Insurance Sector Update August 2020 - Nigeria’s No1

Insurance Sector Update

August 2020

Oluwadara Olunuga

+234 (1) 270 1680 ext. 319

[email protected]

Insurance Sector Update - Afrinvest Securities Limited 1

The Global Insurance Industry maintained steady growth in 2019 as

premiums increased by 3.0% to $6.3tn after crossing the $5.0tn mark in

2018, representing 7.2% of Global GDP. Growth was supported by the

improvement in both life and non-life insurance segments in China and

the non-life segment in advanced markets. The non-life segment printed

an impressive 3.5% growth in premiums to $3.4tn in 2019 while life

insurance premiums grew by 2.2% to $2.9tn. Across regions, emerging

markets led the growth in premiums with China reporting 5.6% and

12.0% increase in life and non-life premiums respectively.

Declining yields on treasury instruments due to the accommodative

monetary policy of global systemically important central banks pressured

life insurance profitability in 2019. However, improved pricing and

underwriting conditions supported the profitability of non-life

insurance.

Broader fallouts from the pandemic in terms of lower demand and

investment returns, deterioration in the credit quality of fixed income

securities and increased mortality rates from the virus could pressure

earnings, reserves, and profitability of the life insurance sector in 2020.

For the non-life sector, a rise in COVID-19 related claims, premium

rebates and lower interest rates could offset the increased demand for

pandemic-related policies and reduce profitability.

economic growth of 2.3%, as the sector expanded 3.6% in 2019 from

6.1% in 2018, according to the National Bureau of Statistics, indicating

slowing momentum since the contraction of 2.9% in 2017. Premiums

recorded a 15.5% growth to ₦365.1bn in 2017 according to available

data from the Nigeria Insurers Association, with the life segment

primarily responsible for the impressive growth.

The industry is undertaking another round of recapitalisation to boost

capacity after two previous exercises in 2003 and 2007. However, growth

remains abysmal with the sector lagging peers in major indicators

penetration and density. This poor level of growth is largely due to little

awareness & understanding of insurance products, lack of trust

especially with regards to claim settlement, socio-cultural & religious

beliefs of Nigerians, weak enforcement of compulsory insurance policies

and the slow pace of innovation amongst industry participants. In

addition, the weak macroeconomic environment affects insurance

adoption given weak economic growth and high unemployment and

poverty rates.

it is pertinent that micro-insurance policies which are specially designed

for the low-income market, micro and small-scale enterprises are

promoted. In this regard, NAICOM recently licensed two full-fledged

micro-insurance companies, GOXI and Cassava Micro-insurance

companies, to offer life and general micro-insurance services in Lagos

Executive Summary

Outline

Executive Summary

Investment Thesis

Global Insurance Industry: Premiums to Con-tract in 2020 due to the Great Economic Reces-sion

COVID-

Bane or Boon?

Emerging Trends in the Global Insurance Indus-

try

tion and Density

Nigerian Insurance Sector amid COVID-19

Boosts Performance

Outlook for the Sector

Recapitalisation Messiah or Déjà vu?

lief for Insurers

Framework

-income

Population

Bancassurance... Leveraging Existing Platform

Collaboration with Mobile Network Operators

Other Emerging Issues in the Nigerian Insur-

ance Sector

Company Analysis

AIICO Insurance Plc

AXA Mansard Insurance Plc

Consolidated Hallmark Insurance Plc

Cornerstone Insurance Plc

NEM Insurance Plc

WAPIC Insurance Plc

Industry Outlook: Underweight


August 2020


state. Alongside the promotion of micro-insurance, we believe less-

restrictive Bancassurance guidelines and the removal of the ban on

partnership with Mobile Network Operators (MNOs) would allow for

low-cost distribution of insurance products and deepen insurance

penetration, especially at the low-income segment of the Nigerian

market. We see recent developments in the form of the partnership

between Axa Mansard & Carbon and agri-business insurance boosting

premiums and awareness for the sector, although there are inherent

risks.

The novel Coronavirus is taking its toll on the Nigerian economy and the

sector is not isolated from its effect. The economy is projected to

experience a severe economic recession in 2020 which may subsequently

result in lower disposable income for the average Nigerian and thereby,

lead to poor renewal and uptake rates for insurance policies. Also,

interest rates in the fixed income market are currently at low single-

digits, implying lower investment income for insurers who majorly

invest in the fixed income market. Overall, profitability would rely

heavily on effective risk management and operational efficiency as a

result of slower growth in premiums and rising claims (majorly in the

life segment due to increasing death toll from the pandemic). However,

the pandemic may provide an avenue for players to roll out variants of

health insurance and pandemic-related policies.

.

...We recommend less-restrictive Bancassur-

ance guidelines and the removal of the

ban on partnership with Mobile Network

Operators to boost awareness and deepen

The Nigerian Insurance Sector grew faster

than the overall economy in 2019, alt-

hough, growth remained sluggish since

the 2017 contraction

The pandemic is taking its toll on the Nige-

rian economy and by implication, the in-

surance sector. However, it may provide an

avenue to roll out health insurance and


August 2020


In 2017, the insurance sector recorded an impressive 15.5% growth in

premiums the highest in 5 years. However, the sector continues to lag

its peers in terms of penetration which stood at 0.5% compared with

South Africa (12.9%), Kenya (2.8%), Angola (0.8%) and Egypt (0.6%)

while density at $6.2 also remains weak compared to South Africa

($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).

Across peers, we observe poor valuation of Nigerian insurers in the

market with price-to-book ratio of 0.43x compared with South Africa

(1.99x), Egypt (1.65x) and Kenya (0.64x). This indicates investor apathy

towards the listed insurers, quite evident in their stock prices. Although

this underpricing appears attractive from an investment standpoint, we

believe the pricing is synonymous with the value-added by the insurers

over time in terms of performance.

In light of weak penetration and density, there is opportunity for strong

growth in the sector. The planned recapitalisation would unlock more of

this growth. We, however, preach consolidations in form of mergers and

acquisitions in order to leverage synergies and reduce operational costs.

In addition to increased capital, partnerships such as Bancassurance and

mobile insurance would provide platforms for better reach. However, the

weak medium-term prospects of the macroeconomic environment would

be a major limitation to performance.

In the life segment, the life and annuity businesses remain a bane,

resulting in valuation losses for insurers. There is a need for insurers to

plug the funding gap between asset and liabilities and also, reprice

policies in the light of the current interest rate environment. For the non-

life segment, we expect insurers to come up with innovative products

and especially, take advantage of this pandemic to promote health-

related products. We believe micro-insurance offers the opportunity to

improve premiums significantly and also grow profits provided the

insurers can make use of cheaper and existing distribution channels.

In our coverage universe, we see significant upside in CORNERSTONE as

current valuation presents a 75.7% upside to its 24-July-2020 closing price

of ₦

operational efficiency compared to peers in the composite insurance

business.

management of its life & annuity funds), Consolidated Hallmark

Insurance (as a result of its exposure to sectors that would be affected by

the pandemic) and WAPIC (due to its lacklustre operational

the back of its foreign currency liability exposure and expected rise in

claims) and NEM (given its exposure to the oil & gas sector)

Investment Thesis

The Nigerian Insurance Industry suffers

poor valuation relative to peers in SSA

market with price-to-book ratio of 0.43x

compared with South Africa (1.99x), Egypt

In our coverage universe, we see signifi-

cant upside in CORNERSTONE as current

valuation presents a 75.7% upside to its 24

-July-2020 closing price of ₦0.50.


August 2020


Global Insurance Industry

Premiums to Contract in 2020 due to the Great Economic Recession

Chart 1: Regional Distribution of Global Insurance Premiums in 2019

US & Canada41.2%

Latin America & Caribbean

2.5%

EMEA28.6%

Asia-Pacific27.7%

Source: Sigma Research, Afrinvest Research

Global insurance premiums increased by

3.0% to $6.3tn in 2019 after crossing the

$5.0tn mark in 2018, representing 7.2% of

Global GDP.

On a segment basis, non-life reported an

impressive 3.5% rise in premiums to $3.4tn

while life premiums rose 2.2% to $2.9bn in

2019

Global insurance premiums increased by 3.0% to $6.3tn in 2019 after

crossing the $5.0tn mark in 2018, representing 7.2% of Global GDP.

Growth was supported by the improvement in both life and non-life

insurance segments in China and the non-life segment in advanced

markets.

On a segment basis, non-life reported an impressive 3.5% rise in

premiums to $3.4tn, higher than the forecasted 3.0% and its 10-year

average growth rate of 3.2%. The growth in non-life premiums was

majorly driven by a 7.7% (2018: 6.9%) increase in Emerging Markets

(EMs) premiums with China reporting a 12.0% growth in premiums

(same as in 2018). On the other hand, growth in premiums in Advanced

Economies (AEs) was slower at 2.7% (2018: 3.1%) with the major boost

coming from a 7.1% increase in Hong Kong. Due to the effect of the

pandemic on global economic growth, global non-life insurance

premiums are forecasted to contract by 0.1% in 2020 and a rebound in

growth to 3.3% is expected in 2021. Premiums in AEs is estimated to fall

by 1.0% while EMs are expected to remain resilient with a 3.0%

increase in premiums in 2020. By 2021, EMs premiums are estimated to

grow by 7.0% while AEs premiums would rise by 2.0%.

Life insurance premiums rose 2.2% in 2019 (2018: 2.6%) to $2.9bn, above

its 10-year average growth rate of 1.5%. growth in life premiums was

mainly due to a recovery in EMs by 5.6% in 2019 from a 2.0% contraction

in 2019. Again, the rebound was hinged on a recovery in China by 6.7%

after premiums contracted in 2018 due to stiffer regulations on sale of

universal life products. In AEs, premiums grew by 1.3% (2018: 0.8%) due

to impressive performance in countries including Italy (3.9%) and

Germany (6.9%) despite a 1.2% decline in premiums in UK and a

deceleration in US premiums growth to 1.4% from 5.1% in 2018. In

2020/21, life premiums are forecasted to contract by 1.5% apiece due to

the pandemic-induced rise in unemployment and dwindling income


August 2020


Chart 2: Insurance Penetration (GPW/GDP) across Major Regions & Countries

6.1%

7.1%7.8%

3.2% 3.0%

12.9%

7.2%

11.4%

9.6%

3.3%2.8%

13.4%

0.0%

4.0%

8.0%

12.0%

World US AEs EMs Africa South Africa

2018 2019


Chart 3: Insurance Density (GPW per capita) across Major Regions & Countries


682

4,481

3,737

169 54

840 818

7,495

4,664

175 52

803

0.0

2,000.0

4,000.0

6,000.0

8,000.0

World US AEs EM Africa South Africa

2018 2019

The reduction in both life and non-life pre-

miums in 2020 is expected to be similar to

that of the Global Financial Crisis (GFC).

However, the rebound beginning in 2021 is

expected to be swifter due to the absence of

the financial market turmoil that followed

Lower demand and investment returns, a

significant deterioration in the credit quality

of fixed income securities and increased mor-

tality rates from the virus could pressure

earnings in the life segment while a rise in

COVID-19 related claims, premium rebates

and lower interest rates could affect non-life

which would drag demand. In AEs, premiums are expected to decline by

3.0% both years while premiums in EMs are expected to stagnate in

2020 and rebound softly in 2021.

The reduction in both life and non-life premiums is expected to be

similar to that of the Global Financial Crisis (GFC). However, the

rebound beginning in 2021 is expected to be swifter due to the absence

of the financial market turmoil that followed the GFC.

Insurers depend on yields on invested funds to complement

underwriting performance especially in the face of unfavorable under-

writing conditions. However, yields on treasury instruments have

declined due to easy monetary policy stance of global systemically

important central banks to cushion the economic impact of the trade

tension between the US & China and support economic growth. The

low interest rate environment in AEs especially in Europe and advanced

Asia-pacific and its resultant decline in yields pressured profitability of

life insurance in 2019. However, improved pricing and underwriting

conditions supported profitability of non-life insurance in the same

period.

Broader fallouts from the pandemic in terms of lower demand and

investment returns, a significant deterioration in the credit quality of

fixed income securities and increased mortality rates from the virus

could pressure earnings, reserves and profitability of life insurance

sector in 2020.


August 2020


While the pandemic may result in increased

claims for some insurance segments including

life, business disruption and events insurance,

it may be instrumental in changing consumer

perception about insurance

Insurtech seeks to digitise the entire insur-

ance value chain from premiums payment to

claims recovery

For the non-life sector, a rise in COVID-19 related claims, premium

rebates and lower interest rates could offset the increased demand

for pandemic-related policies and reduce profitability.

COVID-

The COVID-19 pandemic which began as a flu in Wuhan, China in

about 18.8m confirmed cases and 708,639 recorded deaths world-

wide. The measures taken to fight the spread of the pandemic has

resulted in disruptions to global supply and a massive fall in demand

and employment. The pandemic would have a negative impact on

major insurance policies including business disruptions policies, health

insurance, events insurance as many functions and gatherings get

postponed. The impact would also be felt in travel insurance due to

restrictions in movement especially for customers with additional

covers against travel disruptions and in credit insurance as default

rates rise. Also, premium income would potentially reduce as

businesses close down and the profitability of insurers could decline

due to fall in yields on fixed income instruments which constitutes

Globally, insurers have taken steps to mitigate the effect of COVID-19

on customers and reiterate the insurance mission by extending health

cover to include pandemic-related claims, providing free cover for

healthcare workers, fast-tracking claims application process, among

other measures. Although these actions would increase costs for

insurers, it might be instrumental in driving home the insurance

greater emphasis on life insurance and health policies going forward

and already, demand for life insurance policies has increased

especially among the aged.

