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www.afrinvestwa.com
Nigerian Insurance Market
Capital Market
Perspectives
7 April 2008
INSURANCE FUTURE SUMMIT IN NIGERIA: EMERGING OPPORTUNITIES
Prepared By
Page 2
Introduction
Nigeria’s GDP has grown at an average rate of 6% per annum over the past five years
This economic growth; coupled with recent reforms in the banking, pensions, capital markets, oil/gas and insurance sectors are creating significant new opportunities for risk underwriting business
Measured by Gross Premium Income, the insurance market has grown on a compounded basis at only 15% per annum over the last 5 years
In the last twelve months to March 2008, insurance sector stock valuations have gone up 185%, versus 61% for the NSE All Share Index
We see long term opportunity for genuine value creation in Nigerian insurance despite concerns of short term market exuberance
Page 3
Economy Has Shown Stable GDP Growth
4.0
5.0
6.0
7.0
8.0
9.0
Q3
05
Q4
05
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
Average = 6.1%
In recent years, Nigeria has witnessed stable GDP growth averaging 6% per annum,…
(%)
Page 4
Amid Declining Inflation
0.0
5.0
10.0
15.0
20.0
25.0
Q3
05
Q4
05
Q1
06
Q2
06
Q3
06
Q4
06
Q1
07
Q2
07
Q3
07
Overall Inflation Food Inflation(%) …with inflation declining to single digit levels.
Page 5
GDP Has Benefited from Rising Oil Prices
High oil prices and economic reform are aiding strong economic growth…
25.00
35.00
45.00
55.00
65.00
2003
2004
2005
2006
2007
Price per barrel (US$)
Average = US$47.00
Page 6
Growth/Reform has Fueled Liquidity
…and fuelling a domestic liquidity glut, translating to strong demand for equities.
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
21.0%
23.0%
2003 2004 2005 2006 2007 2008*
Trading Liquidity: Values Traded / Market Capitalization
* As at March 2008
Page 7
Nigeria Insurance Market versus Africa
While Nigeria is one of the faster growing insurance markets in Africa…
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
An
go
la
Ken
ya
Nig
eria
Sou
thA
fric
a
Egyp
t
Alg
eria
Nam
ibia
Tun
isia
% Growth (Nominal)
Average = 14.8%
Page 8
Insurance Growth versus Banks
…the insurance sector is still the slowest of the Nigerian financial services sector.
103.7%
36.2%
15.3%
0%
20%
40%
60%
80%
100%
120%
Stockmarket Turnover Banking Sector Assets Insurance GrossPremiums
Page 9
Insurance Industry Structure
Characterized by numerous players – 49 at last count – most of similar size and competitive positioning
Average underwriter reported only N1.5bn of GPI in 2006
Most premiums sourced from covering risks in same insurance class (life, motor, fire, marine, aviation, general accident and workmen’s compensation)
Large number of insurance brokers (510 in 2006) who act as major intermediaries between corporate customers and underwriters
Broker dominance ensures corporate premium payments are hardly ever received on time (53% premiums receivables ratio in 2006)
Industry is hence highly competitive (especially on pricing) considering slow growth of overall market size
Industry also easy to enter for new players as evidenced by influx of commercial bank subsidiaries eager to take advantage of captive parent insurance business
Competitive and fragmented industry despite recent capitalization and induced consolidation.
Page 10
Key Drivers of Market Opportunity
But, we see a genuine long term market opportunity for insurance business in Nigeria.
Banking Sector Consolidation• Bigger Nigerian banks with greater risk appetite are
lending more to middle class which will drive insurance cover for these loans.
Pension Industry Reforms• Compulsory group life insurance, and the market for
annuities by pension account holders upon retirement will drive growth in life insurance
Capital Markets Growth• Strong growth in capital markets and financial assets
will increase pool of insurable assets and individuals in Nigeria while creating investment and risk dispersion opportunities for insurance companies
Local Content Participation in Oil and Gas• Mandatory local content guidelines in the oil and gas
sector will eventually open up huge market for local underwriters
Page 11
Insurance Sector Index versus NSE Index
The market appears to have priced in this long term opportunity.
