Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Nnadozie Asinobi*
Analyst
Nnadozie.Asinobi@cardinal-stone.com
This report captures our view on medium-term prospects of the insurance sector in Nigeria. Based
on our analysis, we expect total premiums to grow to 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.
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 insurer's books: The quality of an insurers’ balance sheet
ultimately determines how much risk they can underwrite. 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.
Oluwatosin Ojo, CFA*
Team Lead
Tosin.Ojo@cardinal-stone.com
22 September 2014
Sector Data
Market cap (N’Bn)
177.81
Average Fwd P/BV
1.01
Average Fwd Div. Yield (%)
6.83
Average Fwd P/E (x)
9.84
Sector Performance
INSURANCE
NSE
12-month (%)
7.1
13.4
6-month (%)
7.4
10.0
YTD (%)
-5.9
-0.7
TP
Proj.
Return
Rating
CUSTODYINS
6.09
54%
BUY
MANSARD
2.24
-13%
SELL
CONTINSURE
1.19
23%
BUY
AIICO
1.44
69%
BUY
Stocks
12 Month Price Performance (Rebased)
1.2
1.1
1.0
0.9
Sep-13
Jan-14
May-14
INSURANCE
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.
ASI
Contact Information
Research
Email:research@cardinal-stone.com
Phone number: +234 809 0415 178
Sales
Email:sales@cardinal-stone.com
Phone number: +234 809 0415 168
1
Sep-14
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Table of Contents
Summary ..................................................................................................1
Global Insurance Industry ........................................................................3
Nigeria's Insurance Industry ....................................................................8
Company Section




Custodian and Allied Plc ...........................................................26
Mansard Insurance Plc .............................................................36
Continental Reinsurance Plc ....................................................45
AIICO Insurance Plc ..................................................................54
Disclosure ..............................................................................................65
2
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Global Non - Life Insurance
Improving economic growth sets tone for stronger premium growth: As
economic recovery strengthens in advanced economies, the outlook for non-life
insurance premium growth is improving. From a stable growth of 1.4% in 2013
(same as 2012), non-life premium growth in advanced economies is projected at
2.1% and 2.5% in 2014 and 2015 respectively, according to SwissRe Global
Insurance Review and Outlook Report. The slow-down in emerging markets
premium growth in 2013 (down to 7.8% from 8% in 2012), will likely continue in
2014 and 2015, as growth projections are estimated at 7.7% and 7.2%
respectively. A dissection of emerging markets insurance trend in 2013 actually
reveals that non-life premiums rose by about 13% in China, driven by new car
sales and infrastructure investments. The downside to premium growth in
emerging markets stems from weaker economic expansion in Latin America and
Asia. Notwithstanding, the non-life insurance sector will still grow at a much faster
pace than advanced economies.
Driven by economic growth,
insurance is expected to thrive
Table 1: Real growth of premiums written in major non-life insurance markets
Country/Region
United States
Canada
Japan
Australia
United Kingdom
Germany
France
Italy
Advanced Markets
Emerging Markets
World
2011
1.4%
1.8%
3.6%
-4.6%
-3.6%
2.5%
1.8%
-0.7%
1.2%
8.5%
2.3%
2012
2.2%
1.7%
2.5%
5.6%
-1.2%
1.5%
1.0%
-5.5%
1.4%
8.0%
2.5%
2013E
3.0%
1.9%
2.6%
3.6%
-1.2%
1.4%
1.4%
-5.0%
1.4%
7.8%
2.5%
2014F
2.4%
1.9%
2.6%
2.9%
1.8%
2.4%
1.5%
-0.9%
2.1%
7.7%
3.1%
2015F
3.0%
2.9%
2.4%
3.0%
2.2%
1.2%
0.9%
0.6%
2.5%
7.2%
3.4%
Source: SwissRe
Better premium pricing… Given benign claims growth and a gradual streghtening
of premium rates, underwriting profitability in the global non-life insurance
market improved marginally in 2013. According to SwissRe's outlook for 2014/15,
further improvement in the underwriting profitability of non life insurance
companies in 2014 and 2015 is expected. Furthermore, there’s an expectation of
higher premium pricing given that the current reserves of insurers may soon
prove insufficient and there will be a need to strengthen reserves. When this
happens, attention will shift to pricing, which will support a hardening of premium
rates. Also, stricter solvency regulations and higher capital requirements would
also affect pricing, especially with the expected implementation of Solvency II in
2016. In addition, volatile capital markets may impact insurers' capital base, which
can lead to higher premium rates.
….but Investment returns is subdued given low yield environment: However,
due to the low yield environment in advanced economies, investment returns will
likely remain under water. Investments in fixed income instruments, the main
3
Stricter solvency requirements will
lead to higher premium rates
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asset class for insurance companies, offer low yields but other asset classes may
offer better returns at the cost of elevated volatility. For example in Germany, the
running yields (the annual income of an investment divided by its current market
value) of non life insurers, has been following the general downward interest rate
trend. This is because maturing bonds and new cash flows can only be invested at
lower yields, thus driving the average yield of a bond portfolio lower. Recently,
market yields have begun to rise moderately but insurers running yields are still
expected to decline further. Due to the low interest rate environment,
contributions from investment returns to overall profitability in the non life sector
will remain low in the near future.
Given the low interest rate
environment, investment income
will likely remain subdued
Underwriting profitability improving though gradually: Hence, with the marginal
improvement in underwriting profitability and subdued investment returns, the
profitability of global non-life insurer has improved only slightly, with ROE
estimated at 7% in 2013.
Global Life Insurance
Fuelled by strong growth in emerging markets which saw a 6% growth in Life
premiums in 2013, global life premium is projected to rise at 4% in 2014, an
improvement on the 3% growth of 2013. However, the low interest rate
environment in advanced economies is a major challenge for global Life Insurance
outlook.
Improving premium growth in advanced economies. The Life insurance
business is improving in advanced economies, following from a 2.3% growth in life
premiums in 2013. Strong growth in western Europe, particularly in the high
volume markets of France and Italy where premiums rose after two years of
considerable falls, has been the key driver of premium growth in advanced
economies in 2013.
Advanced
economies
have
witnessed improved growth in
premiums
Emerging markets still leading the growth curve. As economic downside
risks abate in advanced and emerging markets, the short-term outlook for
insurance is positive. Sustained income growth in emerging Asia as well as Middle
East and North Africa (MENA), has been a key driver of growth with increasing
sales also projected in retirement (aging population) and healthcare (social
security reforms) insurance. Overall, premium income in emerging markets rose
by 6.2% in 2013. Analysing the growth by continent, Latin America and emerging
Asian countries (which reported 10.8% and 6.3% growth in Life premiums
respectively) led the pack, followed by Africa (around 2%). In China, premium
income grew by 8% while in India, premium income has grown by an average of
17.5%. In South Africa, life premium growth declined to 2% from 13% in 2012.
4
Growth in emerging markets has
been
robust
as
insurance
penetration gets deeper
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Table 2: Real growth of premiums written in major life insurance markets
Country/Region
United States
2011
2012
2013E
2014F
2015F
3.8%
2.5%
0.2%
2.6%
3.4%
Canada
-3.1%
1.6%
2.1%
2.7%
3.2%
United Kingdom
-1.2%
3.8%
2.6%
3.0%
3.2%
Japan
7.1%
5.8%
5.0%
4.0%
3.5%
Australia
6.0%
-5.3%
6.5%
5.0%
4.5%
-15.1%
-12.8%
4.5%
2.9%
2.9%
-7.3%
-1.0%
4.8%
0.8%
0.8%
-20.2%
-8.4%
13.1%
6.3%
3.7%
8.6%
-11.1%
0.4%
0.8%
0.8%
Netherlands
-0.5%
-15.3%
-5.1%
3.7%
3.7%
Advanced Markets
-1.9%
2.0%
2.3%
3.2%
3.2%
Emerging Markets
-5.1%
4.8%
6.2%
8.5%
9.2%
World
-2.4%
2.4%
2.9%
4.1%
4.2%
France
Germany
Italy
Spain
Source: SwissRe
Recent Trends
Stricter capital requirements. Regulators may require life insurers to build up
reserves to ensure that liabilities can be adequately met. In Canada, upcoming
actuarial and regulatory changes will likely increase reserve requirements for
guaranteed products (e.g. annuities). The low interest rate environment in
Germany forced the introduction of additional reserves in 2011. In the US,
Solvency II is expected to be introduced by the beginning of 2016. Under solvency
II, capital requirements for long-term guarantees and asset risks will be more
rigorous compared to Solvency I. The response of life insurers has been to
improve investment and asset-liability management, reduce operational costs and
boost technical profitability through superior underwriting and product strategies.
Stricter regulations will cause
insurers to improve on their
reserves
Evolving product mix: The twin factors of low interest rates and tighter
regulatory environment have accelerated a retreat from guaranteed investment
products. Life insurers will therefore; focus more on business lines that are less
dependent on investment income as a source of earnings (e.g. health), offer unitlinked products which are more capital efficient, alter existing savings products to
provide shorter and more flexible guarantees which can be adjusted periodically.
Life insurers will offer products
less dependent on investment
income as a source of earnings
New asset classes: Due to the long term duration of their liabilities, life insurers
are seeking asset classes that better match their liability profile and are capital
efficient in a risk based solvency framework. Long term infrastructure investments
meet this need as there has been a dearth of bank funding even as governments
are under strain to finance infrastructure. The global life insurance industry, which
is estimated to hold around US$ 23 trillion of investments as at 2012, could utilize
this pool of funds towards infrastructure.
Infrastructure investment provides
an alternative asset class that
matches insurers liability profile
5
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Beacon Shining Forth
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Macroeconomic Environment
According to the IMF World Economic Outlook update, Global growth is projected
at 3.4% for 2014. Growth projection for the US is 2.8% while the Euro area is
expected to only grow by 1%. The United Kingdom’s 2014 growth projection is
estimated at 2.4% whilst Japan’s economic growth is expected to improve to
1.6% on the back of its fiscal stimulus. The growth in the US economy is the
strongest among developed economies and this has been spurred by a recovering
housing market, still resilient consumer spending and an increase in business
investment. Given that growth projections is still perceived as fragile, we expect
the monetary policy in the US, the UK and the Euro zone to remain
accommodative in the short term.
Uneven growth in the euro-zone. Though the Euro zone returned to growth in Q2
2013, there are still discrepancies in the economic performance of member
states. For example, growth in Germany of 1.3% in Q2 2014 - has remained solid,
but the peripheral economies, such as Italy (-0.2%) remains in recession, with
tight credit conditions and deleveraging of the private sector weighing economic
activity lower.
Interest rates to remain low in the short term. The Federal Reserve Bank (US Fed)
recently refined its interest rates guidance, pledging not to raise the main interest
rate until "well past the time" joblessness falls below its threshold of 6.5%. The
Fed has said that any policy moves will be 'data-dependent', meaning that weak
(strong) growth and flat (rising) wage gains could delay (prompt) a rate increase
after the unemployment rate falls to 6.5%.
Monetary Policy is expected to
remain accommodative.
Uneven
growth
share
of
Euro-zone
Central Banks are not eager to
raise interest rates
With the average Euro area inflation standing at 0.4% as at August 2014, which is
below the European Central Bank (ECB) medium to long term inflation target of
'below but close to 2%', the ECB cut its deposit rate for banks from zero to -0.1%,
to encourage banks to lend to businesses and set benchmark interest rates at
0.15%. Therefore, the ECB is not likely to increase interest rates anytime soon.
Resilience in Asia. According to the World Bank East Asia and Pacific economic
update, growth in Asia has stabilised and is expected to continue, rising to 6.7% in
2014 (6.5% in 2013) and 6.8% in 2015. But China’s economic growth is expected
to decline to 7.5% in 2014 and 7.3% in 2015. Though China’s growth rebounded
strongly in the second half of 2013 (7.8% in Q3'13), as a result of an increase in
investment, this surge is expected to be temporary due to policy measures to slow
credit growth and raise the cost of capital (Q2'14 growth came in at 7.5%).
Strong growth prospects in Sub Saharan Africa (SSA). According to the IMF, the
general outlook for growth is strong for SSA; with growth expected to increase to
5.5% in 2014. Strong investment demand will continue to support growth in the
region. Key growth drivers will continue to be natural resource exports and
investment in commodities projects.
6
China to drive growth in Asia
Overall, growth will be robust in
SSA
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Risk scenarios affecting growth outlook: Several risk factors could affect global
growth with implications for premium growth and investment returns. Both
Europe and the US are expanding, but policy errors, such as tightening too early
before the economy fully recovers, could retard the progress made so far. There is
a risk of hard landing1 in China, whilst a number of emerging markets are still
vulnerable to capital flight. On the upside, the US housing market, could be a
shining beacon, given increased demand, low mortgage rates and rising house
prices. In Europe, the UK economy continues to surpass expectations positively
and Germany has remained solid. China could also provide upside surprise if
credit expansion is greater than currently expected. In general, the growth of
insurance premiums will mirror that of GDP in advanced economies and will
generally be higher than GDP growth in the developing economies, which are
expected to benefit from increased insurance penetration.
1
hard landing is an economic state wherein the economy is slowing down sharply or is tipped into outright
recession after a period of rapid growth.
7
The prognosis for global growth is
positive, but several risk factors
persist
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Nigeria’s Insurance Sector
Low penetration, huge upside
Nigeria has the largest population in Africa, and has experienced an era of high
growth in the past few years, fuelled by a thriving economy, increased business
activities and asset ownership, an emerging middle class, and increased foreign
investments. The population has been a major driver in attracting investments
into Nigeria especially since the return to democracy in 1999. However, despite
the population and increased economic activity, insurance penetration in Nigeria
remains among the lowest globally.
Figure 1: Insurance penetration and density (African market ex SA) 2012
Density (LHS)
Penetration (RHS)
450
414.8
360
9%
6%
270
180
3%
21.7
Angola
30.1
Tunisia
10.9
76.3
Namibia
56.5
87.6
Morocco
0
34.3
90
Algeria
Kenya
Egypt
0%
Nigeria
Source: SwissRe
From the Nigerian Bureau of Statistics (NBS) rebased GDP breakdown, Nigeria's
insurance penetration was 0.39% in 2013, down from 0.48% in 2010, due to faster
GDP growth. When compared with the average for Africa, which according to
SwissRe Sigma, was 3.6% in 2011, there is still ample room for improvement. With
gross premium written in Nigeria in 2013 at N314.95 billion ($1.93 billion), we
expect this figure to reach N1 trillion ($6.13 billion) by 2019. This represents a
CAGR of 21% over 6 years, which is typical of a developing market where premium
growth outpaces GDP growth. Consequently, we expect insurance penetration to
increase from 0.38% in 2012 to 0.9% in 2019 (rebased GDP growing by 5%, over
the next 5 years).
8
Insurance penetration in Nigeria
lags behind African peers,
presenting growth opportunities
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Table 3: Contribution Of Select Sectors To GDP
INDUSTRY
Agriculture
Petroleum &
Natural Gas
Wholesale &
Retail Trade
Financial
Institutions
Insurance
Q1'11
Q2'11
Q3'11
Q4'11
Q1'12
Q2'12
Q3'12
Q4'12
Q1'13
Q2'13
Q3'13
Q4'13
19.09%
19.93%
26.50%
23.09%
18.89%
18.65%
25.25%
24.85%
17.96%
17.62%
24.39%
23.49%
19.88%
18.80%
16.50%
15.40%
18.35%
15.31%
16.65%
13.14%
15.07%
11.68%
13.37%
11.57%
17.36%
16.89%
15.42%
16.07%
17.71%
17.97%
14.97%
15.64%
18.48%
18.37%
15.71%
16.09%
2.06%
2.14%
1.73%
1.79%
2.76%
2.55%
2.23%
2.30%
2.90%
2.69%
2.40%
2.42%
0.45%
0.51%
0.41%
0.43%
0.38%
0.43%
0.34%
0.37%
0.40%
0.45%
0.35%
0.37%
Sources: CBN, CardinalStone Research
According to SwissRe, the average amount spent per capita on insurance in
emerging markets increased to $120 in 2012, while insurance penetration
increased to 2.7% of GDP. In Nigeria, the average amount spent per capita in
2011, was c.N1,800 ($11), and given our estimate of N1 trillion in premiums in
2019, we expect the insurance spend per capita to increase to N5,151 ($32). This
spending per capita will be stunted by the relatively fast population growth.
We are optimistic on the prospects of the insurance industry and consider our
forecast CAGR of 21% for gross premiums to be conservative. If we assume that
insurance penetration would converge at the emerging market average of 2.7% by
2019, gross premiums would be expected to reach $17.6 billion (N2.9 trillion). We
expect gross premium income to grow rapidly, but not at this pace, because
ramping up insurance penetration to such levels will take a lot of public
sensitisation (and this will take time to pay off) and a regulatory drive with a high
degree of enforcement, which is not currently in place, neither is it within reach.
Our projected target of N1 trillion ($6.13 billion) premiums by 2019 is on the back
of the following;


Increasing accessibility to credit: Given the expansionary monetary policy
focus of the CBN, we believe a season of strong credit growth especially at
the retail end, is in the offing and we expect the insurance sector to
benefit immensely from this outlook. Typically insurance products
accompany some consumer loans such as mortgage and car loan. Banks’
earnings have come under some pressure recently given the tightening
and restrictive monetary policy stance of the last five years. Therefore,
given realtively penetration of financial services products at the retail end,
a number of banks are pushing rather aggresively into the retail end to
diversify earnings. A glimpse of this dynamic, was seen pre-2009 banking
crisis, when bank lending was at a peak, and we saw insurance premiums
increase to N150 billion ($915 million) in 2008 from N98.6 billion ($601
million) in 2007.