Emerging Trends in the Global Insurance Industry

-chain

InsurTech - a replica of the FinTech model of the banking industry

depicts the emergence of flexible technology to improve efficiency

and customer satisfaction through personalisation of insurance

policies for insurance consumers and making it easier to access

policies. InsurTech generally seeks to digitise the insurance value

chain from premiums payment to claims recovery and would render

the traditional medium of brokers and agents obsolete. Today,

insurers are increasingly required to use consumer data in creating

specialized products to meet the changing needs of consumers. The

more involved in the lives and businesses


August 2020


providing risk-control advice & devices

covering potential losses as always.

Insurance-on-

On-Demand insurance allows consumers purchase insurance policies

on their smartphones whenever and wherever they want and most

times, they purchase these policies when the insured asset is in use and

at risk. This technological development becomes necessary due to

disruptions in the retail distribution market as consumers can now

purchase a wide range of products and services at the click of their

phones. Simple transactions with no paperwork completed via

smartphones are commonplace and consumers, especially millennials,

now expect the same for insurance. This distribution channel requires

taking a consumer-centric approach in developing products, access to

real-time consumer data to update risk profile, terms & pricing and

adequate infrastructure to support the process. While Insurance-on-

Demand might help insurers reach the millennial market in a similar

manner to Uber, Netflix and Amazon, the ability of the consumer to

switch off policies at will may imply lower premiums and facilitate

fraudulent claims.

Advanced Driver-Assistance Systems (ADAS) and Transition to Self-

Advanced driver-assistance are intelligent technological systems that

complements human drivers by providing information and support to

improve safety and comfort. ADAS enables traffic awareness,

increased fuel efficiency, infrastructure use efficiency as well as

facilitate communication between vehicles. These features help reduce

accident rates, lower repair & maintenance costs, thereby reducing

insurance premiums. Similarly, autonomous vehicles adoption is

predicted by KPMG to result in a 90.0% reduction in accident

frequency per vehicle by 2050 and losses from automobile accident is

expected to fall by 63.0% ($122.0bn). By 2030, about 25.0% of cars in

the US would be autonomous according to Boston Consulting Group.

Safer cars, coupled with less frequent and less costly accidents would

significantly reduce premiums paid for motor insurance.

In a similar way to the disruption in the retail

market by Uber, Netflix and Amazon, Insur-

ance-on-Demand seeks to introduce a need-

based system of accessing insurance products

ADAS and Self-driving cars would reduce the

frequency and costs associated with acci-

dents, implying lower motor insurance pre-

miums for insurers


August 2020


Industry Overview

Chart 4: Nigeria Insurance Industry Real GDP Growth (2016 - 2019)

2.5%

-2.9%

6.1%

3.6%

-3.0%

0.0%

3.0%

6.0%

9.0%

2016 2017 2018 2019

Source: NBS, Afrinvest Research

The Nigerian Insurance Industry grew by

3.6% in 2019, although faster than overall

economic growth, growth has been slow

since the contraction in 2017

Although there has been significant foreign

partnerships and investments in the Nigerian

Insurance industry, these are yet to move the

needle as there is still a lack of large-size

The insurance industry grew by 3.6% in 2019 from 6.1% in 2018 according

to the National Bureau of Statistics (NBS), indicating slowing momentum

in recovery since the contraction of 2.9% in 2017. The sector, however,

grew faster than the overall economic growth of 2.3% in 2019.

Structurally, the Nigerian insurance sector is categorised as Life insurance

(13 companies), non-life insurance (27 companies), composite insurance

offering both life and non-life services (13 companies) and Re-insurance

(2 companies). The Life insurance sub-sector held 44.3% of premium

income in 2017 while the non-life premium contributed 55.7%. National

Insurance Commission (NAICOM) recently announced the proposed

liquidation of two companies Investment & Allied insurance and Spring

life assurance. While the former is to be liquidated for fraudulent activities,

the latter failed to maintain the existing minimum capital requirements of

₦2.0bn for the life business.

Foreign investment has increased in the industry lately with substantial

investment in Mansard (2014), Swiss Re in Leadway Assurance (2016),

in UNIC Insurance (2017), Allianz in Ensure (2018) and most recently in

2019, InsurResilience Investment fund in Royal Exchange Plc. These

partnerships and investments are yet to move the needle as there is still a

lack of large-size insurers due to capital issues.

In terms of reach, the Nigerian insurance industry continues to lag peers

with low insurance penetration (Gross Premium Written/GDP) of 0.34% in

2019 (2018: 0.33%) compared with South Africa (13.4%), Morocco (3.9%),

Kenya (2.3%) and Egypt (0.6%). Insurance density (Gross Premium Income

per Capita) at $8.0 (2018:$6.2) also remains weak relative to peers such as

South Africa ($803.0), Morocco ($127.0), Kenya ($43.0) and Egypt ($19.0).


August 2020


.

Chart 5: Insurance Penetration across Peer Countries in 2019

13.4%

3.9%

2.3%

0.6% 0.3%

0.0%

4.0%

8.0%

12.0%

16.0%

South Africa Morocco Kenya Egypt Nigeria


803.0

127.0

43.019.0 8.0

0.0

200.0

400.0

600.0

800.0

South Africa Morocco Kenya Egypt Nigeria

Chart 6: Insurance Density across Peer Countries in 2018


Insurance penetration and density remain

poor in Nigeria, presenting an attractive in-

young and growing population

According to Swiss Re, the Nigerian insurance sector ranks 63rd globally (out

of 88 countries profiled) in terms of gross premium income and the sector

contributed about 0.03% to global premiums in 2019.

Weak insurance penetration presents an attractive investment case,

growing middle class. This size of the market remained unchanged largely

due to little awareness & understanding of insurance products, lack of trust

especially with regards to claim settlement, socio-cultural & religious beliefs

of Nigerians, weak enforcement of compulsory insurance policies, slow pace

of innovation amongst industry participants and high poverty rate. On the

focus on tailored products and micro-insurance. Already, NAICOM is

promoting micro-insurance by providing guidelines for micro-insurance in

2018 and licensing two full-fledged micro-insurance companies, GOXI and

Cassava Micro-insurance companies.


August 2020


Chart 7: Industry Gross Premium Written by Segment in 2017

55.7%44.3%

Non-life Life

Source: NIA Digest 2017, Afrinvest Research

Although Nigerian insurers do not have spe-

cific business interruption policies that cover

pandemics, the sector would take significant

hit from the spread of the virus as other in-

Gross premium Written (GPW) for both life &

non-life grew 15.5% to ₦365.1bn in 2017,

above its 10-year CAGR of 9.3%. For the com-

panies selected as proxy for 2018 and 2019

performance, we note that premiums main-

tained an uptrend, up by 26.1% to ₦216.4bn

in 2019 from ₦171.5bn in 2018.

Nigerian Insurance Sector amid COVID-19

As the country recorded its first COVID-19 case late February this year and

subsequently implemented a 4-week lockdown in 3 of its major commercial

cities (Lagos, Ogun and Abuja) in March, economic activities slowed

significantly. Although Nigerian insurers do not have specific business

interruption policies that cover pandemics, the sector would take

significant hit from the spread of the virus as other insured risks escalate.

For instance, high incidence of theft and burglary during the lockdown

would raise the level of claims, especially in H1:2020. Also, the renewal of

policies may be poor during this economic crunch, leading to lower

premiums. WAPIC and Leadway Assurance are refunding part of premiums

paid for motor insurance, passing lower claims payment to the insured as

people stay at home and there is reduced movement. For insurers with

HMO subsidiaries such as AXA Mansard and Royal Exchange plc, claims are

expected to rise as other health issues escalate on the back of the lock-

down. The insurance industry is also supporting frontline health workers

with life insurance cover. Although, we do not have details of how this

would be borne by insurers, it implies higher claims and expenses. The

recapitalisation exercise has been reviewed as the pandemic has affected

capital raising activities. Insurers and reinsurers are now required to comply

with 50.0% and 60.0% respectively of the new minimum threshold

applicable to their respective businesses by December 2020 and full

compliance is slated for September 2021.

To analyse the performance of the sector, we mainly used data from the

performance of all insurance companies up till 2017. To show recent trend

in earnings between 2018 and 2019, we used aggregated data from 8

listed companies, comprising 4 composite and 4 non-life insurers.


August 2020


Individual 24.3%

Group life 27.6%

Annuity48.1%

Chart 8: Composition of Life Insurance Premiums in 2017

Source: NIA Digest, Afrinvest Research

Chart 9: Top 10 Life Insurance Companies by Premiums in 2017

61.3

21.7 19.6

12.2

6.9 5.0 4.5 3.7 3.6 3.1

-

15.0

30.0

45.0

60.0

75.0

₦'bn

Source: NIA Digest, Afrinvest Research

Annuity business remains the major driver of

life premiums, representing 48.4% of premi-

ums in 2017 due to the growing number of

as retirement benefits as permitted by the

Pension Reform Act 2014.

Gross premium Written (GPW) for both life & non-life grew 15.5% to

₦365.1bn in 2017, above its 10-year CAGR of 9.3%, according to the latest

data available from the NIA. For the companies selected as proxy for 2018

and 2019 performance, we note that premiums maintained an uptrend,

rising by 26.1% to ₦216.4bn in 2019 from ₦171.5bn in 2018.

On a segment basis, non-life premium rose 7.4% to ₦203.3bn (10 year

CAGR: 5.3%) and contributed 55.7% to industry GPW while life premiums

posted an impressive 27.6% growth to ₦161.7bn in 2017 (10 year CAGR:

18.6%).

Life Insurance: Increased Premiums based on Compulsory Group Life

With a 44.3% share of total sector premiums in 2017, life insurance

premiums grew by 27.6% to ₦

life cover continues to drive growth. For our selected companies, life

insurance premiums grew 42.6% to ₦57.1bn in 2019 from ₦40.0bn in 2018.


August 2020


Chart 10: Composition of Non-life Insurance Premiums in 2017

Motor19.3%

Marine & Aviation

10.9%

Fire17.4%

General Accident

14.6%

Workmen Compensation

Insurance0.1%

Oil & Gas 31.4%

Engineering4.4%

Miscellanous Insurance

1.9%

Source: NIA Digest 2017, Afrinvest Research

Oil & Gas and Motor insurance remain the

major insurance segments in Nigeria as trans-

actions in both segments are boosted by

regulations

As the deadline for compliance with the compulsory group life policy

(March 2020) lapse this year, we expect continued double-digit growth in

life insurance premiums in line with the growth in pension assets. We note

a high concentration ratio in this sub-sector with an oligopolistic structure

as the top 5 companies held 75.2% of premiums and the biggest player,

Leadway Assurance accounted for 37.9% of total premiums. A closer look

reveals annuity business as the major driver of life premiums, representing

48.4% of premiums in 2017 due to the growing number of retirees taking

Pension Reform Act 2014.

Oil & Gas Insurance: Premiums Remain Upbeat on the Back of Local

Content Policy

Oil & Gas recorded the largest share of non-life premiums in 2017 with an

18.1% increase to ₦63.9bn, representing 31.4% of total premiums. Using

data from the selected companies, we observe an upward trend in Oil &

Gas premiums, up 20.0% from ₦28.5bn in 2018 to ₦34.2bn in 2019.

local content policy and the Energy and Allied Risks Insurance Pool of

Nigeria. Both policies aim to increase the proportion of oil & gas risks

retained locally. The weak underwriting capacity, however, remains obvi-

ous in the high reinsurance rate of 68.4% (5-year average: 68.6%) which

represents the highest among the sub-classes of insurance.

Motor Insurance: Fake Policies Hamper Growth

Motor insurance premium fell 2.7% to ₦39.3bn in 2017, although this sub-

class remained the second largest driver of non-life premium at 19.3% of

total. However, premiums grew in 2019, rising 15.8% to ₦19.1bn from

₦16.5bn in 2018 using data from the selected companies. The compulsory

third-party insurance policy supports transactions in this sub-class. Despite


August 2020


We believe fire insurance should be added to

the list of compulsory insurance policies and

adequately enforced given the depth of loss-

es incurred (especially by third parties) in the

event of a fire outbreak.

In the life insurance sector, the effect of the

recession may be in the form of reduced pre-

miums especially for individual and group life

policies (as companies lay-off staff members).

the penalty for violating the compulsory third-party insurance regulation

and the initiative of the NIA to spot fake policy certificate (through the

Nigeria Insurance Industry Database), fake policies remain a bane to the

expected growth level in this sub-class. The ratio of insured vehicles to

total number of vehicles of 21.2% clearly reflects this challenge, with total

vehicle count of 11.8m as at Q4:2018 (as reported by NBS) and insured

vehicles at 2.5m.

