017.
Company Profile of Listed Insurance Companies
Chart 53: CUSTODIAN Composition of Gross Revenue
Source: Company Fillings , Afrinvest Research
ACCUMULATE
5.00
6.09
21.8%
6.89
3.71
5.9
63.5%
29.4
81.7
2016 2017E 2018F
Net Margin (%) 13.8% 17.0% 17.5%
Cost to Income 80.9% 80.1% 79.5%
EPS (N) 0.88 1.31 1.34
P/E (x) 4.4 3.0 4.5
P/BV (x) 0.8 0.6 0.9
ROAE (%) 19.5% 22.6% 22.0%
ROAA (%) 8.5% 9.8% 9.7%
Div Yield (%) 5.4% 7.2% 5.1%
48.8%
41.2%
9.4%
10.36x
Source: Company Filings, NSE
Chart 50: Trading Data - October, 2018 (CUSTODIAN)
Rating
Share Price (N)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Source: Company Filings, Afrinvest Research
Chart 51: Shareholding Structure (CUSTODIAN)
15.7%
9.1%
5.9%
12.2%69.3%
MikeadeInvestmentsLimited
StanbicNominees
Abraaj NigeriaAdvisersLimited
GratitudeCapitalLimited
Others
Chart 52: One Year Price Trajectory of NSEASI, NSE-INS 10 & CUSTODIAN
Source: NSE
60
110
160
Oct-
17
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v-1
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Dec-1
7
Jan
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b-1
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Jun
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NSEASI NSE-INS10 CUSTODIAN
Afrinvest West Africa Page 37
Profitability and Earnings Growth - Insurance
Since the insurance business contributes c.70.0% to
CUSTODIAN’s total revenue, we went further to analyse the
business segment. In FY:2017, gross premium earned grew
12.8% to N40.0bn from N28.4bn in 2016 bolstered by growth
in both life and non-life insurance. Non-life insurance, which
currently accounts for 61.4% of GPI increased 21.2% to
N19.7bn from N16.2bn in FY:2016 on the back of th
improved macroeconomic conditions in 2017, while life
insurance expanded by 1.6% to N12.3bn from N12.1bn in
FY:2016. In the last 3 years, life insurance contribution to
total GPI has improved significantly, growing at an average
rate of 67.2% through the period, to settle contribution to
GPI at 38.6% relative to 12.3% recorded in 2014, and is
ranked 4th largest by market share according to NAICOM in
2016.
Underwriting Costs and Claim Ratio Analysis
In line with trend, underwriting expenses increased by 16.0%
to N2.9bn in FY:2017 from N2.5bn in FY:2016 largely driven
by the growth in acquisition costs. However, claims ratio
moderated slightly in the year, 0.9ppts down to 48.8%. The
company’s claims ratio has remained low over the last 5
years (average of c.38.0%) showing its relatively strong risk
management procedures.
Efficiency and Margin Analysis
Similar to historical, the group maintained the ratio of
expenses to revenue around the same levels, with cost to
income ratio staying flattish at 80.1% in FY:2017, in line with
historical average of 80.8%. Thus, CUSTODIAN remained
profitable as PBT and PAT settled at 20.7% and 17.0%, up
1.3ppts and 3.1ppts from 19.4% and 13.8% recorded in
Company Profile of Listed Insurance Companies
FY:2016.
Investment Assets and Yield Analysis
Total deployment to investment bearing assets remained at
similar levels at 82.3%, indicating that the increase in
Chart 54: CUSTODIAN Gross Revenue vs PAT (2013 – 2017)
Source: Company Fillings , Afrinvest Research
Chart 55: CUSTODIAN Gross Revenue vs Gross Premium (2013-2017)
Source: Company Fillings , Afrinvest Research
Chart 56: CUSTODIAN Insurance Historical Performance 2013 - 2017
Source: Afrinvest Research
Page 38 The Nigerian Insurance Sector Report
investment income was largely on the back of the high
interest rate environment of 2017. CUSTODIAN deployed
more funds to shorter term instruments in FY:2017, up
2.4ppts to 61.1% from 58.7% in FY:2016, while the proportion
of other interest-bearing assets – investment properties,
investment in associate, statutory deposit, cash and cash
equivalent – all moderated slightly in FY:2017.
Liquidity, Contingency and Solvency Analysis
In line with the methodology for estimating solvency as
encapsulated in the 2003 Insurance Act, NEM has remained
historically solvent with average solvency margin of 206.0%
over the last 5 years, but in 2017 the company’s solvency
margin stood at 216.2%. As with other years, the company
met statutory obligation to set aside the higher of 3.0% of
net premium earned or 20.0% of profit after tax as
contingency reserves in 2017.
Profitability Outlook
Our outlook for Custodian in the medium to long term is
positive, hinged on expectations for continuous growth in its
Company Profile of Listed Insurance Companies
Source: Company Filings, Damodaran, Afrinvest Research
Chart 57: CUSTODIAN Forecast Revenue, GPE and PAT (2018 – 2022) Chart 58: CUSTODIAN Valuation Assumptions
insurance business coupled with the diversified revenue
base of the company. It would be unsurprising to see
Custodian venture into health insurance, which is currently
receiving fresh interest in the industry. Nevertheless, we
expect the company to maintain good financial
performances over the medium-term.
Valuation and Outlook
As with other companies, we adopted a blend of absolute
and relative valuation; our absolute methodology consists
of the Gordon’s Growth Model, Dividend Discount Model
(DDM), Residual Income Model (RIM) and Free Cash Flow
to Equity (FCFE) method (assuming a terminal growth rate
of 2.0%) while for our relative valuation we blended P/E, P/
BV and P/FCF multiples to estimate the target price. We
arrived at a 12 -month target price of N5.78 and against
the close price of N5.00(31/10/2018), this presents a 15.6%
upside potential. Against this backdrop, we recommend an
“ACCUMULATE”.
