Outline...The Nigerian Insurance Sector Report Executive Summary The recovery in the global...

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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

[email protected]

Analyst


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.


Section Two

Investment Thesis


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


Section Three

Global Insurance Industry


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


Section Four

Nigerian Insurance Industry


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


Chart 1: Insurance Penetration Across Select African Countries in 2016

Source: Sigma Research, Afrinvest Research


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


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


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.


Chart 4: Motor Insurance by Market Players (2016)


Chart 5: Oil & Gas Insurance by Market Players (2016)


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.



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)


Chart 7: Marine Insurance by Market Players (2016)


Fire Insurance

General Accident Insurance



Chart 8: Life Insurance by Market Players (2016) Chart 9: Reinsurance by Market Players (2016)


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



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).


Chart 12: Net Margin, ROAE and ROAA of Select Countries (2016)



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.


Chart 14: Classification of Coverage Companies


Chart 13: Earnings Multiples of Select Countries in 2017

Source: Bloomberg Afrinvest Research

COMPOSITE NON-LIFE REINSURANCE

AIICO NEM CONTINENTAL RE

MANSARD

WAPIC

CUSTODIAN


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


Chart 16: Company Ranking by Gross Premium Written

Source: Company Filings, Afrinvest Research

Chart 15: Industry Gross Premium Written (2013 -2017)



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.


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




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


Chart 21: ROAE Ranking in 2016 vs 2016 Chart 22: ROAA Ranking in 2016 vs 2017




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




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.


Section Five

Company Profile of Listed Insurance Companies


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


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


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


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


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



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



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%


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.



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.


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


Claims ratio

Reinsurance rate


Quick ratio



Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)


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)


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

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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 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.


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.


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


Chart 37: MANSARD - Composition of Business Segment Chart 38: MANSARD GPE TO PAT 2013 - 2015



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.


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.


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.


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,


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



Beta 1.2 1.2 1.2 1.1 1.1




Weights Prices








Blended Valuation



MANSARD Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

INCOME STATEMENT



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%




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%





BALANCE SHEET

Liquidity Ratios




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%




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



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%


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.



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.


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


Net Margin (%) 13.3% 18.6% 21.2%


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


Chart 42: Trading Data - October, 2018 (CONTINENTAL RE)

Rating

Share Price (N)


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)



Claims ratio

Reinsurance rate


Quick ratio


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

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Chart 46: CONTINENTAL RE GPE vs GPE (2013-2017)



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.


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.


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


Chart 48: CONTINENTAL RE Historical Performance (2013 -2017)

Source: CONTINENTAL RE, Afrinvest Research

Chart 47: CONTINENTAL Forecast GPW, GPE and PAT

Source: Afrinvest Research


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.


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%).


As with other companies, we adopted a blend of valuation

methodologies in arriving at our 12-month target price. We


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



Beta 0.6 0.7 0.7 0.7 0.8




Weights Prices








Blended Valuation



Continental Re 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

INCOME STATEMENT



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%









BALANCE SHEET

Liquidity Ratios




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%




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



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%


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.



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.


Chart 53: CUSTODIAN Composition of Gross Revenue


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


Chart 50: Trading Data - October, 2018 (CUSTODIAN)

Rating

Share Price (N)


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)



Claims ratio

Reinsurance rate


Quick ratio


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

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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.


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.


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


FY:2016.


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)


Chart 55: CUSTODIAN Gross Revenue vs Gross Premium (2013-2017)


Chart 56: CUSTODIAN Insurance Historical Performance 2013 - 2017



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.


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.


Our outlook for Custodian in the medium to long term is

positive, hinged on expectations for continuous growth in its


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.


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



Beta 1.2 1.2 1.2 1.1 1.1




Weights Prices








Blended Valuation



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%









BALANCE SHEET

Liquidity Rat ios




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%



Du-Pont Analysis



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%


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.



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


Chart 62: NEM Composition of Business Segment to Total Revenue


BUY

2.90

3.76

29.7%

3.50

1.22

5.3

90.6%

15.5

43.0

2016 2017E 2018F


Net Margin (%) 17.1% 21.3% 21.3%


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


Chart 59: Trading Data - October, 2018 (NEM )

Rating

Share Price (N)


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)



Claims ratio

Reinsurance rate


Quick ratio


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

7

Dec-1

7

Jan

-18

Fe

b-1

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Ma

r-18

Ap

r-18

Ma

y-1

8

Jun

-18

Jul-

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g-1

8

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p-1

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NSEASI NSE-INS10 NEM


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.