Fire Insurance: Compulsory Insurance for Buildings and Markets?

In 2017, fire insurance premium grew by 15.0% to ₦35.4bn and

represented 17.4% of general business premiums. For our selected

companies, fire insurance premiums rose by 8.0% to ₦15.5bn in 2019 from

₦14.4bn in 2018. We believe fire insurance should be added to the list of

compulsory insurance policies and adequately enforced given the depth of

losses incurred (especially by third parties) in the event of a fire outbreak.

This insurance class can be structured in micro-units and mandated for

shop/stall owners and intending tenants especially considering the rate of

inferno recorded in 2019 which ravaged major markets and public

facilities. A similar legislation applies in Ghana as the Insurance Act 2006

requires all commercial buildings and those under construction to have a

commercial property insurance to protect against collapse, fire, earth-

quake, storm and flood. Over the years, the level of compliance has

increased and many buildings have been restored after fire or natural

disasters occurred.

ational Efficiency

major source of revenue and foreign exchange earnings under pressure,

the outlook for the overall economy and the insurance sector remains

bleak. Against this backdrop, the IMF forecasted that the Nigerian

economy would contract by 5.4% given external headwinds. For the

Nigerian economy, the situation is a three-fold whammy as oil prices

crashed on the back of weak demand due to restrictions and lockdown,

OPEC+ alliance enforced a reduction in oil production to support prices

and COVID-19 affects the health and businesses of Nigerians. The insurance

sector may suffer from an economic recession due to lower subscriptions as

insurance premiums represents discretionary expenses to most consumers.

In the life insurance sector, the effect of the recession may be in the form

of reduced premiums especially for individual and group life policies (as

companies lay-off staff members). However, annuity funds - the largest

contributor to life premiums - is expected to maintain steady growth and

support life premiums. Non-life insurance premiums are expected to

decline, especially oil & gas premiums in a similar fashion with the scenario

that followed the 2014 oil price crash where it declined and the retention

level fell (more premiums were ceded to reinsurers).


August 2020


In our view, the profitability of most insurers

would be a function of effective risk manage-

ment and operational efficiency due to ex-

pected slower growth in premiums and rise in

claims.

In terms of claims payment, claims are expected to rise especially in the life

segment considering the increasing death toll from the pandemic. Claims

in the non-life segments would also rise subtly in line with inflation

growth. While claims are expected to rise in sub-segments such as medical

insurance, claims in motor, marine & aviation insurance should reduce due

to restriction in movement and travels.

Investment income would remain poor given the very low-interest rate

environment. Although, rates are expected to rise as the government seeks

domestic borrowing to fund the budget deficit, we do not expect rates to

rise above inflation in the meantime. Insurance companies require positive

real interest rate to raise investment income and complement

underwriting performance. For the life insurance segment, a repricing of

policies may be required in the light of negative real interest rates and

insurers with mismatch between assets and liabilities would require

funding to plug the gap. In our view, the profitability of most insurers

would be a function of effective risk management and operational

efficiency due to expected slower growth in premiums and rise in claims.


August 2020


Regulatory Environment

Recapitalisation: Messiah or Déjà vu?

₦'bn

0.2 0.2 0.4 0.42.0

3.0

5.0

10.0

8.0

10.0

18.0

20.0

0.0

5.0

10.0

15.0

20.0

25.0

Life NonLife Composite Reinsurance

2003 2005 2019

Chart 11: Minimum Capital Requirement for Nigerian Insurance Companies

(2003 - 2019)

Source: NAICOM, Afrinvest Research

...despite the large increase in capital base,

the insurance sector continues to grapple

with low penetration, high claims and poor

growth after the two recapitalisation exercis-

Recapitalisation is a familiar agenda in the history of the Nigerian insurance

sector, considering two series of the exercise in 2003 and 2005. The initial

exercise came as an off-shoot of the Insurance Act 2003 Section 9(1) which

initially reviewed the minimum paid-up share capital for operators in the

industry to ₦150.0m Life, ₦200.0m Non-life, ₦350.0m Composite and

Reinsurance. The same Act section 9(4) empowers NAICOM to increase the

minimum paid-up capital for operators from time to time.

Coming on the heels of the banking recapitalisation in 2004, the Federal

Government of Nigeria through the then Minister of Finance in 2005,

Okonjo-Iweala announced new minimum capital requirements that implied

over 1,000% increase in the capital base for different categories of industry

players; ₦2.0bn Life, ₦3bn Non-life, ₦5bn Composite and ₦10bn Re-

insurers. Subsequently, the number of players reduced drastically from 104

insurers and 4 reinsurers to 49 insurers and 2 reinsurers following a series of

mergers and acquisitions. Notably, 4 companies each merged to form

Custodian and Veritas Kapital. The exercise was aimed at improving the

retention capacity - the amount of risk insurers retain locally - of the sector

and attracting foreign capital into the industry by capitalising on synergies

from mergers, acquisitions and other forms of combinations. However,

despite the large increase in capital base, the insurance sector continues to

grapple with low penetration, high claims and poor growth after the two

recapitalisation exercises.

A Weak Attempt at Risk-based Recapitalisation

NAICOM attempted a tier-based recapitalisation in 2018 with the aim of

having capital levels that would support the nature, scale and complexity of

the businesses of insurance companies. The initiative was to align with

solvency II a model similar to the BASEL framework for banks which

provides harmonised, sound and robust prudential framework for

insurance firms in the EU by requiring insurers to maintain capital


August 2020


For the composite insurers, only Leadway

Assurance has met the minimum capital

threshold of ₦18.0bn (share capital, Share

Among the life insurance companies, African

Alliance and FBN Life Assurance are ade-

quately capitalised relative to the ₦8.0bn

For the non-life insurers, Zenith General and

WAPIC are qualified given the ₦10.0bn

requirements in line with the specific risk they underwrite. Specifically, the

tier-based minimum solvency capital structure had defined minimum

capital of ₦2.0bn, ₦3.0bn and ₦6.0bn for Tiers I, II & III Life business and

₦3.0bn, ₦4.5bn & ₦9.0bn for Tiers I, II & III non-life business. The exercise

was however cancelled by the Federal High Court due to controversies

leading to a class action by shareholders of insurance companies.

The Proposed Recapitalisation Exercise

In May 2019, NAICOM released a circular for a new recapitalisation

exercise for insurers and reinsurers which is expected to take capital levels

to ₦8.0bn, ₦10.0bn, ₦18.0bn and ₦20.0bn for life, non-life, composite and

reinsurance companies respectively, representing over 200.0% increase

from ₦2.0bn, ₦5.0bn, ₦8.0bn and ₦10.0bn previously. The deadline for

compliance which was initially set at June 2020 was extended to

December 2020 to afford insurers adequate time to finalize

recapitalisation plans. Again, the exercise intends to raise the risk

retention capacity and conserve foreign exchange earnings of insurance

recapitalisation plans in August 2019 for approval. However, only 27

received approval while some are being reviewed and the rest were

either requested to resubmit new plans, review current plans or resolve

litigation issues. By October 2019, 52 of 55 insurers had submitted their

recapitalisation plans; 44 plans were approved, 6 rejected and 2 were

reportedly under review. Of the 44 plans approved, 6 were plans of

mergers and acquisitions.

For the composite insurers, only Leadway Assurance has met the minimum

capital threshold of ₦18.0bn (share capital, Share premium & retained

earnings) at c.₦30.0bn while AXA Mansard (₦17.3bn) and Standard

Alliance (₦13.9bn) are close to the threshold and would probably require

capitalisation of profits to meet up. AIICO (₦12.9bn) would also be

₦5.3bn from its private

placement. While there is scanty information on the approaches of the

other companies to recapitalise, Cornerstone insurance has indicated

merger talks with other players.

Among the life insurance companies, African Alliance (₦24.7bn) and FBN

Life Assurance (₦11.5bn) are adequately capitalised relative to the ₦8.0bn

requirement, while Prudential Zenith Life Insurance (₦7.7bn) would

require capitalisation of profits. Capital Express Assurance has indicated

acquisition talks with 3 other insurance companies and ARM Life has been

sold off to Tangerine Life Insurance limited.

For the non-life insurers, Zenith General (₦20.0bn) and WAPIC (₦14.7bn)

are qualified given the ₦10.0bn threshold. NEM (₦8.7bn) may come close

to the mark by capitalizing H1 earnings. Details on the plans of other

companies are unclear, save for the acquisition of a 39.3% stake in Royal

Exchange by InsurResilience Investment Fund.


August 2020


The IFRS 17 standard provides a consistent

model for all aspects of accounting for insur-

ance contracts to facilitate comparison

among contracts, industries and across coun-

The Finance bill generally seeks to reduce

ambiguity with respect to tax treatments in

the sector and this should improve the ease

of doing insurance business in Nigeria and

Consolidated Hallmark Insurance Plc has an ongoing rights issue program to

raise ₦1.05bn coupled with an intended private placement and irreversible

preference shares to meet the requirement.

In the reinsurance space, Continental Reinsurance (₦14.2bn) which is yet to

meet the ₦20.0bn capital requirement has been restructured and the

minority interest has been acquired by its foreign majority shareholder, CRe

Investments and subsequently, delisted from the NSE.

Currently, only a small fraction of the sector have met the recapitalisation

requirements while we note ongoing plans and discussions for the rest. We

expect a flurry of mergers & acquisitions in the sector post-recapitalisation

and a massive reduction in the number of players in a similar fashion to the

banking precedent in 2004, for the sector to fully maximize its potential.

The COVID-19 pandemic and the associated lockdown has affected the pace

of recapitalisation and the exercise has been reviewed. Insurers and

reinsurers are now required to comply with 50.0% and 60.0% respectively

of the new minimum threshold applicable to their respective businesses by

the initial deadline of December 2020 while full compliance is slated for

September 2021.

The Finance bill eliminated and amended some sections of the Company

Income Tax Act (CITA) which relates to insurance companies by harmonising

tax payments by insurers with other sectors. First, the bill allows insurers to

carry forward losses indefinitely and reduce tax payments farther into the

future unlike the 4-year period allowed under the CITA. Also, both life and

non- - a proportion

of taxable income paid in taxes regardless of business performance during

the year. Furthermore, all wholly, exclusively, reasonably and necessarily

incurred expenses are tax-deductible. Taxable investment income would

The bill generally seeks to reduce ambiguity with respect to tax treatments

in the sector and this should improve the ease of doing insurance business

in Nigeria and encourage investments in the sector.

IFRS 17 (Insurance contracts) was established in May 2017 to replace the

interim IFRS 4 and is effective from January, 2022. The IFRS 17 standard

provides a consistent model for all aspects of accounting for insurance

contracts (applicable to all companies that underwrite insurance contracts)

to facilitate comparison among contracts, industries and across countries.

This standard requires companies that write insurance contracts to measure

those contracts using updated estimates and assumptions that reflect the

timing of cash flows and any uncertainty relating to insurance contracts.

Generally, IFRS 17 seeks to provide improved information about the current

and future profitability of insurers and reflect the impact of economic

changes in their financial statements in a timely and transparent manner.


August 2020


.

Chart 12: Minimum Capital Requirement for Micro-Insurance for Unit, State

and National Authorization

State L ife Non-life Compos ite

Unit ₦15.0m ₦25.0m ₦40.0m

State ₦40.0m ₦60.0m ₦100.0m

National ₦200.0m ₦400.0m ₦600.0m

Source: NAICOM, Afrinvest Research

For Micro-insurance to thrive in Nigeria, In-

surers would have to use the available distri-

bution channels through established groups

and societies in a bid to minimize costs and

Micro-insurance policies can be structured in

a way that allows the policyholders to pay in

installments either daily, weekly or monthly

in order to align premium payments with the

income-earning patterns of low-income peo-

There would be significant costs to be incurred on the part of insurers in

applying IFRS 17 as insurers are required to obtain new information,

employ new talents & train them and make changes to their accounting

systems and these costs would be incurred on an ongoing basis. To reduce

these costs, insurers are allowed to apply the new standard to a group of

contracts other than on a contract-by-contract basis. The benefits of

applying the standard include improved global comparability and

competitiveness of insurance companies and enhanced transparency &

quality of financial information.

-income Population

Micro-insurance policies are specially designed for the low income market

and micro and small-scaled enterprises in relation to cost, terms, coverage

and delivery mechanism. Given the target customers for micro-insurance,

it is important that insurers provide appropriate cover, simple & easily

understandable products, manageable premiums, suitable delivery

channels and convenient premium collection methods. A major challenge

in micro-insurance is cost-efficiency given that micro-insurance is a low-

price, high-volume business.

Distribution is a major link in the micro-insurance chain and specialised

distribution channels with ultimate focus on low-income people are

essential. Major distribution channels that have proven effective both

domestically and internationally include Direct Sales Agents, partnership

with financial institutions and groups that offer non-formal financial

services such as co-operative societies, community-based & faith-based

organisations, retail stores, Mobile Network Operators and healthcare

providers.

Opportunities abound for micro-insurance in Nigeria given its large adult

population with low insurance uptake, available distribution channels,

strong financial sector and regulatory support. There are also limiting

factors in micro-insurance such as low premiums & high cost of publicity

which may pressure profitability, general low awareness of insurance

among the populace and insurance apathy due to religious and socio-

cultural beliefs.