Innovative insurance solutions increasing penetration: Given the poor
penetration of insurance products relative to the population, we expect
9
We project total premiums will
grow at a 21% CAGR to N1 trillion
($6.13 billion) by 2019
Strong retail credit growth will
benefit the insurance sector as
insurance products accompany some
consumer loans.
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insurers to come up with increasingly novel ways to grab a share of the
vastly untapped market. We expect insurers to leverage on technology in
their bid to increase insurance penetration and make the insurance
experience more convenient for the customer. Examples of such
innovative solutions include MTN 'Y'ello cover' in collaboration with
Mansard Insurance, Airtel's 'Padi 4 Life' in collaboration with FBN Life
Assurance as well as the development of mobile insurance apps for quick
and convenient insurance transactions.

Emerging middle class: Nigeria's growing middle class offers potential for
insurance sector growth, especially as the demand for status associated
insurance products (like Car insurance, Home insurance - which is
compulsory for mortgage finance) would naturally grow with higher
income levels.

Regulation and Enforcement: The regulator (NAICOM) has been dogged
in its drive to grow the insurance sector by enacting new laws and
ensuring stricter enforcement of existing ones. Some of these policies
include the ‘No Premium No Cover’ policy, the Nigerian Oil and Gas
Industry Content Development Act and IFRS conversion.

Relative underdevelopment of the Nigerian insurance sector: Given
Nigeria’s enormous population and huge potential upside, the insurance
industry is relatively underdeveloped compared to emerging market peers
such as India and Kenya which had a penetration of 3.96% and 3.1%
respectively in 2012. The average insurance penetration for emerging
markets in 2012 was 2.7%. If Nigeria is able to grow its insurance
penetration to the emerging market average of 2.7% of GDP, total
premiums shall increase to N2.24 trillion ($13.8 billion) based on 2013
rebased GDP figures.
Insurers are taking advantage of
mobile phone penetration to
increase insurance penetration
Review of the insurance sector
Cultural and Religious Inclination – a key impediment. Most Nigerians are yet to
fully embrace insurance as a means of hedging risk, which is traceable to the
religious and cultural inclination of the average Nigerian. In addition, with 65% of
the world's insurance premiums from the G7 countries (according to a KPMG
report on Financial services in Africa), insurance is seen as a service for the
wealthy. Hence, given the relatively poor Human Development Index (HDI) of SubSaharan African economies, it is not suprising that insurance penetration is low.
According to the World Bank published figures in 2013, about 100 million
Nigerians live in extreme poverty. Additionally, with Nigeria’s wide income
inequality, majority of Nigerians cannot afford traditional insurance. This has led
to an increased focus on micro-insurance and Takaful insurance, which is aimed at
deepening insurance penetration. In addition, Insurers can also take advantage of
technolgy to increase retail penetration of insurance products. The recent
10
Nigerians have been slow to
embrace insurance due to religious
and cultural inclinations as well as
wide income inequality
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partnerships with mobile telecommunication operators and deployment of
mobile insurance apps are key steps in this regard.
Presently, there are 49 insurance companies in Nigeria, which comprise 10
composite insurers, 7 life specialist companies and 32 non-life risks underwriting
companies, out of which 17 are publicly quoted entities on the Nigerian Stock
Exchange. In addition, Nigeria’s insurance industry has 3 reinsurance companies,
447 insurance brokers, 5 loss adjusters and 2,800 insurance agents. The industry is
dominated by agents and brokers, with brokers accounting for over 70% of
participants in the market.
Figure 2: Gross Premium Income Growth Rate 2001 - 2010
LIFE
NON-LIFE
140.0%
105.0%
70.0%
35.0%
2010
2009
2008
2007
2006
2005
2004
2003
2002
-35.0%
2001
0.0%
Source: NIA Insurance Digest
Stronger balance sheets of insurers. In 2007 NAICOM increased the capital base
of insurance companies in a bid to strengthen the balance sheet of insurers and
ensure they are adequately capitalised to offset claims when due and to drive
investment return. This move saw the capital base of life insurers, non-life
insurers, composite insurers and re-insurers raised to N2 billion ($12 million), N3
billion ($18 million), N5 billion ($30 million) and N10 billion ($61 million) from
N150 million ($0.9 million), N200 million ($1.2 million), N350 million ($2.1 million)
and N350 million ($2.1 million) respectively. This enhanced the industry’s
underwriting capacity and enabled a higher degree of participation in high risk
sectors of the economy such as oil and gas and aviation. Nigerian insurance
companies now co-insure large ticket transactions and retain larger premiums,
with the local retention in the oil and gas insurance business rising to 30% in 2013,
contrary to the pre-consolidation era when large amount of premiums were
ceded to foreign reinsurance companies. As insurance penetration increases,
there will be need to further strengthen the balance sheets of insurers. Hence, in
the medium term, we expect further consolidation in the industry as well as
foreign interest in local insurers as global insurers seek to increase their emerging
market diversification.
11
NAICOM increased the capital base
of re-insurers to ensure they are
adequately capitalised to underwrite
risk
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Figure 3: Total Assets and Shareholders Funds of Insurers
700
600
N billion
500
400
300
200
100
0
2006
2007
2008
Shareholders Funds
2009
2010
Total Assets
Sources: NIA Insurance Digest, CardinalStone Research
Table 4: Gross Premium Income of Insurers By Class of Business
Nm
Class of Business
2006
2007
2008
2009
2010
Fire
9,817
10,383
15,618
16,536
19,293
as % of total premiums
11.9%
10.30%
10.40%
9.20%
10.40%
Motor
17,108
25,220
38,118
45,215
42,039
as % of total premiums
20.8%
25.10%
25.41%
25.27%
22.63%
General accident
11,945
16,191
22,536
23,912
28, 592
as % of total premiums
14.5%
16.10%
14.99%
13.36%
15.39%
Marine and Aviation
7,841
11,256
17,231
16, 728
20,097
as % of total premiums
9.5%
11.20%
11.64%
9.35%
10.82%
Workmen's Compensation
924
984
720
1,704
903
as % of total premiums
1.1%
1.00%
0.47%
0.95%
0.49%
Oil and Gas
14,907
12,981
17,403
31,577
26,092
as % of total premiums
18.1%
12.90%
11.58%
17.65%
14.05%
Miscellaneous
5,393
7,822
9,137
8,982
8,945
as % of total premiums
6.6%
7.80%
6.07%
5.02%
4.82%
Others
1,612
-
-
-
-
as % of total premiums
2.0%
-
-
-
-
Life
12,743
15,783
29,328
34,292
39,761
as % of total premiums
15.5%
15.70%
19.54%
19.17%
21.41%
Total
82,289
100,620
150,090
179,941
185,730
Source: NIA Insurance Digest
12
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Non-Life Insurance
The underwriting business in Nigeria is skewed to the non-life insurance segment
as 75% of industry premiums are from this segment.
Motor Insurance: This is the most popular type of insurance in Nigeria because of
the compulsory third party liability insurance enforced by NAICOM in partnership
with other law enforcement agencies such as Federal Road Safety Corps (FRSC)
and Nigerian Police Force, which makes it unlawful to drive without at least a third
party liability insurance. As a result of Nigeria's economic growth, the number of
cars driven has increased leading to significant growth in motor insurance
premium.
Figure 4: Motor Insurance gross premiums and growth
50,000
Gross Premium
60%
Growth
50%
40,000
40%
30,000
30%
20%
20,000
10%
10,000
0%
0
-10%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
Motor insurance business dominates the Insurance sector as premiums from this
segment of the non-life insurance subsector acccounted for c.21% of total
premiums in 2011. Motor Insurance premiums have grown by a CAGR of 14.4%
from 2002 - 2011. Whilst data for more recent years are yet to be made available,
we adjudged that motor insurance premiums would have risen substantially over
the last 2 – 3 years, due to increasing consumer lease financing which makes it
possible for Nigerians to purchase automobiles through lease finance. These
facilities usually come with a requirement for comprehensive cover on the
vehicles.
13
Motor insurance is the most popular
type of insurance in Nigeria due to
regulation
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Figure 5: Top 10 motor insurers gross premium income (2011)
4,000
Gross Premium Income
3,000
2,000
1,000
Sovereign Trust Ins
Royal Exchange Gen
Ins
Law Union and Rock
Standard Alliance
Mansard
AIICO General Ins
Mutual Benefits
STACO Insurance
NEM Insurance
Leadway Assurance
0
Source: NIA Insurance Digest, CardinalStone Research
General accident insurance: From an average contribution to total premiums
(both life and non-life) of 25% in 2002, General Accident contribution declined to
13.6% in 2011. This was due to the growth in other non-life insurance lines.
Figure 6: General Accident insurance gross premiums and growth
Gross Premium
Growth
35,000
50%
35%
28,000
20%
21,000
5%
14,000
-10%
7,000
-25%
0
-40%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
Premiums from the General Accident business class has grown by a CAGR of 12%
from 2002 - 2011. Despite this, the growth has been sporadic and this can be
attributed to the nature of the insurance cover in this category, which are
personal accident, public liability, burglary protection, travel insurance, cash in
transit etc. Insurance on these risks are generally purchased when needed, hence
annual renewals are not guaranteed.
14
The nature of general accident
insurance leads to volatile growth
patterns
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Despite the volatile growth pattern, General Accident was ranked third in terms of
contribution to total premiums in 2011.
Figure 7: Top 10 general accident insurers gross premium income (2011)
2,500
Gross Premium Income
2,000
1,500
1,000
500
0
Consolidated
hallmark
Mansard
STACO Ins
Cornerstone Ins
Sovereign Trust
Zenith Ins Coy
AIICo general
Leadway
Assurance
Mutual Benefits
NEM
Source: NIA Insurance Digest, CardinalStone Research
Fire Insurance: In 2011, fire insurance premiums contributed 9.1% to total
premiums, with premiums growing by 3% in 2011. Premiums have grown by a
CAGR of 17% from 2002 - 2011.
Figure 8: Fire insurance gross premiums and growth
25,000
Gross Premium
60%
Growth
50%
20,000
40%
15,000
30%
10,000
20%
5,000
10%
0
0%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
Though fire insurance premiums have grown faster than motor insurance
premiums from 2002 - 2011, the growth in this class of business has been stunted
by the lack of enforcement of the law providing for the compulsory insurance of
all public buildings such as government buildings, schools, hospitals, churches,
mosques and fuel stations.
15
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Figure 9: Top 10 fire insurers gross premium income (2011)
2,500
Gross Premium Income
2,000
1,500
1,000
500
0
Sovereign Trust
insurance
Law Union and
rock
Zenith Ins Coy
Mansard
Custodian and
Allied Insurance
STACO
Prestige Assurance
NEM
AIICO General Ins
Leadway Assurance
Sources: NIA Insurance Digest, CardinalStone Research
Oil and Gas Insurance: Notwithstanding the low transaction volume, the oil and
gas segment has the second highest value of premiums in the insurance industry
due to the high value of assets insured. The segment is next to motor insurance in
terms of premium value, thereby accounting for 16% of total industry premiums.
The growth of oil and gas premiums has been driven by the local content act and
increased capacity by local insurers to underwrite risk. Amidst other
requirements, the local content oil and gas act stipulates that up to 70% of
insurance premiums be retained by local insurers.
Figure 10: Oil and Gas insurance gross premiums and growth
40,000
Gross Premium
200%
Growth
32,000
150%
24,000
100%
16,000
50%
8,000
0%
0
-50%
2007
2008
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
16
Growth in oil and gas premiums have
been driven by the local content act
and increased capacity of local
insurers to underwrite risk
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Figure 11: Top 10 oil and gas insurers gross premium income (2011)
10,000
Gross Premium Income
8,000
6,000
4,000
2,000
Goldlink Insurance
LASACO Assurance
Royal Exchange Gen
Ins
International Energy
Mansard
Sovereign Trust
AIICO General
IGI
Custodian and Allied
Leadway Assurance
0
Sources: NIA Insurance Digest, CardinalStone Research
Life Insurance
In recent times, life insurance has been on the uptrend, rising to 25.1% in 2011
from 18.9% of total gross premium income in 2002. Given the increasing health
conciousness and better life expectancy of Nigerians- which is now c.52 years
from about 47 years in 2001, there is a rising awareness of life insurance as a
vehicle to meet future spending needs of policy beneficiaries. Many life insurance
policies now have an embedded savings plan which has increased the
attractiveness of these policies and insurance penetration. In addition to this, all
companies with more than 5 employees are required by law to purchase Group
Life insurance cover for their employees. Life insurance is a key driver of growth
for insurers as it increases the duration of their liabilities and hence they can
invest in long term investment vehicles such as infrastructure projects and real
estate to derive higher returns.
Figure 12: Life insurance gross premiums and growth
60,000
Gross Premium
120%
Growth
100%
50,000
80%
40,000
60%
30,000
40%
20,000
20%
10,000
0%
0
-20%
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
17
Growth in life insurance premiums has
been driven by regulation on Group Life
insurance
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Macroeconomic Environment
Economic growth bodes well for insurance
Rebased GDP. The rebased GDP figure released by the Nigerian Bureau of
Statistics (NBS) has made Nigeria the largest economy in Africa. The GDP figure for
2013 was US$510 billion, dwarfing South Africa's US$372 billion. Nigeria’s GDP
growth rate as at Q1'14 was 6.21%.
For an insurance market with low penetration and given the drive to develop this
sector, we expect the insurance sector to grow faster than GDP. According to
IMF's World economic outlook projections, Nigeria is expected to grow at a faster
rate than the average emerging market and developing economies growth of
5.3%, the average growth rate in Sub-Saharan Africa of 5.95% and the average
growth rate of South Africa which is 3.05%, over the next 2 years.
We expect the insurance sector to
grow faster than GDP in Nigeria
Following the GDP rebasing exercise, insurance contributes a larger amount to
GDP (from a quarterly contribution of c.0.15% pre GDP rebasing to a quarterly
contribution of c.0.45% post GDP rebasing), although it still remains lower than
emerging market average of 1.3%.
Figure 13: Nigeria’s GDP Growth Rate (2011 – 2014)
8%
6.88%
6.77%
6.37%
6%
5.57%
4.69%
5.17%
4%
4.45%
4.11%
3.61%
6.21%
5.40%
3.64%
3.46%
2%
0%
Q1'14
Q4'13
Q3'13
Q2'13
Q1'13
Q4'12
Q3'12
Q2'12
Q1'12
Q4'11
Q3'11
Q2'11
Q1'11
Sources: NBS, CardinalStone Research
Threats to growth still abound. Despite the growth prospects, the key downside
risk to the economy in the short term is the uncertainty attributable to the 2015
general elections. The opposition party is building momentum and with the
National Assembly divided between the two parties, it will be increasingly difficult
to pass legislation and move the economy forward, assuming status quo is
maintained post election.
18
The key short term risk to the economy
is the uncertainty attributable to the
2015 general elections
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Despite the downside risks, we expect a positive growth outlook, especially with
Nigeria's recent classification as a MINT (Mexico, Indonesia, Nigeria and Turkey)
nation, which represents the group of countries that have the strongest prospects
of joining the ranks of the emerging world economic powers.
Regulatory Impact - NAICOM
Aggressive push by regulator yielding fruit
NAICOM, under the leadership of the present commissioner, Mr Fola Daniel, has
been dogged in its drive to improve insurance penetration in Nigeria, by working
hard to ensure compliance with insurance laws, which has yielded positive results
in the industry. A few of the policies that the regulator has enacted include:
Market Development and Restructuring Initiative (MDRI): The MDRI was
introduced in 2009 by NAICOM to promote insurance culture in the country and
achieve a N1 trillion ($6.13 billion) premium target by 2012. The initiative focuses
on four key areas which include the enforcement of compulsory insurance,
sanitisation and modernisation of the insurance agency system, wiping out of fake
insurance institutions, and introduction of risk-based supervision.
Through the MDRI, NAICOM's plan is to enforce five major compulsory insurance
policies in the country. These are the Motor Third Party Liability insurance,
Builders Liability Insurance, Group Life Insurance, Occupiers Liability Insurance
and Health Care Professional Indemnity Insurance. The delay in the
implementation of the initiative affected the projections set to be achieved as the
initiative which was meant to take off in 2009, only commenced in 2011.
No Premium No Cover Policy: NAICOM began the enforcement of Section 50 (1)
of the Insurance Act 2003 which stipulates that no valid insurance contract can
exist without the receipt of an insurance premium. Although this provision has
always been in the insurance act, it was not enforced, leading insurers to retain
unhealthy amounts of receivables on their balance sheets. The government also
contributed to this practice as budgetary provisions for insurance of government
assets and properties were either inadequate or in most cases not made at all.
The previous state of affairs, before the enforcement of this policy, not only
increased the credit risk of insurers, but also introduced uncertainty in the market
regarding the capacity of many insurers to meet their obligations to insurance
policy holders and other stakeholders. This policy therefore allows insurers to
better manage their cash flows, thereby improving balance sheet quality by a
significant reduction in receivables.
