April 4, 2012

AIICO Insurance Plc recently released its FY 2011 financial performance, reporting a 23% and 37% YoY and QoQ growth respectively, to N18.44 billion. The company’s life business remained the major contributor to premiums, accounting for 54% of the total in line with its 3 year average of 55%, despite growing at a slower pace (+22% YoY) than its general business (+25% YoY). The company’s retention rate declined 300bps to 87%, on the back of a 55% YoY increase in reinsurance costs. We attribute this largely to an increased oil & gas portfolio.
 

Expenses weigh… 

The company’s total expenses grew 27% YoY to N15.09 billion. Claims incurred grew 37% YoY to N6.86 billion, corroborating a trend of increased claims in the industry in 2011, which is attributed to flooding in various parts of the country. Subsequently, the company’s claims ratio rose 7ppts to 40%. Furthermore, the company’s underwriting expenses rose 31% to N3.45 billion, implying an underwriting expense ratio of 22%, a 200bps YoY increase, and much higher than the average of 8.5% for peers Custodian and GTA. It appears that the company’s weak proprietary distribution platform continues to weigh, as we believe a sizeable portion of the premium business is driven by its agency network, which continues to add to the company’s cost profile.

Consequently, underwriting profit declined 6% YoY to N3.07 billion, even as underwriting profit margin declined 5ppts to 17%, which falls well short of its 3 year average of 21%.
 

Margins supported by rise in investment income 

Despite a dip in performance in its core business, the company performed much better with investment income which grew 26% YoY to N1.03 billion as high yields in Q4 2011 provided support, despite a dismal year for equities. Nevertheless investment income margin remained unchanged from FY 2010 at 6%, lower than 9.6% average for peers Custodian, Continental Re and GTA.

PBT and PAT rose 23% and 19% YoY to N1.57 billion and N1.33 billion respectively, but were flat QoQ reflecting the impact of a 174% YoY increase in diminution of investments to N553 million in Q4 2011. However, net margin was flat YoY, despite a 300 bps dip QoQ to 7%. 
 

Outlook mixed 

On current results, AIICO’s ability to grow gross premiums which are already the highest in the industry appears undiminished with the company apparently able to leverage its brand in attracting new business. Also, the planned take-off of enforcement of compulsory insurance classes improves outlook for premium growth, even as its pervasive branch network which spans the country places AIICO in good stead to benefit from these initiatives.

However, the company’s inability to transmit strong premium growth into improved profitability largely on the back of challenges in containing its growing cost profile remains a source of concern. While the company has hinted that it is seeking alternative distribution lines to complement its agency network, in addition to pursuing operational efficiency initiatives in the current year, we are yet to be convinced that the impact of these on costs will be material.
 

Slight improvement in margins expected for FY 2012 

We forecast a 23% YoY rise in gross premiums to N22.7 billion for FY 2012; supported by strong performances in its key business lines. While we believe the company will struggle to contain costs, we believe support from investment income will improve profitability, as capital market outlook improves.

As such, we forecast a 40% and 41% YoY rise in PBT and PAT to N2.1 billion and N1.8 billion respectively for FY 2012, translating to a pre-tax and net margin of 9% and 8% respectively; a 100bps improvement from FY 2011. Our PAT forecast for FY 2012 translates to an estimated EPS of N0.27, and dividend of N0.08, assuming a similar payout ratio (31%) to FY 2011.
 

Valuation still attractive 

The company’s N0.06 dividend on N0.19 2011 EPS results in a 31% payout ratio and a 12% dividend yield. The stock trades at a current P/E of 2.6x and forward P/E of 1.8x, compared to 6.4x and 6.0x respectively for stocks under our coverage.

Based on the above, we derive a current target price of N0.98, implying a 96% upside potential from current price. We therefore maintain our BUY rating on the stock. 

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Reference: AIICO declares 6 kobo dividend in '11 Audited result,(SP:N0.50k)

http://www.proshareng.com/quote/AIICO 

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