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 1.2 1.2 1.2 1.1 1.1
Cost of Equity (COE) 27.9% 28.6% 27.8% 27.7% 27.8%
Return on Equity (ROE) 21.0% 19.8% 19.6% 20.7% 20.6%
Sustainable Growth Rate 2.0% 2.0% 2.0% 2.0% 2.0%
Weights Prices
Gordon Growth (NAV Approach) 35.0% NGN 6.58
Dividend Discount Model (DDM) 20.0% NGN 1.94
FCFE Method 25.0% NGN 8.86
Residual Income 0.0% NGN 6.30
Relative Valuation 20.0% NGN 4.35
Blended Target Price (NGN) 5.78
Upside/(Downside) 15.6%
Blended Valuation
Afrinvest West Africa Page 39
Company Profile of Listed Insurance Companies
Custodian Investment Plc 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOM E STATEM ENT
OPEX Margin 13.67% 15.31% 14.49% 14.36% 12.87% 12.16% 12.17% 12.17% 12.17% 12.17%
Net margin 14.60% 16.22% 14.10% 13.83% 16.97% 17.53% 16.64% 16.56% 16.74% 17.00%
Statutory Deposit/Paid-Up Capital 28.90% 28.90% 27.27% 10.21% 12.50% 13.55% 14.57% 15.99% 17.68% 19.95%
Investment Assets/Total Assets 66.01% 74.10% 81.82% 82.17% 82.33% 82.33% 82.33% 82.33% 82.33% 82.33%
Investment Properties/Total Assets 13.82% 15.04% 12.83% 11.96% 10.89% 10.92% 11.30% 11.04% 11.08% 11.14%
Investment in Associate/Total Assets 1.22% 1.37% 0.00% 0.79% 0.71% 0.71% 0.71% 0.71% 0.71% 0.71%
Statutory Deposit/Total Asset 1.86% 0.00% 0.67% 1.18% 0.62% 0.62% 0.62% 0.62% 0.62% 0.62%
Cash&Cash equivalent/Total Asset 33.78% 32.47% 42.56% 10.97% 9.78% 8.40% 6.98% 5.64% 4.26% 2.88%
Short term Investments/Total Asset 16.35% 24.45% 24.88% 58.71% 61.09% 62.47% 63.49% 65.10% 66.43% 67.75%
Yield on Investment Assets 6.93% 6.98% 6.03% 7.59% 9.45% 9.45% 8.83% 9.24% 9.17% 9.08%
BALANCE SHEET
Liquidity Rat ios
Current Ratio 7.38x 6.53x 7.08x 7.71x 10.38x 11.22x 20.90x 27.90x 22.88x 24.66x
Quick Ratio 7.35x 6.48x 7.06x 7.70x 10.36x 11.21x 20.87x 27.87x 22.85x 24.63x
Cash ratio 4.95x 3.70x 4.46x 1.21x 1.43x 1.33x 2.07x 2.22x 1.38x 1.01x
Underwrit ing Rat io
Claims Ratio 23.21% 24.30% 43.12% 49.62% 48.76% 47.17% 48.52% 48.15% 47.94% 48.20%
Re-Insurance Rate 53.15% 51.66% 37.68% 35.67% 41.21% 38.18% 38.35% 39.25% 38.59% 38.73%
Reinsurance Recovery Rate 0.0% 0.0% 3.9% 2.8% 5.3% 3.96% 4.00% 4.41% 4.13% 4.18%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.54x 0.52x 0.52x 0.57x 0.53x 0.53x 0.53x 0.53x 0.53x 0.53x
Cost to Income(Opex/Net Operating Income) 81.99% 80.13% 80.90% 80.91% 80.12% 79.47% 79.47% 79.47% 79.47% 79.47%
PBT margin 19.03% 20.83% 19.82% 19.44% 20.72% 21.41% 21.41% 21.41% 21.41% 21.41%
PAT Margin 14.60% 16.22% 14.10% 13.83% 16.97% 17.53% 16.64% 16.56% 16.74% 17.00%
ROAE 18.87% 19.67% 17.55% 19.49% 22.57% 22.03% 20.52% 20.66% 21.31% 22.06%
ROAA 7.89% 8.65% 7.91% 8.50% 9.81% 9.74% 9.14% 9.24% 9.37% 9.60%
ROE 18.87% 18.18% 16.55% 18.18% 20.63% 20.98% 19.85% 19.64% 20.69% 20.64%
ROA 7.9% 8.4% 7.3% 7.8% 9.0% 9.37% 8.82% 8.82% 8.92% 9.05%
Page 40 The Nigerian Insurance Sector Report
NEM Insurance Plc
The Silent Performer – High ROE to Bolster Pricing
Company Overview
NEM Insurance Plc. (“NEM” or “the Company”) was established in 1948 through
the agency of Edward Turner & Co. The agency then metamorphosed into a
branch of NEM General Insurance Association Limited of London in 1965 and was
later listed on the Nigerian Stock Exchange in 1989.
NEM was initially set up as a life and non-life insurance company, however,
following its recapitalization exercise in 2007 and the subsequent merger with
Vigilant Insurance Company Limited, the Company now focuses on all classes of
General Insurance services ranging from corporate and personal to SME products.
In 2009, NEM expanded its footprints into the West African Sub-Region, setting
up NEM Insurance Ghana Limited. The subsidiary was later merged with Regency
Alliance to form Regency NEM Insurance Ghana Limited after its recapitalisation
exercise in Ghana. Similar to other industry big players, the company added NEM
Asset Management Limited as a subsidiary in 2016.
