• Continental Reinsurance Plc recently released its FY 2011, reporting an 8% decline in gross premiums to N9.48 billion, 16% below our estimates; despite a relatively strong 39% growth in gross premiums, in Q4 2011 compared to 9% in Q3 2011. Regardless, Q4 premiums accounted for ~28% of FY 2011 premiums, lower than its 34% trailing 3 year average.
• Evidently anticipated premium growth from improved contributions from its oil & gas segment, expansion in the company’s African operations and supportive regulatory initiatives such as the commencement of compulsory insurance schemes in Q4 2011 did not materialise in full. Nevertheless robust Q4 growth is still a positive signal.
• PBT grew a marginal 1% YoY to 1.59 billion from N1.58 billion and just ahead of our N1.57 billion forecast. PAT was also flat YoY, at N1.23 billion, 2% behind our N1.26 billion forecast. QoQ, PBT and PAT grew 58% and 53% respectively driving a 100bps YoY (and QoQ) improvement in net margin to 13%
Investment income below expectations
• Investment income declined 1% YoY to N972 million for and was 13% below our FY 2011 estimate of N1.09 billion. On a quarterly basis however, investment income grew 121% from N441 million in Q3 2011, helping expand investment income margin by 400bps to 10%. QoQ growth was likely driven by relatively high fixed income yields particularly in Q4 2011, after a disappointing Q3 2011 for equities, had eroded FY margins.
Gross premium growth remains a concern
• In our last note on the company, we had highlighted our concerns about gross premium growth and a steady decline in investment income. Despite substantial improvements for FY 2011, investment income margins, still fall well short of the 21% 3 year average. Our concerns about the company’s stagnating premium growth still linger. We will be looking to clarify these issues to determine their impact on longer term outlook.
Rating under review
• The current performance translates to an EPS of N0.12, implying a payout ratio of 67% on a proposed N0.08 dividend. The stock trades on a current P/E and P/B of 8.4x and 0.90x respectively, compared to an average of 6.4x and 0.55x for stocks under our coverage. We are placing the stock under review and will revise our model and assumptions upon the receipt of more detailed financials and further clarification as to current performance from management.
ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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