The Nigerian insurance sector, like many others, is navigating a challenging macroeconomic environment impacted by inflationary pressures, high interest rates, removal of fuel subsidies, and the devaluation of the naira.
These factors have reshaped the operating landscape, significantly impacting claims costs, operating expenses, investment income, profitability, and investor sentiment.
Amid these challenges, AIICO Insurance Plc and NEM Insurance Plc have demonstrated resilience, as reflected in their financial results, share price performance, and financial health.
In the first nine months of 2024 for example, AIICO Insurance Plc exceeded its insurance revenue forecast by 25%, reaching N76.98 billion, and its pre-tax profit forecast by 41%, hitting N13.633 billion.
Also, NEM Insurance Plc outperformed its insurance revenue forecast by 36%, achieving N69.518 billion, and surpassed its pre-tax profit forecast by 50%, reaching N15.709 billion.
In terms of share price performance, AIICO rallied with a year-to-date (YtD) gain of 36% in 2023, closing at N0.80. This momentum continued into 2024, with an impressive 50% YtD gain as of November 27, 2024.
In contrast, NEM Insurance Plc recorded a 40% YtD gain in 2023 but has delivered a lower 34.92% YtD gain so far in 2024.
For investors seeking diversification opportunities, understanding the factors shaping these companies’ performance and outlook is crucial.
In this analysis, we delve into the financial performance, profitability, market positioning, and overall prospects of AIICO and NEM, providing insights for investors to evaluate these two major insurance companies.
Which is the better bet in the current environment? Let’s find out.
Revenue performance:
Both AIICO Insurance Plc and NEM Insurance Plc have demonstrated resilience in growing their insurance and investment revenues, as highlighted in their financial reports.
- In 2023, the combined insurance revenue of the two companies stood at N124.746 billion, reflecting an impressive 45% year-on-year growth.
- This growth trajectory accelerated in the first nine months of 2024, with aggregate insurance revenue surging by 64% to N146.502 billion, surpassing the 2023 full-year insurance revenue by 17%.
- Breaking it down, AIICO Insurance recorded insurance revenue of N76.98 billion in the first nine months of 2024, exceeding its forecast by 25%.
- NEM Insurance achieved N69.518 billion in insurance revenue during the same period, outperforming its forecast by 36%.
Insurance service results and profitability:
While both companies showcased robust revenue growth, their profitability and core insurance performance differ significantly.
- AIICO Insurance recorded a pre-tax profit of N13.633 billion in the first nine months of 2024, exceeding its forecast by 41% and marking a 133% year-on-year growth.
- However, the company faced challenges in its core insurance operations, reporting a loss of N2.457 billion from insurance services.
- A closer look at its financials reveals that AIICO spent about 103% of its insurance revenue on claims and other expenses, a trend consistent with its 2023 performance when it spent over 102% of its insurance revenue on such costs.
- In contrast, NEM Insurance reported a stronger pre-tax profit of N15.709 billion, beating its forecast by 50% and representing a 168.48% year-on-year increase.
- Unlike AIICO, NEM generated a robust insurance service profit of N18.44 billion, spending only 73% of its insurance revenue on claims and related expenses.
Investment income and net results
AIICO outperformed NEM in investment income, generating N24.815 billion in the first nine months of 2024, a 28% year-on-year increase, resulting in net investment results of N11.318 billion.
- This performance was bolstered by foreign exchange gains of N11.524 billion.
- NEM Insurance reported N2.941 billion in investment income, supplemented by a moderate foreign exchange gain of N308 million, culminating in net investment results of N2.503 billion.
- Despite its lower investment income, NEM’s stronger performance in core insurance operations resulted in higher combined net insurance and investment results of N20.922 billion, compared to AIICO’s N13.775 billion.
Valuation:
Both AIICO and NEM are priced lower than the average insurance company, making them attractive investment options, especially for those looking for stocks that are priced below their market value.
However, the low prices also come with different strengths and risks, which investors should understand before deciding where to put their money.
NEM:
NEM’s stock is a bit more expensive compared to AIICO, with a price-to-book (P/B) ratio of 0.87x.
This means you’re paying more for each Naira of assets the company owns compared to AIICO.
However, NEM stands out because it is more profitable. It has a higher return on equity of 67%, meaning the company is better at turning its investments into actual profits.
Furthermore, NEM has a strong price-to-free-cash-flow (P/FCF) ratio of 3.3x, which indicates that the company is generating a healthy amount of cash from its business.
This means NEM can reinvest in growth opportunities or pay back to its investors through dividends, which is a good sign for those looking for stability and potential growth.
AIICO:
AIICO, on the other hand, is cheaper, with a lower price-to-book ratio of 0.69x and price-to-sales (P/S) ratio of 0.31x.
This suggests that investors are paying less for each unit of profit, assets, or sales.
On the surface, this seems like a great deal if you’re looking for a stock that is underpriced. However, AIICO has a negative price-to-free-cash-flow ratio of -2.12x, meaning the company is not currently generating enough cash to cover its operations and growth.
This is a red flag because it might need to borrow money or raise more capital to fund its future projects or return money to shareholders.
Although AIICO is cheaper and might appear as a bargain, it comes with higher risks due to these financial challenges.
Share price and dividend yield performance
Both AIICO and NEM are offering solid returns that surpass the current inflation rate, which is a positive sign for investors.
- AIICO, with its 54.17% total return in 2024, might be attractive for those looking for capital appreciation, as its share price has experienced significant growth.
- On the other hand, NEM provides a more balanced return, offering a higher dividend yield of 7.06%, which can be appealing for income-focused investors seeking regular payouts.
- While both companies have delivered strong performance, their appeal depends on the investor’s preference.
- AIICO is more growth-oriented, with impressive share price gains, while NEM offers a stable, higher dividend yield.
- In either case, both companies are performing well above inflation, making them good investment options in the current economic environment.