Financial Performance
Profitability and Earnings Growth
NEM’s FY:2017 result was largely impressive as Gross Premium Written (GPW)
increased 24.7% to N13.4bn from N10.8bn recorded the prior year. This growth
was broad based as all product lines – Fire, Oil & Gas, General Accident, Marine,
Motor and Inward Reinsurance - witnessed significant increases in premium in the
reported year. Motor insurance, the largest contributor to GPW - accounting for
32.6% - grew 19.0% to N4.3bn in FY:2017 from N3.6bn the previous year against
the backdrop of improvement in the macroeconomic environment.
Fire insurance, which historically trails Accident insurance, grew by 30.3% to
N3.1bn in 2017 from N2.3bn in FY:2016, while contributing c.22.8% to total GPW
in 2017. Similarly, premiums received from General Accident grew higher in the
Company Profile of Listed Insurance Companies
Chart 62: NEM Composition of Business Segment to Total Revenue
Source: Company Fillings , Afrinvest Research
BUY
2.90
3.76
29.7%
3.50
1.22
5.3
90.6%
15.5
43.0
2016 2017E 2018F
Underwrit ing Margin (%) 32.3% 34.6% 43.7%
Net Margin (%) 17.1% 21.3% 21.3%
Combined Ratio 75.1% 68.5% 71.2%
EPS (N) 0.34 0.53 0.58
P/E (x) 3.1 3.1 6.5
P/BV (x) 0.8 0.9 1.9
ROAE (%) 26.7% 32.4% 30.6%
ROAA (%) 13.5% 17.3% 16.6%
Div Yield (%) 7.6% 6.0% 3.3%
39.4%
24.8%
6.9%
10.47x
Source: Company Filings, NSE
Chart 59: Trading Data - October, 2018 (NEM )
Rating
Share Price (N)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Source: Company Filings, Afrinvest Research
Chart 60: Shareholding Structure (NEM)
7.0%
6.4%
7.3%
79.4%
JEIDOCLIMITED
BUKSONINVESTMENTLIMITED
CAPITALEXPRESSASSURANCE
OTHERS
Chart 61: One Year Price Trajectory of NSEASI, NSE-BNK 10 & NEM
Source: NSE
50
100
150
200
250
300
350
400
Oct-
17
No
v-1
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Dec-1
7
Jan
-18
Fe
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NSEASI NSE-INS10 NEM
Afrinvest West Africa Page 41
reported period, increasing by 13.1% to N2.6bn from N2.3bn
in 2016. Also, Oil & Gas and Marine Insurance – the two risky
segments cumulatively accounting for 34.9%of GPW - grew
59.1% and 23.9% in 2017 to N1.6bn and N1.4bn respectively
following the pickup in Oil & Gas and Marine activities after
Nigeria’s exit from recession. In the same vein, the level of
inward reinsurance - which accounts for a minute 2.0% of
GPW – rose by 32.6% to N0.3bn from N0.2bn in 2016.
Underwriting Costs and Claim Ratio Analysis
In line with the uptick in premium received, underwriting
expense also inched higher in 2017 (up 41.1% to N4.2bn
from N2.9bn in 2016) due to increased acquisition costs (a
combination of commission paid to independent brokers as
well as agents). In FY:2017, although NEM’s Gross Claims
compared to the prior year was higher at N5.1bn relative to
N4.1bn in FY:2016, claims ratio (Gross Premium/ Net
Premium Earned) moderated to 39.4% from 45.0% on the
back of improved Re-insurance and Claims Recovery (RCR)
rate which printed at 20.9% (vs. 18.2% in 2016). The
Company’s claims ratio has stayed largely below 50.0%over
the last 9 years, save for 2015 when it reached 50.4% of Net
Premium Earned, indicating the company’s strength in
gauging risk across its business lines.
Efficiency and Margin Analysis
In 2017, the Company’s financials reflected an overall
improvement in efficiency of operations. Although expense
ratio increased to 54.8% in 2017 from 50.0% in 2016, NEM’s
combined ratio declined to 68.5% from 75.1% the prior year,
indicating profitability.
Company Profile of Listed Insurance Companies
Chart 63: NEM GPW vs PAT (2013-2017)
Source: Company Fillings , Afrinvest Research
Chart 64: NEM GPE vs PAT (2013-2017)
Source: Company Fillings , Afrinvest Research
Chart 66: NEM Historical Performance (2013 –2017)
Source: Afrinvest Research
Chart 65: NEM GPW, GPE and PAT Forecast
Source: Afrinvest Research
Page 42 The Nigerian Insurance Sector Report
Combined ratio for NEM averaged 79.5% over the last 5
years, 22.8ppts lower than industry peers. Similarly, the
company showed improved profit margins in FY:2017, mainly
boosted by improvements in other income margin which
increased to 11.2% from 9.4%, hence PBT and PAT margins
improved to 23.7% and 21.3% from 20.2% and 17.1%
respectively in FY:2016.
Investment Assets and Yield Analysis
Total deployment to interest yielding assets increased Y-o-Y
as investment assets relative to total assets increased by
0.6ppts in 2017 to 54.5%, supported by a growth in short
term investments and investment properties. Investment in
short term assets to total assets inched 6.0% to 33.7% in
FY:2017 from 27.6% in FY:2016 while investment properties
to total assets increased marginally by 90bps to 3.9% in
FY:2017. Similarly, yield on investment assets improved
by1.27ppts in FY:2017 to 7.4% slightly lower than its five-year
average of 7.8%.
Liquidity, Contingency and Solvency Analysis
In line with the methodology for estimating solvency as
encapsulated in the 2003 Insurance Act, NEM has remained
historically solvent with average solvency margin of 206.0%
over the last 5 years, but in 2017 the company’s solvency
margin stood at 216.2%. As with other years, the company
met statutory obligation to set aside the higher of 3.0% of
net premium earned or 20.0% of profit after tax as
contingency reserves in 2017. Furthermore, NEM’s liquidity
ratio measured using the quick ratio, is relatively strong at
10.5x from 9.5x in 2016 while current (14.1x as at FY:2017
Company Profile of Listed Insurance Companies
from 16.6x in FY:2016) and cash ratios (2.7x in 2017 from 3.5x
2016) also indicate the company’s ability to meet its short-
term liabilities with sufficiently liquid assets.