Nigeria Oil and Gas Industry Content Development Act: NAICOM collaborated
with the Nigerian Content Development and Monitoring Board (NCDMB) to
ensure compliance with relevant provisions of the Nigeria Oil & Gas Industry
Content Development Act 2010 and other laws relating to insurance.
19
Policies enacted by NAICOM have
been favorable to insurers
Through the MDRI, NAICOM enforces
five major compulsory insurance
policies in Nigeria
The No Premium No Cover policy
ensures
that
insurers
receive
premiums before risk is assumed
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The act provides that an oil and gas participant which intends to insure any
property located in Nigeria, or any insurable interest or liability, shall place such
insurance with local insurers, who may, subject to NAICOM’s approval, reinsure
the excess overseas where the Nigerian insurance industry lacks adequate
capacity to retain the risk. The Act therefore presents opportunities for local
insurers in the oil and gas sector to book premiums by providing underwriting
services to oil and gas companies which were originally provided by foreign
companies. This has significantly increased the growth of premiums in the
industry as local retention of oil and gas premiums has risen to about 30% in 2013
from 6% as at 2010.
Take-off of Micro Insurance and Takaful (Islamic Insurance). In trying to reduce
the percentage of the uninsured population (insurance gap) from 94% to at least
70%, NAICOM has decided to lower the capital requirement for the registration of
insurance businesses at the micro level and provide a framework that allows for
the establishment of Takaful operations. According to the former Minister of State
for Finance, Dr Yerima Ngama, the target market for Takaful and micro insurance
in Nigeria is large, with 70% penetration attainable acording to the report of the
few Takaful operators in the industry. Some insurers have already introduced
innovative products to take advantage of microinsurance to grow their premiums
and deepen insurance penetration. For example, Mansard Insurance in
collaboration with MTN introduced 'MTN Y'ello Cover' and FBN Life Insurance in
collaboration with Airtel introduced 'Padi4Life'. These products are designed to
give subscribers daily cover from specified losses with premiums deducted daily
from airtime balance.
IFRS Conversion: In a bid to ensure comparability and increase the quality of
financial statements, the regulator set a deadline of December 2012, for insurers
to convert to International Financial Reporting Standards (IFRS). The adoption of
IFRS provides an internationally recognised framework that ensures transparency,
comparability and high quality of financial statements of insurers. The
implementation of the conversion from Nigerian Generally Accepted Accounting
Practices (NGAAP) to IFRS led to delays in the release of 2012 annual reports of
most insurers. But subsequent results have come out faster and the full
compliance with the IFRS standards by all insurers has increased investor
confidence in the financial statements of insurers.
Consumer protection: In 2014, NAICOM has communicated its plan to focus on
consumer protection, in a bid to manage the problems from overriding
commission in the industry. Overriding commission is a fee or percentage of
premiums which is paid by the insurer to brokers or agents to secure insurance
contracts; hence brokers/agents were biased towards the insurers who paid the
most commission. Given the regulators stance, we expect this practice to reduce
in the coming years and consumers will get more value for money from being able
to chose suitable insurers, not just those who pay the brokers the most overriding
commission.
20
The Oil and Gas local content act
aims to retain more oil and gas
premiums locally by Nigerian
insurers and re-insurers.
Micro Insurance and Takaful to
deepen insurance penetration
The industry has adopted IFRS to
ensure
transparency
and
comparability of insurers
The regulator aims to reduce
overriding commissions and delays in
the payment of claims
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Another issue the regulator will look into in 2014 is the delay or non-payment of
claims, a practice which has eroded confidence in the sector. While this practice
has been on the decline in recent years, it remains an issue in the insurance
industry. Therefore if this practice can be reduced to the barest minimum, it will
increase the public's confidence in the sector.
Top players in the industry
We have seen increased interests by foreign companies in the Nigerian Insurance
market, given the inherent potential of the sector. Although foreign players are
coming into the market, local expertise is still valued for the optimal running of
insurance in Nigeria. Put differently, a local understanding of the market is key to
performing well in the market.
Despite the consolidation in the industry which was as a results of the higher
capital requirements the sector remains highly fragmented with 59 insurance
companies from the 96 companies in 2006. Out of these 59 companies, 11 are
composite insurers, 15 are Life insurers, 31 are general insurers and 2 are
Reinsurers.
The top 20 insurers controlled 71% of the market in 2011, up from 67% in 2009.
The two top ranked insurers controlled 11% and 8% of the market in 2011, from
18% and 8% in 2006, which shows a higher level of competitiveness in the market.
Figure 14: Top 20 Insurers by market share and gross premiums (2011)
Gross Premium (N billion)
Market Share
30
12%
25
10%
20
8%
15
6%
10
4%
5
2%
0
0%
Sources: NIA Insurance Digest, CardinalStone Research
The top 5 players in the industry (measured by GPI) are local players save for
AIICO insurance which has a substantial foreign ownership. They have a combined
market share of c.34%, with the largest insurer controlling 11% of the market.
21
A local understanding of the
market is key to performing well
There are currently 59 insurance
companies in operation
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Figure 15: Top 5 Insurers by market share and gross premiums (2011)
Custodian and
Allied Insurance,
N10.06b (4.62%)
Mansard
Insurance,
N10.00b
(4.59%)
IGI, N10.60b
(4.87%)
Leadway
Assurance,
N24.09b (11.06%)
AIICO insurance,
N18.44b (8.47%)
Sources: NIA Insurance Digest, CardinalStone Research
Reinsurance
Re-insurance is the practice of insurers diversifying their risk profile, by ceding
some part of their risk portfolio to another party/parties in order to reduce the
probability of paying very large claims. This way insurance companies are able to
mitigate the risks they face. There are relatively few reinsurers compared to
insurers and due to the fact that reinsurers are exposed to part of the risk faced
by insurers, reinsurers have to be diversified. Therefore, in order to avoid risk
concentration, re-insurers diversify internationally by re-insuring risks outside of
their home country, thereby making them less susceptible to systemic shocks in
one country.
Reinsurance premiums in Nigeria declined by c.12% in 2011 having risen by 35% in
2010. The local content act in the oil and gas sector, has been a key driver of
reinsurance premiums. However, we note that growth in re-insurance premiums
is still below potential given the inadequate capacity of local reinsurers. The
nature of the business is such that a re-insurance company does not need to have
a local office to re-insure risk in that country. Therefore, even though there are
only 2 registered local re-insurers, the competition is still fierce from international
re-insurance companies such as MunichRe, SwissRe, etc.
Due to the vital risk management role that re-insurers play in the insurance
industry, re-insurers must meet a more stringent capital requirement (N10
billion/$61.7 million). As a result of the inadequate capacity of local re-insurers to
significantly re-insure local risk, we expect to see re-insurers raise capital to
increase their capacity to re-insure both local and international risk.
22
There are relatively few re-insurers
and they diversify internationally by
re-insuring risks outside of their home
country
Growth in re-insurance premiums has
been below potential due to the
inadequate
capacity
of
local
reinsurers
We expect re-insurers to raise capital
to increase their capacity to re-insure
both local and international risk
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Figure 16: Gross premiums of re-insurers
14
Gross Premium (N billion)
12
10
8
6
4
2
0
2009
2010
2011
Sources: NIA Insurance Digest, CardinalStone Research
Given the desirability of the regulator to retain more premiums locally, and the
relatively few local players, we expect the re-insurers to perform well.
The Future Of Insurance
Diversification into health insurance: Health insurance is a thriving area that
insurers are expanding into. Health insurance, like life insurance requires a
minimum scale to be profitable. With life expectancy increasing and healthcare
costs rising, we expect that this will be an important product line for insurers in
the near future as awareness level rises. Hence, we expect to see more insurers
offering these services in the near future.
Innovative products to capture new markets: As the drive to ramp up volumes in
insurance increases, we expect to see insurers get more innovative with their
product offering, even as they embrace micro insurance to deepen penetration,
and increase retail presence. We also expect to see insurers harness technology in
their drive for customers to reach out to a wider audience. Some examples of
innovative products in the Nigerian insurance market include MTN's 'Y'ello cover'
in collaboration with Mansard insurance, Airtel's 'Padi4Life' in collaboration with
FBN Life. Other’s include AIICO's e - insurance, which allows customers to pay for
premiums, manage policies, request for quotes and report claims online from
anywhere with internet access and mobile insurance apps (Custodian and Allied
insurance currently has one under development). Airtel in collaboration with
Cornerstone Insurance and MicroEnsure, has also launched a free insurance policy
(Airtel Insurance) for all of its subscribers to cover death and hospitalisation, with
the cash pay-out dependent on the airtime recharged each month.
The focus of insurers will be on retail expansion to drive volumes and increase
insurance penetration in the country.
23
With life expectancy increasing and
healthcare costs rising, we expect
health insurance to be better
accepted
We expect insurers to offer
innovative insurance solutions to
deepen penetration and increase
their retail presence
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Strengthening of balance sheets via M&A activities: With the drive for
compulsory insurance, the target for increased insurance penetration, the local
content in the oil and gas sector and opportunities in marine and aviation
insurance, there will be need for insurance companies to increase their capital
base to enable them meet claims on big ticket transactions. We see this
happening through the raising of fresh capital, mergers and acquisitions of
existing insurers and entry into the market by foreign insurers. For example
Custodian and Allied Insurance acquired majority interest in Crusader Nigeria Plc
in December 2012, FBN Life Ltd acquired 71.2% of Oasis Insurance Plc in February
2014, while Prudential Life, a prestigious worldwide life insurer, recently met with
the regulator to inquire about the process of beginning operations in Nigeria.
Climate change presents opportunities: The weather pattern in Nigeria has
shifted in the past ten years. The pattern and severity of rainfall has changed as
evidenced by the floodings in recent years. Damages from the floods of 2012 were
estimated at N2.6 trillion ($16.05 billion). With the adverse weather expected to
continue, we expect disaster insurance such as flood insurance to be an avenue
for premium growth, especially in the areas that are prone to flooding.
Risk Based Capital Requirement: We expect a shift from the current regime,
which is a combination of regulatory capital and maintenance of solvency margin
to a Risk Based Capital (RBC) regime for Insurers in line with global practices. In
the RBC regime, insurers will be required to maintain an economic capital - which
is typically calculated by determining the amount of capital that the insurer needs
to ensure that its realistic balance sheet stays solvent over a certain time period
with a pre‐specified probability. For example, the Economic capital may be
determined as the minimum amount of capital required to make 99.5% certain
that the insurer remains solvent over the next twelve months.
We expect insurers to grow their
balance sheets in order to compete
on a larger scale
Disaster insurance such as flood
insurance is an avenue for premium
growth, especially in areas prone to
flooding
We expect a shift to a Risk Based
Capital regime for insurers, in line with
global practices
Industry risks
While we are bullish about the huge potential in the insurance industry, we
however highlight the following risk factors:
Discontinuation of reforms - The regulator has been a significant force in
reshaping the insurance industry and if the regulator does not follow through in
its vigour and push, the industry might not reach its full potential. A key risk is the
fact that the current Commissioner for Insurance at NAICOM, Mr Fola Daniel, who
has been in charge when all the policies highlighted earlier were enforced, is in his
2nd term in office, which will end in August 2015. Continuity, after his retirement,
will be important. The regulator's ability to enforce established policies will be
crucial going forward, especially as it seeks autonomy from the government.
Therefore, NAICOM will need to make sure it can still fund its operations,
effectively regulate the industry and enforce its policies.
24
Continuity of reforms enacted by
the regulator will be critical
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Premium Leakages - In the motor and marine sectors there has been a
proliferation of fake insurance papers. If this practice isn't curbed, insurers will
continue to lose out on premiums that they could have hitherto received.
Premium leakage basically leads to loss of revenues for insurers which is not
healthy for the industry.
Legal System - A judicial system that provides effective commercial dispute
resolution is crucial to a healthy economy2. The Nigerian legal system is
characterised by lengthy trials and this increases legal costs for all parties. The
judicial system needs to be reformed so that those found in violation of insurance
laws (e.g violation of compulsory insurance, possession of fake insurance papers)
can face the requisite punishment without the hassles of adjournments and
lengthy trials. The legal system therefore poses a significant risk to achieving the
aims of the NAICOM policies, as wrong doers may seek to 'game' the system.
Political Risk - The elections coming up in 2015, and the heated polity already
being witnessed is a major consideration as a key risk to macroeconomic stability.
Any instability resulting from the political process can lead to adverse effects on
the economy and thus negative outcomes for insurers going forward.
2
Ramello and Voigt (2012)
25
Lengthy legal processes could be
detrimental to punishing violators of
insurance laws
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Custodian and Allied Plc
Poised for continued growth
Expanded platform, more opportunities: Custodian is pursuing
aggressive retail penetration strategies, for example by going into partnership
with over 200 farmer groups to provide insurance cover to farmers. We see
these strategies yielding fruits in the short to medium term. Besides the
insurance business, we also see immense potential for growth in the pension
business – Crusader Sterling Pension – in which Custodian now has a
controlling stake (76%). Crusader Sterling Pension currently ranks among the
top 10 Pension Fund Administrators in Nigeria based on Assets under
Management (AUM). With an estimated 6 million Nigerians signed on to the
contributory pension scheme out of an estimated working population of 60
million, there is abundant room for growth in the pension industry. A huge
number of people in Nigeria’s working population bracket are in the informal
sector, largely in small businesses, which typically have few employees. Hence,
based on the Pension Reform Act of 2014, which stipulates a minimum
number of 3 employees for the contributory pension scheme, we foresee a
significant headroom for growth. In addition, we believe that the potential
employment growth in new sectors like Power will prove substantial.
Management estimates a sustainable growth rate of 30% in AUM for Crusader
Sterling Pension over the next 5 years.
Consolidation benefits continue to accrue: Following from the
consolidation with Crusader Insurance, Custodian’s earnings are now more
diversified. We expect 63% of FY 2014 earnings to be generated from Net
Premium Income, 17% from Net Investment Income and 20% from fee income.
Juxtaposing this with the 2013 results, where 74% of earnings were from Net
Premium Income, 20% from Net Investment Income and 6% from fee income,
the evolution of earnings mix is obvious. From the analysis of the company’s
H1'14 results, the synergies from Custodian's consolidation have continued to
play out, as underwriting expenses dropped by 19% YoY. Net claims expenses
were also down by 31% YoY, possibly signalling a return to normalcy from the
high claim expenses recorded in 2013. We project Custodian's FY'14 EPS at
N0.78 (27.5% growth from FY’13), and an ROAE of 22.6% (compared to 22.4%
in FY’13).
Valuation: With the strong run-rate in H1, we raise our TP for Custodian to
N6.09 (4 cents), which translates to a potential upside of 54% and therefore
we maintain a BUY rating on the stock. Custodian is currently trading at 5.1x
2014E estimated earnings with a P/B ratio of 1.08x compared to Africa ex SA
peer average of 10.36x and 0.81x respectively.
Equity Research
BUY
TP: N6.09
Company Information
Address
16A, Commercial Avenue,
Sabo, Yaba, Lagos.
Website
www.custodianplc.com.ng
MD
Oluwole Oshin
FYE
December
NSE Sector
Other Financial Institutions
Ownership
Chief M.
Ade-Ojo
18.01%
Mr Oluwole Oshin
Others
14.48%
67.51%
Stock Data
Bloomberg
Ticker:
CUSTODYI.NL
Market Price (N)
3.95
Shares Outs (Mn)
5,882
Market cap (N’Mn)
23,233
Price Performance
12-month
(%)
CUSTODIAN
NSE
180
13
3-month (%)
12
10
YTD (%)
90
-1
2013A
2014E
2015F
P/E (x)
6.45
5.06
4.63
P/BV (x)
1.22
1.08
0.93
4.1
5.9
6.9
Valuation
Div. Yield (%)
12 Month Price Performance (Rebased)
3.0
2.0
1.0
Sep-13
Risks: The risks to our projections include an adverse claims environment and
a softer investment environment, which will reduce profitability.
Dec-13
Mar-14
CUSTODYINS
Jun-14
ASI
Source: NSE
26
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Investment Rationale
Immense growth potential: The insurance industry is on an upward trajectory
due to the low penetration. As a major player in this industry, Custodian will
benefit from the overall potential of the sector. Therefore the company is driving
strategies to benefit from the growth in retail penetration by rapidly ramping up
its sales agents. Management disclosed plans to increase its sales agents, to push
its Life Business, which is significantly skewed to corporate customers (about 90%
of Life premiums are from corporate customers) more aggresively at the retail
end. Also, the company recently, entered into a partnership with farmers cooperative groups (about 200 in all) to provide insurance covers to the members.
We see this retail strategy driving growth in gross premiums in the coming years
and with Custodian’s strong track record in the underwriting business, we
anticipate a signifcant trickle down effect to bottom-line performance. Apart from
the insurance business, the pension fund business also has a lot of growth
potential. Crusader Sterling pension is currently ranked among the top 10 PFAs in
Nigeria based on AUM. With an estimated 6 million Nigerians signed on to the
contributory pension scheme, there is abundant room for growth, given the size
of the population, and management estimates a sustainable growth rate of 30% in
AUM. A huge number of Nigeria’s working population are in the informal sector,
largely in small businesses with few employees. Hence, the new Pension law
(Pension Reform Act 2014) gives pension fund managers the backing to pursue
aggressive growth strategies in the informal sector.
