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Friday, March 24, 2023

Nigerian Insurers’ Improved ROE’s Fail to Drive Valuations

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Nigerian listed insurers, generating profit from the money that investors have put in the business, have yet to reap the benefit in their stock valuations.

The average return on equity (ROE) for the largest companies has risen to 15.69 percent in June 2021 from 14.66 percent as at June 2020, according to data gathered by MoneyCentral.

Return on equity (ROE) measures a corporation’s profitability in relation to stockholders’ equity. It is calculated by dividing net income by total shareholders’ equity.

A higher return on equity indicates that a company is effectively using the contributions of equity investors to generate additional profits and return the profits to investors at an attractive level.

Investors have found that ROE is a much better metric at assessing the market value and growth of financial institutions.

The moderate growth in returns to equity holders spanned from premium growth and rising bond yields since the start of the year that added much impetus to investment income; and the uptick in fixed investment securities made up for rising claims, underwriting, and management expenses.

Despite the coronavirus pandemic and unfavorable underwriting conditions, insurers tracked by MoneyCentral collectively grew net income by 12.94 percent to N11.45 billion in June 2021 from N10.13 billion as at June 2020.

However, profit growth is not in tandem with stock valuations that are poor as investors’ apathy towards listed insurers remains strong.

Nigerian insurers in the market trade at an average price-to-book ratio of 0.43x compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x).

“Although this underpricing appears attractive from an investment standpoint, we believe the pricing is synonymous with the value-added by the insurers over time in terms of performance,” said analysts at Afrinvest Securities.

Insurers are not magnifying earnings to the extent that they can pay shareholders bumper dividends, and the minimum payout across the sector is 5kobo.

That compares with the N3 average for the largest banks who have strong capital buffers to surmount macroeconomic headwinds.

Notably, Custodian Investment Plc, the most capitalized insurance group, has a market value of N35.98 billion as at July 20.

That is abysmally poor when compared to the N767.64 billion market capitalization of Zenith Bank.

A lot of insurers were trading below N0.50 before the stock exchange removed a cap in 2018 that saw many now trading at between N0.40k and N0.15k.

Many could argue that companies are operating in a tough and unpredictable macroeconomic environment. Poor regulations, lack of awareness about the benefits of taking a cover, and lack of trust for the claims process have been sending insurers sprawling.

But the truth is that there are too many weak insurers who do not have the financial strength to take on more risk. Some are technically insolvent while their activities have been significantly curtailed by receding premium and recurring losses.

A game changer is the recapitalization exercise by the regulator that is expected to spur mergers and acquisition and attract the much-needed foreign investment.

Investors and market participants have unanimously agreed that there are lots of potentials in the sector and that with the right capital injections, insurers will be well capitalized to the extent they will start acquiring companies across sub-Saharan Africa.

“In Europe, Asia, and the United States, insurers own banks. We have the largest economy in Africa yet penetration level is abysmally poor,” said Tony Elumelu, economist, entrepreneur, and philanthropist, and chairman of Heirs Holdings, the United Bank for Africa, Transcorp and founder of The Tony Elumelu Foundation.

Elumelu is poised to disrupt the industry with the launch of 2 companies: Heirs Insurance Limited (HIL) and Heirs Life Assurance (HLA).

A further analysis of the financial statements of the operators in the industry show Mutual Benefit Assurance’s ROE increased to 35.32 percent in March 2021 from 23.0 percent the previous year. Net income surged by 119.95 percent to N1.97 billion as at June 2021.

However, the insurer’s shares closed at N0.40 2:00 pm in Lagos, and the stock trades at a price to earnings ratio of 1.08.

AXA Mansard Insurance Plc ROE moved to 29.70 percent in March 2021 from 24.48 percent as at March 2020. Net income increased by 34.43 percent to N2.63 billion as at June 2021.

Its shares closed at N0.89, while the stock trades at a price to earnings ratio of 6.19.

Coronation Insurance Plc’s ROE is 10.75 percent in the period under review from 6.75 percent as at March 2020; net income spiked by 79.44 percent to N648.24 million as at June 2021.

Its share price closed at N0.54, the stock price trades at a price to earnings ratio of 21.56.

Cornerstone Insurance Plc ROE increased to 14.58 percent in the period from 11.65 percent the previous year; net income surged by 38.52 percent to N358.15 million as at June 2021.

Its shares closed at N0.53, while the stock price trades at a price to earnings ratio of 4.91.

Regency Insurance’s ROE increased to 25.51 percent in March 2021 from 14.28 percent the previous year; net income spiked by 95.80 percent to N427.88 million as at June 2021.

Its shares closed at N0.49, while stock price trades at a price to earnings ratio of 5.59.

Veritas Kapital Assurance Plc ROE increased to 13.63 percent in June 2021 from 1.79 percent the previous year; net income surged 708.12 percent to N301.51 million as at June 2021.

Its shares closed at N0.25, but information on price to earnings ratio was unavailable.

The Insurance Index finished 2020 with a positive year to date returns as investors wagered that the recapitalization exercise would be expeditious and that they were poised to get a better return on their investment.

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