Profitability Outlook
We are of the view that NEM will continue to leverage its
strength in its key revenue lines - Fire, General Accident and
Motor Insurance. Nonetheless, we also anticipate an increase
in the contribution of Oil & Gas and Marine Insurance to
GPW in the near term as our estimates show that the
company will meet the requirements for a Tier-1
classification which will permit it to continue to underwrite
these assets. Hence, we maintain a positive outlook for
NEM’s earnings and profitability in the near term.
Valuation and Outlook
To arrive at our target price, we employed the use of both
absolute and relative methodologies. Our absolute
methodology consists of the Gordon’s Growth Model,
Dividend Discount Model (DDM), Residual Income Model
(RIM) and Free Cash Flow to Equity (FCFE) method (assuming
a terminal growth rate of 3.0%). We also employed the use of
relative valuation and blended P/E, P/BV and P/FCF multiples
to estimate the target price and all our methodologies all
pointed towards the relative undervaluation of the stock. We
arrived at a target price of N3.76 against the close market
price of 2.90 (31/10/2018), which presented an upside of
29.7%. Our Recommendation is therefore to “BUY”
Source: Afrinvest Research
Chart 67: NEM Valuation Assumptions
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 0.6 0.6 0.7 0.7 0.8
Cost of Equity (COE) 20.4% 21.3% 21.8% 22.2% 22.6%
Return on Equity (ROE) 29.9% 30.1% 27.8% 27.7% 26.2%
Sustainable Growth Rate 3.0% 3.0% 3.0% 3.0% 3.0%
Weights Prices
Gordon Growth (NAV Approach) 20.0% NGN 3.69
Dividend Discount Model (DDM) 20.0% NGN 0.91
FCFE Method 20.0% NGN 3.56
Residual Income 20.0% NGN 6.07
Relative Valuation 20.0% NGN 5.05
Blended Target Price (NGN) 3.62
Upside/(Downside) 24.8%
Blended Valuation
Afrinvest West Africa Page 43
Company Profile of Listed Insurance Companies
NEM Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOME STATEMENT
Gross Premium Earned/Gross Premium Written 87.21% 99.36% 98.37% 98.80% 97.13% 96.17% 97.97% 97.69% 97.55% 97.30%
Solvency Ratio 1.96x 2.14x 2.05x 1.98x 2.16x 2.01x 2.03x 2.07x 2.05x 2.05x
OPEX Margin -22.78% -18.08% -21.97% -22.20% -22.85% -22.34% -22.46% -22.55% -22.45% -22.49%
Net margin 5.07% 15.61% 6.66% 17.10% 21.30% 27.22% 27.86% 26.24% 25.72% 24.61%
Underwriting Margin 23.50% 34.60% 21.28% 32.34% 34.63% 43.69% 44.27% 42.02% 42.57% 41.18%
Statutory Deposit/Paid-Up Capital 13.23% 12.88% 13.01% 12.12% 12.12% 13.25% 15.09% 16.80% 18.87% 21.45%
Investment Assets/Total Assets 72.75% 66.38% 62.58% 56.86% 58.31% 59.33% 58.30% 58.65% 58.76% 58.57%
Investment Properties/Total Assets 4.67% 4.34% 3.11% 3.05% 3.85% 3.85% 3.85% 3.85% 3.85% 3.85%
Investment in Associate/Total Assets 0.00% 0.00% 0.00% 1.83% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23%
Statutory Deposit/Total Asset 3.48% 3.04% 2.75% 2.21% 1.82% 1.82% 1.82% 1.82% 1.82% 1.82%
Cash&Cash equivalent/Total Asset 38.48% 30.78% 27.14% 23.96% 18.95% 23.30% 22.08% 21.43% 22.27% 21.93%
Short term Investments/Total Asset 26.13% 28.23% 29.58% 27.64% 33.69% 30.35% 30.55% 31.54% 30.82% 30.97%
Yield on Investment Assets 6.09% 8.18% 9.55% 5.82% 6.93% 7.43% 6.73% 7.03% 7.06% 6.94%
BALANCE SHEET
Liquidity Ratios
Current Ratio 144.02x 215.23x 40.01x 16.56x 14.08x 19.35x 17.37x 17.33x 18.03x 17.55x
Quick Ratio 64.33x 106.41x 22.20x 9.50x 10.47x 11.40x 10.55x 10.73x 10.93x 10.72x
Cash ratio 17.87x 17.22x 4.89x 3.51x 2.74x 7.94x 6.82x 6.59x 7.10x 6.83x
Underwriting Ratio
Claims Ratio 42.25% 36.97% 50.39% 45.03% 39.35% 38.20% 40.52% 41.82% 41.75% 42.44%
Expense Ratio 55.36% 44.41% 47.47% 49.96% 54.80% -50.89% -50.63% -50.66% -50.82% -51.38%
Opex Margin 22.78% 18.08% 21.97% 22.20% 22.85% -22.34% -22.46% -22.55% -22.45% -22.49%
Combined Ratio 94.76% 74.52% 84.41% 75.08% 68.49% 71.19% 70.88% 72.23% 72.02% 73.09%
Re-Insurance Rate 4.70% 9.63% 20.17% 19.91% 24.78% 15.84% 18.07% 19.75% 19.67% 19.62%
Reinsurance Recovery Rate 2.8% 4.4% 10.4% 18.2% 20.9% 31.56% 36.48% 40.43% 40.42% 37.22%
Other Income Margin 6.26% 1.56% 6.27% 9.38% 11.20% 11.67% 11.05% 11.30% 11.33% 11.25%
Interest income 5.71% 6.22% 6.96% 4.51% 5.45% 5.92% 5.29% 5.54% 5.57% 5.49%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.78x 0.87x 0.86x 0.73x 0.74x 0.75x 0.74x 0.74x 0.74x 0.74x
Cost to Income(Opex/Net Operating Income) 76.52% 50.00% 79.72% 53.21% 49.86% 48.65% 49.33% 51.58% 50.50% 52.04%
