May 31, 2021/Cowry Asset Report
In FY 2020, NEM Insurance remained profitable and registered an average performance rating of “Bb” amid the 2020 pandemic (slightly below its historical above-average ”BB” performance). This, coupled with an upside potential of 17.32% on its share price, informed our “MODERATE BUY” recommendation.
NEM Sustains Positive Performance in Core Business
NEM Insurance Plc, a provider of general insurance, continued to demonstrate increased capacity, efficiency and profitability. In FY 2020, its gross premium written increased by 11.52% to N22.04 billion while earned premium rose by 25.72% to N15.56 billion. Underwriting profit also spiked by 37.52% to N5.98 billion despite a combined increase in claims and underwriting expenses to N11.01 billion (combined ratio rose to 60.68% in 2020 from 59.07% in 2019; albeit lower than 2020 industry average of 73.28%). The insurer also grew investment income (dividend and interest) by 14.37% to N1 billion which helped boost insurance margin to 44.03% (from 41.43%). However, investment returns and revenue to equity fell to 5.76% (from 6.70%) and 137.41% (from 228.60%) as total investments and shareholders fund rose by 35.35% and 30.24% to N20.05 billion and N18.36 billion respectively.
Fair Value Gain in Equities Portfolio Boosts Profitability
The bullish equities market performance witnessed in 2020 helped the non-life insurer report significant portfolio gains. Net fair value gain increased by 554% to N1.12 billion (98% of which was due to a 541% spike in fair value gains in FVPL quoted equity securities) which, coupled with an 8.90% fall in operating expenses to N3.22 billion, resulted in a 112.27% increase in profit after tax to N5.08 billion.
NEM on Track to Tap Increased Opportunities…
Between 2016 and 2020, the company grew its gross premium written at a CAGR of 19.63% to N22.04 billion even as shareholders fund grew at a CAGR of 25.50% to N18.36 billion. Against the backdrop of an impressive track record of business growth and operating efficiency, we believe the non-life insurer is poised to seize even greater opportunities which a bigger balance sheet affords, especially with the ongoing industry recapitalisation, as it deepens penetration, not only in Nigeria, but also in other African countries under the auspicies AfCFTA. Already, NEM has presence in Ghana via its associate company, Regency Nem Insurance (Ghana) Limited.
As the Race Continues to Meet Recapitalization Deadline…
The 7.56% y-o-y increase in shareholders funds to N18.36 billion in 2020 partly resulted from a 90% increase in share capital account to N5.02 billion. The jacked up share capital account was an accounting treatment and was in response to NAICOM’s directive to non-life insurers to meet 50% (N5 billion) of the new capital base requirement of N10 billion (from N3 billion) by the end of December 2020. NEM easily met the requirement, when, at its Extra Ordinary General Meeting held on 10 December 2020, the Company resolved that the sum of N272,551,000 and N2,103,675,311 be transferred from the Company’s share premium account and Retained Earnings accounts respectively to the Share Capital account.
Our Expectation…
As Nigeria recovers from the effects of the pandemic and opens up to more economic activity, we expect NEM to continue to witness increase in its underwriting business. We also believe the insurer is well positioned to meet up with the September 2021 recapitalisation deadline, hence, boosting its standing and penetration in the industry. Furthermore, anticipate higher investment income amid relatively higher interest rate environment. We are also mindful, however, of a probable rise in loss expense given an 8.6% y-o-y increase in insurance contract liabilities to N9.78 billion in 2020, which may partly offset margins.
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