NEM Insurance Rated Hold as Analysts Forecast Marginal Upside
NEM Insurance Plc. has been rated hold by analysts as they cited that higher reinsurance cost pressure underwriting margin.
As a result, equity analysts at Meristem Securities forecasted price target ₦2.23 per share for the Insurance firm.
Though, NEM Plc. stock traded at ₦2.15 on the Nigerian Stock Exchange (NSE) on Friday.
So, due to limited upside estimated at 3.72%, equity analysts rated NEM’s stock hold as the investment firm maintained its earnings per share projection of ₦0.61.
In the first half of 2020, the Insurance Company’s topline growth slowed down.
Meristem said NEM Insurance bucked the trend of double-digit growth in gross premium income, stretching back to three years.
In the period, the Insurer’s gross premium income rose by 6.00% to ₦11.22 billion as against ₦10.59 billion in H1:2019.
Analysts attributed this was to weaker performance in the second quarter (Q2) of 2020 as premium income plunged by 16.26%.
By comparison, this is a sharp contrast to the 26.66% year on year growth recorded in the preceding quarter.
The main drag was the 24.78% drop in direct premium from the fire insurance business, given it accounted for an average of about 23.62% of the firm’s topline in the last six years.
Hence, the drop overshadowed the impressive growth across motor insurance – which lifted 26.06%, oil & gas insurance spiked 7.58%, marine insurance grew 51.68%, and the general accident expanded 33.06% – segments.
“While the economic impact of the Coronavirus continues to linger, the reopening of economic activities should support topline growth. We maintain our 6% growth estimate for GPI in 2020”, Meristem said.
It was discovered that underwriting margin was pressured by higher reinsurance.
NEM’s claims expenses fell by 4.62% to ₦1.99 billion compare to ₦2.08 billion in H1:2019, as all business lines except fire (with a rise of ₦0.77 billion) recorded a decline in the period.
Despite the fall in net claims expense, loss ratio deteriorated to 27.08% (from 26.13% in H1:2019) due to the higher reinsurance, about 35% relative to 25% in the corresponding period in 2019.
Analysts noted that underwriting expenses also declined by 8.15% year on year to ₦3.29 billion in H1:2020, in line with the dip in maintenance costs by 26.06% to ₦1.29 billion.
In the comparable period in 2019, NEM’s maintenance cost was ₦1.75 billion. Thus, combined ratio improved to 52.83% from 56.50%.
Thus, NEM Insurance maintained its cost leadership among non-life player, considering the industry average currently stand at about 63%.
However, analysts said the drop in underwriting related costs could not offset the drop in premium income.
Hence, underwriting margin contracted to 22.05% from 24.85% in H1:2019.
The Insurance firm’s cost profile increased, thus thinned down profit margin. This dilutive effect of rising cost bear upon earnings per share.
Explaining this, Meristem noted that high operating costs cut into profit in H1:2020, though NEM grew investment income by 63.79% to ₦0.52 billion.
The growth in investment income was driven by a 29.66% rise in interest on statutory deposit and 65.85% in investment assets to ₦0.02 billion and ₦0.49 billion respectively.
This is a reflection of 9.22% increase in investment assets and the better Investment yield performance in H1:2020.
The review showed that invested assets yielded 3.71% in H1:2020 as against 2.47% in H1:2019.
However, the combined effect of the fall in underwriting profit and a significant increase of 15.58% in management expenses dragged profit after tax by 3.02% to ₦1.56 billion.
In the first half of 2019, NEM’s Insurance profit after tax pitched at ₦1.61 billion
NEM Meets Phase I Recapitalization Threshold:
As at Q1:2020, NEM’s capital base which include its paid-up capital, share premium, and retained earnings was below the regulatory minimum at ₦9.05 billion.
The national insurance commission (NAICOM) has set minimum capital base of ₦10 billion for operators in the segment.
However, Meristem said due to the phased implementation of the recapitalization exercise, its ₦9.11 billion is way above the ₦5 billion Phase I minimum for non-life players in the industry and should remain so by the Phase I deadline of December 2020.
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NEM Insurance Rated Hold as Analysts Forecast Marginal Upside
