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Thursday, June 30, 2022

Nigerian Insurers Suffer Poor Valuations Relative to Peers – Afrinvest

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Nigerian listed insurers suffer poor valuations relative to peers in Sub Saharan African (SSA), which validates investor apathy towards stocks as return on investment remains low, according to a new report by Afrinvest Securities Limited.

Nigerian insurers have price-to-book ratio of 0.43x compared with South Africa (1.99x), Egypt (1.65x) and Kenya (0.64x), according to the research house.

Insurers in Africa largest economy are grappling with protracted deteriorating profit margins, just as they pay more in claims than they earn in premium income.

Investors are attracted to a company that pays steady robust dividend, consistent earnings growth, and a strong balance sheet that makes it very easy to surmount macroeconomic headwinds.

The continued low stock price means insurers operating performance has not lifted investor sentiments over the past 10 years, and market participants prefer to invest their money in sectors that guarantees them higher returns in form of share appreciation.

Before the Nigerian Stock Exchange removed the cap on N0.50 a few years ago, over 70 percent of companies had their shares stuck at N0.50, and now they are trading below that price.

“Although this under pricing 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.

The total market capitalization of AXA Mansard Insurance Plc– the most valuable Nigerian insurer- is less than the N52.1 billion market value of tier 2 lender, Fidelity Bank Nigeria Plc.

Analysts and actuarial scientist have said that Nigerian insurers are not liquid enough, and hence can’t take on more risk necessary to magnify premium income.

Insurers could have been recording recurring reduction in profit save for investment income that has been compensating for weak underwriting performance.

Companies parked their money in government securities, as their cumulative net income increased by 35.43 percent to N28.13 billion in December 2019, thanks to combined investment income of N44.98 billion that helped wipe out underwriting loss of N15.60.

The environment in which these firms operate is scorching as poor government regulations, apathy towards the industry due to religious beliefs, and weak economic fundamental leaves a hole in the balance sheet.

A weak consumer purchasing power, inflationary pressures, and high unemployment rate means taking a cover is the least of the problem of Nigerians.

Nigeria’s inflation quickened to 26-month high at 12.56 percent in June, and over 50 percent of a population of 200 million live on less than $1.90 a day.

As a result of myriad of challenges, Nigerian insurers continue to lag peers in terms of premium penetration.

The country’s figure stood at 0.50 percent, which compares with with South Africa (12.9 percent), Kenya (2.8 percent), Angola (0.8 percent) and Egypt (0.6 percent) while density at $6.2 also remains weak compared to South Africa ($762.5), Kenya ($40.5), Angola ($30.5) and Egypt ($22.8).

Analysts are of the view that the new minimum capital requirements set by National Insurance Commission (NAICOM) would spur mergers and acquisitions that will lead to synergies and reduction in operating costs.

“There is a need for insurers to plug the funding gap between asset and liabilities and also, reprice policies in the light of the current interest rate environment,” said analysts at Afrinvest.

The unprecedented economic uncertainties caused by the coronavirus pandemic and a low yield environment would be a major blow to performance of insurers.

The fallout from the COVID-19 outbreak includes a surge in health, travel and business interruption claims, pressure on sales from reduced business activity, and less use of face-to-face channels.

The gathering economic slowdown emanating from the pandemic is also driving interest rates even lower and increasing credit risk exposures from businesses facing possible default, according to analysts at Pricewaterhousecoopers or PWC in a recent report.

“This raises the possibility of regulators asking for extraordinary solvency tests to ensure insurers can withstand the immediate and knock-on impacts,’’ said analysts at Pricewatercoopers Limited.

 

 

 

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