PBT margin 6.99% 18.08% 5.59% 20.19% 23.75% 23.58% 23.07% 21.17% 22.01% 20.73%
PAT Margin 5.07% 15.61% 6.66% 17.10% 21.30% 21.34% 21.70% 20.25% 20.01% 19.10%
ROAE 8.78% 28.88% 11.83% 26.73% 32.39% 30.61% 32.11% 29.43% 29.20% 27.96%
ROAA 4.43% 14.36% 6.03% 13.48% 17.31% 16.61% 17.14% 15.88% 15.77% 15.04%
ROE 8.41% 26.00% 11.51% 24.56% 28.50% 29.91% 30.05% 27.75% 27.73% 26.25%
ROA 3.9% 13.6% 5.7% 12.5% 15.8% 15.90% 16.09% 15.07% 14.90% 14.14%
Page 44 The Nigerian Insurance Sector Report
Company Profile of Listed Insurance Companies
WAPIC INSURANCE PLC
Plagued by High Cost to Income Ratio
Company Overview
WAPIC Insurance (“WAPIC” or “The Company”), is a composite insurance firm offering
both Life and Non-Life insurance products. The company was founded in 1958 and
licensed to underwrite all classes of insurance. It was later listed on the Nigerian Stock
Exchange in 1990.
In 2012, shareholders of WAPIC and Intercontinental properties agreed to merge both
entities following the abolishment of the universal banking license by the Central Bank
of Nigeria (CBN) as both entities were owned by Access Bank Plc. This in turn helped
shore up WAPIC’s insurance capital base, enabling the company to grow premium
income whilst increasing capacity to underwrite risks.
Following the company’s strategy to drive growth and increase its retail market
penetration, WAPIC introduced the MOOV product which according to management
was the major driver of WAPIC’s insurance premium growth in FY:2017. WAPIC
currently has its footprint in Nigeria as well as Ghana where it operates WAPIC
Insurance (Ghana) Limited.
Financial Performance
Profitability and Earnings Growth
Despite WAPIC’s FY:2017 result, in our opinion, was rather underwhelming, although at
first glance it appeared impressive. GPW grew 22.5% Y-o-Y to N9.8bn in 2017 from
N8.0bn in FY:2016, driven by a broad-based expansion across business lines in the year.
In its non-life business, motor insurance contributed the highest to GPW, accounting for
22.0% of GPW in FY:2017, riding on the back of the firm’s flagship motor product
“MOOV”. Unsurprisingly, Oil & Energy and General Accident followed closely in terms of
contribution to GPW, inching 21.0% apiece as the level of activities in Oil & Gas and
trade improved significantly.
A closer look at the composition of GPW reveals that WAPIC has created competence in
Motor, Oil & Energy, Life and General Accident whilst still underwriting Fire, Marine,
Engineering and Aviation Insurance, which accounted for 6.0%, 4.0%,4.0% and 2.0%
Chart 71: WAPIC Composition of Business Segment to Total Revenue (2017)
Source: WAPIC, Afrinvest Research
BUY
0.40
0.52
30.0%
0.78
0.31
13.4
52.0%
5.8
16.0
2016 2017E 2018F
Underwrit ing Margin (%) 5.0% 16.0% 16.6%
Net Margin (%) 7.7% 16.0% 14.3%
Combined Ratio 165.5% 136.1% 141.3%
EPS (N) 0.04 0.11 0.12
P/E (x) 12.5 4.6 4.5
P/BV (x) 0.4 0.4 0.4
ROAE (%) 3.7% 8.9% 8.3%
ROAA (%) 2.4% 5.6% 5.2%
Div Yield (%) 6.0% 10.0% 10.7%
39.8%
41.1%
10.3%
4.56x
Source: Company Filings, NSE
Chart 68: Trading Data - October, 2018 (WAPIC)
Rating
Share Price (N)
Upside Potential (%)
52 Wks High (N)
52 Wks Low (N)
Outst. Shares (bn)
2017/18 TP (N)
Free Float (%)
Mkt Cap (N'bn)
Mkt Cap (US$'m)
Other ratios (FY2017)
Profitability and Valuation Metrics (FY2017)
Claims ratio
Reinsurance rate
Yield on investment assets
Quick ratio
Source: Company Filings, Afrinvest Research
Chart 69: Shareholding Structure (WAPIC)
17.0%
27.0%
56.0%
ReunionEnergy Limited
CoronationCapital(Maurit ius)Limited
Others
Chart 70: One Year Price Trajectory of NSEASI, NSE-BNK 10 & WAPIC
Source: NSE
40
90
140
190
Oct-
17
No
v-1
7
Dec-1
7
Jan
-18
Fe
b-1
8
Ma
r-18
Ap
r-18
Ma
y-1
8
Jun
-18
Jul-
18
Au
g-1
8
Se
p-1
8
NSEASI NSE-INS10 WAPIC
Afrinvest West Africa Page 45
respectively in 2017.
Historically, WAPIC’s Gross Premium Earned (GPE) has moved in
tandem with GPW, and in the last 5 years has maintained a steady
climb in each accounting year. In 2017, unearned premium
declined, thus driving GPE up 26.4% to N9.6bn from N7.6bn in
2016.
Underwriting costs and Claim Ratio Analysis
The company’s underwriting costs increased, although marginally
to N1.8bn in 2017 from N1.7bn in 2016, with maintenance cost
still the major contributor to total underwriting expense.
