BusinessDay... the voice of business: Insurance stocks that can boost your returns Insurance stocks that can boost your returns ================================================================================ GODFREY OBIOMA on 30 April, 2008 02:00:00 Part I Before now investors reaped robust returns from insurance stocks through capital appreciation with prices appreciating by double-digit percent. Many that were penny stocks early 2007 emerged stronger by the close of the year. Even then, their growth was slowed down because of the delay in the verification of the funds pooled during their recapitalization exercise. But towards the end of the year when about N70 billion was released by the insurance regulatory agent, it was believed that the bull runs in the market may switch to insurance stocks this year, creating return opportunities for investors in that segment. Until recently, the banks took the shine off insurance sectors in volume activities and capital gains. Optimism for appreciable growth in insurance stock prices was based on the expectation that insurance companies would deploy the pool of funds to expand their business frontier and reward investors better. Already, some are targeting oil and gas, real estate, stock market as institutional investors while others are planning to acquire stock broking firms and foreign financial institutions. These new initiatives were expected to bolster earnings and returns on investment. The thinking was that like what happened in the banking industry, some of the insurance companies would enter the second phase of the consolidation exercise and replicate the banking experience. The market was expected to remain liquid in the New Year as a result of the new capital deployment. Really a few of them met the expectation as stocks like Intercontinental WAPIC, Prestige Assurance and Niger Insurance recorded capital gains. The growth in insurance stocks was driven by perception that the consolidation, in the sector would make it a preferred segment of the market. But four months into the year, insurance stock prices appear sticky. This is because the period of euphoria is gone and investors are now looking for fundamentals. It would seem that the pause period may last for a while until these companies begin to send their interim and audited financials. A couple of results already turned in suggest marginal performances with little or zero dividend. Many insurance companies have been encumbered by past stigma of non-payment of premium and related malpractice. Some are yet to develop the prerequisite capacity building to launch into the deep waters where the big bucks are . What this shows is that insurance stocks need some time to meet investors’ expectation. Luckily, many are making foray into new business ventures that would grow their bottom-line. But for long term investors, stocks in the sector should be the preferred assets. Analysis of some of these stocks is presented below: Intercontinental WAPIC Insurance The stock as at April 24, 2008 traded at N12.70 with earning and dividend per share at 23 kobo and 17 kobo per share respectively. A study by Afrinvest West Africa, is projecting earning per share of 26 kobo in 2008 and 43 kobo next year. Price earning ratio which shows the period within which investors would recover their initial investment outlay, is expected to drop from 51.5 in 2008 to 31.6 times in 2009. For the year ended December, 2006, the company recorded gross premium income of N3.15 billion with profit before tax of 922.4 million and net operating cash of 121.9 million. Intercontinental Bank’s interest to manage WAPIC as an integral part of the group is expected to grow the company’s business frontier and earning. With market capitalization of N53.5billion and outstanding shares of 3.9 billion, the company has good potential of appreciating further. Investors are advised to take position, now as further growth in price is expected following the liquidity from the implementation of the 2008 budget and the support service from Intercontinental Bank. Prestige Assurance Trading at N12.30 April 24, 2008 ,Prestige Assurance has earning per share of 29 kobo and dividend of 15 kobo, with PE ratio of 42.41 times. For the financial year ended December 2006, the company recorded gross premium income of N1.54 billion with profit before tax of N600.5 million and profit margin of 39.0 percent. Investment analysts believe Prestige Assurance would record profit after tax of N445.72 million in the 2007 financial year. Earning per share is expected to rise from 35 kobo in 2008 to 49 kobo in 2009 while PE ratio is forecast to decline to 27.9 in 2009 from 38.9 times this year. Crusader Insurance. The stock traded at N7.50 per share with earning and dividend per share of 19 kobo. The PE ratio stands at 38.47 multiple. Afrinvest is projecting earning per share of 33 kobo at the end of 2008 and 55 kobo in 2009 while the investment returning period is expected to decline from 22.7 in 2008 to 13.6 next year. As a result of the mergers and acquisition involving five other companies , the company has shareholders fund of about N4.5 billion . With its large asset base of N9billion and being one of the strongest underwriters, Crusader has an edge over new comers. The company’s ability to sustain its position in the industry is a function of its costumer –focused product development and market penetration strategy. Mutual Benefit Assurance Mutual Benefit is currently trading at N4.55 with earning per share of 8 kobo and dividend per share of 6 kobo. Earning is expected to rise from 24 kobo at the end of 2008 and 30 kobo in 2009 while the PE ratio is projected to fall to 17.2 from 21.5. As at the financial year-ended December 2006, Mutual Benefits reported gross premium income of N1.85 billion. Profit before tax was 742.3 million while net operating cash was N1.08 billion with profit margin of 40.1 percent. The company’s market share has been increasing rapidly but the company need to further expand its business scope and product development strategy to be able to break into the top- tier industry performers.