As a major player in this industry,
Custodian will benefit from the overall
potential of the sector
Strong balance sheet: The strength and quality of the balance sheet of an
insurer goes a long way in determining the ability of an insurer to meet its claims.
Custodian doubled its balance sheet in 2012 following its acquisition of Crusader
Nigeria, and this puts it in a very strong position to underwrite insurance risks and
meet liabilities when they become due. Custodian has a strong liquidity position
(deliberately holding c.50% of total assets in cash and near cash instruments) to
meet its liabilities (mostly short duration liabilities due to the company's active
participation in underwriting non-life business). Prior to the “No Premium No
Cover policy”, the balance sheet of insurers had a lot of receivables which reduced
the quality of the balance sheets. We expect trade receivables to be an
insignificant portion of the balance sheet going forward, with trade receivables as
a percentage of total assets already down from a high of 16.4% in 2010 to 0.23%
in 2013. With net assets of c.N19.5 billion ($125 million) as at FY 2013, Custodian
is in a good position financially to venture into new projects and insure more risk
assets.
Consolidation brings diversification benefits: The merger of Custodian and
Allied Insurance Plc with Crusader Nigeria Plc, has led to the new entity
diversifying its earnings potential. Though Custodian had some minority stakes in
Leadway Pensure Limited prior to the acquisition of Crusader Nigeria, the
acqusition of Crusader Nigeria confered on Custodian the ownership of controlling
27
Custodian doubled its balance sheet
in 2012 following its acquisition of
Crusader Nigeria
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
stake (about 76%) in Crusader Sterling Pension. Hence, in our view, the income
from this subsidiary will prove substantial in diversifying Custodian’s income going
forward. Over the past three years, pension assets have grown geometically with
industry’s Assets Under Management rising by a CAGR of 36% to N4.3 trillion ($26
billion) from N1.7 trillion ($10 billion). Given the intrinsic growth potential of the
pension business (management estimates 30% CAGR in AUM over the next five
years, we expect more contribution from investment income as well as fee and
commission income to total earnings. Though, Custodian will be more exposed to
interest rate risk as PFAs and Insurance companies predominatly invest in fixed
income instruments, we still envisage that the PFA subsidiary will continue to
impact positively on the group.
Custodian now has controlling stake in
a Pension Fund Administrator,
Crusader Sterling Pension
Consistent dividend payout: Custodian has a history of consistent dividend
payout. The company has paid interim and final dividends consistently, since
listing on the Nigerian Stock Exchange in 2007, and we expect this to continue into
the future. With a 2013 dividend payout of c.26%, compared to a four year
average of 46.9%, we believe Custodian can sustain this trend in the long term.
Strong credit rating with a stable outlook: Custodian has consistently been
rated stable by both local and foreign rating agencies. Notable among the foreign
rating agencies is A.M. Best Europe, the top rating agency for the insurance
industry, which gave Custodian a financial strength rating of B (fair) and issuer
credit rating of 'BB'. The outlook assigned to both ratings is stable. This rating
reflects A.M. Best's expectation that Custodian's risk-adjusted capitalization will
continue to remain supportive of its current rating level. Also the company's
competitive profile and operating performance are expected to remain solid.
With this stable outlook, Custodian will be able to embark on big ticket
transactions which will have the potential of improving their earnings.
Company Overview
Custodian and Allied Plc is a group holding company formed following the
acquisition of approximately 56.24% of the shareholding of Crusader Nigeria Plc
by Custodian and Allied Insurance Plc on 27 December, 2012. The subsidiary
companies in the group include Custodian and Allied Insurance Limited, a wholly
owned general insurance subsidiary, Custodian Life Assurance limited (formerly
Crusader life insurance limited), a wholly owned life insurance subsidiary,
Crusader Sterling Pensions Limited, in which the group has a 76% stake, Custodian
trustees Limited (formerly Crusader trustees limited), also a wholly owned trust
company providing secretarial and trusteeship services to the group and external
clients. The acquisition of a majority shareholding in Crusader Nigeria Plc was in
line with Custodian's growth plans to focus on the retail space, life insurance and
pension administration.
28
Custodian has consistently been rated
stable by both local and foreign rating
agencies
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Board Of Directors






Chief Michael Ade-Ojo is the current chairman of Custodian and Allied Plc.
He is a well respected entrepreneur and he is the Founder and Executive
Chairman of Elizade (Nig) Ltd and Toyota (Nig) Ltd, amongst others.
Mr Oluwole Oshin is the founder and Managing Director/CEO of
Custodian and Allied Plc. Wole has over 26 years experience in insurance
underwriting/claims, marketing and investment and served on the
Presidential committee that set up the reforms in the Pension industry.
Mr Gboyega Asabia is the Chairman/CEO of Interstate Securities Limited.
A graduate of the London School of Economics, he also sits as a Director
on the boards of Crusader Sterling Pensions Limited and Unity Bank Plc.
Mr Toni Ogunbor is the Chairman of Grand Union Limited. Before going
into private business, he worked in the former Lever Brothers Nigeria Plc
as a sales manager and later became National Sales/Marketing Manager
of Union Carbide Nigeria Limited.
Mr Ravi Sharma is a Partner with Aureos Nigeria Advisers Limited, with
over ten years experience in private banking, investment banking and
private equity. He has been instrumental in the investment of over US$65
million of Aureos Funds in Nigeria. Ravi sits on the board of 9 Aureos
portfolio companies.
Mr I. Dikko is currently director for Regulatory Affairs in Etisalat Nigeria
and also serves as an independent director on the Board of Baker Hughes
Nigeria. He was chairman of First Securities Discount House from 2004 to
2012.
Financial Analysis and Outlook
Custodian has maintained a strong positive performance, with a 31% CAGR in
gross premium written between 2009 and 2012 reporting a decline only in 2011
(-26.7%). Following the consolidation with Crusader Nigeria, Custodian’s gross
premium written rose by 37% to N22.96 billion ($147 million) in FY’13, from
N16.79 billion ($107 million) recorded in FY'123. Gross Premium Income grew by
28%, while Fees and Commission income were up 38%. The consolidation with
Crusader Nigeria Plc led to certain efficiencies, with underwriting expenses,
management expenses and finance costs dropping by 15%, 8% and 33%
respectively. In terms of contribution to net profit, Custodian and Allied Insurance
limited contributed 56%, the holding company, Custodian and Allied Plc
contributed 30% via investment income, Crusader Sterling Pensions limited
contributed 12% and Custodian Life Assurance limited contributed 2%. While
these contributions are skewed towards the general insurance business, the
management expects the relative contribution of the subsidiaries to even out in
3
Custodian's FY' 12 income statement was not consolidated because the consolidation was concluded on
December 27, 2012. All comparative FY' 12 figures are as if the FY'12 income statement was consolidated. These
figures were made available by Custodian and Allied Plc and provide a better comparison.
29
Custodian has maintained a strong
positive performance
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
the coming years. Earnings grew by c.62% from the corresponding period in FY'12,
while PAT margin stood at 15.2% against 12.91% recorded in FY'12.
Figure 17: Business Segment Contribution to PAT
Trustee &
Holding
30%
Non-Life
56%
Pension
Administration
12%
Life
2%
Sources: Company Financials, CardinalStone Research
Figure 18: 5 year trend in Gross Premium Written and PAT
25,000
22,963
20,000
13,724
15,000
11,832
10,061
10,000
5,277
5,000
3,603
1,887
2,042
1,058
2,056
2009
2010
2011
Gross Premium Written (N Million)
2012
2013
PAT (N Million)
Sources: Company Financials, CardinalStone Research
Custodian's Return on Average Equity has been on an uptrend from c.17% in 2009
to c.22% in 2013. There was a dip in 2011 due to a drop in profitability as a result
of a slowdown in premium income.
Return on Assets has declined from c.13% in 2009 to c.8% in 2013, primarily due
to the jump in assets of Custodian (the total asset size of Custodian doubled in
2012). Underwriting profitability has been strong, growing by a CAGR of 20% from
2009 - 2013, showing the strength of underwriting performance. Combined ratios
has been on the increase, due to an uptick in loss ratios. This is however normal
30
Though combined ratios have been
rising, this is normal for a
predominantly non-life insurer
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
for an insurer with a significant non-life business (The non-life business
contributed 91% of FY'13 gross premium written). Underwriting expense ratio has
also risen (from 42.9% of net premium income in 2009 to 68.9% in 2013) on the
back of increased management and underwriting expenses.
Figure 19: 5 year trend in Underwriting Performance Ratios
140%
120%
100%
80%
60%
40%
20%
0%
2009
2010
Loss Ratio
2011
2012
Underwriting Expense Ratio
2013
Combined Ratio
Sources: Company Financials, CardinalStone Research
Figure 20: 5 year trend in Total Assets
45.65
40.99
Jump due to the
consolidation
with
Crusader Nigeria
18.37
20.24
14.16
2009
2010
2011
2012
2013
Total Assets (N billion)
Sources: Company Financials, CardinalStone Research
31
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Figure 21: 5 year trend in PAT Margin and ROE
40%
35.8%
27.4%
30%
18.3%
20%
16.9%
10%
17.5%
10.5%
14.9%
17.4%
15.7%
2012
2013
9.1%
0%
2009
2010
2011
PAT Margin
ROE
Sources: Company Financials, CardinalStone Research
Revenue and Profitability Outlook
Revenue Outlook: Our revenue forecast for Custodian is based on the benefits
to be accrued from consolidation, the increasing acceptance of insurance in the
economy and Custodian's retail drive. With a stronger balance sheet and
specialisation in oil and gas insurance, we expect Custodian to cover a larger
portion of the risks entailed in energy insurance. Given the recent privatisation of
power assets, we see this development as a potential opportunity for Custodian
to grow its revenues in the longer term. In view of the higher base from the
consolidation, we project an 11% CAGR in Gross premium income from 2013 to
2018 and 17% CAGR in PAT.
Figure 22: Forecasted Gross Premium Income Growth and PAT growth
45,000
38,311
34,828
36,000
27,000
26,407
28,784
31,662
18,000
9,000
4,055
4,919
7,191
5,887
8,043
2014F
2015F
2016F
Gross Premium Written
2017F
2018F
PAT
Source: CardinalStone Research
32
We project an 11% CAGR in Gross
premium income from 2013 to 2018
and 17% CAGR in PAT
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Profitability Outlook: Our average expected PAT margin from 2014 through to
2018 is 21%, higher than its historical 5 year average of 19%. Fees and commission
income has surged due to the PFA subsidiary, and we expect this to contribute
more to bottom line in the coming years as AUM increases. Investment income is
projected to keep contributing a significant amount to earnings. We do not expect
the equity market to perform as strongly as it did in 2013, hence we may see short
term volatility in investment income. Though the CBN has indicated its intent to
lower interest rates, we do not expect interest rates to decline in the next 6
months. Eventually, lower interest rates may have an adverse impact on
Custodian's profitability due to the nature of Custodian's investment portfolio,
which is tilted towards short term instruments (c.50% of investment assets held in
cash and near cash instruments).
We expect the PFA subsidiary to
contribute more to bottom line as
AUM increases
Figure 23: Forecasted PAT Margins
PAT Margin
18.6%
20.6%
21.0%
17.1%
15.4%
2014F
2015F
2016F
2017F
2018F
Source: CardinalStone Research
Balance Sheet: Custodian has a strong balance sheet position with total assets of
c.N46 billion ($293 million) as at FY'13. With total liabilities of N26.1 billion ($168
million), Custodian is in a comfortable position to meet its liabilities. We expect
total assets to grow by a CAGR of 11% over the next 5 years as Custodian ramps
up its retail drive. With solvency ratios at 290% and liquidity ratio (cash and cash
equivalents to insurance liabilities) at 87% as at FY'13, Custodian is well positioned
to meet claims when they fall due. Due to the unpredictable nature of claims,
Custodian maintains a strong liquidity position especially as its insurance liabilities
are tilted towards short duration policies. A strong balance sheet position thus
reassures policy holders and enables Custodian embark on big ticket transactions.
33
We expect total assets to grow by a
CAGR of 11% over the next 5 years as
Custodian ramps up its retail drive
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Forecasts and Valuation
Valuation assumptions
The projections in our valuation model (Residual Income model) for Custodian
span over a period of 5 years. Our forecasts are based on the expected increased
acceptance of insurance in the country and deeper insurance penetration as well
as the expected growth in economic activities leading to more opportunities for
insurance companies. The following forecasts guide our cost of equity
assumptions for Custodian:
Cost of Equity Assumptions
RFR (1 year exponential average of 10 year bond)
Stock Beta
Risk Premium
Cost of Equity
LT Growth Rate
12.4%
1.0
5.0%
17.4%
4.0%
Valuation
Based on our Residual Income model target price of N6.09 (4 cents), CUSTODYINS
provides an upside of 54%. With a 2014E P/E ratio of 5.1x and a P/B ratio of 1.08x,
compared to an Africa ex SA peer average of 10.36x and 0.81x respectively, we
maintain our BUY rating on the stock. We believe Custodian is currently
undervalued and possesses strong fundamentals.
Return on Equity (%)
Cost of Equity (%)
Equity at the Beginning
Residual Income
Discount Factor
Present Value of RI
Terminal Value
Residual Income
Discount Factor
Present Value of Terminal RI
Present Value of RI
Add Equity at the beginning
Equity Value (N' Million)
Price/Share/(N)
Target Price (N)
2014E
(N in Millions)
2015E
2016E
2017E
2018E
24.1%
17.4%
19,093
1,267
0.85
1,079
23.4%
17.4%
21,501
1,273
0.73
923
24.6%
17.4%
33,672
2,409
0.45
1,078
24.3%
17.4%
24,916
1,720
0.62
1,062
13,409
0.45
6,004
11,395
19,093
30,488
5.18
6.09
Catalysts: Given Custodians growth potential, strong profitability outlook,
diversified earnings mix, strong balance sheet, consistent bi-yearly dividend
payout and stable credit ratings, we expect CUSTODYINS to continue to perform
well.
34
25.7%
17.4%
28,857
2,376
0.53
1,249
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Financial Statements and Key Ratios
Income Statement
2012A
N Million
2013A
2014F
2015F
2012A
Gross Premium Written
Gross Premium Income
Net Premium Income
Fees and Commission Income
Net Underwriting Income
Total Underwriting Expenses
Underwriting Profit
Total Investment Income
Expenses
Results Of Operating Activity
PBT
Income Tax Expense
Profit For the Period
11,832
9,915
4,662
394
5,056
(3,864)
1,191
1,269
(1,259)
1,201
2,330
(274)
2,056
22,963
18,797
8,417
2,327
10,744
(6,749)
3,995
4,138
(3,584)
4,550
4,337
(733)
3,603
24,111
20,494
9,222
2,676
11,899
(5,823)
6,075
3,368
(3,978)
5,465
5,537
(941)
4,596
26,281
21,025
9,461
3,078
12,539
(6,775)
5,764
3,609
(3,416)
5,956
6,050
(1,029)
5,022
76
64
30
3
32
(25)
8
8
(8)
8
15
(2)
13
147
121
54
15
69
(43)
26
27
(23)
29
28
(5)
23
150
128
57
17
74
(36)
38
21
(25)
34
35
(6)
29
159
127
57
19
76
(41)
35
22
(21)
36
37
(6)
30
Statement of financial position
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
16,503
5,871
1,963
617
5,592
654
399
5,603
422
2,517
815
40,989
15,420
7,462
107
737
11,042
372
557
6,309
333
2,464
850
45,654
20,118
8,564
152
1,318
9,122
456
608
6,537
164
2,787
850
50,676
22,331
9,506
169
928
10,125
450
844
7,425
191
3,431
850
56,250
106
38
13
4
36
4
3
36
3
16
5
263
99
48
1
5
71
2
4
41
2
16
5
293
127
53
1
8
57
3
4
41
1
17
5
318
135
58
1
6
61
3
5
45
2
21
5
341
11,455
2,859
974
1,574
815
5,535
426
23,639
17,658
3,080
826
1,079
1,208
1,974
305
26,131
19,510
3,142
963
1,216
1,318
1,976
594
28,719
20,925
3,375
1,069
1,350
1,463
2,081
566
30,828
74
18
6
10
5
36
3
152
113
20
5
7
8
13
2
168
121
20
6
7
8
13
3
179
126
20
6
8
8
13
3
184
2,550
5,367
2,423
2,929
(140)
13,129
4,222
17,351
40,989
2,941
6,406
4,128
5,554
(140)
204
19,093
430
19,523
45,654
2,941
6,406
4,895
7,399
(140)
21,501
456
21,957
50,676
2,941
6,406
5,713
9,996
(140)
24,916
506
25,422
56,250
16
34
16
19
(1)
84
27
111
263
19
41
27
36
(1)
1
123
3
125
293
19
41
31
46
(1)
136
3
139
318
19
41
35
60
(1)
154
3
157
341
Key Ratios
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
Loss ratio
Underwriting expense ratio
Combined ratio
RoAE
P/E (x)
P/B (x)
Dividend Yield
44.2%
63.1%
107.4%
16.5%
9.80
1.53
3.3%
53.8%
68.9%
122.8%
22.4%
6.45
1.22
4.1%
37.0%
69.3%
106.3%
22.6%
5.06
1.08
5.9%
48.0%
59.7%
107.7%
21.6%
4.63
0.93
6.9%
44.2%
63.1%
107.4%
16.5%
9.80
1.53
3.3%
53.8%
68.9%
122.8%
22.4%
6.45
1.22
4.1%
37.0%
69.3%
106.3%
22.6%
5.06
1.08
5.9%
48.0%
59.7%
107.7%
21.6%
4.63
0.93
6.9%
Assets
Cash and Short term funds
Financial Assets
Trade Receivables
Other Receivables
Reinsurance Assets
Deferred Acquisition Cost
Investments in Associates
Investment Properties
Intangible Assets
Property and Equipment
Statutory Deposit
Total Assets
Liabilities
Insurance Liabilities
Investment Contract Liabilities
Trade Payables
Other Payables
Current Income Tax Liabilities
Borrowings
Deferred Tax Liabilities
Total Liabilities
Equity
Paid Up Share capital
Share Premium
Contingency Reserves
Retained Earnings
Treasury Shares
Other Reserves (AFS Reserve)
Shareholders' funds
Minority Interest
Total Equity
Total liabilities and equity
$ Million
2013A
2014F
2015F
Source: CardinalStone Research
35
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Mansard Insurance Plc
SELL
Strong brand name, limited upside
Company Information
Pushing for further diversification: Mansard is a composite insurance
company that covers all the major lines of risk underwriting via its insurance
business and its two subsidiaries: Mansard Investment Limited (asset
management) and Mansard Health. The company plans to diversify its
earnings base by adding Pension Fund Administration to the group’s business,
but the timeline for this is still unknown. Mansard generates the largest
portion of its premiums from Oil and Gas, Life and Motor Insurance. These
three business segments contributed 25%, 22% and 20% of Gross Premium
Written in FY 2013 respectively. Mansard underwrites risk in the Oil and Gas,
Financial Institutions, Public Sector, Telecoms, Construction and Retail sectors
through 6 regional offices, 13 agency offices (Welcome Centres), 4 Bank
Partners, 104 Bancassurance offices and 1 telecommunications partner.
