November 14, 2019
Life Business Expansion underpins Growth in Gross Premium Income
Gross premium earned advanced by 37.13% YoY to NGN35.56bn (vs. NGN25.93bn in Q3:2018), driven by the extensive distribution network of the firm. The firm’s life insurance segment was the most significant contributor to premium growth; the business segment was the fastest growing during the period (43.18% YoY) and accounted for 73.32% of total gross premium income. Premium income from the non-life and health businesses also rose by 23.66% and 8.98% respectively. While the growth rate of the nonlife business was higher than its 3 year average growth rate (21.07%), the faster growth recorded in the life business dwarfed the contribution of the nonlife business to topline during the period. Hence, the contribution of the non-life business came in at 25.36%, lower than its 5-year average contribution of 30.58%. The low contribution of the business segment reinforces the need for the firm to strengthen the weak capital base of its nonlife business (with solvency margin of NGN6.34bn) to improve the performance of the business segment. We expect 11.50% YoY rise in total premium earned by 2019FY, given its stance as one of the dominant life insurers in the industry and its large agent force (over 4,000 retail outlet) and its well diversified product designs.
Increased Underwriting Costs Pressures Firm’s Profitability
Losses incurred on both its life and non-life insurance contracts increased by NGNO.78bn and NGNO.30bn respectively, pushing total net claims expense up by 6.18% to NGN18.50bn in 9M:2019. However, claims ratio was 59.52%, due to faster growth in premium income relative to the rise in claims expense. The claims ratio figure was significantly better than the prior period in 9M:2018 (78.59%) and a 5-year average of 76.37%. The firm’s performance however did not benefit from this improvement, robbed by increased provisioning to the life and annuity reserve fund, which stood at NGN12.04bn, from NGN1.51bn at this time last year. This led to the 69.41% YoY increase in total underwriting costs to NGN37.22bn in 9M:2019. This also masked the benefits of lower underwriting costs due to the digitization of its underwriting processes. Nonetheless, the combined ratio for the period came in at 73.69%, lower than the 4-year average of 85.85%. As a result, the firm recorded an underwriting loss of NGN3.78bn (vs. underwriting profit of NGN2.30bn in 9M:2018).
Fair Value Gains Drive Net Profit by Highest rate in Five years
Investment income rose by 29.03% to NGN8bn (vs. NGN6.21bn in 9M:2018) due to interest income on its fixed income assets (which represents 94% of total financial assets). Profit after tax grew by the highest growth rate in 5 years (157.52%), largely due to fair value gains on its financial assets (NGN6.24bn) If we adjust for this non-cash item, earnings will print at NGN2.28bn, an implied 12.68% decline from the adjusted PAT of NGN2.62bn in 9M:2018. Based on adjusted figures, return on equity and net margin stood at 12.23% and 6.42% respectively, lower than 4-year averages of 15.72% and 7.90%. The net margin however compares favorably with a peer average of 12.74%.
Weak Solvency Margin Despite Strong Revenue Growth
In terms of capital adequacy, AllCO’s life business segment has a paid-up share capital of NGN8.98bn, which is barely above the industry requirement of NGN8bn. More instructively, the non-life business has a weak capital base, as highlighted by a paid-up share capital of NGN2.31bn, lower than the minimum capital requirement of NGN10bn. Hence, the firm needs to shore up its capital base, especially in its non-life business to be keep up with the competition in the industry. Hence, the plan to raise capital by way of rights issue after seeking shareholders’ approval.
We maintain our EPS and target PE of NGNO.37 and 2.00x respectively. This implies a FY2019 target price of NGNO.74 and an upside potential of 5.71% to its closing price of NGNO.70 on 12th November 2019. Hence, we rate as HOLD.