August 2020


...we believe the Bancassurance model would

significantly improve insurance awareness,

raise premiums, deepen penetration and

ultimately, boost financial inclusion.

and NCC would allow insurers to leverage

the customer base of MNOs to support pene-

tration especially at the retail end of the mar-

NAICOM recently licensed GOXI Micro-insurance and Cassava Micro-insurance

companies as full-fledged state composite micro-insurers, both offering life

and general micro-insurance services in Lagos state. Similarly, Consolidated

Hallmark Insurer (CHI) obtained license to operate a full-fledged micro-

assurance business. For Micro-insurance to thrive in Nigeria, Insurers would

have to use the available distribution channels through established groups

and societies in a bid to minimize costs and reach a larger populace. Insurers

can also leverage available technology through the use of USSD and mobile

money agents. In our opinion, annual premium payments may be expensive

for low-income earners and defeat the purpose of micro-insurance.

Therefore, micro-insurance policies can be structured in a way that allows the

policyholders to pay in installments either daily, weekly or monthly in order

to align premium payments with the income-earning patterns of low-income

people.

Bancassurance... Leveraging Existing Platform

According to the Nigerian Interbank Settlement Service (NIBSS), there are

currently 41.7m registered Bank Verification Numbers (BVN), 125.0m bank

accounts of which 79.4m are active as at April 2020. The data prove an

existing foundation on which Bancassurance a referral model where an

insurance products should thrive. Following the initial suspension of

Bancassurance in Nigeria in 2016, both the CBN and NAICOM revised

Bancassurance guidelines in 2017, clearly prohibiting banks from advertising

or marketing insurance products, effectively limiting the model to referral

only and placing a limit of two years on all Bancassurance contracts after

which the contracts are subject to renewal. The guidelines are however

restrictive, in our opinion, as only two banks can partner with an insurer and

a bank can only have two insurance partners.

Bancassurance provides an efficient distribution channel for insurers as banks

only get commission for actual insurance contracts compared with direct

marketing channels and also, the lack of trust characterising insurance is

eliminated through the banking channel. In Nigeria, major Bancassurance

agreements exist between WAPIC & Access Bank, Old mutual limited & Eco-

bank and in January 2020, NAICOM announced the approval of 18 new

Bancassurance licenses. Although there are scanty details on the impact of

Bancassurance on premium growth of insurers with only WAPIC disclosing

premiums from Bancassurance (0.8% of GWP in 2019), we believe the model

would significantly improve insurance awareness, raise premiums, deepen

penetration and ultimately, boost financial inclusion.

Insurance?

Much like Bancassurance, we believe collaboration between MNOs and

insurers would deepen penetration and bolster premium growth. With the

number of active telephone subscribers at 185.7m and teledensity number


August 2020


Guaranty Trust Bank may be disrupting the

retail segment of health insurance by provid-

ing coverage for basic and essential health

services including ante-natal, general consul-

tations and other common health problems

of telephone connections per 100 residents - at 97.5%, there is an

attractive case for partnership with MNOs. However, NAICOM banned the

distribution of insurance products through telecommunications companies

in 2016 and discussions between NAICOM and the Nigeria Communication

Commission (NCC) have stalled as both regulators seek to license players at

the other end. However, it is pertinent for both regulators to agree for the

insurers to leverage the customer base of MNOs to support penetration

especially at the retail end of the market. Insurers can also adopt

Unstructured Supplementary Service Data (USSD), in a similar manner with

the banks and other financial services, to connect with millions of Nigerians

who, although may not have access to internet and formal banking

services, have mobile phones. This method can be used to educate

consumers while allowing premium payments through airtime purchases

and also, insurance policies may be offered as incentives to encourage the

purchase of bulk data or voice plans.

Partnerships and Collaborations in the Nigerian Insurance Sector

Beta Health

Guaranty Trust Bank may be disrupting the retail segment of health

insurance by providing coverage for basic and essential health services

including ante-natal, general consultations and other common health

problems such as malaria and typhoid for ₦500 monthly and ₦5,500

annually. The plan, which is in collaboration with AXA Mansard and

Leadway Assurance, also offers a life insurance cover for ₦50,000.

brand loyalty especially among young Nigerians, Beta health may help

insurers capture value at the retail end of the market.

AXA Mansard and Carbon Partnership

AXA Mansard partnered with Carbon, a Fintech company, to provide

health benefits worth ₦

save a monthly minimum of ₦3,000, have an existing loan with up-to-date

payment or carry out transactions worth more than ₦5,000 monthly. We

believe this kind of partnership would help boost awareness about

insurance products.

Insurance for Agri-Business Crowdfunding

Crowdfunding platforms for agricultural produce and poultry products

have proliferated in Nigeria, offering attractive double-digit returns to

investors. This is especially as lending rates and conditions for agri-business

remain high given the riskiness of the sector. Insurers play a major role in

boosting investor confidence by providing cover for these farms against

major risks such as fire, flood, theft and other weather-related & natural

catastrophes. With the increasing number of agri-business crowd-funding

platforms, this could boost income and profits of insurers, barring huge

claims. With the pandemic slowing agricultural sector activities due to the

disruption in the value chain, claims may rise for insurers.

Company Analysis

August 2020


AIICO Insurance Plc

The Life Insurance Giant

Company Overview

Nigeria in 1963 as American Life Insurance Company - a subsidiary of

International Insurance Company (AIICO) upon the acquisition of a

60.0% stake by the Federal Government of Nigeria (FGN). AIICO was

listed on the Nigerian Stock Exchange in 1990 and subsequently, both

the FGN and AIG divested from the Company.

During the 2007 insurance recapitalisation exercise, the Company

acquired Nigerian French Insurance Plc and Lamda Insurance Company

Limited, thereby restructuring to become a composite insurer.

Currently, apart from offering life and non-life insurance products,

AIICO also offers pension management, health insurance and asset

management services through its wholly-owned subsidiary, AIICO

Capital and other subsidiaries AIICO Pension Management Limited and

AIICO Multishield Limited. In a bid to meet the new minimum capital

requirement of ₦18.0bn, Leap Frog Investment (a private equity fund)

and AIICO Bahamas limited invested ₦5.3bn in the Company.

Financial Performance and Outlook

Earnings Growth and Analysis

AIICO reported an impressive 33.1% growth in Gross Premium Written

(GPW) y/y to ₦50.2bn in 2019 as all 4 business segments recorded

by 166.5% y/y to ₦7.0bn from ₦2.6bn, although it accounts for 13.9% of

GPW. Life insurance which is the 2nd largest in Nigeria and

contributed 60.4% to GPW in 2019 - grew by 26.2% to ₦30.3bn y/y.

Similarly, premiums from non-life insurance and the health segment

rose by 17.3% and 5.3% to ₦12.2bn and ₦0.7bn in that order. Gross

Premium Earned (GPE) the proportion of GPW earned during the year

- moved in line with changes in GPW, advancing 35.0% to ₦50.0bn as

the Company earned 99.7% of its GPW in 2019 (2018 98.4%).

As the life segment reported an impressive 35.1% increase in premiums,

₦31.9bn in H1:2020. AIICO also recorded

increases in premiums across other segments in H1:2020 despite the

lockdown during the period.

Over the forecast period (2020/24), GPW is forecasted to grow at a CAGR

of 7.4% (2015/19: 8.8%) to ₦84.5bn in 2024, majorly hinged on steady

growth in the life segment while the non-life insurance premiums are

expected to grow at a slower pace especially in 2020 and 2021. The

slower growth in the non-life business would be due to the negative

impact of the restrictions put in place to combat COVID-19.

Source: Company Filings , Afrinves t Res earch

Chart 14: Shareholding S tructure (AIICO)

9.4%

16.2%

74.4%

AIICO

Bahamas

Limited

DF

Holdings

Others

Source: NSE

Chart 15: One Year Price Trajectory of NSEASI, NSE-BNK 10

& AIICO

50

100

150

200

250

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20

NSEASI NSE-INS10

SELL

0.90

0.48

Ups ide Potential (%) -47.2%

52 Wks High (N) 1.22

52 Wks Low (N) 0.6

Outs t. Shares (bn) 11.33

74%

10.2

28.3

2019 2020E 2021F

Underwriting Margin (%) -14.5% -13.8% -9.8%

Net Margin (%) 13.5% 7.9% 6.0%

Combined Ratio 121.9% 123.4% 119.3%

EPS (N) 0.85 0.55 0.48

P/E (x) 1.1 1.7 1.9

P/BV (x) 0.2 0.2 0.2

ROAE (%) 27.9% 14.0% 11.4%

ROAA (%) 4.4% 2.3% 1.9%

Div Yield (%) 6.7% 6.1% 5.4%

58.0%

12.5%

7.7%

5.2

Source: Company Filings , NSE

Chart 13: Trading Data - July 2020 (AIICO)

Rating

Share Price (N)

2019/20 TP (N)

Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)

Profitability and Valuation Metrics (FY2019)

Claims ratio

Reinsurance rate

Yield on investment assets

Quick ratio

Other ratios (FY2019)

Company Analysis

August 2020


Underwriting costs and Claims Ratio Analysis

In 2019, claims ratio moderated to 58.0% from 74.9% in the previous

year, given slower growth in claims across all the business segments.

On the flip side, underwriting expenses spiked to 55.8% of GPW from

20.5% in 2018, majorly due to huge losses emanating from the

actuarial valuation of life insurance and annuity funds to the tune of

₦21.7bn compared to ₦3.3bn loss recorded in 2018. This resulted in a

surge of 263.2% in underwriting expenses to ₦28.0bn in 2019 from

₦7.7bn.

This trend was sustained in H1:2020 as claims ratio declined 3.7ppts to

56.1% while total underwriting expenses as a proportion of GPW

spiked 118.1% from 106.4% in H1:2019 due to a ₦19.8bn valuation loss

on the life insurance and annuity funds.

Over the past 10 years, claims ratio has averaged 66.6% inclusive of

two outlier years 2015 & 2017 when claims ratio surged to 158.1%

and 118.7% respectively due to increase in life insurance claims. For

2020/24, claims ratio is estimated to average 65.4%, beginning at

68.0% in 2020 as we expect higher claims from the life insurance

segment due to rising death toll from the pandemic. Expense ratio is

also expected to be upbeat and average 52.7%, majorly driven by

losses from the life and annuity funds. However, the losses from the

funds are expected to reduce over time as the Company plugs the

in the light of the current interest rate environment.

Efficiency and Margin Analysis

As a result of the sharp increase in underwriting expenses, expense

ratio (underwriting expenses as a % of Net Premium Earned) rose to

64.0% in 2019 from 24.2% in 2018, and subsequently, pushed the

combined ratio to 121.9% (2018 99.1%) notwithstanding the

moderation in claims ratio.

Despite the lacklustre underwriting performance, AIICO reported

increased profitability and improved margins on the back of a 14.6%

increase in investment income and net realised gains of ₦14.2bn. While

underwriting margin turned negative (-14.5%) due to underwriting

losses recorded, net margin and PBT margin improved by 3.6ppts and

3.0ppts respectively to 13.5% and 12.5% in 2019. RoAE and RoAA also

inched higher by 2.7ppts and 1.3ppts to 27.9% and 4.4% in that order.

In H1:2020. underwriting margin worsened to 42.1% from 37.4% due

to lacklustre underwriting performance and PBT margin also declined

5.4ppts to 7.5%.

Over the forecast period, we expect underwriting margin to remain in

the negative region at an average of 8.7% in 2020/24, majorly on the

back of losses emanating from the life and annuity businesses. PBT

margin, RoAE and RoAA are also forecasted to average 9.1%, 13.4%

and 2.3% respectively, lower than 13.3, 19.6% and 2.7% recorded

over the last 5 years excluding 2016 an outlier year.

2019

Source: Company Filings, Afrinvest Research

(2015 - 2019)


Chart 18: AIICO Financial Performance Analysis 2017 - 2021E


Non Life24.3%

Life60.4%

Annuity13.9%

Health Mgt1.4%

32.9

27.1

32.1

37.7

50.2

1.2

10.2

1.3 3.2

5.9

-

10.0

20.0

30.0

40.0

50.0

60.0

2015 2016 2017 2018 2019

GPW PAT₦'bn

Financial Highlights

Column1 2017 2018 2019 2020E 2021EGross Premium Written (₦'bn) 32.1 37.7 50.2 59.3 66.0

Net Claims Incurred (₦'bn) 20.8 23.9 25.3 32.7 36.4

Underwriting Profit (₦'bn) (4.0) 3.2 (6.9) 3.6 3.3

PAT (₦'bn) 1.3 3.2 5.9 4.6 4.2

GPE/GPW (%) 66.3% 98.4% 99.7% 93.8% 93.8%

Claims Ratio (%) 118.7% 74.9% 57.8% 70.0% 70.0%

Expense Ratio (%) 17.7% 24.2% 65.4% 31.2% 33.3%

Combined Ratio (%) 136.4% 99.1% 123.2% 101.2% 103.3%

Underwriting Margin (%) (23.0%) 10.1% (15.8%) 7.6% 6.1%

Net Margin (%) 7.3% 9.9% 13.4% 9.7% 7.9%

RoAE (%) 13.6% 25.1% 28.3% 17.5% 14.8%

RoAA (%) 1.5% 3.1% 4.4% 2.8% 2.4%

Investment Asset/Total Asset (%) 86.5% 87.0% 86.7% 84.4% 84.2%

Quick Ratio 10.0 6.8 5.1 4.9 5.4

Company Analysis

August 2020


Investment Assets and Yield Analysis

Despite the rise in investment income, yield on interest-yielding assets

declined 2.0ppts to 7.7% in 2019. The increase in investment income

resulted mainly from a 42.1% rise in investments to ₦126.8bn. We

-

bank local corporates from the OMO market which resulted in treasury

bills yield receding to single-digits. Consequently, the Company increased

the federal government bonds in its investment portfolio by 314.9% to

₦72.4bn.