However, the company’s cost efficiency in driving premiums
increased as underwriting expense relative to the amount of
premium generated moderated to 17.9% in 2017 from 21.0% in
2016.
Similarly, as the company pushed to be more efficient in
generating income, we observed a moderation in claims ratio as
Company Profile of Listed Insurance Companies
gross claims incurred remained relatively flat in 2017 and 2016
(N3.8bn in 2017 and N3.8bn in 2016). However, WAPIC received
more in premiums relative to the amount paid out as claims. Thus,
claims ratio declined to 39.8% in 2017 from 50.7% in 2016.
Efficiency and Margin Analysis
As with other metrics, expense ratio, a measure of total expenses
fell to 64.5% in 2017 from 76.9% in 2016. Despite a moderation in
combined ratio from 165.5% in FY:2016 to 136.1% in FY:2017, the
ratio remained higher than the optimal 100.0%
WAPIC’s profit before tax margin improved to 16.9%, from 15.7%
in the prior year. However, a closer look at WAPIC’s PBT margin
over the years revealed that its high cost to income (CI) ratio
continues to weigh heavily on profitability as CI ratio has averaged
100.0% since 2013. Nevertheless, the company’s CI ratio
moderated to 95.0% in 2017 from 100.8% in 2016, buoying
margins. Similarly, net margin inched 8.2ppt to 16.0%, boosted
Chart 72: WAPIC GPW vs PAT (2013-2017) Chart 73: WAPIC GPE vs PAT (2013-2017)
Source: WAPIC, Afrinvest Research
Chart 74: WAPIC Historical Performance 2013 -2017
Source: WAPIC, Afrinvest Research
Page 46 The Nigerian Insurance Sector Report
primarily by the share of associate profit which has been the case
since 2015. In the absence of this, WAPIC’s net margin would have
printed at 2.4%.
Investment Assets and Yield Analysis
We observed an increase in WAPIC’s investment bearing assets -
investment assets to total assets grew from 41.6% in FY:2016 to
42.6%in FY:2017. We observed a move from cash and cash
equivalents to short term financial instruments (up 4.6ppt to
33.2% from 28.6% in 2016), which we saw across all companies
under our coverage due to the favorable yield environment.
Also, in line with the company’s strategy to sell down investment
properties, we observed a decline in its proportion to total assets
(down to 1.1% from 2.1% recorded in FY: 2016). We believe funds
realized from the sell off on investment properties were
channeled into high yielding short term assets, hence the rise in
ROAA to 5.4% from 2.3%.
Liquidity, Contingency and Solvency Analysis
The company’s liquidity position declined slightly in 2017. Quick
ratio inched 10bps higher to 4.6x from 4.5x in 2016 while other
liquidity measures – current ratio (down to 5.3x from 5.8x) and
cash ratio (down to 0.8x from 1.3x) declined Y-o-Y. In line with
regulation, WAPIC continued to build its contingency fund and
remained solvent as with other years, recording a solvency margin
of 233.6% in 2017.
Toast of Investors
Company Profile of Listed Insurance Companies
Chart 75: WAPIC Forecast GPW, GPE and PAT Chart 76: WAPIC Valuation Assumption
Source: Company Filings, Damodaran, Afrinvest Research
Profitability Outlook
In 2018, we maintain a positive outlook for WAPIC as we be-
lieve the company will continue to drive revenue from both its
Nigerian and Ghanaian operations. We expect to see an im-
provement in the parent company’s contribution to net margin
in forecast years – (25.0% of total profit in FY:2018 vs 15.0% in
FY:2017) as its retail strategy garners momentum. Furthermore,
as guided by management, we anticipate a capital raise in the
near term to boost its revenue earning capacity. While we re-
main generally optimistic for growth in the near term, we pro-
ject profit to grow at a slower pace due to WAPIC’s heightened
cost to income ratio which has averaged 100.4% in the last 5
years compared to 66.9% industry average. Hence, we expect
profitability to pace at 1.9% Y-o-Y.
Valuation and Outlook
In arriving at a target price for WAPIC, we employed the use of
absolute valuation methodologies – Gordon Growth (NAV ap-
proach), Residual Income, Dividend Discount Model (DDM) &
Free Cash Flow to Equity Method as well as relative valuation.
However, we blended all methods save the Residual income in
arriving at our target price of N0.52 which presented an upside
of 30.0% against the current price of N0.40 (30/10/2018).
Based on our outlook for the sector and the broader economy,
we forecasted a 3.5% sustainable growth rate for the company.
A downside risk to our growth forecast include – elevated cost
ratios coupled with a slower pace of retail penetration. Hence,
we recommend an “BUY” rating on the stock.