TP: N2.24
Address
Plot 1412, Ahmadu Bello
Way, V/Island, Lagos.
Website
www.mansardinsurance.com
MD
Yetunde Ilori
FYE
December
NSE Sector
Financial Services
Ownership
Assur Africa
Holding
74.99%
Stanbic Nominees
Others
6.04%
18.97%
Stock Data
Bloomberg
Ticker:
MANSARD.NL
Market Price (N)
Earnings Outlook: We estimate Mansard’s 2014EPS at N0.11, which
translates to 7.4% ROE and implies a 43% decline from FY’13 level. Though we
project a 20% growth in gross premium income, (higher than the 9% growth
recorded in FY'13, but in line with H1'14 growth), we expect increases in net
claims expenses (up 42% as at H1'14) and a decrease in investment income
(down 40% as at H1'14) to affect earnings negatively. In congruence with our
expectation of a fourfold increase in industry premiums over the next five
years, we believe Mansard will leverage on its brand to drive top-line growth,
as the company has already returned to double-digit growth in gross
premiums.
2.58
Shares Outs (Mn)
10,000
Market cap (N’Mn)
25,800
Price Performance
MANSARD
NSE
12-month (%)
22
13
3-month (%)
-3
10
YTD (%)
3
-1
2013A
2014E
2015F
13.56
23.79
9.87
1.81
1.59
1.35
3.1
1.9
5.1
Valuation
P/E (x)
P/BV (x)
Valuation: Using a residual income model, we project a one-year TP of
Div. Yield (%)
N2.24 (1.4 cents) for MANSARD’s shares. At a current price of N2.58 (1.6
cents), MANSARD is trading at a 13% premium to our target price. Hence,
despite MANSARD’s strong fundamentals, we adjudged the counter
overpriced at current levels and would be buyers of the stock at a lower price. 1.3
MANSARD is trading at a P/B and P/E of 1.6x and 23.8x relative to Africa ex SA
peer averages of 0.8x and 15.8x.
12 month price performance (Rebased)
1.1
Risks: The risks to our projections include higher-than-anticipated claims and
lower investment yield if interest rates fall. The impact of these will be lower
profitability.
0.9
0.7
Sep-13
Dec-13
Mar-14
MANSARD
Jun-14
ASI
Source: NSE
36
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Investment Rationale
Well recognised brand to take advantage of increased insurance
penetration: Mansard has built a well recognised brand and with the clamour for
increased insurance penetration, Mansard is in good position to leverage on its
brand to achieve its target of 1 million customers and 10% market share by 2017.
With the recent increase in micro insurance, Mansard in collaboration with MTN
has introduced 'MTN Y'ello Cover', to provide daily insurance cover for health and
life up to a maximum of N350,000 ($2,134) at N15 (9 cents) premium per day.
Although it is not clear how much this will contribute to top or bottom line or the
usage statistics so far, we believe this type of innovative products, which takes
advantage of technology, will help Mansard achieve its stated targets.
Mansard is in a good position to
leverage on its brand to grow market
share
Diversification strategy tapping into new product lines: With the
establishment of a Health Insurance subsidiary in 2013, Mansard is evolving into a
well diversified insurance company. The health insurance segment of the
insurance market has significant upsides as 63% of total health expenditure in
Nigeria are made out of pocket, a major contrast to South Africa, where five year
average out - of - pocket health expenditure (as a percentage of total health
expenditure) is below 10%. With global healthcare costs having increased at an
average of 9.8% in the last five years, we believe more people will be inclined to
use health insurance, especially as medical costs are increasing in Africa. Although
the company will get little contributions from its health subsidiary in the near
term, we expect the health subsidiary to start making significant positive
contributions to the earnings of the group in 3 - 5 years. As we have noted, the
company also has plans to add pension fund administration to its business lines in
a bid to improve earnings diversification. With subsidiaries cutting across
insurance, asset management/investments, property, health insurance and soon,
pension administration, Mansard is a well diversified operation.
Strong revenue generation capacity: By virtue of its size, Mansard is a key
player in oil and gas insurance, with oil and gas contributing the highest (c.22%)
to Gross Premium Income in FY'13. The other top contributor was Group life
followed by Motor insurance which contributes about 20% to Gross Premium
Income. In 2013, growth in gross premium written was marginal (3%) due to the
effect of the No Premium No Cover policy, but the retail business was still strong
(26% growth in gross premium), due to Mansard's aggressive retail expansion as
the company opened more welcome centres in large urban cities and embarked
on marketing campaign. As institutional clients adjust to the No Premium No
Cover policy, we expect growth in gross premium income to continue along its
historical double digit growth (already H1'14 gross premium growth is 27%).
37
Mansard has diversified into health
insurance by setting up a HMO as a
subsidiary
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Company Overview
Mansard Insurance plc (previous GTAssurance plc) was incorporated in June 1989
and has gone through many phases including a nine-year period that ended in
2011 during which GTBank Plc was the majority shareholder. With the acquisition
of GTBank’s majority shareholding by Assur Africa Holding - a consortium of three
European Development Finance Institutions and two Private Equity (PE) Firms, the
company changed its name to Mansard Insurance Plc. Mansard Insurance has
progressed through the ranks in the insurance industry, gaining market share to
move to top five insurance companies in the industry presently from 97 th (out of
109 companies) in 2003. In September 2010, Global Credit Rating Company of
South Africa (GCR) rated the Company A+ for Claims Paying Ability and B- for
Issuer Credit Rating. In 2012, A.M. Best, world’s leading specialist insurance rating
agency, gave Mansard Insurance a B rating for Financial Strength and BB+ for
Issuer Credit Rating whilst Agusto & Co Nigeria rated Mansard A+ for Credit Risk.
These ratings are the highest received by any insurance company in Nigeria.
Mansard Insurance Plc has three subsidiaries: Mansard Investments Limited (asset
management), Mansard Health (acquired a HMO in June 2013 and recapitalized
the HMO to N500 million) and APD limited (property development). Mansard
underwrites both Life and General classes of insurance as a composite insurance
company.
Board of Directors




Mr Victor Osibodu, MFR, a well respected business professional and the
chairman of Vigeo Group, is the Chairman of Mansard Insurance Plc. Mr
Osibodu is a recipient of the Member of the Federal Republic of Nigeria
(MFR), one of the highest civilian national honors. He has also received
numerous awards in recognition of his contributions to not-for-profit
organisations and also to the development of the Nigerian economy.
Mr Tosin Runsewe is the Chief Client Officer/Group Executive of Mansard.
Prior to joining Mansard, he had over 12 years experience with Guaranty
Trust Bank cutting across commercial and investment banking divisions.
He has attended senior management courses at IMD, INSEAD and several
other institutions and is an alumnus of the Harvard Business School.
Mrs Yetunde Ilori is currently the Chief Executive Officer of Mansard
Insurance (Life and General). She began her insurance career in 1985, has
chaired the Life Offices Committee for the last five years, and currently
represents Nigeria on the Life Committee of African Insurance
Organization. Mrs Ilori is also a member of the Governing Council of the
Nigeria Insurance Association.
Mr Hakim Khelifa serves as Chairman of Mansard Investments Limited.
Hakim is an Executive Partner at Tuninvest in charge of the AfricInvest
Fund. He has over 6 years experience in Private Equity including sourcing,
negotiating, structuring and executing private equity transactions in
Northern and Sub-Saharan Africa.
38
Nigerian Insurance Sector Report
Beacon Shining Forth







Equity Research
Mr Olusola Adeeyo is an independent director in Mansard Insurance. He is
an experienced ex-banker. He capped his banking career as a member of
the founding management team of IBTC in the late 1980. He is a reputable
entrepreneur, having gone on after banking to found other successful
business including CWAY Limited, makers of non-alcoholic beverages and
bottled water.
Mrs Abiola Ojo-Osagie is a Senior Partner at AfricInvest covering the West
African English-speaking countries. Her experience, spanning over 16
years, has been focused on financial and business advisory services,
including building businesses, providing value-added strategic advice,
M&A, change management, project and people management, process
review and management workshops.
Mrs Runa Alam co-founded Development Partners International in 2007.
She has 29 years of investment banking, emerging market
entrepreneurship and private equity experience. Runa serves on the
boards of directors of Eaton Towers Holding LLP, ETW Africa Holdings UK
Limited and Touax Africa SAS and has previously served on the boards of
directors of Liberty Star Consumer Holdings (Proprietary) Limited, UBA
Plc, Lethshego Holdings Limited and Celtel. She is also a member of the
Millennium Promise's UK board and on the advisory board of The Tony
Elumelu Foundation
Mr Jatin Mukhi is an insurance specialist with over 35 years of cognate
experience. He has vast knowledge in key areas ranging from operations,
pricing, marketing, distribution and general management. He has held
senior positions in the industry including a stint with Zurich Insurance
Group Limited, Japan, where premium income grew from US$50m to
US$800m. He also serves on the board of Asia Insurance 1950 Public
Limited in Thailand.
Mr Karl Weinfurtner is a Director of the Africa Department with DEG
(Deutsche Investitions - und Entwicklungsgesellschaft mbH, a member of
the KfW - Bankengruppe). Karl has worked for DEG for the past 20 years
and during this time, he gained experience in structuring and financing
projects in Africa, Latin America, Asia and Eastern Europe.
Mr Idris Mohammed has over 18 years of experience in private equity
investing, corporate finance and banking, spanning both the US and Africa
He has been with the Development Partners International since inception
and was formerly a Vice President in the Special Situations Group at
Goldman Sachs . He currently serves on the Letshego Holdings limited,
Assur Africa Holdings and Mansard Investments Limited board of
directors.
Mr Kunle Ahmed was appointed to the board of Mansard as an Executive
Director in 2012. He is a member of the Chartered Insurance Institute of
London and an alumnus of the Advanced Management Programme, Lagos
Business School. His professional career spans twenty years.
39
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Financial Analysis and Outlook
Over the past five years, Mansard has recorded strong performance, with
consistent double digit growth in Gross Premium Written. The company has
grown topline by a CAGR of c.26% over the last five years, while after tax profit
increased by a CAGR of c.42% from 2009 - 2013. 2013 marked the first time in a
decade that Mansard's top line grew by a single digit (c.9%). The company has
attributed this to the No Premium No Cover policy imposed by NAICOM.
Mansard's FY'13 gross premium written came in at N13.59 billion ($87 million), a
9.2% growth over N12.44 billion ($80 million) recorded in FY'12. From the FY'13
results, we note a significant increase in investment income by c.58%, largely
attributable to net fair value gains on non -financial assets (investment property)
as well as a surge in rental income. Profit Before Tax was however down by 8.6%
due to lower underwriting profit and higher finance costs. An increase in deferred
tax led to a tax credit, thus causing PAT to increase by c.31% from the
corresponding period in 2012. PAT margin stood at 15.4% compared to 12.9% in
FY'12. The company's H1'14 results were impacted by adverse net claims
expenses (up 42% YoY) and lower investment income (down 40% YoY), hence
after tax profit declined by 56% YoY.
Mansard's Return on Equity has been on an uptrend from c.4% in 2009 to c.15% in
2013. There has been a consistent uptick in ROE, as the company has experienced
strong growth in top line and relatively stable expense ratios over the past five
years. Return on Assets has also been on an uptick, from c.3% in 2009 to c.6% in
2013, as after tax earnings has grown at a faster pace than total assets.
Underwriting profitability has been strong, growing by a CAGR of 23% from 2009 2013. However, underwriting profitability dropped in 2013, due to higher claims
and underwriting expenses.
Figure 24: 5 year trend in Gross Premium Written and PAT
Gross Premium Written (N Million)
PAT (N Million)
16,000
12,444
12,000
13,594
10,005
7,521
8,000
5,378
4,000
517
647
966
1,603
2,094
2009
2010
2011
2012
2013
Sources: Company Financials, CardinalStone Research
40
Over the past five years, Mansard has
recorded strong performance, with
consistent double digit growth in
Gross Premium Written
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Figure 25: 5 year trend in PAT Margin and ROE
PAT Margin
18%
ROE
15.4%
15%
12.9%
14.7%
12%
9.6%
9%
8.6%
6%
3%
9.7%
11.4%
7.1%
4.1%
5.0%
0%
2009
2010
2011
2012
2013
Sources: Company Financials, CardinalStone Research
Balance Sheet: Mansard has a strong balance sheet position with total assets of
c.N40 billion ($244 million) as at H1'14. With total liabilities of N24.3 billion ($148
million), Mansard is in a comfortable position to meet its liabilities. We expect
total assets to grow by a CAGR of 15% over the next 5 years as Mansard grows its
businesses especially its health subsidiary. With solvency ratios at 242% and
liquidity ratio (cash and cash equivalents to insurance liabilities) at 79% as at
FY'13, Mansard is well positioned to meet claims when they fall due. With 76% of
gross premiums from non-life business, Mansard maintains a strong liquidity
position in order to meet its insurance liabilities, which are mostly short duration
policies.
We expect total assets to grow by a
CAGR of 15% over the next 5 years as
Mansard grows its businesses
especially its health subsidiary
Revenue and Profitability Outlook
Revenue Outlook: Our revenue forecast for Mansard is based on expected
contributions from Mansard's diverse business lines and management's plans for
growth to achieve a 10% market share and 1 million customers by 2017 (from 5%
market share and 683,000 customers as at 2013). We project a c.16%
compounded annual growth rate in gross premium income from 2013 to 2018 as
Mansard continues to focus on deepening patronage by institutional customers
especially in Energy, Power and Telecoms industries and retail expansion (the
company plans to open more welcome centres, mostly in large urban cities).
41
We project a c.16% compounded
annual growth rate in gross
premium income from 2013 to 2018
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Figure 26: Forecasted Gross Premium Written and PAT Growth
28,532
30,000
24,810
25,000
20,000
21,574
18,760
16,313
15,000
10,000
5,000
1,209
4,547
3,723
2,915
5,788
2014F
2015F
2016F
Gross Premium Written
2017F
2018F
PAT
Source: CardinalStone Research
Profitability Outlook: We expect average PAT margin from 2014 through to
2018 to be 15.8%, higher than its historical 5 year average of 11.2%. Despite the
slower growth in Gross Premium Written, profit margin in 2013 came in higher
than in 2012, due to the tax credit recorded in 2013. Mansard also experienced
higher operating expenses (probably due to the new health subsidiary). However,
as clients get accustomed to the No Premium No Cover policy and the health
subsidiary starts adding to bottom line, we expect profits to more than double to
N5.7 billion ($35 million) by 2018 (assuming an average claims environment
consistent with historical pattern). Higher gross premiums received would make
more funds available to invest, thereby increasing investment income
contribution to bottom line.
Figure 27: Forecasted PAT Margin
20.29%
17.26%
18.33%
15.54%
7.41%
2014F
2015F
2016F
2017F
2018F
PAT Margin
Source: CardinalStone Research
42
We expect profits to more than double
to N5.7 billion ($35 million) by 2018
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Forecasts and Valuation
Valuation assumptions
Our residual income valuation model projections for Mansard spans over a period
of 5 years. Our projections takes into account the likely delay in the contribution
of the health subsidiary to earnings and increasing investment income from
investment property. The following forecasts guide our cost of equity assumptions
for Mansard:
Cost of Equity Assumptions
RFR (1 year exponential average of 10 year bond)
Stock Beta
Risk Premium
Cost of Equity
LT Growth Rate
12.4%
0.64
5.0%
15.5%
4.0%
Valuation
At current levels, we believe Mansard is overvalued and trades on an illiquidity
premium. Increased expenditures associated with the new health subsidiary may
slow down profitability in the short term. We maintain a SELL recommendation on
the counter as it currently trades at a downside of 13% from our one year target
price of N2.24 (1.4 cents). With a 2014E P/E of 23.8x and a P/B of 1.59x compared
to an Africa ex SA peer average of 15.8x and 0.83x respectively, we believe the
stock is currently fully priced.
