Equity Research Report On AIICO INSURANCE PLC December 27 This report is based upon information from various sources that we believe are reliable. However, we do not make any representation as to the accuracy or completeness of the report. This report is not an offer to buy or sell, nor a solicitation to buy or sell the securities mentioned therein. This report is provided solely for the information of clients of LeadCapital Limited (LeadCapital) who are expected to make their own investment decisions without sole reliance on this report. LeadCapital accepts no liability for any direct or consequential loss arising from any use of this report or its contents. Investments can fluctuate in price and value and the investor may get back less than was originally invested. Past performance is not necessarily a guide to future performance. This information has been issued by LeadCapital, which is licensed by the Securities and Exchange Commission (SEC) and the Nigerian Stock Exchange (NSE). Enquiries relating to any matters in this report should be directed to Bamidele Adewole (1 4611269 ext 13)
Offer Highlights Issuer Authorised Share Capital Issued Share Capital Shares on Offer (inclusive of rights issue) AIICO Insurance Plc 1 billion ordinary shares 3.1 billion ordinary shares 2.5 billion ordinary shares Offer Price N2.2 Total Offer Size Market Capitalisation (pre offer @ O/P) Market Capitalisation (post offer @ O/P) Underwriting Preferential Allotment Purpose N5.5 billion N6.84 billion N12.34 billion 8% firm underwriting by joint underwriters A maximum of 8 million ordinary shares (4%) is to be preferentially allotted The net proceeds of the total offer will be utilised for upgrading and expansion of branches, information technology and enhancement of the company s working capital. Offer Opened December 1th, 27 Offer Closes December 31st, 27 2
Key Statistics Offer Price (N) 2.2 YTD Capital appreciation (%) 88.46 Current Market Price (N) 3.43 Estimated Free Float (%) 35 Assets (N bn) 6.32 Market Cap. (N bn) 6.84 Trailing PE Valuation (x) 14.14 Trailing Earnings Yield (%) 7.1 Trailing Price to Book (%) 2.1 28 Forecast P/E Valuation (x) 3 28 Forecast Earnings Yield (%) 3.2 28 Forecast Price to Book (%) 1 Recommendation Short term Long-term Analyst BUY HOLD Bamidele Adewole bamidele.adewole@leadcapitalng.com Company Profile AIICO Insurance Plc ( AIICO or the company ), was established in 1963 as an agency office of American Life Insurance Company (ALICO). ALICO was granted operating licence in Nigeria as a private limited liability company and a subsidiary of its parent company in 197 to offer life and pension products and insurance services. However, 6% of the foreign shareholding of ALICO was acquired by the Federal Government of Nigeria and the name was subsequently changed to American International Insurance Company Limited. It converted to a PLC in 1989 and listed its shares on the floor of the NSE in December 199. The Federal Government subsequently divested its 6% holding in the company while ALICO retained its 4% interest. AIICO recently concluded a merger arrangement with NFI insurance Plc and Lamda Company Limited and currently has a shareholders fund in excess of N6 billion and an asset base in excess of N1 billion. The company has a major advantage in terms of reach as its branches and agency offices are spread all over the country. AIICO as a full fledged insurance company is involved in all major classes of insurance, both life and non-life. Its range of products and services include: group life insurance; ordinary life insurance; fire and special perils; burglary; marine; oil & gas etc. The company s board of directors consist of 1 members of which 3 are executive and 7 are non-executive. AIICO currently has two subsidiary companies including AIICO general insurance limited and AIICO Asset Management Limited and maintains a pool of reinsurers such as Munich Re, Swiss Re and Africa Re. 3