Liquidity, Contingency and Solvency Analysis

slightly waned in 2019. Current ratio fell to 5.6x from 7.2x in 2019,

although it remained above peer average of 5.2x while quick ratio

declined to 5.1x from 6.8x, also above 3.9x peer average. However, cash

ratio inched slightly higher to 0.42x from 0.38x as the company doubled

its cash holdings from ₦5.3bn to ₦11.1bn. We suspect this is due to

limited reinvestment opportunities especially in the money market. The

182.0% in 2018.

The Company failed the contingency requirement by setting aside

₦807.4m as contingency reserve which is lower than both 3.0% of its net

premium and 20.0% of Profit after Tax.

Outlook and Valuation

In the coming year, we expect AIICO to maintain topline growth

especially by leveraging its position as the second largest life insurance

company in Nigeria to boost life premiums. However, the Company

would require efficient management of its life & annuity fund and a

review of fund assumptions in the light of the current interest rate

environment to minimise losses. We expect a slower 9.0% growth in non-

life insurance premiums given lower expected premiums in auto and

aviation insurance in 2020, on the back of the slowdown in economic

activities while life insurance should maintain double-digit growth. In

terms of claims, life insurance claims is expected to rise as a results of

increased mortality rate and considering that it accounts for over 70.0%

of gross claims, overall claims would rise. The Company has significant

foreign exchange liability exposure given the IFC loan granted to the

Company in 2015, especially as the moratorium lapsed in 2019. Although

the loan is convertible to equity at the decision of the IFC, that option

was not exercised in 2019, implying higher finance costs for the Company

going forward.

We employed a combination of Dividend Discount Model (DDM) and

Relative valuation methodologies with respective weights of 80.0% and

20.0% to value AIICO. The DDM assumes the Company would maintain

consistent dividend payment at a stable payout of 10.0% over the

forecast period to arrive at a target price of 34kobo.

Source: Company Filings, Damodaran, Afrinvest Research

Weighting

Relative Valuation Methodology

P/Bv Valuation Methodology

Valuation P/Bv 0.25x

Forecas t BVPS 4.17

Target Price 1.30

Abs olute Valuation Methodology

Valuation Metric s

Ris k Free Rate (%) 11.9

Beta 1.1

Cos t of Equity (%) 26.1

S us tainable Growth Rate (%) 3.0

Dividend Dis count Model (DDM) 0.34

Current Market Price 0.90

NGN 0.48

-47.2%

Valuation Methodologies

20.0%

80.0%

Blended 12-month Target Price

Upside/Downside Potential

Company Analysis

August 2020


ed growth rate using its ROE and retention ratio stands at a premium to

peers at 25.9%. We also used price-to-book value method by applying the

₦4.17 to

obtain a target price of ₦1.3. We applied the respective weighting to ar-

rive at a 12-month target price of ₦0.48, representing a 47.2% downside

potential from its 24-July-2020 close of ₦0.90, hence we recommend a

Company Analysis

August 2020


AXA MANSARD

Restrategising to Focus on Core Operations

Company Overview

AXA group, a global leader in insurance and asset management.

Mansard was initially incorporated in Nigeria as a private limited liability

NAICOM in 2004. Following the acquisition of a majority stake of 56.0%

in the Company by Guaranty Trust Bank (GTB), the name was changed

to Guaranty Trust Assurance limited. The Company was later listed on

the Nigerian Stock Exchange in 2009 and in line with the CBN guidelines

for banks to either divest from non-banking subsidiaries or form holding

companies in 2012, GTB divested from the Company. In 2014, AXA

acquired Assur Africa Holdings which held a 77.0% stake in the

Company, hence, the Company changed its name and corporate identity

to AXA Mansard Insurance Plc in 2015.

Currently, the company offers life and non-life insurance business, asset

management services, medical insurance solutions and pension fund

administration through its subsidiaries including: AXA Mansard Health

limited, AXA Mansard Investments limited and AXA Mansard Pensions

limited. However, in February 2020, the Company announced its

divestment from its Pension business and real estate investments subject

to regulatory approval to focus on its core competencies.



As recorded in the last 4 years during which Gross Premium Written

(GPW) recorded impressive growth, GPW grew by 28.6% in 2019 to

₦43.6bn. The biggest increase was recorded in the HMO business with

premiums up 43.2% to ₦15.6bn with an increasing contribution to GPW

of 35.8% (FY:2018 32.1%). Life Insurance also posted an impressive

67.9% increase to ₦7.9bn, contributing 18.2% to total GPW. Similarly,

non-life insurance premiums grew 9.6% to ₦20.1bn. Although this has

been the major business of the company, its share of GPW has been

declining significantly and currently stands at 46.0% (FY:2018 56.0%).

Notably, no premium was reported from the annuity business and we

suspect this as a move to remove this segment given its complex nature

and the declining premiums from this segment over the last 3 years.

Mansard earned 95.4% of its GPW in FY:2019 as GPE came in at ₦41.6bn,

although GPE/GPW ratio was lower than its 5-year average and 2018

value of 96.4%.

For 2020/24, we estimate GPW to grow at a CAGR of 12.6% to ₦89.3bn

in FY:2024, slower compared with the last 5 years CAGR of 21.4% and

this is due to expected slower growth in the non-insurance business

especially in 2020/21. The major drivers of non-life insurance premiums -

oil & energy and motor insurance are expected to record lower pre-

REDUCE

1.60

1.45



52 Wks Low (N) 1.4


22%

18.9

49.7

2019 2020E 2021F

Underwriting Margin (%) 23.3% 28.1% 30.9%

Net Margin (%) 7.0% 8.9% 8.2%

Combined Ratio 83.9% 94.3% 91.8%

EPS (N) 0.26 0.23 0.31

P/E (x) 6.2 6.8 5.1

P/BV (x) 0.7 0.6 0.5

ROAE (%) 12.6% 10.5% 12.1%

ROAA (%) 3.5% 3.0% 3.6%

Div Yield (%) 0.0% 4.3% 5.5%

66.5%

36.8%

8.4%

0.58x


Claims ratio

Reinsurance rate


Quick ratio



Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)

2017/18 TP (N)

Chart 20: Trading Data - July, 2020 (MANSARD)

Rating

Share Price (N)


Chart 21: Shareholding Structure (MANSARD)

76.5%

8.8%

14.7%Assur AfricaHoldingsLimited

StanbicNominees

Others

Chart 22: One Year Price Trajectory of NSEASI, NSE-BNK 10 & MANSARD

Source: NSE

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NSEASI NSE-INS10 MANSARD

Company Analysis

August 2020


miums due to the pandemic.


Claims ratio in 2019 rose to 66.5% compared with 61.6% in 2018 as a

spike in HMO claims by 49.6% to ₦10.5bn more than offset the 16.6%

moderation in claims paid for non-life business to ₦5.9bn. We note an

abysmal reinsurance recovery rate of 6.4% (2018 35.8%) despite

stable reinsurance rate of 34.9% (2018 38.3%) implying that the

Company may be taking on higher risks other than ceding them to

reinsurers.

Underwriting expenses as a percentage of GPW rose in FY: 2019 to

10.5% (2018: 10.1%) as underwriting expenses grew faster at 33.5% to

₦3.5bn majorly as a result of losses from actuarial valuation of

individual life and annuity reserves. Specifically, acquisition cost grew

by 4.4% to ₦3.2bn while maintenance cost contracted by 3bps to

₦0.3bn and the Company reported a valuation loss of ₦1.1bn on its life

and annuity funds.

For our forecast period, we expect claims ratio to average 71.1%,

higher than its 2015/19 average of 62.9% as we expect higher claims in

life insurance spurred by the pandemic and in the HMO segment due

to the nature of the business. Expense ratio is also estimated to slightly

rise and average 18.9%, lower than its 2015/19 average of 20.5% as

the losses from annuity business would be eliminated due to the

removal of the annuity business and operational efficiency.


the 78.6% recorded in 2018, due to rising claims ratio, although it

remained below 100.0%. The expense ratio (underwriting expenses as

a % of Net Premium Earned (NPE)) remained flat at 17.3% in 2019 as

both the NPE and underwriting expenses rose at the same rate of

33.5%.

On the back of higher claims and underwriting expenses, underwriting

margin fell 6.9ppts to 23.3%, Net Margin also declined 60bps to 7.0%

and PBT Margin fell 1.2ppts to 10.5%. RoAE improved 55bps to 12.6%

while RoAA remained flat at 3.5%.

The Company is expected to maintain underwriting profitability during

the forecast period and underwriting margin is estimated to average

33.0% (2015/19: 25.9%) on the back of increased premiums and

operational efficiency. PBT margin, RoAE and RoAA are also forecasted

to average 14.5%, 15.9% and 4.7% respectively, indicating improving

profitability compared to the 2015/19 average of 13.5%, 12.8% and

4.0%.


Although the company increased its short term investments holding by

27.1% to ₦36.4bn in 2019, we observed a 241.9% surge in cash & cash

equivalent to ₦17.9bn in line with industry trend. This is especially as

in 2019


Chart 24: MANSARD Gross Premium Written (GPW) Vs

PAT (2015 2019)


2017 - 2021E


Non-life46.0%

Life - Group & Individual

18.2%

Mansard Health - HMO

35.8%

16.6

20.7

26.8

33.9

43.6

1.7 2.6 2.7 2.5 2.9

-

10.0

20.0

30.0

40.0

50.0

2015 2016 2017 2018 2019

GPW PAT₦'bn



Net Claims Incurred (₦'bn) (9.5) (12.1) (17.5) (18.0) (19.9)

Underwriting Profit (₦'bn) 2.6 5.9 6.1 8.4 10.5

PAT (₦'bn) 2.7 2.5 2.9 2.9 3.7

GPE/GPW (%) 97.7% 96.4% 95.4% 96.5% 96.1%

Claims Ratio (%) 69.2% 61.6% 66.5% 75.0% 73.0%

Expense Ratio (%) 23.3% 17.3% 17.3% 19.3% 18.8%

Combined Ratio (%) 92.5% 78.9% 83.9% 94.3% 91.8%

Underwriting Margin (%) 18.7% 30.1% 23.3% 28.1% 30.9%

Net Margin (%) 10.2% 7.6% 7.0% 8.9% 8.2%

RoAE (%) 14.2% 12.1% 12.6% 10.5% 12.1%

RoAA (%) 4.4% 3.5% 3.5% 3.0% 3.6%


Quick Ratio 0.6 0.6 0.6 0.6 0.6

Company Analysis

August 2020


the CBN excluded non-bank local corporates and individuals from the

OMO auctions in October 2019, thereby limiting opportunities for rein-

vestment of maturities. The split of the money market also reflected in

yields, which moderated to 8.4% from 10.4% in 2018.


The company maintained regulatory compliance in setting funds aside for

contingency reserve, although we note a lower reserve funds to profits of

0.9% compared to a 5-year average of 21.1% as the company capitalised

profits to meet the recapitalisation threshold. The contingency reserve of

₦131.4m also failed to meet the regulatory requirement of the higher of

3.0% of net premium and 20.0% of Profit after Tax.

cash ratios stood at 2.5x, 0.6x, 0.2x respectively, although similar to 2018

levels of 2.8x, 0.6x and 0.1x, it remained abysmal compared to the averag-

es across the composite insurers of 5.2x, 3.9x and 1.2x respectively. In

ry benchmark at 372.2%, rising from the 256.4% recorded in 2018.


We expect Mansard to leverage its partnership with Carbon and Guaranty

Trust Bank to boost premiums especially in its largest segment by

premiums; the HMO business. Even though the annuity segment may be

stopped, the effect would be insignificant on the total GPW given that

annuity has been declining over the years and contributed 0.03% to GPW

in 2018. However, we believe claims ratio would rise, especially in the life

and HMO segment in the face of the pandemic and this may pressure

weakness through the FCY loan from Rand Merchant Bank obtained in

2018 with a floating interest rate tied to the LIBOR and a floor rate of

10.0% with the final principal repayment due in August, 2020.