Return on Equity (%)
Cost of Equity (%)
Equity at the Beginning
Residual Income
Discount Factor
Present Value of RI
Terminal Value
Residual Income
Discount Factor
Present Value of Terminal RI
Present Value of RI
Add Equity at the beginning
Equity Value (N' Million)
Price/Share/(N)
Target Price/Share (N)
2014E
(N in Millions)
2015E
2016E
2017E
2018E
8.5%
15.5%
14,271
(1,010)
0.87
(874)
17.9%
15.5%
16,255
388
0.75
291
22.2%
15.5%
26,094
1,732
0.49
841
19.5%
15.5%
19,070
759
0.65
492
6,371
0.49
3,094
4,444
14,271
18,715
1.94
2.24
Catalysts: Despite Mansard's position as the most capitalised insurance firm,
weak half year numbers released by Mansard, could spur investors to react to the
stock's relatively high P/E and P/B, thereby pushing its share price downward.
However, the relative illiquidity of Mansard's shares (free float of about 20%) is a
positive that could mitigate this downside risk.
43
20.3%
15.5%
22,365
1,070
0.56
600
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Financial Statements and Key Ratios
Income statement
2012A
N Million
2013A
2014F
2015F
2012A
Gross Premium Written
Gross Premium Income
Net Premium Income
Fees and Commission Income
Net Underwriting Income
Total Underwriting Expenses
Underwriting Profit
Total Investment Income
Expenses
Results Of Operating Activity
PBT
Income Tax Expense
Profit For the Period
12,444
11,656
7,109
528
7,637
(4,812)
2,825
2,358
(2,934)
2,250
2,179
(576)
1,603
13,594
12,520
7,538
542
8,080
(5,629)
2,451
3,733
(3,931)
2,253
1,991
103
2,094
16,313
15,497
9,462
664
10,126
(7,492)
2,633
3,203
(4,193)
1,643
1,343
(134)
1,209
18,760
17,822
10,881
764
11,644
(7,074)
4,571
3,984
(4,531)
4,023
3,737
(822)
2,915
80
75
46
3
49
(31)
18
15
(19)
14
14
(4)
10
87
80
48
3
52
(36)
16
24
(25)
14
13
1
13
102
97
59
4
63
(47)
16
20
(26)
10
8
(1)
8
114
108
66
5
70
(43)
28
24
(27)
24
23
(5)
18
Statement of Financial Position
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
3,257
5,423
3,067
4,007
2,147
2,273
1,799
867
254
6,937
101
1,478
500
32,109
6,169
6,450
3,424
1,014
3,739
166
2,852
923
362
8,743
111
1,680
500
36,133
6,978
7,388
3,858
1,067
4,515
205
3,284
978
410
9,851
123
1,888
500
41,047
8,025
8,497
4,484
1,227
5,192
236
3,776
1,058
472
11,423
142
2,171
500
47,204
21
35
20
26
14
15
12
6
2
45
1
9
3
206
40
41
22
7
24
1
18
6
2
56
1
11
3
232
44
46
24
7
28
1
20
6
3
61
1
12
3
257
49
52
28
7
32
1
23
6
3
69
1
14
3
290
5,865
2,000
2,147
3,582
2,054
1,047
411
421
17,527
7,693
2,190
3,739
3,484
1,143
2,467
280
206
21,202
8,825
2,504
4,228
3,694
1,231
2,873
328
246
23,930
10,149
2,879
4,862
3,776
1,369
3,304
378
283
27,001
38
13
14
23
13
7
3
3
113
49
14
24
22
7
16
2
1
136
55
16
26
23
8
18
2
2
149
61
17
29
23
8
20
2
2
163
5,000
3,843
1,565
2,466
205
1,035
14,113
469
14,582
32,109
5,000
3,843
1,913
2,500
733
282
14,271
660
14,931
36,133
5,000
3,843
2,266
2,627
1,229
1,290
16,255
862
17,117
41,047
5,000
3,843
2,825
2,927
1,977
2,499
19,070
1,133
20,203
47,204
32
25
10
16
1
7
91
3
94
206
32
25
12
16
5
2
92
4
96
232
32
25
14
16
8
8
103
5
108
257
32
25
17
18
12
15
119
7
126
290
Key ratios
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
Loss ratio
Underwriting expense ratio
Combined ratio
RoAE
P/E
P/B
Dividend yield
44.5%
35.3%
79.8%
10.4%
17.94
1.83
4.6%
46.8%
36.0%
82.8%
13.4%
13.56
1.81
3.1%
55.3%
31.2%
86.5%
7.1%
23.79
1.59
1.9%
40.4%
31.8%
72.2%
14.8%
9.87
1.35
5.1%
44.5%
35.3%
79.8%
10.4%
17.94
1.83
4.6%
46.8%
36.0%
82.8%
13.4%
13.56
1.81
3.1%
55.3%
31.2%
86.5%
7.1%
23.79
1.59
1.9%
40.4%
31.8%
72.2%
14.8%
9.87
1.35
5.1%
Assets
Cash and Short term funds
Held to Maturity
Available for sale
Fair Value through Profit and Loss
Other financial assets at fair value
Trade Receivables
Reinsurance receivables
Other Receivables
Deferred Acquisition Cost
Investment Properties
Intangible Assets
Property and Equipment
Statutory Deposit
Total Assets
Liabilities
Insurance Liabilities
Investment Contract Liabilities
Other Financial Liabilities
Borrowing
Trade Payables
Other Payables
Current Income Tax Liabilities
Deferred Tax Liabilities
Total Liabilities
EQUITY
Paid Up Share capital
Share Premium
Contingency Reserves
Other Reserves
Retained Earnings
Fair Value Reserves
Shareholders' funds
Minority Interest
Total Equity
Total Liabilities and Equity
$ Million
2013A
2014F
2015F
Source: CardinalStone Research
44
Nigerian Insurance Sector Report
Beacon Shining Forth
Equity Research
Continental Reinsurance Plc
BUY
TP: N1.19
Expansion on the horizon
Company Information
Insurance growth bodes well for reinsurance business: The increased
Address
6 Catholic Mission Street, Lagos
Island, Lagos.
activity level of the insurance companies, is generally psoitive for reinsurance
business. Re-insurers are essential for effective risk management by insurers
and consequently, as insurers underwrite more risk, the gross premium
income for re-insurers will also increase because the insurers will have more
risks to re-insure. Also, regulatory policies by NAICOM aimed at increasing the
local retention of insurance (and re-insurance) premiums has aided growth in
gross premium income of the re-insurers, especially in the oil and gas sector.
Continental Reinsurance (ContinentalRe or CONTINSURE) is a well run
business, with a high degree of efficiency, with combined ratios between 80 90% which implies that the company is able to meet all claims related
expenses from premiums received in a year. The company’s after tax profit
margin was 11.67% as at FY'13 and 11.52% as at H1'14 (14.82% in H1'13).
Website
www.continental-re.com
MD
Femi Oyetunji
FYE
December
NSE Sector
Financial Services
Ownership
C-Re Holding
Ltd
50.62%
Stanbic Nominees
Others
5.76%
43.62%
Stock Data
Bloomberg
Ticker:
CONTINSU:NL
Market Price (N)
Geographical diversification: In order to reduce the concentration of risk,
Continental Reinsurance is geographically diversified, but limits its focus to
Africa. There are about 3 reinsurers with offices in Nigeria, but since
reinsurance is a global industry there are many international reinsurers
competing in Nigeria. ContinentalRe has 2 subsidiary companies in Nairobi and
Botswana, 4 other regional offices and operations in more than 40 countries
across Africa. Currently, Nigeria accounts for 60% of ContinentalRe's business,
while the rest of Africa accounts for 40%. The company aims to flip this around
in the near future, principally by growing its business in the rest of Africa and
by building up its capacity to reinsure more business, both in Nigeria and the
rest of Africa. We anticipate that as the company raises capital to increase its
capacity to underwrite business, ContinentalRe will be in a position to perform
strongly. Hence, we believe its expansion strategy in the rest of Africa would
help grow revenues and consequently increase shareholder value.
0.97
Shares Outs (Mn)
10,373
Market cap (N’Mn)
10,062
Price Performance
12-month
(%)
CONTINSURE
NSE
-14
13
3-month (%)
-10
10
YTD (%)
-22
-1
2013A
2014E
2015F
P/E (x)
5.74
6.82
5.44
P/BV (x)
Div. Yield
(%)
0.70
0.69
0.64
11.3
11.3
11.3
Valuation
12 Month Price Performance (Rebased)
Valuation: Our one year target price from our residual income model for
1.2
CONTINSURE stands at N1.19 (1 cent), which translates to an upside of 23%;
thus we place a BUY rating on the stock. CONTINSURE is currently trading at
6.8x 2014E earnings with a P/B ratio of 0.69x compared to an Africa ex SA peer
average of 5.1x and 0.73x respectively.
1.0
Risk: A higher than average claims environment and slower growth in other
African markets would adversely affect ContinentalRe's performance.
0.8
Sep-13
Dec-13
Mar-14
CONTINSURE
Jun-14
ASI
Source: NSE
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Investment Rationale
Greater demand for reinsurance expected, given increased insurance
penetration: With the growth potential of insurance in Nigeria and Africa,
which will lead to higher risk underwriting, we expect an increase in the level
of reinsurance. In Nigeria especially, the enforcement of the local content act
has led insurers to take on big-ticket transactions in the oil and gas, marine
and aviation sectors. There are only 2 reinsurers with offices in the country,
and the greater demand for insurance, will present opportunities for
reinsurers to grow their premium income.
With the growth potential of insurance in
Nigeria and Africa, we expect an increase in
the level of reinsurance
Consistent dividend payout: ContinentalRe has been paying dividends
consistently since 2009. With a dividend payout averaging 64% from 2009 to
2012, we expect the company to continue with its dividend payment culture
and envisage that the company will at least maintain the absolute value of
dividends year by year. With a 2013 dividend yield of 11.3% at current price,
ContinentalRe is a good income stock for investors.
We expect ContinentalRe to continue with
its dividend payment culture, maintaining
the absolute value of dividends year by year
Geographic diversification: Given that there are only 2 reinsurers in Nigeria
and the tendency for the correlation of risks within borders, geographical
diversification is important for a reinsurance firm. ContinentalRe has regional
offices covering Anglophone West African countries, Francophone West
African countries, Francophone Central African region, Eastern and Southern
Africa countries and some North African countries. In all, ContinentalRe has
operations in 46 countries in Africa (though ContinentalRe has physical
presence in only five countries). With the expected growth of insurance in
Africa, we expect this diversification to not only mitigate concentration risk,
but also contribute to growth in premium income
ContinentalRe has operations in 46
countries in Africa
Adequately capitalised: NAICOM requires that re-insurance companies
should hold a minimum level of regulatory capital (N10 billion) and maintain a
solvency margin of 15%. ContinentalRe had a solvency margin of 43% in FY'13,
and therefore the company is adequately capitalised. However, as the
company intends to scale up its operations, it would need to build capacity for
effective underwriting. Hence, ContinentalRe intends to raise capital to
recapitalise its regional offices so that these offices can re-insure greater risks.
ContinentalRe is adequately capitalised for
its current operations
Company Overview
Continental Reinsurance Plc is a Pan-African reinsurance company offering life
and non-life reinsurance with a well - diversified business mix and customer
base across Africa. Incorporated as a private reinsurance company in Nigeria
in 1985, It commenced business as a general reinsurer in 1987 and became a
composite reinsurer in January 1990. In 2000, the company became a public
limited liability company and subsequently raised its capital base to N10 billion
($61 million) in 2007 from N2 billion ($12 million) with ownership including
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international investors. Subsequently, ContinentalRe listed on the Nigerian
Stock Exchange on May 30, 2007. The corporate head office in Lagos, Nigeria
also serves as the regional office for Lagos and oversees business activities in
the Anglophone West African countries, Angola and South Africa. The regional
office in Douala, Cameroon, covers Francophone Central African region while
the new regional office in Abidjan, Cote D'Ivoire covers all francophone West
African and some North Africa–based businesses. The Nairobi, Kenya office
covers the Eastern and Southern Africa countries. In 2012, the company
obtained a licence for an office in Tunis, Tunisia that will cover its operations in
North Africa. Also, a subsidiary company was incorporated in Kenya at the end
of 2012 to replace the Nairobi regional office. The new Kenyan subsidiary,
which is fully licensed to operate in Kenya and the east Africa region as a local
re-insurance firm, commenced operations in January 2013. Continental
Reinsurance currently has offices in 5 African countries but reinsures risk in 46
African countries. The company is rated B+ (Good) for financial strength and
credited for strong risk-adjusted capital by AM Best Europe - Rating Services
Limited, the world's oldest insurance rating and information source.
ContinentalRe’s services cover non-life and life treaty, as well as facultative
reinsurance, supported by retrocessionaires in the London and African
reinsurance markets. Service line cuts across Fire, Energy, Marine, Liability,
Accident and Life Insurance (both individual and group life).
Board of Directors



Mr Hurley Doddy is the chairman of Continental Reinsurance Plc and
currently co-CEO of Emerging Capital Partners. With over 30 years
experience in finance, he has served on numerous boards including
Financial Bank, Celtel International, Agromed S.A, All Africa Airways
and Horizon Portfolio Limited. He was appointed as Chairman of the
board on March 5, 2014.
Dr Femi Oyetunji is the Managing Director/CEO of Continental
Reinsurance Plc and holds a PhD in Statistics from the University of
Manchester Institute of Science & Technology in the UK. He is a fellow
of the Institute of Actuaries in the UK and has attended several
management development programmes locally and overseas. Prior to
his appointment, Dr. Oyetunji served as the Managing Director and
Chief Actuary of Alexander Forbes Consulting Actuaries Nigeria Limited
(“AFCANL”), overseeing large insurance schemes in the private and
public sector for five years. Prior to Alexander Forbes, Dr. Oyetunji
spent six years with Crusader Insurance Nigeria, where he served as
CEO.
Mr Lawrence Nazare is the Executive Director overseeing the Non-Life
segment of ContinentalRe’s business. He has about 24 years
experience in the insurance industry with stints as Managing Director
at Intermarket Reinsurance, Managing Director at Tristar and
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





Equity Research
Managing Director at ZB Reinsurance, which are all located in
Zimbabwe.
Mr Vincent Le Guennou is currently co-CEO of Emerging Capital
Partners and serves as a Non-Executive Director of Continental
Reinsurance. Prior to joining ECP, he served as the CFO of Compagnie
Ivoirienne d'Electricite in Cote d'Ivoire and also on numerous boards of
various African companies, including Air Ivoire, Veolia Water Maroc,
Finagestion and Oragroup.
Ms Nana Appiah-Korang is a director of Emerging Capital Partners and
serves as a Non-Executive Director of Continental Reinsurance. Prior to
joining ECP, she worked for the Real Estate Principal Investment Group
of Goldman Sachs & Co. in New York where she executed real estate
private equity transactions in the US.
Mr David Sobanjo is the former Group Managing Director and Chief
Executive Officer of AIICO insurance Plc and serves as a Non-Executive
Director of Continental Reinsurance. He has more than 25 years’
cognate experience in the Insurance Industry. He started his career
with Union Bank of Nigeria Plc and later joined SCIB Nigeria and
company (an insurance broker). He also worked in Glanvill Enthoven
Life and Pension Consultants prior to joining Highgate Insurance
Brokers Ltd as the Managing Director/CEO.
Mr Bakary Kamara is the former Chief Executive Officer and Managing
Director of the African Reinsurance Corporation and serves as a NonExecutive Director of Continental Reinsurance. He is a permanent
member of the Executive Committee of the African Insurance
Organization and member of the Association of African insurance
lawyers.
Mr Johnnie Wilcox is the former Managing Director of United African
Insurance Brokers Ltd (UAIB) and serves as a Non-Executive Director of
Continental Reinsurance. He is a Fellow of the Chartered Insurance
Institute of London with about 35 years working experience in the
insurance industry covering direct insurance, reinsurance, risk
management, reinsurance broking and insurance education
Mr Foluso Laguda is an experienced strategy consultant with over 15
years experience in advisory and research and serves as a NonExecutive Director of Continental Reinsurance. He serves on the board
of several companies including SALAG Limited. He is a member of the
Institute of Directors in both Nigeria and the UK.
Financial Analysis
Over the past five years, ContinentalRe’s gross premium income has grown by
a CAGR of c.26%. In 2012, gross premium income (GPI) growth slowed down to
c.5%, but rebounded in 2013, to 25.9% to raise gross premium income to
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N15.04 billion ($97 million). Continental Reinsurance H1'14 top line came in at
N7.88 billion ($48 million), a 7% growth over N7.38 billion ($45 million)
recorded in H1'13. The PAT margin stood at 11.52% in H1'14 against 14.82%
recorded in H1'13.