Key Selling Points Management Team. The board s executive and non-executive directors as well as its senior management team are made up of a crop of highly skilled, experienced, and committed staff. Ratings. As a result of AIICO s giant strides over the years, a host of analysts have continued to rate the company high. The International Certification of A+ by Global Credit Rating (GCR) of South Africa as well as the Agusto & Company rating of AIICO as the second in Nigeria by all criteria, is evidence of this position. Strategic Alliances. AIICO has entered into strategic alliances with certain foreign companies. These alliances are intended to help boost management s capabilities and ensure greater output and productivity. They include: the signing of a technical service agreement with AIICO Bahamas Limited as well as the leverage on the pool of re-insurers such as Munich Re, Africa Re and Continental Re. Challenges & Risk Factors Industry Risk. There is intense competition currently being experienced in insurance industry. With the recently concluded recapitalization/consolidation exercise, insurance companies are now better equipped to undertake large tickets transactions. AIICO is therefore faced with the enormous task of competing with its peers within the industry. Poor Interim Performance. Based on its 3 months results ended March 27, the company s profits declined considerably when compared with the previous period. This was due primarily to its increase in unexpired premium (unearned income) as well as a decrease in its reserve. Future Plans AIICO plans to significantly deepen its hold on the individual life segment of the market through a thorough and thought out programme of expansion of its agency and field workforce in all major cities and state capitals of the federation. In the area of short term insurance, AIICO has mapped out strategies aimed at significantly capturing the personal lines in the retail segment of the market. The company has also concluded plans to dominate the oil and energy insurance market through its strategic alliance with reputable oil and energy insurance specialists leveraging on the Nigerian content of the Federal Government. AIICO will also leverage on the huge opportunities presented in the consumer finance segment through products and services targeted at the emerging middle class. The company has positioned itself for massive infrastructure roll out which will attract reasonable insurance elements in the area of construction as well as operational policies in view of its rich experience and sound insurance backing. The resurgence of the middle class in Nigeria has brought about the need for very vibrant products in the area of mortgage protection insurance, especially in view of the increasing housing needs of the populace. The current capital raising exercise will also expand the company s branch network, increase its retention capacity and participation in high risk and large premium insurance businesses from the power, oil and gas, real estate and telecommunications sector. The company therefore plans to consolidate its position in the industry in this regard. 4
Chart 1 Total Assets (N'bn) 12 1.73 9.67 1 8.54 8.7 8 6.23 6 4 2 22 23 24 25 26 Chart 2 Shareholders' Funds (N'bn) 8 6 5.87 5.17 4 2.65 2.96 2 1.52 22 23 24 25 26 Chart 3 PAT (N'm) 6 5 483.7 4 3 2 183.22 133.9 1 72.52 81.81 22 23 24 25 26 Financial Analysis One major feature of AIICO s financials is the consistent growth in its asset base for the first four years of our review period. The company recorded a Compound Annual Growth Rate (CAGR) of 15% from N6.23 billion to N1.73 billion between 22 and 25. There was however a sharp decline to N8.7 billion in FYE 26 due largely to the diminution in certain long term investments during the period. AIICO recorded a decline in quoted equity investments from N1.6 billion to N677 million while its lease/guarantee stock of N1.57 billion was totally written off in 26. The company however intends to utilise a large portion of its offer proceeds on asset maintenance and growth. In response to the National Insurance Commission (NAICOM) enforced recapitalisation