100
150
200
250
300
Mar
-07
Ap
r-07
May
-07
Jun-0
7
Jul-07
Jul-07
Au
g-0
7
Sep
-07
Oct
-07
No
v-07
Dec
-07
Jan
-08
Feb
-08
Mar
-08
Insurance Stocks NSE
Page 12
General Index versus Composite Index
The current pricing favors General Insurers over the Composite Insurance segment.
100
150
200
250
300
350
400
450
500
Mar-
07
Ap
r-07
May-0
7
Jun
-07
Jul-
07
Jul-
07
Au
g-0
7
Sep
-07
Oct
-07
No
v-0
7
Dec-
07
Jan
-08
Feb
-08
Mar-
08
Composite
General
NSE
Page 13
Top 10 Insurers: Shareholders Funds
9.4 9.3
7.5
5.9 5.9 5.95.5 5.4 5.3
4.0
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Lead
way
Wap
ic IGI
GN
I
Aiic
o
Zeni
th
Nig
er
Gol
dlin
k
GTA
Mut
ual B
enefi
ts
Source: Afrinvest Research, based on most recent public data
Amounts in Billions of NairaLeadway, WAPIC and IGI are the leading players by shareholders funds.
Page 14
Top 10 Insurers: Gross Premium Income
6.15.7
3.2 3.1 3.02.7 2.6
2.4
1.91.7
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
IGI
Lead
way
Wap
ic
Nig
er
Aiic
o
Corn
erst
one
Gol
dlin
k
Roya
lEx
chan
ge
Mut
ual
Bene
fits
Stac
o
Source: Afrinvest Research, based on most recent public data
Amounts in Billions of NairaIGI, Leadway and WAPIC are also leaders by GPI.
Page 15
Top 10 Insurers: Market Capitalization
53.5
46.4
37.034.9 34.3 33.4
30.527.9
26.2 25.3
-
10.0
20.0
30.0
40.0
50.0
60.0
Wap
ic
Gol
dlin
k
Nig
er
Lasa
co IEI
Equi
tyA
ssur
ance
Corn
erst
one
Stac
o
Aiic
o
Pres
tige
Source: Afrinvest Research, based 10th March Share Prices
Amounts in Billions of NairaAmong listed underwriters, WAPIC is the most capitalized followed by Goldlink and Niger.
Page 16
Top 10 Insurers: 2009 P/E Ratio
124.0
90.4
50.5 49.9
39.935.1 31.6 31.4 27.9 27.8
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
Oas
isIn
sura
nce
Equi
tyA
ssur
ance
Link
age
Nig
er
Gol
dlin
k
Roya
lEx
chan
ge
Wap
ic IEI
NEM
Pres
itge
Source: Afrinvest Research, based 10th March Share Prices
P/E Multiples Valuation Oasis, Equity and Linkage are the highest priced stocks in the industry in terms of price to earnings ratio.
Page 17
Sector Trading at Steep Multiples
Insurance
General insurance companies trade at generous P/E multiple of 48.8x 2008E earnings
Composite underwriters are somewhat lower at 39.0x 2008E earnings
Banking
Large cap Nigerian banks trade at multiple of 21.7x 2008E earnings, while
Mid-cap banks are at 20.9x 2008E earnings
The Nigerian stock market currently trades at a P/E ratio of 20.5x 2008E earnings.
Page 18
Conclusions
Sector trading at a significant premium to the overall market
Aggressive players have used the capital markets window to raise large amounts of capital to invest in growth
The expectation is that large and sustained spending on marketing & PR (like in the banking sector) will generate greater market share
We prefer measured operators with a clear market focus and deeper understanding of the long term nature of the insurance industry opportunity
We believe that careful investments in people, systems, processes and delivery channels will be most value-adding
Insurance is not the new banking…
…we recommend caution in selecting insurance opportunities.
Page 19
Thank You
CONTACT INFORMATION
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12th Floor, Foreshore Towers
2A Osborne Road
Ikoyi, Lagos
Nigeria.
www.afrinvestwa.com
Investment Research Fola Fagbule [email protected]
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Investment Banking Olusegun Oso [email protected]
Asset Management Winston Osuchukwu [email protected]
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