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.


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.


Chart 63: NEM GPW vs PAT (2013-2017)


Chart 64: NEM GPE vs PAT (2013-2017)


Chart 66: NEM Historical Performance (2013 –2017)


Chart 65: NEM GPW, GPE and PAT Forecast



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.


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%.


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


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.


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.


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”


Chart 67: NEM Valuation Assumptions

2018 2019 2020 2021 2022

Valuation Metrics



Beta 0.6 0.6 0.7 0.7 0.8




Weights Prices








Blended Valuation



NEM Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

INCOME STATEMENT



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%










BALANCE SHEET

Liquidity Ratios




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%




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



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%



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.



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


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


Chart 68: Trading Data - October, 2018 (WAPIC)

Rating

Share Price (N)


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)



Claims ratio

Reinsurance rate


Quick ratio


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

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Jan

-18

Fe

b-1

8

Ma

r-18

Ap

r-18

Ma

y-1

8

Jun

-18

Jul-

18

Au

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p-1

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NSEASI NSE-INS10 WAPIC


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.


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


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.


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)


Chart 74: WAPIC Historical Performance 2013 -2017



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%.


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%.


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


Chart 75: WAPIC Forecast GPW, GPE and PAT Chart 76: WAPIC Valuation Assumption

Source: Company Filings, Damodaran, Afrinvest Research


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.


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



Beta 0.6 0.6 0.7 0.7 0.8




Weights Prices








Blended Valuation



WAPIC Insurance PLC 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

INCOME STATEMENT



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%









BALANCE SHEET

Liquidity Ratios




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%




Du-Pont Analysis



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%


Section Six

Afrinvest (West Africa) Limited


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 [email protected] +234 1 270 1680 ext. 314

Jolomi Odonghanro [email protected] +234 1 270 1680 ext. 321 Adedayo Bakare

[email protected] +234 1 270 1680 ext. 316 Eronmosele Aziba

[email protected] +234 1 270 1680 ext. 319 Omoefe Eromosele

[email protected] +234 1 270 1680 ext. 317 Abiola Gbemisola

[email protected] +234 1 270 1680 ext. 312

Adeoluwa Eweje [email protected] +234 1 270 1680 ext. 318

Institutional Sale and Marketing

Ayodeji Ebo [email protected] +234 1 270 1680 ext. 315

Bolaji Fajenyo [email protected] +234 1 270 1680 ext 261

Investment Banking

Jessica Essien [email protected] +234 1 270 1680 ext 171

Victor Ndukauba [email protected] +234 1 270 1680 ext 311

Asset Management

Ola Belgore [email protected] +234 1 270 1680 ext 281

Morenike Ominike [email protected] further information, please contact:

Afrinvest West Africa Limited (AWA)

27,Gerrard Road

Ikoyi, Lagos

Nigeria

Tel: +234 1270 1680 | +234 1 270 1689


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 -


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 [email protected]

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%


DISCLAIMER

This report has been issued and approved by Afrinvest Securities Limited (“Afrinvest”). This report is based on information from various

sources that we believe are reliable; however, no, representation is made that it is accurate or complete. While reasonable care has been

taken in preparing this document, no responsibility or liability is accepted for errors or fact or for any opinion expressed herein. This

document is for information purposes only. It does not constitute any offer or solicitation to any person to enter into any trading

transaction. Any investment discussed may not be suitable for all investors. This report is provided solely for the information of clients of

Afrinvest who are expected to make their own investment decisions. Afrinvest conducts designated investment business with market

counter parties and intermediate customers and this document is directed only at such persons. Other persons should not rely on this

document. Afrinvest accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

This report is for private circulation only. This report may not be reproduced distributed or published by any recipient for any purpose

without prior express consent of Afrinvest. Investments can fluctuate in price and value and the investor might get back less than was

originally invested. Past performance is not necessarily a guide to future performance. It may be difficult for the investor to realize an

investment. Afrinvest and/or a connected company may have a position in any of the instruments mentioned in this document. Afrinvest

and/or a connected company may or may not have in the future a relationship with any of the entities mentioned in this document for

which it has received or may receive in the future fees or other compensation. Afrinvest is a member of The Nigerian Stock Exchange and is

regulated by the Securities and Exchange Commission to conduct investment business in Nigeria.

For further information, please contact:

Afrinvest Securities Limited (ASL)

27 Gerrard Road

Ikoyi, Lagos

Nigeria

Tel: +234 1270 1680

Fax: +234 1 270 1689

Date post:	21-Sep-2020
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