In valuing Mansard, we applied the Justified Price-to-Book Value method,

Dividend Discount model (DDM), Residual Income and relative valuation

methodologies with respective weights of 20.0%, 40.0%, 20.0% and

20.0%. For the DDM, we believe MANSARD would resume dividend

payment in 2020 after capitalising profits in 2019 to meet recapitalisation

benchmark. Hence, we assume a stable payout ratio of 25.0% over the

forecast period and we obtained a target price of 79 kobo. The Residual

value based on its ability to generate returns in excess of its cost of capital

and using the forecasted average RoAE of 14.6% and average required

return on equity of 22.2% calculated using the CAPM method, we arrived

at a ₦ -to-Book Value ratio of

0.7x was also applied to its forecasted book-value-per-share of ₦2.41 to

obtain a fair value of ₦2.01. A combination of all the valuation methods

with respect to their weights gave a target price of ₦1.45 which implies a

9.1% downside to its 24-July-2020 close of ₦1.60. Hence, we issue a





Forecas tBVPS 2.41

Target Pric e 1.69


Valuation Metric s


Beta 0.4



Dividend Dis count Model (DDM) 0.79

J us tified P/Bv (Gordon Growth Model) 1.70

Res idual Income Model 1.99

C urrent Market Price 1.60

NGN 1.45

-9.1%Upside/Downside Potentials

20.0%

80.0%


Company Analysis

August 2020


Consolidated Hallmark Insurance

Pivoting into Life Insurance through its Micro-

insurance Subsidiary

Company Overview

licensed to offer general business insurance in Nigeria with products

ranging from motor, fire and general accident to transactions in marine,

aviation and oil & gas sectors. CHI Plc was incorporated in Nigeria in

1991 as Consolidated Risk Insurers and subsequently, following its

merger with Hallmark Assurance and the Nigerian General Insurance

Company Limited during the 2007 recapitalisation exercise, changed its

Nigerian Stock Exchange in 2008.

Recently, the Company obtained approval to set-up a full-fledged micro-

-

the life insurance segment. This is in addition to its existing subsidiaries

including CHI Capital limited and Hallmark Health Services limited. CHI

Plc has an ongoing rights issue program to raise ₦1.05bn coupled with a

planned private placement and irreversible preference shares to meet

the recapitalisation requirement of ₦

capital base of ₦4.8bn.



Gross Premium Written (GPW) grew 26.6% y/y in 2019 to ₦8.7bn as

premiums grew across all segments of the Company. Oil & Gas

premiums, the largest contributor to GPW at 25.1%, grew by 14.7% to

₦2.1bn, while Motor insurance premiums increased by 20.9% to ₦2.0bn

with 23.7% contribution. Fire and General Accident insurance premium

also grew by 18.9% and 24.3% respectively to ₦1.2bn and ₦1.0bn

respectively. Similarly, Bond, Engineering and Marine recorded growth

in premiums of 65.7%, 36.9% and 2.5% respectively with contributions

of 2.2%, 4.1% and 7.0% to GPW. Lastly, Aviation and Medical premiums

surged 136.6% and 632.6% respectively to ₦736.1m and ₦224.9m, with

a contribution to GPW of 8.9% and 2.7%. In line with trend, CHI Plc

earned 95.5% of GPW in 2019 with Gross Premium Earned (GPE) at

₦8.3bn. In H1:2020, GPW grew steadily by 12.1% to ₦5.3bn majorly

driven by the Engineering, General Accident, Oil & Gas and Medical

segments. Although premiums from fire, marine and bond segments

contracted.

For 2020/24, we expect GPW to grow at a CAGR of 11.2% to ₦16.0bn in

FY:2024, faster than its historical CAGR for 2015/19 of 7.6% based on

steady growth along all business lines save motor, marine and aviation

which are expected to record lower premiums in 2020 due to the impact

of the pandemic. Aviation and oil & gas premiums declined significantly


Chart 28: Shareholding S tructure (CHI PLC)

16.4%

12.3%

6.2%65.2%

Niger DeltaExploration &Production Plc

Capital ExpressAssurance Co.Ltd

SPDC WestMultipurposeCooperativeSociety

Others

Chart 29: One Year Price Trajectory of NSEASI, NSE-INS 10 & CHI PLC

Source: NSE

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NSEASI NSE-INS10 CHI PLC

SELL

0.45

0.31



52 Wks Low (N) 0.2


21%

4.0

11.1

2019 2020E 2021F


Net Margin (%) 7.2% 5.0% 4.7%


EPS (N) 0.07 0.04 0.05

P/E (x) 6.1 10.2 9.5

P/BV (x) 0.6 0.7 0.7

ROAE (%) 9.4% 7.0% 7.4%

ROAA (%) 5.3% 3.9% 4.1%

Div Yield (%) 4.4% 3.9% 4.2%

34.0%

40.4%

15.3%

7.0


2019/20 TP (N)

Chart 27 Trading Data - July, 2020 (CHI PLC)

Rating

Share Price (N)

Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)



Claims ratio

Reinsurance rate


Quick ratio

Company Analysis

August 2020


during the 2016 recession, hence we are not optimistic of growth in

both segments in 2020.


Claims ratio tapered to 34.0% compared with 42.1% in 2018,

indicating improved risk management system. Underwriting costs

maintained historical trend, currently at 22.5% of GPW (5-year average

of 21.2%) as underwriting expenses grew by 20.7% to ₦2.0bn, trailing

growth in GPW. Specifically, the Company reported a 20.1% and

21.9% rise in acquisition and maintenance costs respectively to ₦1.3bn

and ₦0.6bn respectively. In H1:2020, claims ratio maintained a down-

trend, declining to 34.1% from 36.6% in the corresponding period of

2019. We also note a y/y decline of 2.5% in underwriting expenses in

H1:2020 to ₦1.1bn majorly due reduction in activities during the lock-

down.

Claims ratio is estimated to average 40.0% over the forecast period,

higher than its 2015/19 average of 36.9%. Although we do not have

sufficient information to determine the segment of the Company with

the major claims, we expect claims to rise as the new micro-insurance

subsidiary begins operation.


CHI Plc remained efficient with a combined ratio of 73.5%, lower than

80.1% reported in 2018 and well-below the 100.0% threshold,

indicating increased underwriting profitability on the back of lower

claims. However, expense ratio rose slightly to 39.6% from 38.0% in

2018, driven by faster growth in underwriting expenses.

increased premiums and efficient risk management. Underwriting

margin improved 8.7ppts to 37.0%, PBT margin also rose 36bps to

8.6% and net margin increased 1.0ppts to 7.2%. RoAE and RoAA

improved 1.9ppts and 1.3ppts to 9.4% and 5.3% respectively. Under-

writing margin maintained this trend in H1:2020, up 6.1ppts y/y to

37.7% while PBT Margin slightly declined by 82bps y/y to 8.8% during

the same period.

Underwriting margin is expected to move in line with historical trend

over the next 5 years to an average of 38.4% (2015/19: 34.5%) on the

back of efficient risk management and operational efficiency. Similarly,

RoAE and RoAA are estimated to average 10.4% and 5.7% respectively

from 8.8% and 5.0% recorded over the last 5years.


The allocation to investment assets in the total asset mix remained

largely stable at 60.1%, slightly lower than 62.6% in 2018. The

company recorded a 1.4ppts increase in yield on investment assets to

15.3% majorly due to efficient allocation and a diversified asset base

despite a low interest rate environment. The company recorded the

highest investment yield in our coverage universe, higher than the

sector average of 8.2%.

2019


Chart 31: CHI PLC Gross Premium Written (GPW) Vs PAT

(2015 2019)


-

2021E


Fire14.0%

General Accident

12.4%

Motor23.7%

Aviation8.9%

Oil & Gas25.1%

Marine7.0%

Engineering4.1%

Bond2.2%

Medical Premium

2.7%

6.0 5.8 5.7

6.9

8.7

0.7 0.4

0.6 0.5 0.8

-

2.0

4.0

6.0

8.0

10.0

2015 2016 2017 2018 2019

GPW PAT₦'bn₦'bn





PAT (₦'bn) 0.4 0.4 0.6 0.4 0.5

GPE/GPW (%) 97.6% 94.9% 95.6% 96.0% 96.0%

Claims Ratio (%) 38.6% 42.1% 37.1% 40.0% 40.0%

Expense Ratio (%) 37.6% 38.0% 39.0% 40.6% 40.6%

Combined Ratio (%) 76.2% 80.1% 73.5% 80.6% 80.6%


Net Margin (%) 7.3% 6.2% 7.2% 5.0% 4.7%

RoAE (%) 8.9% 7.5% 9.4% 7.0% 7.4%

RoAA (%) 4.8% 4.0% 5.3% 3.9% 4.1%


Quick Ratio 4.8 8.7 7.0 8.9 9.1

Company Analysis

August 2020



ratios remained strong, although slightly lower than that of the previous

year, with current, quick and cash ratio at 10.3x, 7.0x and 6.7x respectively

from 12.1x, 8.7x and 8.4x in 2018. Solvency ratio strengthened to 209.9%

from 171.7% in 2018 as it remained above regulatory benchmark of

100.0%.

The company, in line with regulatory requirement, set aside ₦251.6m as

contingency reserve and this exceeds both 3.0% of net premium and

20.0% of Profit after Tax.


We expect CHI Plc to apply its competence in managing non-life insurance

to establish its footprint in the life insurance business through CHI Micro-

pandemic such as aviation, oil & gas and marine insurance, we expect a

decline in premiums from these segments in 2020. We believe the

Company would maintain operational efficiency in the face of slower

growth in premiums in 2020 to maintain profitability. Considering the

compared with peers, we believe investment income would complement

underwriting performance. We also expect significant ownership dilution

resulting from the ₦1.05bn ongoing rights issue. Assuming a 100.0%

success rate in line with the 2017 rights issue, shares outstanding would

increase to 10.2bn from 8.1bn shares.

We employed the Justified Price-to-Book value ratio, Dividend Discount

model (DDM) and relative valuation methodologies with weights of

30.0%, 50.0% and 20.0% respectively in valuing CHI Plc. With a

sustainable growth rate of 2.0% in line with the broader economic

on equity of 17.7%, we obtained a justified P/BV of 0.5x and a target

price of ₦0.45. The Company has paid dividends consistently for the past 3

years with an average payout ratio of 31.7% and we estimate a 40.0%

payout ratio over the next 5 years to derive a DDM fair value of ₦0.15.

share of ₦0.82 to obtain a fair value of ₦0.58. Using the listed valuation

methodologies in their respective weights, we arrived at a target price

of ₦0.31 which represents a 30.4% downside potential from its close price

of ₦0.45 as at 24-July-




Valuation P/Bv 0.60

Forecas t BVPS 0.81x

Target Pric e 0.58


Valuation Metric s


Beta 0.1




Dividend Dis c ount Model (DDM) 0.15


NGN 0.31

-30.4%

80.0%

20.0%



Company Analysis

August 2020


Cornerstone Insurance Plc

Stellar Underwriting Performance

Company Overview

incorporated in 1991 as a private limited liability company and became

listed on the Nigerian Stock Exchange in 1997. Cornerstone is licensed by

NAICOM to offer both life and non-life insurance policies including

takaful policies through its subsidiary, FIN Insurance Company limited.

The Company also offers asset leasing services through its fully-owned

subsidiary, Cornerstone Leasing and Investment limited. In 2020,

Cornerstone sold its major real estate property in order to meet the new

capital threshold while indicating merger negotiations with two other

insurance companies to boost capacity.



its 5-year CAGR of 17.3% to ₦13.1bn in 2019, supported by growth in

the life segment. The life segment grew by 27.5% to ₦3.4bn as both

individual and group life premiums surged, with a contribution of

25.8% to GPW. The non-life segment which accounted for 68.6% of

GPW in 2019 reported slower growth of 3.2% (2018 21.4%) to ₦9.0bn.

The Halal Takaful segment premiums also reported slim growth of 1.8%

y/y (2018 18.9%) to ₦236.3m and contributed 1.8% to GPW. In 2019,

the Company introduced the annuity business with premiums totaling

₦480.9m. Gross Premium Earned came in at ₦13.3bn as the Cornerstone

earned 101.8% of its GPW in 2019, higher than its 5-year average of

97.3% due to increase in unearned premium.

In H1:2020, GPW increased y/y by 4.2% to ₦8.0bn mainly due to growth

of 24.5% in Life insurance premiums to ₦3.1bn.

GPW is forecasted to grow at a CAGR of 8.3% over the next 5 years

(2015/19: 12.2%) to ₦21.4bn in 2024. Although we anticipate slower

growth in the non-life segment (which has recorded an unstable growth

pattern over the years), the life and annuity premiums are expected to

rise steadily and support overall GPW.


Claims ratio rose 4.3ppts to 46.6% in 2019 due to sharp growth in net

claims in the life and takaful business segments. Underwriting expenses

expanded by 13.7% to ₦2.0bn as acquisition cost increased by 12.9% to

₦1.5bn and maintenance cost. Maintenance cost rose, albeit at a slower

pace of 12.3% to ₦0.5bn. Therefore, underwriting costs as a percentage

of GPW increased to 16.6% from 15.1% in 2018.