drive which requires that insurance company s involved in life and non-life insurance business are capitalised to a minimum of N5 billion, AIICO was able to grow its shareholders funds to N5.17 billion in FYE 25. This was done through its successful consolidation with 2 other insurance firms and its growth in called up share capital from N1.4 billion to N2.6 billion in the last financial year. Perhaps the most outstanding achievement of AIICO is its impressive growth in after tax earnings during the most recent financial year end. From N81.81 million in 25, the bank was able to grow its earnings by an impressive 491% to N483.7 million due largely to its decrease in reinsurance commitments as well as reduction in unexpired premium. The earnings was also buoyed by its growth in investment income through profit on sale of certain investments. 5
Chart 4 ROE (%) 6 5.7 5 4 29.17 3 2 13.9 1.68 1 6.21 22 23 24 25 26 Chart 5 AIICO 12 Month Price History (N) 6 5 4 3 2 1 Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Chart 6 Forecast PAT (N'bn) 4 3.21 3 2.33 2 1.2 1 28 29 21 Investment Strategy AIICO has performed below our expectation in terms of its Returns on Equity (RoE). From an initial RoE of 5%, the performance dropped to 6.21% in FYE 25 a 41% Compound Annual Decline Rate. The company however recorded a slight recovery in 26 as it was able to leverage on its outstanding growth in earnings during the same period. This analysis reveals the fact that the company has not optimally utilised its asset/capital growth over the years. The company will need to improve on its efficiency in income generation in the years to come. The year to date price trend of AIICO reveals an increase in its share price from N1.82 at the beginning of the year, to its frozen price of N3.43. (up 88.46%) During the last financial year, the bank also declared scrip dividends in the ratio of 1 for 6. This further boosted its attractiveness and improved the total returns to its shareholders. Based on its 3 months results to March 27 in which the bank declared a PAT of N42.4 million, we forecast that the bank will achieve a 1 year forward earnings of N4 million. We therefore express our reservations about the company s ability to achieve its FYE 28 forecast earnings of N1.2 billion. Assuming a full subscription to the offer, AIICO s 1 year forward P/E, based on our projections, stands at 3x which is above its peer group average forecast P/E valuation of 15x 2x. However, based on its relatively low absolute offer price (N2.2) and attractive offer discount (35%) and considering other technical factors, we expect an initial high demand for its shares post public offer. We therefore place AIICO on a BUY for short term investors, but advise investors with long term horizons to HOLD, until the company is able to show a marked improvement in its earnings capacity. 6
Balance Sheet 22 23 24 25 26 ASSETS N' N' N' N' N' Cash and bank 552,48 275,73 15,111 316,427 474,922 Short-term Investment 1,36,227 2,266,224 2,37,13 1,523,325 2,259,37 Debtors and Prepayments 544,28 1,39,112 686,262 959,319 588,815 Loans to policy Holder 211,696 26,74 241,622 332,111 425,651 Long-term Investments 2,342,46 2,996,257 4,975,351 4,474,866 1,754,758 Statutory Deposit 13,5 13,5 35, 35, 35, Fixed Assets 1,27,374 1,468,99 1,541,446 3,88,64 2,982,81 Deferred Tax - - - 183,891 Total 6,231,945 8,536,49 9,666,922 1,729,688 8,74,155 Current Liabilities Creditors and Accruals 689,231 838,854 1,146,298 1,157,347 1,637,344 outstanding claims 117,24 167,223 2,213 172,533 165,944 Taxation 11,48 22,451 3,931 6,253 51,8 Dividend 3,846 73,986 1,349 3,788 1,199 Insurance Funds 3,859,396 4,782,51 1,86,927 1,354,269 1,5,358 Deposit Admin & Pension Fund - - 4,256,344 3,765,427 (53,662) 4,77,761 5,885,24 6,74,62 6,459,617 2,834,191 CAPITAL AND RESERVES: 1,524,184 2,651,466 2,962,86 4,27,71 5,869,964 Called-up Share Capital 15, 35, 35, 7, 1,332,765 Contingency Reserve 175,136 26,457 248,185 299,654 368,619 Fixed Assets Revaluation Reserve 731,912 731,912 731,912 2,323,454 2,323,454 Quoted Investment Revaluation Reserve 317,541 773,98 1,11,974 427,337 427,337 Bonus Issue Reserve 5, - 35, 222,128 222,128 General Reserve 99,595 181,495 212,286 521,484 521,484 Share Premium - 48,53 58,53 674,177 674,177 Share Holders' Funds 1,524,184 2,651,465 2,962,86 5,168,234 5,869,964 7