2018 2019 2020 2021 2022
Valuation Metrics
Risk Free Rate (RFR) 14.2% 15.1% 14.6% 14.8% 15.1%
Equity Risk Premium (ERP) 11.4% 11.4% 11.4% 11.4% 11.4%
Beta 0.6 0.6 0.7 0.7 0.8
Cost of Equity (COE) 20.4% 22.0% 22.1% 22.7% 23.6%
Return on Equity (ROE) 7.9% 9.3% 10.0% 10.3% 11.0%
Sustainable Growth Rate 3.5% 3.5% 3.5% 3.5% 3.5%
Weights Prices
Gordon Growth (NAV Approach) 25.0% NGN 0.54
Dividend Discount Model (DDM) 25.0% NGN 0.60
FCFE Method 20.0% NGN 0.19
Residual Income 0.0% NGN 0.63
Relative Valuation 30.0% NGN 0.67
Blended Target Price (NGN) 0.52
Upside/(Downside) 30.4%
Blended Valuation
Afrinvest West Africa Page 47
Company Profile of Listed Insurance Companies
WAPIC Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
INCOME STATEMENT
Gross Premium Earned/Gross Premium Written 99.36% 92.58% 86.59% 94.76% 97.77% 96.27% 97.02% 96.64% 96.83% 96.74%
Solvency Ratio 6.63x 6.55x 3.31x 2.41x 2.34x 2.27x 2.16x 2.20x 2.23x 2.30x
Solvency Margin 6.63x 6.55x 3.31x 2.41x 2.34x 2.27x 2.16x 2.20x 2.23x 2.30x
OPEX Margin 75.05% 63.81% 56.41% 54.71% 46.22% 46.14% 42.96% 42.85% 42.98% 43.36%
Net margin -5.57% 4.92% 21.10% 7.72% 15.96% 14.34% 15.88% 17.43% 18.38% 20.78%
Underwriting Margin -2.66% 27.31% 24.03% 5.02% 16.02% 16.64% 14.09% 15.90% 13.98% 14.57%
Statutory Deposit/Paid-Up Capital 7.71% 7.75% 7.79% 9.23% 9.46% 11.09% 12.00% 13.51% 14.92% 16.63%
Investment Assets/Total Assets 82.20% 84.02% 53.02% 41.62% 42.60% 41.70% 42.15% 41.93% 42.04% 41.98%
Investment Properties/Total Assets 19.54% 18.39% 2.85% 2.08% 1.09% 1.15% 1.12% 1.14% 1.13% 1.13%
Investment in Associate/Total Assets 0.00% 0.00% 22.13% 27.70% 28.89% 28.30% 28.60% 28.45% 28.52% 28.48%
Statutory Deposit/Total Asset 2.31% 2.35% 2.20% 2.38% 2.21% 2.33% 2.27% 2.30% 2.29% 2.29%
Cash&Cash equivalent/Total Asset 26.24% 23.45% 29.77% 8.57% 6.10% 7.37% 7.52% 6.93% 7.31% 7.24%
Short term Investments/Total Asset 34.11% 39.83% 18.20% 28.57% 33.20% 30.85% 31.24% 31.56% 31.31% 31.32%
Yield on Investment Assets 7.94% 7.85% 10.96% 9.45% 10.31% 11.34% 10.36% 10.67% 10.79% 10.61%
BALANCE SHEET
Liquidity Ratios
Current Ratio 3.67x 3.87x 4.17x 5.77x 5.34x 5.24x 4.95x 5.06x 5.14x 5.30x
Quick Ratio 2.10x 2.43x 1.70x 4.51x 4.56x 4.30x 4.05x 4.21x 4.22x 4.37x
Cash ratio 1.57x 1.43x 2.47x 1.26x 0.78x 0.95x 0.90x 0.86x 0.91x 0.93x
Underwriting Ratio
Claims Ratio 79.99% 22.61% 35.44% 50.66% 39.84% 41.98% 44.16% 42.00% 42.71% 42.96%
Expense Ratio 96.74% 83.75% 76.39% 76.86% 64.55% 65.60% 62.76% 62.12% 62.46% 62.90%
Opex Margin 75.05% 63.81% 56.41% 54.71% 46.22% 46.14% 42.96% 42.85% 42.98% 43.36%
Combined Ratio 233.79% 127.07% 138.89% 165.52% 136.11% 141.31% 141.17% 136.95% 138.94% 139.69%
Re-Insurance Rate 28.76% 38.75% 35.91% 43.43% 41.06% 37.58% 39.35% 39.47% 40.18% 39.53%
Reinsurance Recovery Rate 22.9% 1.9% 8.9% 12.8% 7.9% 8.25% 9.92% 9.17% 8.95% 9.12%
Other Income Margin 60.87% 37.71% 47.06% 49.26% 32.65% 33.40% 33.82% 32.35% 33.64% 33.90%
Du-Pont Analysis
Asset Turnover (Revenue/Total Asset) 0.17x 0.22x 0.26x 0.29x 0.34x 0.34x 0.35x 0.35x 0.34x 0.33x
Cost to Income(Opex/Net Operating Income) 128.93% 98.13% 79.34% 100.79% 94.98% 92.19% 89.67% 88.80% 90.25% 89.45%
PBT margin -16.84% 1.22% 27.12% 15.73% 16.92% 19.45% 21.54% 23.63% 24.93% 28.18%
PAT Margin -5.57% 4.92% 21.10% 7.72% 15.96% 14.34% 15.88% 17.43% 18.38% 20.78%
ROAE -1.91% 1.67% 8.90% 3.72% 8.87% 8.26% 9.62% 10.63% 10.90% 11.70%
ROAA -1.19% 1.07% 5.67% 2.36% 5.62% 5.16% 5.86% 6.41% 6.66% 7.25%
ROE -1.47% 1.67% 8.67% 3.54% 8.52% 7.88% 9.31% 10.02% 10.31% 11.01%
ROA -0.9% 1.1% 5.5% 2.3% 5.4% 4.90% 5.57% 6.09% 6.32% 6.89%
The Nigerian Insurance Sector Report
Section Six
Afrinvest (West Africa) Limited
Afrinvest West Africa Page 49
About US
Afrinvest (West Africa) Limited (Afrinvest or the Company) is a leading independent investment banking firm with a focus on West Africa
and active in four principal areas: investment banking, securities trading, asset management, and investment research. The Company was
originally founded in 1995 as Securities Transaction and Trust Company Limited (SecTrust) which grew to become a respected research,
brokerage and asset management firm. Afrinvest (West Africa) Limited is licensed by the Nigerian Securities and Exchange Commission
(SEC) as an issuing house and underwriter. We provide financial advisory services as well as innovative capital raising solutions to High Net-
worth Individuals (HNIs), corporations, and governments. Afrinvest is a leading provider of research content on the Nigerian market as well
as a leading adviser to blue chip companies across West Africa on M&A and international capital market transactions. The company
maintains three offices in Lagos, Abuja and Port-Harcourt.