Claims ratio in H1:2020 surged to 68.8% from 48.8% in H1:2019 driven

by a 29.0% rise in life insurance claims despite a reduction in claims from


Chart 35: Shareholding Structure (CORNERSTONE)

48.5%

30.5%

21.0%

Banc-AssureLimited

CapasureNigeriaLimited

Others

Chart 36 One Year Price Trajectory of NSEASI, NSE-INS 10 & CORNERSTONE

Source: NSE

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NSEASI NSE-INS10

BUY

0.50

0.88

Ups ide Potential (%) 75.7%


52 Wks Low (N) 0.2


21%

8.1

21.3

2019 2020E 2021F


Net Margin (%) 30.4% 14.2% 14.5%


EPS (N) 0.27 0.14 0.15

P/E (x) 1.8 3.7 3.3

P/BV (x) 0.5 0.5 0.5

ROAE (%) 27.7% 13.2% 14.2%

ROAA (%) 11.5% 5.3% 5.5%

46.6%

48.7%

4.2%

5.2



Claims ratio

2019/20 TP (N)

Chart 34: Trading Data - July 2020 (CORNERST)

Rating

Share Price (N)

Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)


Reinsurance rate


Quick ratio

Company Analysis

August 2020


the non-life and takaful segments.

Over the forecast period, claims ratio is forecasted to average 52.0%,

higher than its past 5-year average of 46.9%, excluding 2017 which

was an outlier when claims ratio exceeded 100.0% due to a surge in

non-life premiums. Expense ratio is expected to move in tandem with

historical trend to average 30.5% through 2020/24 from an average of

30.6% recorded over the last 5 years.


Although Cornerstone maintained a combined ratio less than 100.0%

at 76.8% in 2019, it increased from 72.7% in 2018 and this was driven

largely the rise in claims ratio.

gins improved y/y due to improving underwriting performance and

higher investment and trading income. Underwriting margin improved

7bps to 40.5%, net margin also increased by 3.9ppts to 30.4% and PBT

margin rose by 5.1ppts to 33.5%. RoAE declined slightly by 1.4ppts to

33.4% while RoAA improved 1.2ppts to 12.7%. In H1:2020,

underwriting margin worsened to 20.7% from 36.5% in the

corresponding period of 2019 due to increased claims. PBT Margin,

however, improved by 7.5ppts to 16.3% as higher investment income

and foreign exchange gains complemented the weak underwriting

performance

Although we modelled a lower underwriting margin of 25.8% for

2020, we expect it to stabilise at an average 32.3% through 2020/24,

which is slightly higher than its current 5-year average of 31.8% (with

the exclusion of 2017 when underwriting margin turned negative due

to a spike in non-life claims). Net margin is expected to be stable and

average 15.6% over the next 5 years, compared to 4.6% in 2015/19

dragged by losses recorded in 2016 and 2017. RoAE and RoAA are also

estimated to average 15.6% and 6.0% respectively over the next 5

years. The ratios are expected to be lower compared with 2019 ratios

as the company already sold-off its major revenue-generating real

estate assets.


In line with the reduction in yields at the short-end of the sovereign

1.4ppts to 4.2%. We note a slight reduction in the financial assets

component of total assets to 36.0% in 2019 from 37.8% in 2018 as

cash equivalent spiked by 199.2% to ₦12.6bn from ₦4.2bn and we

real estate property a move in line with the ongoing recapitalisation.


in 2019, remaining above the regulatory benchmark of 100.0%. The

company set aside ₦755.5m as contingency reserves which although

in 2019


Chart 38: Cornerstone Gross Premium Written (GPW) Vs

PAT (2015 2019)


2017 - 2021E


Non-life insurance premiums

68.8%

Life insurance premiums

25.8%

Halal Takaful Insurance

1.8%

Annuity3.7%

7.3

9.2 9.2

11.6

13.1

1.6

(1.7)

(3.4)

3.0 3.0

(4.0)

-

4.0

8.0

12.0

16.0

2015 2016 2017 2018 2019

GPW PAT₦'bn₦'bn




Underwriting Profit (₦'bn) (2.0) 2.3 2.7 1.8 2.7

PAT (₦'bn) (3.4) 3.0 4.0 2.0 2.2

GPE/GPW (%) 99.8% 98.1% 101.8% 97.8% 97.9%

Claims Ratio (%) 116.9% 42.3% 46.6% 60.0% 50.0%

Expense Ratio (%) 32.5% 30.4% 30.2% 30.6% 30.9%

Combined Ratio (%) 149.4% 72.7% 76.8% 82.5% 76.9%

Underwriting Margin (%) (37.2%) 40.5% 40.5% 90.6% 80.9%

Net Margin (%) (36.6%) 26.6% 30.4% 14.2% 14.5%

RoAE (%) (38.8%) 34.7% 33.4% 13.2% 14.2%

RoAA (%) (14.8%) 11.4% 12.7% 5.3% 5.5%


Quick Ratio 5.3 4.1 5.2 4.9 4.7

Company Analysis

August 2020


exceeds 3.0% of net premium, lies below 20.0% of Profit after Tax.

Liquidity ratios remained robust and above peer average at 6.3x, 5.2x and

2.6x for the current, quick and cash ratio respectively in 2019 compared to

peer average of 5.2x, 3.9x and 1.2x in that order and 2018 ratios of 5.1x,

4.1x and 1.1x respectively.


We believe premium would maintain steady growth as life insurance

premiums retains high growth rate. The Company would be required to

tame growth in operational expenses and improve risk management

processes to maintain profitability as claims might rise especially in the

life segment.

In valuing the company, we applied the Justified Price-to-Book value

40.0%) and Price-to-

current ROE at 27.7%, required rate of return calculated using CAPM of

20.3% for 2020, and a sustainable growth rate of 2.0%, we obtained a

justified P/BV of 1.4x and an intrinsic value of ₦1.19. For the residual

-year average ROE

of 15.6% and 5-year average required rate of return of 22.3% and we

obtained a fair value of ₦

also applied to its book value per share of ₦0.99 and we derived a fair

value of ₦0.65. The application of the weights to the fair value from each

valuation method resulted in a 12-month target price of ₦0.88, implying a

75.7% potential upside from its close of ₦0.50 as at 24-July-2020. Hence,





Forecas t BVPS 0.99

Target Pric e 0.65


Valuation Metric s


Beta 0.4




Res idual Income Method 0.81


NGN 0.88

75.7%

20.0%

80.0%


Upside/Downside Potentia

Company Analysis

August 2020


NEM Insurance Plc

The Most Efficient of Them All

Company Overview

Nigeria through the agency of Edward Turner & Co in 1946, became

listed on the Nigerian Stock Exchange in 1989 following its privatisation

by the Federal Government of Nigeria. NEM was initially licensed to

offer both non-life and life insurance services, however, following its

merger with Vigilante Insurance Company during the 2007

recapitalisation exercise, the Company focused majorly on non-life

insurance business.

NEM expanded operations into West Africa by setting up NEM Insurance

Ghana limited in 2009, however, the subsidiary was merged with

following a recapitalisation exercise in Ghana. The Company diversified

into asset management in 2016 through its subsidiary NEM Asset Man-

agement limited. In 2019, a private equity fund Advanced Finance

Investment Group (AFIG Funds) - acquired a 29.9% stake in NEM Insur-

ance Plc.



NEM reported an impressive 31.3% rise in Gross Premium Written (GPW)

to ₦19.7bn, with significant increase in premiums across all business

segments. General Accident premiums rose the most by 51.4% to ₦4.0bn

and contributed 20.2% to GPW. Marine and Fire premiums also grew

41.9% and 36.6% to ₦2.2bn and ₦4.7bn respectively, with contributions

of 10.9% and 23.8%. Similarly, Motor and Oil & Gas premiums, with a

combined contribution of 43.9% increased 21.0% and 17.6% to ₦5.7bn

and ₦2.9bn respectively. Finally, premiums from Inward reinsurance also

rose 4.0% to ₦249.2m and contributed 1.3% to GPW. In line with trend

over the last 10 years in which the company earned an average of

96.5%, Gross Premium Earned came in at ₦19.3bn which represents

97.5% of GPW.

In H1:2020, GPW grew by 10.2% y/y to ₦13.0bn driven by growth across

all segments save fire insurance premiums that contracted by 24.1% to

₦2.7bn.

Over our forecast horizon, GPW is estimated to grow at a CAGR of 9.2%

to ₦34.4bn in 2024, slower than the 12.6% recorded in 2015/19 due to

the expected slowdown in motor and oil & gas insurance in 2020, with a

combined contribution of 43.9% to GPW. Although these segments

recorded increase in premiums in H1:2020, we are not optimistic of a

similar trend going forward as both sub-segments recorded decline in

premiums during the 2016 recession.

Chart 42: Shareholding Structure (NEM)

49.5%

6.4%

7.3%

29.9%

6.9%Jeidoc Limited

BuksonInvestmentlimited

Capital ExpressAssurance

AFIG Funds

Others

Chart 43 One Year Price Trajectory of NSEASI, NSE-BNK 10 & NEM

Source: NSE

30

60

90

120

150

Jun-1

9

Jul-19

Aug-1

9

Sep-1

9

Oct-19

Nov-1

9

Dec-1

9

Jan-2

0

Feb-2

0

Mar-

20

Apr-

20

May-2

0

Jun-2

0

NSEASI NSE-INS10 NEM

REDUCE

2.00

1.91



52 Wks Low (N) 1.4


61%

10.6

27.8

2019 2020E 2021F


Net Margin (%) 12.4% 11.9% 13.1%


EPS (N) 0.45 0.49 0.60

P/E (x) 4.4 4.1 3.4

P/BV (x) 0.7 0.7 0.6

ROAE (%) 18.1% 17.7% 19.6%

ROAA (%) 10.0% 9.7% 10.7%

Claims ratio 31.2%

34.5%

6.0%

5.17



Quick ratio



Reinsurance rate

Chart 41: Trading Data - July 2020 (NEM)

Rating

Share Price (N)

2019/20 TP (N)

Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)

Company Analysis

August 2020



Claims ratio rose to 31.2% from 23.9% in 2018, as gross claims surged

by 47.8% y/y to ₦8.7bn due to a 115.8% spike in claims paid out to

marine policy holders. In H1:2020, claims ratio rose slightly by 94bps y/y

to 27.1% mainly due to a spike in claims paid to fire insurance policy

holders.

Underwriting costs stood at 28.0% of GPW, slightly lower than 28.3%

in 2018 as growth in underwriting expenses moved in line with growth

in GPW. Acquisition costs inched higher by 23.6% y/y to ₦3.0bn while

maintenance costs also rose by 36.5% y/y to ₦2.6bn. Underwriting costs

tapered 8.1% y/y in H1:2020 to ₦3.3bn driven by a 26.1% decline in

maintenance costs to ₦1.3bn

Claims ratio, over the forecast period, is expected to rise slightly to an

claims performance which is expected to be sustained going forward.

NEM recorded the lowest claims ratio among the Companies under our

coverage, especially compared with CHI plc which offers similar non-

life insurance services. Expense ratio is estimated to average 42.2%

over the forecast period (2015/19: 38.5%).


due to rising claims and underwriting expenses. However, it remained

below the 100.0% threshold for underwriting profitability. Meanwhile,

Underwriting margin fell 8.8ppts to 22.6% while Net margin slightly

declined 1.8ppts to 12.4%. PBT Margin also slipped 8.8ppts to 10.0%

just as RoAE and RoAA declined 32bps and 23bps to 18.1% and 10.0%

respectively, indicating waning profitability. Underwriting margin

improved 2.3ppts y/y to 39.0% in H1:2020 due to operational efficiency

while PBT margin declined 1.5ppts to 16.5%

NEM is expected to maintain a favorable combined ratio with an

average of 72.7% - the lowest among its peers - from 68.7% in the last

5 years. Underwriting margin is expected to average 33.0% over the

forecast period, lower than the previously recorded 38.2%, due to

slower growth in premiums especially in 2020 and a slight increase in

claims. RoAE and RoAA are forecasted at a 5-year average of 20.3%

and 11.1% respectively from 21.5% and 11.4% in the 2015/19 period.


2019 from 8.4% in 2018 in line with lower yields in the Treasury Bills

market especially in Q4:2019. We also note that the increase in

investment assets, accounting for 57.2% of total assets (2018 50.4%),

is majorly due to the purchase of an additional real estate property in

Victoria Island, Lagos.

2019


Chart 45: NEM Gross Premium Written (GPW) Vs PAT

(2015 2019)


- 2021E


Fire 23.8%

Oil & Gas14.8%

General Accident

20.2%

Marine10.9%

Motor29.1%

Inward reinsurance

1.3%

10.9 10.8

13.4

15.0

19.8

0.7 1.8

2.8 2.0 2.4

-

4.0

8.0

12.0

16.0

20.0

2015 2016 2017 2018 2019

GPW PAT₦'bn₦'bn





PAT (₦'bn) 2.8 2.0 2.4 3.2 3.4

GPE/GPW (%) 97.1% 95.3% 97.5% 97.4% 97.2%

Claims Ratio (%) 18.2% 23.9% 31.2% 32.0% 32.0%

Expense Ratio (%) 42.5% 39.8% 43.6% 40.8% 40.7%

Combined Ratio (%) 60.7% 63.7% 74.8% 72.8% 72.7%


Net Margin (%) 21.3% 14.2% 12.4% 11.9% 13.1%

RoAE (%) 32.4% 18.4% 18.1% 17.7% 19.6%

RoAA (%) 17.3% 10.2% 10.0% 9.7% 10.7%


Quick Ratio 7.6 3.9 5.2 5.1 5.0

Company Analysis

August 2020



and quick ratios increased to 8.9x and 5.2x respectively from 6.7x and 3.9x

in 2018 while cash ratio remained flat at 0.3x. The Company remained

adequately solvent in 2019 as solvency ratio strengthened to 293.5% from

265.5% in 2018, comfortably above the threshold of 100.0%.

