Topline Growth Slows
NEM Insurance Plc. (NEM) bucked the trend of double-digit growth in gross premium income (stretching back to three years), as GPI rose by 6.00% to NGN11.22bn (vs. 10.59bn in H1:2019) in H1:2020. This was due to the weaker performance in Q2:2020 with premium income dropping by 16.26%, a sharp contrast to the 26.66% YoY rise 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 c.23.62% of the firm’s top line in the last six years.
Hence, the drop overshadowed the impressive growth across motor insurance (+26.06% YoY), oil & gas insurance (+7.58% YoY), marine insurance (+51.68% YoY), and the general accident (+33.06% YoY) segments. While the economic impact of the Coronavirus continues to linger, the reopening of economic activities should support topline growth. We maintain our 6.00% growth estimate for GPI in FY2020.
Underwriting Margin Pressured by Higher Reinsurance
NEM Insurance’s Claims expenses fell by 4.62% YoY to NGN1.99bn (vs. NGN2.08bn in H1:2019), as all business lines except fire (with a rise of NGN0.77bn) recorded a decline in the period. Despite the fall in net claims expense, loss ratio deteriorated to 27.08% (vs 26.13% in H1:2019) due to the higher reinsurance, c.35% relative to 25% in the corresponding period in 2019.
NEM Insurance’s Underwriting expenses also declined by 8.15% YoY to NGN3.29bn in H1:2020, in line with the dip in maintenance costs by 26.06% YoY to NGN1.29bn (vs. NGN1.75bn in H1:2019).
Thus, the combined ratio improved to 52.83% (vs. 56.50% in H1:2019). Thus, maintaining its cost leadership among non-life player, considering the industry average currently stands at c.63.00%. However, the drop in underwriting related costs could not offset the drop in premium income. Hence, underwriting margin contracted to 22.05% (vs. 24.85% in H1:2019).
High Operating Costs Cut into Profit
In H1:2020, NEM grew investment income by 63.79% YoY to NGN0.52bn. This was driven by a rise in interest on statutory deposit (+29.66%) and Investment assets (+65.85%) to NGN0.02bn and NGN0.49bn respectively, a reflection of the increase in investment assets (+9.22%) and the better Investment yield performance in H1:2020 (3.71% in H1:2020 vs. 2.47% in H1:2019).
However, the combined effect of the fall in underwriting profit and a significant increase (+15.58% YoY) in management expenses dragged profit after tax by 3.02% to NGN1.56bn (vs. NGN1.61bn in H1:2019).
NEM Meets Phase I Recapitalization Threshold
As at Q1:2020, NEM Insurance’s capital base (Paid-up Capital, Share Premium, and Retained Earnings) was below the regulatory minimum at NGN9.05bn (vs. NGN10bn as required by NAICOM). However, due to the phased implementation of the recapitalization exercise, its NGN9.11bn is way above the NGN5.00bn Phase I minimum for non-life players in the industry and should remain so by the Phase I deadline of December 2020.
We maintain our earlier EPS estimate of NGN0.61 by 2020FY, but we have revised the target PE upwards to 3.38x to arrive at a target price of NGN2.23. This compared to the current market price (NGN2.15) indicates an upside potential of +3.72%.
Thus, we recommend the ticker as a HOLD.