Thursday, November 14, 2019 / 2:20 PM / Meristem
Research / Header Image Credit: Commercial Risk Online
Life Business Expansion underpins Growth in Gross Premium Income
Gross premium earned advanced by 37.13% YoY to NGN35.56bn (vs.
NGN25.93bn in Q3:2018), driven by the extensive distribution network of the
firm. The firm's life insurance segment was the most significant contributor to
premium growth; the business segment was the fastest growing during the period
(43.18% YoY) and accounted for 73.32% of total gross premium income. Premium income
from the non-life and health businesses also rose by 23.66% and 8.98%
respectively. While the growth rate of the nonlife business was higher than its
3 year average growth rate (21.07%), the faster growth recorded in the life
business dwarfed the contribution of the nonlife business to topline during the
period. Hence, the contribution of the non-life business came in at 25.36%,
lower than its 5-year average contribution of 30.58%. The low contribution of
the business segment reinforces the need for the firm to strengthen the weak
capital base of its nonlife business (with solvency margin of NGN6.34bn) to
improve the performance of the business segment. We expect 11.50% YoY rise in
total premium earned by 2019FY, given its stance as one of the dominant life
insurers in the industry and its large agent force (over 4,000 retail outlet)
and its well diversified product designs.
Increased Underwriting Costs Pressures Firm's Profitability
Losses incurred on both its life and non-life insurance contracts increased by NGNO.78bn and NGNO.30bn respectively, pushing total net claims expense up by 6.18% to NGN18.50bn in 9M:2019. However, claims ratio was 59.52%, due to faster growth in premium income relative to the rise in claims expense. The claims ratio figure was significantly better than the prior period in 9M:2018 (78.59%) and a 5-year average of 76.37%. The firm's performance however did not benefit from this improvement, robbed by increased provisioning to the life and annuity reserve fund, which stood at NGN12.04bn, from NGN1.51bn at this time last year. This led to the 69.41% YoY increase in total underwriting costs to NGN37.22bn in 9M:2019. This also masked the benefits of lower underwriting costs due to the digitization of its underwriting processes. Nonetheless, the combined ratio for the period came in at 73.69%, lower than the 4-year average of 85.85%. As a result, the firm recorded an underwriting loss of NGN3.78bn (vs. underwriting profit of NGN2.30bn in 9M:2018).
Fair Value Gains Drive Net Profit by Highest rate in Five years
Investment income rose by 29.03% to NGN8bn (vs. NGN6.21bn in 9M:2018)
due to interest income on its fixed income assets (which represents 94% of
total financial assets). Profit after tax grew by the highest growth rate in 5
years (157.52%), largely due to fair value gains on its financial assets
(NGN6.24bn) If we adjust for this non-cash item, earnings will print at
NGN2.28bn, an implied 12.68% decline from the adjusted PAT of NGN2.62bn in
9M:2018. Based on adjusted figures, return on equity and net margin stood at
12.23% and 6.42% respectively, lower than 4-year averages of 15.72% and 7.90%.
The net margin however compares favorably with a peer average of 12.74%.
Weak Solvency Margin Despite Strong Revenue Growth
We maintain our EPS and target PE of NGNO.37 and 2.00x respectively. This implies a FY2019 target price of NGNO.74 and an upside potential of 5.71% to its closing price of NGNO.70 on 12th November 2019. Hence, we rate as HOLD.