The company set aside ₦592.8m in contingency reserve which, although

exceeds 3.0% of net premium, lies below 20.0% of profit after tax.


performance during the 2016 recession, when GPW contracted. The

pandemic and its associated economic recession might pressure

However, we expect NEM to be profitable in 2020 and throughout our

forecast period due to lower expected claims, especially from motor

insurance.

Although, underwriting performance slightly weakened in 2019, NEM has

the best underwriting performance among the companies under our

coverage with the lowest average combined ratio of 68.7% over the last 5

years and the highest underwriting margin at a 5-year average of 38.2%

and this trend is expected to continue in the next 5 years.

We applied a blend of absolute and relative valuation methodologies

including the Justified Price-to-Book Value using the Gordon Growth

model, Dividend Discount model (DDM), Residual income model and Price

-to-book value in their respective weights of 20.0%, 50.0%, 20.0% and

18.1%, cost of equity of 22.6% and a sustainable growth rate of 2.0% to

arrive at a target price of ₦ -year record of

consistent dividend payment, we assumed a 20.0% payout ratio for the

DDM method and we discounted the expected dividends to obtain a fair

value of ₦0.83. For the residual income method, we valued the company

based on the excess of its ROE (2020/24 average of 22.3%) over its cost of

capital to obtain a fair value of ₦3.0. We arrived at a final target price of

₦1.91, representing a 4.3% downside from its ₦2.00 close price as at

24-July-





Forecast BVPS 2.67

Target Price 2.28

Absolute Valuation Methodology

Valuation Metrics

Risk Free Rate (%) 11.9

Beta 0.7

Cost of Equity (%) 22.6

Sustainable Growth Rate (%) 2.0

Justified P/Bv (Gordon Growth Model) 2.55

Dividend Discount Model (DDM) 0.83

Residual Income Method 3.00

Current Market Price 2.00

NGN 1.91

-4.3%

20.0%

80.0%



Company Analysis

August 2020


WAPIC Insurance Plc

Performance Hinged on Profitability of Associate

Companies

Company Overview

West Africa Provincial Insurance Company and licensed as a composite

insurance firm offering both life and non-life insurance products. The

company became listed on the Nigerian Stock Exchange in 1990.

Intercontinental bank acquired a majority stake in the company in 1997

and upon the acquisition of Intercontinental bank by Access bank,

Wapic became a subsidiary of Access bank.

As the Central Bank abolished the universal banking license of banks in

2012, WAPIC merged with Intercontinental properties as both entities

insurance capital base due to the high liquidity of Intercontinental

income whilst increasing capacity to underwrite risks.

Asides its life subsidiary Wapic Life Assurance limited - and its associate

companies - Coronation Merchant Bank Limited and Coronation

Securities Limited, WAPIC also has its footprint in Ghana where it

operates as WAPIC Insurance (Ghana) Limited. To shore up its capital

base to the required ₦18.0bn for composite insurers, the company issued

a 7-for-6 ordinary shares right issue which was undersubscribed by

32.0%.

In the light of the lockdown and restriction in movement effected to

curb the spread of the pandemic in March/April 2020, Wapic offered

partial refunds to motor insurance policy holders and a 15.0% discount

on new policies taken up by health workers.



Gross Premium Written (GPW) grew by 9.4% in 2019 to ₦15.2bn, slower

than its last 5 years CAGR of 21.7%. The slower pace of growth was

driven by contraction in premiums from general accident, motor and

aviation by 41.1%, 11.1% and 45.3% respectively to ₦1.1bn, ₦2.0bn and

₦152.0m (the trio accounted for a total of 21.0% of GPW in 2019).

Conversely, life premiums grew the fastest, advancing 45.9% to ₦3.0bn

and contributed 20.0% to GPW. Similarly, fire, marine and engineering

premiums increased by 9.4% apiece to ₦1.1bn, ₦456.0m and ₦4.1m with

respective contributions of 7.0%, 3.0% and 27.0%. Wapic earned

104.6% of GPW the highest in 7 years - as Gross Premium Earned (GPE)

stood at ₦15.9bn.

Over the next 5 years, we expect GPW to expand at a CAGR of 10.5%,

slower than its 2015/19 CAGR of 16.4% as we are cautiously optimistic of

SELL

0.31

0.16



52 Wks Low (N) 0.2


73%

24.0

66.6

2019 2020E 2021F


Net Margin (%) 1.3% 1.7% 3.5%


EPS (N) 0.02 0.01 0.03

P/E (x) 19.4 27.5 12.0

P/BV (x) 0.2 0.4 0.4

ROAE (%) 1.2% 1.5% 3.5%

ROAA (%) 0.7% 0.9% 2.0%

Claims ratio 39.1%

50.9%

8.2%

647.3%


Reinsurance rate


Quick ratio



Free Float (%)

Mkt Cap (N'bn)

Mkt Cap (US$'m)

2019/20 TP (N)

Chart 48: Trading Data - July 2020 (WAPIC)

Rating

Share Price (N)


Chart 49: Shareholding Structure (WAPIC)

17.3%

26.7%

56.0%

ReunionEnergy Limited

CoronationCapital(Mauritius)Limited

Others

Chart 50 One Year Price Trajectory of NSEASI, NSE-BNK 10 & WAPIC

Source: NSE

40

90

140

Ju

n-1

9

Ju

l-1

9

Au

g-1

9

Se

p-1

9

Oct-

19

Nov-1

9

Dec-1

9

Ja

n-2

0

Fe

b-2

0

Ma

r-20

Ap

r-20

Ma

y-2

0

Ju

n-2

0

NSEASI NSE-INS10 WAPIC

Company Analysis

August 2020


last 5 years. The pandemic is also expected to take its toll on premiums

from motor and aviation which would be magnified by the refunds

given to policyholders.


Underwriting expenses grew faster by 47.5% to ₦6.6bn, spiking to

23.0% of GPW (2018:17.1%). Acquisition cost skyrocketed by 569.7%

to ₦1.3bn while maintenance cost slightly declined by 0.3% to ₦2.2bn.

The company also recorded a ₦72.1m valuation loss on its life

insurance fund. On the other hand, claims ratio fell 6.4ppts to 39.1%

due to lower claims in the marine and general accident sub-segments.

Over our forecast period (2020/24), we expect claims ratio to rise to an

average of 51.8% (2015/19: 49.4%) as the life segment, which is claims-

intensive, expands. Underwriting expenses as a proportion of GPW is

expected to average 21.9% in 2020/24 (2015/19:20.5%) due to the

impact of valuation losses from the life fund.


Due to faster growth in underwriting expenses, expense ratio

(underwriting expenses/Net Premium Earned) rose to 44.8% from

35.0% in 2018. This pushed combined ratio 3.3ppts higher to 83.9%

despite the moderation in claims ratio, however, the ratio still re-

mained below 100.0%.

With the exception of underwriting margin which improved 80bps to

18.4% on the back of a 36.0% increase in underwriting profit, all other

margins waned in 2019 due to lower profitability. Net margin and PBT

margin declined 1.5ppts and 1.4ppts to 1.3% and 0.1% respectively

while RoAE and RoAA fell 90bps and 46bps to 1.2% and 0.7% in that

order.

higher compared with its 2015/19 average of 85.8% due to expected

an unstable pattern with lacklustre performance in 2018 and 2019. We

modelled underwriting margin to average 22.0% in 2020/24, up from

16.2% in 2015/19. The other ratios PBT margin, RoAE and RoAA are

expected to wane over the forecast period to an average 3.1%, 2.3%

poor operational performance continues to be complimented by the

profit from its associates.


Investment yield declined 1.8ppts to 8.2% in 2019 in line with

reduction in short-term yields in the fixed income market. Specifically,

interest income on fixed income securities held by Wapic declined

34.7% to ₦635.3m despite the increase in fixed income securities by

23.7% to ₦8.3bn as yield on fixed income instruments alone fell to

7.7% in 2019 from 14.5% in 2018. Investment assets as a proportion of

total assets slightly declined to 36.1% from 38.3% in 2018.

2019


Chart 47: Wapic Gross Premium Written (GPW) Vs PAT

(2015 2019)


- 2021E


Oil & Energy22.8%

General Accident

6.9%

Life19.8%Motor

12.9%

Fire6.9%

Marine3.0%

Engineering26.7%

Aviation1.0%

7.1 8.0

9.8

13.9

15.2

1.3 0.6

1.5

0.4 0.2

-

4.0

8.0

12.0

16.0

2015 2016 2017 2018 2019

GPW PAT₦'bn





PAT (₦'bn) 1.5 0.4 0.2 0.3 0.6

GPE/GPW (%) 97.8% 87.9% 104.6% 94.3% 95.9%

Claims Ratio (%) 54.2% 45.5% 39.1% 52.0% 52.0%

Expense Ratio (%) 30.7% 35.0% 44.8% 44.1% 38.7%

Combined Ratio (%) 84.9% 80.5% 83.9% 96.1% 90.7%


Net Margin (%) 16.0% 2.9% 1.3% 1.7% 3.5%

RoAE (%) 8.5% 2.1% 1.2% 1.5% 3.5%

RoAA (%) 5.4% 1.2% 0.7% 0.9% 2.0%


Quick Ratio 5.7 5.3 6.5 5.5 5.5

Company Analysis

August 2020



60.1% to ₦1.2bn. Conversely, the current and quick ratios improved to

7.0x and 6.5x respectively from 6.5x and 5.3x in 2018. In terms of solvency,

although it exceeds the regulatory required 100.0%. Wapic set aside

₦396.0m as contingency reserves which exceeds both 3.0% of net

premium and 20.0% of profit after tax.


profits majorly hinged on the profitability of its associate companies for

2016 to 2019. With the pandemic and its attendant effect, we expect

lower premiums in motor and aviation segments of the company. Claims

are expected to rise in the life segment on the back of increased mortality

from the pandemic, however, given that the life segment represents

may be minimal. We note significant equity dilution as the company

completed a 7-for-6 rights issue program in January 2020. Although, the

program recorded a 32.0% undersubscription, shares outstanding

increased by 10.6bn shares to 24.0bn shares.

We employed a combination of absolute and relative valuation

methodologies with weightings of 60.0% and 40.0% respectively to

Free-Cash-Flow-to-Equity method (as the company has held back on

dividends payments for 3 years) to obtain an intrinsic value of 7kobo. in

terms of relative valuation, we applied to median price-to-book value

ratio of peer companies offering composite insurance products in Nigeria

-value-per-share of ₦1.38 to derive a fair

value of ₦0.41. A blend of both valuation methods in their respective

weights gave a 12-month target price of ₦0.14 which implies a 56.2%

downside from its 24-July-2020 close of ₦0.31. Hence, we rate the stock a





Forecas t BVPS 1.38

Target Pric e 0.41


Valuation Metric s


Beta 0.8



Free Cas h Flow Method 0.07


NGN 0.14

-56.2%

20.0%



80.0%


August 2020


About Afrinvest

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), Target Project Plan (TPP), Private

Investment Club (PIC) and Afrinvest Guaranteed Income Portfolio (Afrinvest-GIP).

Contacts

For further information, please contact:

Afrinvest West Africa Limited (AWA)

27,Gerrard Road

Ikoyi, Lagos

Nigeria

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

www.afrinvest.com

Investment Research

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

Adedayo Bakare [email protected] +234 1 270 1680 ext. 316

Aminat Ibidun [email protected] +234 1 270 1680 ext. 313

Akintoye Oyelakun [email protected] +234 1 270 1680 ext. 321

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

Benedict Egwuchukwu [email protected] +234 1 270 1680 ext. 317

Oluwadara Olunuga [email protected] +234 1 270 1680 ext. 319

Vivian Alozie [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

Olanrewaju Ogunlana [email protected] +234 1 270 1680 ext. 178

Asset Management

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

Florence Warikam [email protected] +234 1 270 1680 ext. 289


August 2020


About Afrinvest

ANALYST'S CERTIFICATION AND DISCLAIMER

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

as other relative/comparable trading multiples valuation models. However, we attach the most weight to EV/EBITDA

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 AIICO -

AXA Mansard Insurance plc MANSARD -

Consolidated Hallmark Insurance Plc CHIPLC -

Cornerstone Insurance Plc CORNERST -

NEM Insurance Plc NEM -

WAPIC Insurance Plc WAPIC -


August 2020


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:

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

Universe 1 0 0 2 3 6

% distribution 16.7% 0.0% 0.0% 33.3% 50.0% 100.0%


August 2020


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 1 270 1680

Fax: +234 1 270 1689

Documents

Insurance Sector Update August 2020 - Nigeria’s No1