Insurance Sector Report - Beacon Shining Forth

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Monday, September 22, 2014 12:42 PM / CardinalStone Research


This Insurance Sector Report captures the CSR’s view on the medium-term prospects of the industry. Based on our analysis, we expect total premiums to reach N1 trillion ($6.13 billion) by 2019, increasing penetration to 0.9% from 0.4% of GDP in 2013. Thus, we project a CAGR of 21% in premiums over the next 5 years, on the back of improving access to credit, innovative insurance products, intense regulatory push and the low insurance penetration in Nigeria relative to emerging market peers. On a company specific level, we retain a BUY rating on CUSTODYINS and initiate coverage on CONTINSURE and AIICO with BUY ratings.


Kindly see highlights below;


Vastly untapped market creates opportunities


The insurance industry in Nigeria presents a lot of growth opportunities due to the low insurance penetration in the country (0.37% as at Q4'13). Foreign insurers are aware of the growth prospects and some global insurers such as Old Mutual, Prudential and Sanlam are taking strategic positions through the acquisition of local insurance companies, thereby expressing interest to begin operations. We feel this is a testament to the opportunities in the sector and we expect to see more M&A and recapitalisation activities in the industry, as insurers ensure they are adequately capitalised to increase their capacity to underwrite risk.


Regulatory drive improves confidence


The dogged stance of the regulator (NAICOM) to drive insurance growth and to ensure strict compliance with the relevant laws that makes certain classes of insurance compulsory, has increased investors' confidence in the insurance industry lately. Some of the policies recently enforced by NAICOM include the adoption of International Financial Reporting Standards (IFRS) by insurers, the enforcement of the 'No Premium No Cover' rule, the enforcement of the Nigerian Local Content Act in the Oil and Gas sector and a drive for micro-insurance to spur retail growth of insurance products.


Improved quality of insurers' books


Prior to 2013, a common occurrence on the balance sheet of insurers was the prevalence of high receivables, due to low payment of premiums for the insurance cover provided. Most times, these receivables would be written off, impairing the quality of the balance sheet and leading to charges on the income statement. With the introduction of the No Premium No Cover policy, this is no longer the case as the policy ensures that premium income cannot be booked if cash is not received, thereby improving the cash flow of insurers.


Hence, we see long term value in some insurance counters


We are optimistic on the strong growth potential and improving fundamentals of the insurance sector, despite the fact that the sector has been long discounted by investors. Thus, we see value in some stocks. Following revisions for its strong H1'14 results, we raise our TP on CUSTODYINS and retain a BUY rating on the stock. In addition, we initiate coverage on AIICO and CONTINSURE with BUY ratings.


Please click here to download a copy of our full report. 

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