NEM Insurance Gets Moderate Buy Rating ahead of Recapitalisation Deadline
NEM Insurance Plc, a provider of general insurance, gets a moderated buy recommendation from equity analysts at Cowry Asset Management Limited on the expectation that the insurer will beat September 2021 recapitalisation.
Based on performance outturn in 2020, Cowry Asset said in a new equity report that NEM Insurance remained profitable and registered an average performance rating of ‘Bb’ amid the 2020 pandemic. The company’s ‘Bb’ rating means the stock performance is acceptable with the price target set at N2.48 per share.
Meanwhile, the rating came slightly below its historical above-average of ‘BB’, an investment grade as a result of new development in its operating fundamentals, analysts added.
This, coupled with an upside potential of 17.32% on its share price, informed our ‘moderate buy’ recommendation, analysts at Cowry Asset Management explained.
NEM Sustains Positive Performance in Core Business
In the period, analysts hinted that NEM Insurance continued to demonstrate increased capacity, efficiency, and profitability. The insurer’s gross premium written amidst the pandemic increased by 11.52% to N22.04 billion while earned premium rose by 25.72% to N15.56 billion.
Analysts spotted that underwriting profit spiked by 37.52% to N5.98 billion despite a combined increase in claims and underwriting expenses to N11.01 billion. With that, combined ratio jerked up to 60.68% in 2020 from 59.07% in 2019; albeit lower than 2020 industry average of 73.28%.
Cowry Asset noted that 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% in the comparable period in 2019. However, its investment returns and revenue to equity fell to 5.76% from 6.70% and 137.41% from 228.60%.
Likewise, NEM Insurance total investments and shareholders fund jumped 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, analysts at Cowry Asset stated. The firm stated that NEM’s 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 a fair value through profit or loss quoted equity securities.
This, 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
Analysis of the Insurance company indicated that NEM recorded more business across most of its product classes, with the highest growths recorded in the general accidents and oil & gas insurance. Analysts said it also began to underwrite risk in the Agricultural sector.
NEM on Track to Tap Increased Opportunities
Equity analysts believe there is upside in NEM Insurance stock, albeit it limited but noted that the insurer is on track to tap increased opportunities.
Cowry Asset detailed that between 2016 and 2020, the company grew its gross premium written at a cumulative average growth rate (CAGR) of 19.63% to N22.04 billion even as shareholders fund grew at an average of 25.50% to N18.36 billion in the last five years.
“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”, Cowry Asset said.
Especially with the ongoing industry recapitalisation, as it deepens penetration, not only in Nigeria, but also in other African countries under the auspices of African Continental Free Trade Agreement -AfCFTA.
Analysts noted that already, NEM has presence in Ghana via its associate company, Regency Nem Insurance (Ghana) Limited.
Recapitalization Deadline
Analysts said the 7.56% year on year 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 National Insurance Commission’s (NAICOM) directive. NAICOM asked non-life insurers to meet 50% 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”, Cowry Asset explained.
Analysts Expectation
Cowry Asset said as Nigeria recovers from the effects of the pandemic and opens up to more economic activity, it expects 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”, the investment firm added.
Analysts also anticipate a 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% year on year increase in insurance contract liabilities to N9.78 billion in 2020, which may partly offset margins”, Cowry Asset recognised.
NEM Insurance Gets Moderate Buy Rating ahead of Recapitalisation Deadline
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