Profit and Loss Accounts 22 23 24 25 26 N' N' N' N' N' Premium 1,454,46 1,723,2 2,356,794 2,931,822 3,3,487 Deposits 1,84,179 1,216,641 1,31,25 - - 2,538,225 2,939,841 3,657,819 2,931,822 3,3,487 Investment and Other Income 674,85 1,54,729 1,41,23 21,872 385,366 3,212,31 3,994,57 4,699,49 3,142,694 3,415,853 Reinsurance (385,616) (431,356) (512,591) (658,426) (456,56) Maturities, Surrenders and Bonuses (613,996) (896,633) (1,67,818) (41,291) (545,816) Claims Paid and Admitted (147,948) (196,881) (252,145) (22,472) (32,859) Net Commission (164,666) (277,3) (321,45) (335,91) (46,318) Guaranteed Interest on Group Pension (316,575) (341,224) (448,313) - - Other direct Expenses (142,77) (28,23) (234,622) (229,624) (22,785) Overhead Expenses (623,77) (87,122) (1,89,747) (961,86) (884,915) Increase in insurance Fund (645,336) (581,89) (112,447) (267,343) (146,88) Increase/(Decrease) in Claims Reserve (22,179) (49,983) (33,68) 27,76 7,9 Bad Debt Provision - - (12,59) (18,4) (39,226) Profit before Taxation 15,21 24,221 74,789 86,947 348,799 Taxation (17,121) (21,) (2,27) (5,137) 13493 Profit after Taxation 133,89 183,221 72,519 81,81 483,72 Appropriation: Dividend 3, 7, 41,728 51,469 - Transfer to Contingency Reserve 27,948 31,321 3,791 3,341 68,965 Bonus Reserve 5, - - - - Transfer to General Reserve 25,141 81,9 - - 414,737 133,89 183,221 72,519 81,81 483,72 8
Forecast Balance Sheet 28 29 21 ASSETS N' N' N' Cash & Bank 1,18,467 958,14 1,124,69 Short - Term Investments 4,5,666 4,154,916 4,876,81 Debtors & Prepayments 1,453,571 1,772,378 2,811,3 Loans To Policy Holders 1,653,658 1,984,39 2,944,757 Long Term Investments 5,29,661 8,2,524 9,674,86 Statutory Deposit 57, 57, 57, Fixed Assets 4,86,54 3,144,899 2,548,248 TOTAL ASSETS 18,168,77 2,785,247 24,55,35 LIABILITIES Creditors & Accruals 3,87,444 2,93,66 2,855,783 Outstanding Claims 198,281 225,647 29,32 Taxation 118,28 156,334 19,959 Dividend 41,979 56,979 841,468 Insurance Funds 1,966,826 2,24,483 2,634,819 TOTAL LIABILITIES 5,781,738 6,86,59 6,813,349 NET ASSETS 12,386,338 14,698,737 17,736,956 CAPITAL AND RESERVES Called - Up Share Capital 2,84,893 2,84,893 2,84,893 Contingency Reserve 73,46 824,616 993,844 Fixed Assets Revaluation Reserve 2,323,454 2,323,454 2,323,454 Reserve 553,111 1,349,666 2,341,665 General Reserve 1,352,243 2,746,931 4,623,923 Share Premium 4,649,177 4,649,177 4,649,177 12,386,338 14,698,737 17,736,956 9
Forecast Profit & Loss Account 28 29 21 N' N' N' Premium - General Insurance 2,118,276 2,584,297 3,11,157 Oil & Gas 13,418 172,152 26,582 Premium - Individual Life 2,97,848 3,692,966 4,431,56 Group Life 528,377 723,877 941,4 5,684,919 7,173,292 8,68,339 Investment Income & Other Income 482,574 874,545 1,22,614 Commission Received 253,81 346,721 468,74 Profit on sale of investment 26,158 76,124 21,749 Profit on sale of Fixed Asset 165 182 2 6,446,897 8,47,865 1,372,975 Reinsurance 724,42 83,43 996,483 Claims Paid 617,539 677,967 85,934 Commissions Paid 1,6,968 1,277,26 1,548,341 Other Direct Expenses 281,728 286,33 291,644 Overhead Expenses 1,67,292 1,247,38 1,453,472 Depreciation 255,638 251,342 197,995 Increase/ (Decrease) in unexpired premium / Ins Funds 33,639 395,255 475,563 Increase/ (Decrease) in Claims Reserve 49,149 52,366 64,673 Maturities, Surrenders and Bonuses 817,963 965,196 1,138,931 5,124,336 5,983,418 6,973,36 Profit before Taxation 1,322,56 2,487,448 3,399,939 Taxation (118,28) (156,334) (189,254) Profit After Tax 1,24,352 2,331,114 3,21,685 Appropriation : Dividend 454,979 67,979 1,6,468 Transfer to Contingency Reserve 29,85 376,445 513,29 Bonus Reserve - - - Transfer to General Reserve 539,523 1,283,691 1,69,928 Retained Profit 1,24,352 2,331,115 3,21,686 1
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