Afrinvest Securities Limited (ASL) is licensed by the Nigerian SEC as a broker dealer and is authorized by the Nigerian Stock Exchange (NSE)
as a dealing member. ASL acts as a distribution channel for often exclusive investment products originated by Afrinvest and AAML as well
as unique value secondary market trading opportunities in equity, debt, money market and currency instruments.
Afrinvest Asset Management Limited (AAML) is licensed by the Nigerian SEC as a portfolio manager. AAML delivers world class asset
management services to a range of mass affluent and high net worth individual clients. AAML offers investors direct professionally
managed access to the Nigerian capital markets through equity focused, debt focused and hybrid unit trust investment schemes amongst
which are the Nigeria International Debt Fund (NIDF), Afrinvest Equity Fund (AEF), Afrinvest Plutus Fund (APF), Balance Growth Fund (BGF),
Ethical Investment Fund (EIF) and Guaranteed Income Fund (GIF).
Contacts Investment Research
Robert Omotunde romotunde@afrinvest.com +234 1 270 1680 ext. 314
Jolomi Odonghanro jodonghanro@afrinvest.com +234 1 270 1680 ext. 321 Adedayo Bakare
abakare@afrinvest.com +234 1 270 1680 ext. 316 Eronmosele Aziba
eaziba@afrinvest.com +234 1 270 1680 ext. 319 Omoefe Eromosele
oeromosele@afrinvest.com +234 1 270 1680 ext. 317 Abiola Gbemisola
agbemisola@afrinvest.com +234 1 270 1680 ext. 312
Adeoluwa Eweje aeweje@afrinvest.com +234 1 270 1680 ext. 318
Institutional Sale and Marketing
Ayodeji Ebo aebo@afrinvest.com +234 1 270 1680 ext. 315
Bolaji Fajenyo bfajenyo@afrinvest.com +234 1 270 1680 ext 261
Investment Banking
Jessica Essien jessien@afrinvest.com +234 1 270 1680 ext 171
Victor Ndukauba vndukauba@afrinvest.com +234 1 270 1680 ext 311
Asset Management
Ola Belgore obelgore@afrinvest.com +234 1 270 1680 ext 281
Morenike Ominike mominike@afrinvest.comFor further information, please contact:
Afrinvest West Africa Limited (AWA)
27,Gerrard Road
Ikoyi, Lagos
Nigeria
Tel: +234 1270 1680 | +234 1 270 1689
Page 50 The Nigerian Insurance Sector Report
About US
ANALYST'S CERTIFICATION AND DISCLAIMER
ANALYSTS’ CERTIFICATION
The research analysts responsible for this report hereby certify that: 1) all of the views expressed in this report reflect our personal views
about the subject industry, the subject company or companies and its or their securities referred to in this report, 2) we also certify that no
part of our compensation was, is or will be directly or indirectly related to the specific recommendations, views or opinions expressed in
this report, and 3)no part of our compensation is or will be tied to any specific investment banking transaction between the companies
covered in this report and Afrinvest (West Africa) Limited.
Fair Value Estimate
Our approach to establishing fair value takes into account a weighted average of price estimates derived from a blend of valuation
methodologies including the Net Asset Valuation (“NAV”), Discounted Cash Flow (“DCF”) and its variants as well as other relative/
comparable trading multiples valuation models. However, we attach the most weight to DCF valuation methodology, particularly the
Dividend Discount Model (DDM), Free Cash Flow (FCF) model and Residual Income Valuation/Model (“RIV/RIM”). The utilization of
comparable trading multiples is guided by the analysts’ understanding of the company’s fundamentals, as well as key price drivers from
the firm, industry and macroeconomic perspectives.
Company-Specific Disclosures
The following disclosures relate to relationships between Afrinvest (West Africa) Limited or its analyst(s) with companies covered in this
report.
COMPANY SECURITY DISCLOSURES
AIICO Insurance Plc AAIICO -
AXA Mansard Insurance plc MANSARD -
Continental Reinsurance Plc CONTINUSURE -
Custodian Investment Plc CUSTODIAN -
NEM Insurance Plc NEM -
WAPIC Insurance Plc WAPIC -
Afrinvest West Africa Page 51
About US
ANALYST'S CERTIFICATION AND DISCLAIMER
Investment Ratings
BUY: The expected total return over the next 12 months is 25.0% or more. Investors are advised to take positions at the
prevailing market price as at the report date.
ACCUMULATE: The expected total return over the next 12 months ranges between 10.0% and 25.0% or the upside potential is above
industry average. However, cautious portfolio positioning is advised.
HOLD: Over the next 12 months, investors are advised to remain neutral as the expected total returns may not exceed
10.0% based on the prevailing market price as at the report date.
REDUCE: The expected total return of the stock ranges from nil to negative. Aggressive exit or entry may not be appropriate as
the stock might fluctuate into a 10.0% decline over a 12-month horizon. Thus, the slim upside potential does not
adequately compensate for the inherent risk.
SELL: The stock trades at a premium to its intrinsic value and is thus expected to lose up to 10.0% or more of its market
value. Immediate exit is therefore advised at the prevailing market price as at the report date.
Target Prices: Target prices disclosed in this report are partly based on analysts’ estimate of the company earnings. However, prices of
securities could fluctuate if earnings miss estimate or due to general market, industry or macroeconomic risk factors.
For more details on company specific valuation methodologies, upside/downside risks to current valuation, contact the primary Analyst or
email research@afrinvest.com
Ratings Summary
BUY ACCUMULATE HOLD REDUCE SELL Total
Banking Universe 4 2 0 0 0 6
% distribution 66.7% 33.3% 0.0% 0.0% 0.0% 100.0%
Page 52 The Nigerian Insurance Sector Report
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