Figure 28: 5 year trend in Gross Premium Income and PAT
15,037
16,000
11,946
11,347
12,000
9,433
8,000
5,911
4,000
905
1,733
1,443
1,230
1,753
2009
2010
2011
Gross Premium Income (N Million)
2012
2013
PAT (N Million)
Sources: Company Financials, CardinalStone Research
Figure 29: 5 year trend in PAT Margin and ROE
18%
15.3%
15%
14.5%
13.0%
13.2%
12.7%
14.1%
12%
12.1%
6%
11.7%
11.0%
9%
8.1%
3%
0%
2009
2010
2011
PAT Margin
2012
2013
ROE
Sources: Company Financials, CardinalStone Research
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For the major lines of business, non-life premiums have grown by a CAGR of
19.1% for the 5 years to 2013. Non-life contributed c.82% of GPI for the 2013
financial year, down from the c.80% the previous year showing that non-life
business grew faster than the life business in 2013. This is in contrast to
previous years where the life business has experienced faster growth due to
the enforcement of the Group Life policy. In 2013 Group life contributed 95%
of the total of N2.79 billion ($17 million) gross premium generated by the life
reinsurance business, up from 90% in 2012 due to the impact of the Nigerian
Pension Reform Act, which makes group life insurance compulsory. Individual
life premiums fell by c.45% in 2013 although premiums from individual life has
been on the increase in prior years (from c.N60 million ($0.4 million) in 2010
to c.N242 million ($1.5 million) in 2012).
Figure 30: Business Segment Contribution to Gross Premium Income 2013
Life
18%
Non - Life
82%
Source: CardinalStone Research
Revenue and Profitability Outlook
Revenue Outlook: Our revenue forecast for Continental Re-insurance is
based on the company's expansion drive across Africa and an increased
contribution from life reinsurance. We project a 15.3% CAGR growth in gross
premium income from 2013 to 2018, slower than the c.17% historical CAGR
growth recorded from a lower base. The benefits of ContinentalRe’s
geographical expansion were evident in their 2013 performance. Premiums
outside Nigeria grew by 53.5%, faster than the 21.5% growth of Nigerian
premiums. With ContinentalRe beginning operations in Tunis to cover the
Maghreb states (Mauritania, Morocco, Algeria, Tunisia and Libya), we expect
the fast growth to be maintained, given the low base of the current African
operations.
We project a 15.3% CAGR growth in
gross premium income from 2013 to
2018
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Figure 31: Forecasted Gross Premium Income and PAT Growth
30,000
25,107
25,000
22,825
20,563
20,000
16,540
18,360
15,000
10,000
5,000
2,407
2,120
1,851
1,475
2,699
2014F
2015F
2016F
Gross Premium Income
2017F
2018F
PAT
Source: CardinalStone Research
Profitability Outlook: ContinentalRe is an efficient player, with average
combined ratio coming in at 86% in line with global average of 88%; hence
Underwriting profit has grown by a CAGR of c.22% from 2009 - 2013. Profit
margin of 2013 was lower than 2012 due to the increase in claims expenses
and growth in gross premium income, but we expect average PAT margin from
2013 through to 2018 to come in at 11.41% and profits to increase to N3.5
billion ($21 million) by 2018.
We expect profits to increase to N3.5
billion ($21 million) by 2018
Figure 32: Forecasted PAT Margin
10.75%
10.08%
10.31%
10.54%
8.92%
2014F
2015F
2016F
2017F
2018F
PAT Margin
Source: CardinalStone Research
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Forecasts and Valuation
Valuation assumptions
Our residual income valuation projections for Continental Reinsurance span
over a period of 5 years. The following guides our cost of equity assumptions
for Continental Reinsurance:
Cost of Equity Assumptions
RFR (1 year exponential average of 10 year bond)
Stock Beta
Risk Premium
Cost of Equity
LT Growth Rate
12.37%
1.04
5%
17.56%
4%
Valuation
CONTINSURE is trading at a discount to our target price and provides an
upside potential of 22.9% to our target price of N1.19 (1 cent). With a 2014E
P/E and P/B of 6.8x and 0.69x, compared to an African ex SA peer average of
5.1x and 0.73x we believe the stock is currently underpriced. We therefore
initiate coverage on the stock with a BUY rating.
2014E
(N in Millions)
2015E
2016E
2017E
Return on Equity (%)
10.3%
12.8%
13.5%
14.1%
14.7%
Cost of Equity (%)
17.6%
17.6%
17.6%
17.6%
17.6%
Equity at the Beginning
14,285
14,480
15,675
17,016
18,415
Residual Income
(1,033)
(691)
(632)
(580)
(533)
2018E
Discount Factor
0.85
0.72
0.62
0.52
0.45
Present Value of RI
(879)
(500)
(389)
(304)
(238)
Terminal Value
Residual Income
(4,928)
Discount Factor
0.45
Present Value of Terminal RI
(2,195)
Present Value of RI
(4,504)
Add Equity at the beginning
14,285
Equity Value (N' Million)
9,781
Price/Share/(N)
1.01
Target Price/Share (N)
1.19
Catalysts: We believe the expected increase in insurance activity will translate to
better performance for ContinentalRe. Coupled with it's African expansion,
consistent dividend payout and relatively high dividend yield, we believe
CONTINSURE will perform well.
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Financial Statements and Key Ratios
Income Statement
2012A
N Million
2013A
2014F
2015F
2012A
$ Million
2013A
2014F
Gross Premium Income
11,946
15,037
16,540
18,360
77
97
103
111
GPI ceded to Retrocessionaires
(1,554)
(1,686)
(1,819)
(2,020)
(10)
(11)
(11)
(12)
2015F
Net Premium Income
10,392
13,351
14,721
16,340
67
86
92
99
Claims expenses (Net)
(4,793)
(6,262)
(7,592)
(8,427)
(31)
(40)
(47)
(51)
Underwriting Expenses
(4,252)
(5,411)
(5,958)
(6,308)
(27)
(35)
(37)
(38)
Underwriting Profit
1,347
1,678
1,171
1,605
9
11
7
10
785
556
673
709
5
4
4
4
Profit Before Tax
2,132
2,233
1,843
2,314
14
14
11
14
Income Tax Expense
(399)
(480)
(369)
(463)
(3)
(3)
(2)
(3)
Net Other Operating Activities
PAT
1,733
1,753
1,475
1,851
11
11
9
11
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
Cash and Cash Equivalents
6,264
5,674
6,035
6,417
40
36
38
40
Financial Assets
6,402
8,260
8,966
10,116
41
53
57
62
Reinsurance Receivables
5,428
6,292
6,322
6,955
35
40
40
42
Loans and Other Receivables
193
379
273
285
1
2
2
2
Retrocession Assets
779
358
1,006
1,106
5
2
6
7
Deferred Acquisition Cost
1,077
1,428
1,437
1,581
7
9
9
10
Other Assets
1,114
366
862
948
7
2
5
6
Investment Properties
Statement of Financial Position
Assets
1,661
1,747
2,012
2,276
11
11
13
14
Intangible Assets - Software
17
10
20
43
0
0
0
0
Property, plant and Equipment
115
612
805
885
1
4
5
5
Statutory Deposit
1,000
1,000
1,000
1,000
6
6
6
6
Total Assets
24,049
26,125
28,738
31,612
154
168
181
194
Liabilities
Insurance contract Liabilities
9,237
9,873
11,783
13,214
59
63
73
80
Reinsurance Creditors
755
1,169
1,264
1,391
5
8
8
8
Other Liabilities
252
311
661
727
2
2
4
4
Income Tax Payable
402
391
489
537
3
3
3
3
Employees Retirement Benefit Obligations
164
46
57
63
1
0
0
0
4
49
4
5
0
0
0
0
10,814
11,840
14,258
15,937
69
76
89
96
Paid Up Share capital
5,186
5,186
5,186
5,186
33
33
33
33
Share Premium
3,915
3,915
3,915
3,915
25
25
25
25
Contingency Reserves
1,873
2,420
2,816
3,276
12
16
18
20
Retained Earnings
2,345
2,519
2,457
2,707
15
16
15
16
-
(32)
-
-
-
(0)
-
-
(84)
277
106
590
(1)
2
1
4
13,235
14,285
14,480
15,675
85
92
92
98
-
-
-
-
-
-
-
-
13,235
14,285
14,480
15,675
85
92
92
98
Deferred Tax Liabilities
Total Liabilities
EQUITY
Other Reserves
AFS reserves
Attributable to owners of the Company
Minority interest
Total Equity
Total Liabilities and Equity
24,049
26,125
28,738
31,612
154
168
181
194
Key Ratios
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
Loss and Loss Expense Ratios
46.1%
46.9%
51.6%
51.6%
46.1%
46.9%
51.6%
51.6%
Underwriting Expense Ratios
40.9%
40.5%
40.5%
38.6%
40.9%
40.5%
40.5%
38.6%
Combined Ratio
87.0%
87.4%
92.0%
90.2%
87.0%
87.4%
92.0%
90.2%
RoAE
13.6%
12.7%
10.3%
12.3%
13.6%
12.7%
10.3%
12.3%
P/E (x)
5.81
5.74
6.82
5.44
5.81
5.74
6.82
5.44
P/B (x)
0.76
0.70
0.69
0.64
0.76
0.70
0.69
0.64
10.3%
11.3%
11.3%
11.3%
10.3%
11.3%
11.3%
11.3%
Dividend yield
Source: CardinalStone Research
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AIICO Insurance Plc
BUY
TP: N1.44
Restructuring cleans up books
Company Information
A repositioning strategy: In the 2013 financial year, AIICO was the
Address
Plot PC 12, Churchgate Street,
Victoria Island, Lagos.
second biggest player in the insurance industry in Nigeria (by revenue), the
market leader in life and top 3 in non-life. AIICO Insurance has embarked on a
strategy to improve on the quality of its balance sheet, people and business
model. In FY'13, the company wrote off N1.1 billion ($7 million) in trade
receivables, N0.7 billion ($4 million) in impairment of investment properties
and increased their provisions by N0.4 billion ($2 million) for liabilities that
relate to prior years. Although these provisions led to a loss after tax in FY'13
of N739 million ($5 million), the International Finance Corporation (IFC)
communicated its management approval to invest c.$20 million (N3.24 billion)
in AIICO via a convertible loan instrument. With the conscious steps taken by
AIICO to clean up its balance sheet, the fundamentals of the company and its
earnings power are now much stronger, as the company has fully provided for
potential liabilities.
Website
www.aiicoplc.com
Earnings Outlook: We estimate AIICO’s 2014EPS at N0.26, which
translates to 21.8% ROE, a reversal from the negative ROE in 2013. Our
projection is based on an assumption of 20% growth in Gross Premium
Income, higher than the 11% recorded FY'13 growth but in line with H1'14
growth run-rate of 18%. Though AIICO reported a loss after tax in FY'13,
management does not expect to make provisions or write-downs of the
magnitude made in FY'13 in the short to medium term, therefore, we expect
FY'14 performance to be better as we do not envisage any further writedowns in this financial year.
MD
Edwin Igbiti
FYE
December
NSE Sector
Financial Services
Ownership
Dr O.
Fajemirokun
9.36%
AIICO Bahamas Ltd
Others
14.73%
75.91%
Stock Data
Bloomberg
Ticker:
AIICO:NL
Market Price (N)
0.85
Shares Outs (Mn)
8,800
Market cap (N’Mn)
7,480
Price Performance
AIICO
NSE
12-month (%)
8
13
3-month (%)
1
10
YTD (%)
-3
-1
Valuation
2013A
2014E
2015F
P/E (x)
-10.12
3.67
3.99
0.72
0.69
0.62
0.0
8.2
8.0
Valuation: With the strong run-rate in H1, we arrive at a one year TP of
P/BV (x)
N1.44 (1 cent) for AIICO, which translates to a potential upside of 69% and
therefore we place a BUY rating on the stock. AIICO is currently trading at 3.7x
2014 estimated earnings with a P/B ratio of 0.69x, compared to an Africa ex SA
peer average of 10.1x and 0.74x respectively.
Div. Yield (%)
12 Month Price Performance (Rebased)
1.3
Risks: Our projections are based on the assumptions that there will be no
further write-offs in the short to medium term, no adverse negative impacts to
investment income and that claims projection will not deviate much from
historical average. Any change in any of these assumption s would
imply that actual earnings released by the com pany may deviate
substantially from our projections.
1.1
0.9
Sep-13
Dec-13
Mar-14
AIICO
Jun-14
ASI
Source: NSE
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Investment Rationale
Cleaner, better quality balance sheet to support growth: To place AIICO
insurance in the best position to achieve its long term goals, the board decided to
make cummulative provisions of N2.2 billion ($13 million), broken down into N1.1
billion ($7 million) in trade receivables written off, N0.7 billion ($4 million) in
impairment of investment properties and an increase in provisions for liabilites by
N0.4 billion ($2 million) which related to prior years. Thus AIICO insurance has
made full provisions and has adequate reserves to back all their liabilities. With
the write offs, AIICO's reserves will be sufficient to meet any legacy claims, thus
increasing the capacity of the company to underwrite risks.
AIICO's reserves are sufficient to meet
any legacy claims, thus increasing its
capacity to underwrite risks
Major player in the industry: AIICO Insurance is the market leader in life
insurance business in Nigeria and among the top 3 in non-life insurance. With over
50 years experience in the Nigerian insurance market, AIICO has total assets of
N42 billion ($270 million) for the insurance business (among the top 3 in the
industry), over N40 billion ($258 million) in assets under management from its
pension business and group revenues of over N23 billion ($152 million). AIICO has
a goal to build each of its businesses to rank among the top three players in their
respective industries. Hence the company has outlined a strategy to drive growth
in retail segment which is the segment it considers most profitable and in which
the company is poised to derive significant economies of scale due to its size.
AIICO intends to achieve this by making significant investments in areas such as
systems and information technology infrastructure, operational excellence,
innovation and branding.
AIICO Insurance is the market leader in
life insurance business in Nigeria and
among the top 3 in non-life insurance
Balanced and well-diversified revenue stream: AIICO has two primary
businesses - life and non-life insurance and three supporting businesses - health
management organisation (HMO), pension management and asset management.
In the 2013 financial year, Life insurance contributed 57% of gross premium
written, non-life insurance contributed 40% of gross premium written while the
HMO contributed the remaining 3%. The company’s business model is in line with
its long term goal to be a diversified non-bank financial institution offering long
term savings, protection and investments services to a broad range of customers.
The company has a medium term strategy to drive its recurring fee-driven
businesses which requires minimal balance sheet risk; essentially the pension and
asset management businesses. With the growth potential of the pension industry
already enumerated, we believe this business will contribute increasingly to
bottom line going forward.
Company Overview
AIICO insurance Plc commenced operations in Nigeria in 1963, as an agency office
of American Life Insurance Company USA. AIICO was incorporated as a Nigerian
company and later became a full subsidiary of its parent company in 1970.
55
AIICO’s business model is in line with its
long term goal to be a diversified nonbank financial institution
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However, following the Indigenization Decree, which affected all foreign owned
companies in Nigeria at that time, 60% of the foreign shareholding of AIICO was
acquired by the Federal Government of Nigeria. The company became a public
liability company in 1989 and was listed on the floor of the Nigerian Stock
Exchange in December 1990. The Federal Government of Nigeria subsequently
divested its 60% holding in the company. Today, AIICO is one of Nigeria’s leading
insurance companies with capacity to underwrite all classes of risks. Furthermore,
the company currently leverages technical partnership arrangement with the
world's largest insurance conglomerate, American International Group (AIG). In
2013, the company celebrated its Golden Jubilee and in the same year, became
the first insurance company in Africa to be ISO 22301: 2012 Certified by the British
Standard Institution. The company is the largest life insurance company and the
second largest insurance company in Nigeria with agency network and branches
in Nigeria covering eighteen states.
Board Of Directors



Chief (Dr.) Oladele Fajemirokun is the current chairman of AIICO
Insurance Plc and has served on the board of several companies,
including Xerox HS, Food Concepts and Entertainment Group, Kings Guard
Group Limited, Multishield Limited and First Hydrocarbon Nigeria
Company Limited. He has a BSc in Economics from the University of Ife
(now Obafemi Awolowo University) and a Honorary Doctor of Business
Administration from City University Los Angeles, USA. He is also a fellow
of the Institute of Directors.
Mr Edwin Igbiti is currently the Managing Director/Chief Executive Officer
of AIICO Insurance Plc. His career in the Insurance industry spans over two
decades as a seasoned professional with tremendous depth and wealth of
technical expertise as well as best in-class management practices. Prior to
joining AIICO Insurance, he had served and gained vast experience in
Insurance at Phoenix Insurance Company, where he worked for several
years. He is professionally affiliated to the Nigerian Institute of
Management (NIM) and the Chartered Insurance Institute of Nigeria
(CIIN) where he recently bagged a fellowship of the institute. He has
attended several local and international courses and seminars. He holds
an MBA from the University of Ado- Ekiti (2005), an Advanced Diploma in
Management from the University of Lagos (1997), an Insurance Certificate
from chartered Insurance Institute, London and is an alumnus of Howard
University Business School, U.S.A.
