AIICO Insurance Rated Hold as Analysts Estimate Limited Upside

AIICO Insurance Rated Hold as Analysts Estimate Limited Upside

AIICO Insurance Plc. (AIICO) reflated its earnings performance in the first half of 2020 as the firm grew gross premium income by 24.31% year on year.

The insurance company share price was traded at ₦0:90 kobo on the Nigerian Stock Exchange yesterday as investors valued the company ₦10.197 billion on 11,330,204,480 shares outstanding.

The insurer’s unaudited financial statement for the first half showed that gross earnings increased to ₦29.07 billion from ₦23.39 billion in H1:2019.

Due to better than expected earnings performance in H1:2020, analysts upgraded their growth expectations, though rated stock hold due to limited upside.

The Life segment of the business was the main driver of growth, with premium income from the segment lifted 30.41% in H1:2020,

Meanwhile, the non-life business recorded an improvement of 8.46% to ₦6.21 billion.

Cash premium received by AIICO Plc during the period rose to ₦31.58 billion compare to ₦14.05 billion in H1:2019, despite the prevailing macroeconomic challenges.

For H2:2020, Meristem stated that it expects the firm to drive premium income higher, having crossed the recapitalization hurdle and the resulting increase in underwriting capacity.

“We have revised our growth expectation for premium income upward from 10.00% to 14.56% by 2020”, Meristem Securities stated.

Meanwhile, the insurance company’s underwriting performance worsens due to provisioning.

Analysts said net claims rose by 17.34% year on year to ₦14.45 billion from ₦12.32 billion in H1:2019, slower than the growth in premium income.

Hence, this resulted to the loss ratio for the period which improved to 56.05% from 59.79% in H1:2019.

Meristem said this is an indication that 24.31% year on year growth in premium income in the period out-powered 17.34% increase in claims and benefit incurred.

Meanwhile, the life business continues to account for the most part of claims and benefit, at 88.56% of the total incurred in the period.

In the period, underwriting expenses grew by 9.33% to ₦3.43 billion as against ₦3.14 billion in H1:2019, as acquisition and maintenance expenses inched up by 5.60% and 30.71% respectively.

This and the increase in provisions for life business to ₦19.82 billion from ₦11.58 billion in H1:2019 worsened the combined ratio to 143.65% from 128.37% in H1:2019.

Thus, the underwriting segment recorded a loss of ₦10.86 billion from loss of ₦5.65 billion in H1:2019.

Growth in Operating Expenses Dims Earnings:

AIICO Insurance’s investment income in H1:2020 grew by 44.92% to ₦7.58 billion, from ₦5.23 billion in H1:2019.

Meristem Securities said in line with the 43.12% increase in financial assets to ₦195.95 billion from ₦136.91 billion H1:2019.

However, investment yield remained flattish at 3.87% as against 3.82% in H1:2019 in the period – proof of the low yield environment.

The results showed that management and other operating expenses grew sharply by 52.96% to ₦6.50 billion from ₦4.25 billion in the comparable period, but moderated the net income by 2.18% to ₦2.79 billion.

This implies a net margin of 9.59% from 12.19% in H1:2019.

“For 2020, we expect profit after tax to moderate further to ₦5.10 billion compare to ₦5.98 billion in 2019 due to rising management and underwriting costs”, analysts at Meristem forecasted.

In Q2:2020, AIICO’s capital base improved by ₦0.54 billion to ₦19.78 billion with paid-up capital at ₦5.67 billion, Share Premium ₦5.83 billion and retained earnings valued at ₦8.29 billion.

This further strengthened the base beyond the ₦18.00 billion regulatory minimum, Meristem Securities explained.

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Likewise, Meristem said AIICO has recognized ₦1.37 billion as available for sale financial asset from the proposed disposal of the firm’s 70% stake in AIICO pensions (subject to regulatory approval) to FCMB pensions.

“When fully implemented, we expect this to give more room for the firm to double down on the core insurance business”, analysts stated.

Furthermore, AIICO restructured its financial assets as at H1:2020, lowering the proportion of financial assets valued at amortized cost (held to maturity) from 35.37% in H1:2019 to 27.31%.

Analysts said this should support the active management of its investment portfolio against the widening negative real rate of return.

“We estimate AIICO’s earnings per share to come in at ₦0.45 and price-earnings ratio at 2.20x, hence, a target price of ₦0.99.

“This coupled with the current stock price at ₦0.93, portends an upside potential of 6.45%. Thus, we recommend the ticker as a HOLD”, Meristem stated.

AIICO Insurance Rated Hold as Analysts Estimate Limited Upside