Senator Tokunbo Ogunbanjo serves as a Member of the Board of
Directors in AIICO Insurance Plc in a non-executive capacity. He attended
the University of Buckingham between 1980 and 1982, where he got an
LLB degree and was in the Nigerian Law School in 1983. Before his
appointment as a member of the board in 2007, he has served as a
member of the Boards of Directors in Dragages Engineering Company
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



Equity Research
Limited, Johnson Wax Nigeria Limited, NFI Insurance Plc, IPI Plc and IDEaS
(Information Display Exhibit and Systems Ltd). He served as a Senator in
the National Assembly representing Ogun East Senatorial District from
2003 to 2007.
Mr Sobandele Sobanjo currently serves as a non-executive director of
AIICO Insurance Plc. He was erstwhile Managing Director/Chief Executive
Officer of AIICO Insurance Plc and has more than 25 years cognate
experience in the Insurance Industry. He started his career with Union
Bank of Nigeria Plc and later joined SCIB Nigeria and company (an
insurance broker). He also worked in Glanvill Enthoven Life and Pension
Consultants prior to joining Highgate Insurance Brokers Ltd as the
Managing Director/CEO. He later moved to AIICO Insurance Plc as the
Deputy General Manager, Operations.
Mr Jide Orimolade is currently the Executive Director, Marketing at AIICO
Insurance Plc. He holds a Bachelor of Science (Honours) degree in
Insurance from the University of Lagos, Akoka, and a Masters degree in
Marketing from the same University. He started his Insurance career in
1989 with the former Financial Assurance Company Limited as an
Underwriting executive. In 1991 he joined Bullion Insurance Brokers
Limited as a Deputy Manager in charge of Marketing and was invited in
1995 to be part of the pioneer team of Sovereign Trust Insurance Plc, with
the responsibility of overseeing the Apapa Area Office. He rose to the
position of Assistant General Manager before voluntarily resigning his
appointment in 2004. In March 2004, Mr. Orimolade was also invited to
lead the pioneer team as the General Manager and Chief Executive Officer
of Zenith General Insurance Company Limited which was established as
the Insurance subsidiary of Zenith Bank Plc. He resigned his appointment
in 2008 to take on a more challenging international appointment with
Liberty Life Group of South Africa as the Regional Director in charge of
West Africa. He is an Associate of the Chartered Insurance Institute of
Nigeria, and also a member of the Nigerian Institute of Management.
Dr (Mrs) Adenike Fajemirokun-Koumpatis is a non-executive director of
AIICO Insurance Plc. She is a highly experienced Risk Management,
Strategy and Performance specialist with over 10 years diverse experience
executing Risk Management, Strategy performance improvement
programs in Financial Engineering and other industries. She graduated
with a second class upper division in Civil Engineering from the University
of Manchester in 2000. She has worked in Deutsche Bank AG of London
(2005 to 2009), as well as First Bank of Nigeria as the Head of Operational
Risk.
Mr Sonnie Ayere serves as a non-Executive Director of AIICO Insurance
Plc. He established Dunn Loren Merrifield in early 2009. He possesses
extensive cognate experience in fixed income capital markets and has
played a pivotal role in originating and executing several notable
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transactions in securitisations, and other various structured finance
related transactions internationally and in Nigeria. He has amassed about
17 years of corporate and structured finance, corporate banking and asset
management experience working with HSBC London, NatWest Bank, The
Sumitomo Mitsui Bank, Bank of Montreal – Nesbitt Burns, all in London;
the International Finance Corporation (The World Bank Group) based in
Washington D.C. and Johannesburg, South Africa and the UBA Group. He
joined USA Group as the pioneer Managing Director/CEO of VBA Global
Markets, the investment banking arm of the group, in August 2005. Key
innovative transactions such as the N100 billion Residential Mortgage
Backed Securitisation for Federal Mortgage Bank, NNPC sponsored
US$350m Multi-Seller Notes Issuance Program, the N10 billion future flow
securitisation program for Food Concepts limited, the N20 billion Zero
Coupon Puttable Bond for Tinapa Limited were led and structured by Mr.
Ayere and his team. Mr. Ayere obtained an MA(Hons.) in Financial
Economics (2:1) from the University of Dundee, Scotland. He is an
Alumnus of Cass Business School London (MBA) and the London Business
School.
Financial Analysis and Outlook
Over the past five years, AIICO's topline performance has been positive with the
company growing Gross Premium Written by a CAGR of 28% from 2009 to 2013.
The Gross Premium Written of AIICO Insurance Plc for FY'13 came in at N23.6
billion ($152 million), an 11% growth over N21.3 billion ($136 million) recorded in
FY'12, while Fees and Commission income was up 54%.
Figure 33: 5 year trend in Gross Premium Written and PAT
23,603
25,000
21,273
18,445
20,000
14,952
15,000
10,000
8,799
5,000
1,001
1,118
2,236
1,321
2009
2010
2011
2012
(739)
2013
(5,000)
Gross Premium Written (N Million)
PAT (N Million)
Sources: Company Financials, CardinalStone Research
The Life business contributed 57% to Gross premium written in 2013. The non-life
business contributed 40% of GPW while the HMO subsidiary contributed 3%.
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Figure 34: Business Segment Contribution to Gross Premium Written
HMO
3%
Non-Life
business
40%
Life business
57%
Sources: Company Financials, CardinalStone Research
Total Assets of AIICO has almost doubled over the past 5 years, growing by a
CAGR of 14%. The ROE and ROA has been volatile for AIICO as depicted in the
charts below.
Figure 35: 5 year trend in Total Assets
45,000
Total Assets (N million)
36,000
27,000
18,000
9,000
2009
2010
2011
2012
2013
Sources: Company Financials, CardinalStone Research
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Figure 36: 5 year Combined Ratio Trend
Combined Ratio
120%
102.3%
100%
80%
83.4%
80.5%
78.3%
60%
66.2%
40%
20%
0%
2009
2010
2011
2012
2013
Sources: Company Financials, CardinalStone Research
Figure 37: Historical Trend in PAT Margin, ROE and ROA
20%
15.7%
13.7%
15%
10%
12.1%
8.7%
6.2%
7.5%
8.0%
5%
4.7%
4.5%
0%
2010
2011
2012
-5%
-2.1%
2013
-3.1%
-6.5%
-10%
PAT Margin
ROE
ROA
Sources: Company Financials, CardinalStone Research
Revenue and Profitability Outlook
Revenue Outlook: Our revenue forecast for AIICO is based on its established
presence in the Nigerian market, its strong brand recognition and existing
network. A testament to this is its ability to grow gross premium written by c.11%
in 2013, despite the introduction of the No Premium No Cover policy, when some
insurers struggled to grow gross premiums.
We project a 17.0% CAGR in gross premium written from 2013 to 2018 and 14.9%
CAGR in PAT from 2012 to 2018. Our gross premium written projections is in line
with the 3 year average historical growth of 16.5%. We believe that AIICO will
60
We project a 17.0% CAGR in gross
premium written from 2013 to 2018
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leverage on its brand and size to at least defend its market share among the top 3
insurers in the industry and maintain its historical level of growth.
Figure 38: Forecasted Gross Premium Written Growth and PAT growth
60,000
51,782
50,000
44,135
38,103
40,000
30,000
33,010
28,323
20,000
10,000
2,037
3,036
2,459
2,150
1,876
2014
2015
2016
Gross Premium Written (N Million)
2017
PAT (N Million)
2018
Source: CardinalStone Research
Profitability Outlook: Our average expected PAT margin from 2014 through to
2018 is 6.0%, slightly below the 5 year historical average of 6.8%. We expect the
pension business to keep on adding to bottom line as the AUM of the pension
business increases in line with the expected exponential growth of the pension
industry in Nigeria. We expect investment income to continue to be robust, though
the CBN has indicated its desire to eventually lower interest rates (perhaps after the
2015 general elections). We expect AIICO to benefit from this decline in interest
rates, as a major part of its investment assets are held in longer duration
instruments (to match the longer duration liabilities of its life business).
Figure 39: Forecasted PAT Margins
8%
7.2%
5.6%
6%
5.7%
5.9%
5.6%
4%
2%
0%
2014
2015
2016
2017
2018
PAT Margin
Source: CardinalStone Research
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Balance Sheet: AIICO has a strong balance sheet position with total assets of
c.N42 billion ($270 million) as at FY'13 (top 3 in the industry). With total liabilities
of N31.5 billion ($202 million), AIICO is in a comfortable position to meet its
liabilities. As an insurer with a larger life underwriting business, AIICO has
maintained an average cash ratio (cash and cash equivalents to total assets) of
24.5% in the past 4 years, but maintains a higher share in financial assets (4 year
average of 40%). We expect total assets to grow by a CAGR of 17.9% over the next
5 years, faster than the historical 4 year CAGR of 14.0% as AIICO continues to
focus on retail expansion.
Forecasts and Valuation
Valuation assumptions
Our residual income valuation model for AIICO spans over a period of 5 years. Our
assumptions are based on the expected increased acceptance of insurance in the
country and deeper insurance penetration as well as the expected growth in
economic activities leading to more opportunities for insurance companies. The
following forecasts guide our cost of equity assumptions for AIICO:
Cost of Equity Assumptions
RFR (1 year exponential average of 10 year bond)
Stock Beta
Risk Premium
Cost of Equity
LT Growth Rate
12.4%
1.0
5.0%
17.4%
4.0%
Valuation
We believe the restructuring carried out by AIICO will improve the quality of its
balance sheet and thus, the company will increase its capacity to underwrite risk.
Based on our Residual Income model target price of N1.44 (1 cent), AIICO is
currently trading below its fair value and provides an upside potential of 69% to
our target price. With a 2014E P/E ratio of 3.67x and a P/B ratio of 0.69x,
compared to a peer average of 10.12x and 0.74x respectively, we place a BUY
rating on the stock. We therefore believe AIICO is currently undervalued and
possesses strong fundamentals.
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Return on Equity (%)
Cost of Equity (%)
Equity at the Beginning
Residual Income
Discount Factor
Present Value of RI
Terminal Value
Residual Income
Discount Factor
Present Value of Terminal RI
Present Value of RI
Add Equity at the beginning
Equity Value (N' Million)
Price/Share/(N)
Target Price/Share (N)
Equity Research
2014E
(N in Millions)
2015E
2016E
2017E
2018E
19.7%
17.4%
10,332
243
0.85
207
17.4%
17.4%
10,801
0
0.73
0
20.5%
17.4%
14,843
459
0.45
206
17.9%
17.4%
12,002
66
0.62
41
(249)
0.45
(112)
431
10,332
10,763
1.22
1.44
Catalysts: We believe a return to profitability in the current financial year and a
possible payment of dividend (in the previous 5 years, AIICO has paid a dividend
every year it has made profit) would spur investor interest in the stock.
63
18.6%
17.4%
13,183
169
0.53
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Financial Statements and Key Ratios
Income Statement
2012A
N Million
2013A
2014F
2015F
2012A
Gross Premium Written
Gross Premium Income
Net Premium Income
Fees and Commission Income
Net Underwriting Income
Total Underwriting Expenses
Underwriting Profit
Total Investment Income
Expenses
Results Of Operating Activity
PBT
Income Tax Expense
Profit For the Period
21,273
21,070
16,084
983
17,067
(12,713)
4,355
(2,195)
(5,572)
2,084
2,084
(763)
1,321
23,603
23,316
18,228
1,515
19,743
(17,012)
2,731
(3,144)
(6,756)
(1,280)
(1,280)
540
(739)
28,323
28,040
21,921
1,136
23,057
(18,254)
4,804
(2,026)
(4,977)
2,849
2,849
(812)
2,037
33,010
32,680
25,549
1,250
26,798
(21,220)
5,578
(3,040)
(5,973)
2,624
2,624
(748)
1,876
136
135
103
6
109
(82)
28
(14)
(36)
13
13
(5)
8
152
150
117
10
127
(109)
18
(20)
(43)
(8)
(8)
3
(5)
177
175
137
7
144
(114)
30
(13)
(31)
18
18
(5)
13
200
198
155
8
162
(128)
34
(18)
(36)
16
16
(5)
11
Statement of financial position
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
9,722
12,444
2,184
1,106
690
508
1,502
760
894
4,745
500
35,055
8,542
19,046
36
1,804
2,255
285
2,908
1,190
879
4,657
500
42,101
11,193
27,341
831
1,772
2,267
918
2,846
1,224
956
4,882
500
54,731
12,087
32,552
987
2,052
2,295
911
3,364
1,536
1,573
5,082
500
62,941
62
80
14
7
4
3
10
5
6
30
3
225
55
122
0
12
14
2
19
8
6
30
3
270
70
170
5
11
14
6
18
8
6
30
3
341
74
197
6
13
14
6
20
9
10
31
3
383
15,577
4,983
387
969
648
695
50
35
23,542
21,870
6,356
59
1,776
691
528
50
152
31,528
30,013
7,808
590
3,556
990
501
50
152
43,660
34,737
9,199
608
4,332
1,101
485
50
127
50,639
100
32
2
6
4
4
0
0
151
140
41
0
11
4
3
0
1
202
187
49
4
22
6
3
0
1
272
210
56
4
26
7
3
0
1
306
3,465
2,824
2,066
528
2,491
11,374
138
11,513
35,055
3,465
2,824
2,507
(1,407)
2,943
10,332
241
10,573
42,101
3,465
2,824
2,914
(389)
1,986
10,801
270
11,071
54,731
3,465
2,824
3,289
512
1,911
12,002
300
12,302
62,941
22
18
13
3
16
73
1
74
225
22
18
16
(9)
19
66
2
68
270
22
18
18
(2)
12
67
2
69
341
22
18
20
3
12
75
2
77
383
Key Ratios
2012A
2013A
2014F
2015F
2012A
2013A
2014F
2015F
Loss ratio
Underwriting expense ratio
Combined ratio
RoAE
P/E (x)
P/B (x)
Dividend Yield
30.7%
47.6%
78.3%
12.6%
5.66
0.66
9.4%
37.2%
46.2%
83.4%
-6.8%
-10.12
0.72
0.0%
30.0%
39.5%
69.5%
19.3%
3.67
0.69
8.2%
30.0%
38.9%
68.9%
16.5%
3.99
0.62
8.0%
30.7%
47.6%
78.3%
12.6%
5.66
0.66
9.4%
37.2%
46.2%
83.4%
-6.8%
-10.12
0.72
0.0%
30.0%
39.5%
69.5%
19.3%
3.67
0.69
8.2%
30.0%
38.9%
68.9%
16.5%
3.99
0.62
8.0%
Assets
Cash and Short term funds
Financial Assets
Trade Receivables
Other Receivables
Reinsurance Assets
Deferred Acquisition Cost
Deferred Tax Assets
Investment Properties
Intangible Assets
Property and Equipment
Statutory Deposit
Total Assets
Liabilities
Insurance Liabilities
Investment Contract Liabilities
Trade Payables
Other Payables
Current Income Tax Liabilities
Retirement Benefit Obligations
Irredeemable Preference Shares
Deferred Tax Liabilities
Total Liabilities
Equity
Paid Up Share capital
Share Premium
Contingency Reserves
Retained Earnings
Other Reserves (AFS Reserve)
Shareholders' funds
Minority Interest
Total Equity
Total liabilities and equity
$ Million
2013A
2014F
2015F
Source: CardinalStone Research
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Disclosure
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The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analysts denoted by an “*” on the cover or within
the document individually certifies, with respect to each security or issuer that the research analyst(s) cover in
this research) that: (1) all of the views expressed in this report accurately articulate the research analyst(s)
independent views/opinions, based on public information regarding the companies, securities, industries or
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connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this
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Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive
compensation based upon various factors, including the quality and accuracy of research, client feedback,
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CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.
Buy ≥ +15.00% expected share price performance
Hold 0.00% to +14.99% expected share price performance
Sell < 0.00% expected share price performance
A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +15.00%
between the current price and the analyst’s target price.
An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of 0.00%
and +14.99%,
A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns
of less than 0.00% is expected, between the current price and analyst’s target price.
Cardinal Stone Research distribution of ratings/Investment banking relationships as of September 8th, 2014
Rating
Buy
Sell
Hold
% of total recommendations
28%
41%
31%
with investment banking relationships
50%
33%
17%
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation
methodology and risks on any security recommended herein. You can contact the analyst named on the front of
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Frequency of Next Update: An update of our view on the company would be provided when next there are
substantial developments/financial news on the company.
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Company Disclosure:
CardinalStone may have financial or beneficial interest in securities or related investments discussed in this
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has with companies or in securities discussed in this report are disclosed hereunder:
Company
Disclosure
Custodian and Allied Plc
a
Mansard Insurance Plc
j
Continental Reinsurance Plc
AIICO Insurance Plc
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of
the company
The analyst responsible for this report as indicated on the front page is a board member, officer or
director of the Company
CardinalStone is a market maker in the publicly traded equities of the Company
CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly
disclosed offer of securities of the Company
CardinalStone beneficially own 1% or more of the equity securities of the Company
CardinalStone holds a major interest in the debt of the Company
CardinalStone has received compensation for investment banking activities from the Company within the
last 12 months
CardinalStone intends to seek, or anticipates to receive compensation for investment banking services
from the Company in the next 3 months
The content of this research report has been communicated with the Company, following which this
research report has been materially amended before its distribution
The Company is a client of CardinalStone
The Company owns more than 5% of the issued share capital of CardinalStone
CardinalStone has other financial or other material interest in the Company
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66