The Nigerian insurance sector faces challenges like inflation, high interest rates, fuel subsidy removals, and the naira’s devaluation. Despite these factors, AIICO Insurance Plc and NEM Insurance Plc have both shown resilience, outperforming expectations in 2024 and demonstrating strong financial health. Here’s an analysis of their financial performance, profitability, and investment potential:
Revenue Performance:
Both AIICO and NEM have posted impressive growth in insurance revenue.
- AIICO Insurance: In the first nine months of 2024, AIICO’s insurance revenue reached N76.98 billion, exceeding its forecast by 25%.
- NEM Insurance: NEM outperformed its forecast by 36%, with a total insurance revenue of N69.518 billion for the same period.
Combined, both companies had a 64% year-on-year growth in insurance revenue, totalling N146.502 billion, surpassing 2023’s full-year revenue by 17%.
Insurance Service Results and Profitability:
While both companies demonstrated robust revenue growth, their core insurance profitability differed significantly.
- AIICO Insurance: Despite a pre-tax profit of N13.633 billion in 2024 (41% above forecast), AIICO faced a loss of N2.457 billion from insurance services. The company spent over 100% of its insurance revenue on claims and expenses, reflecting ongoing challenges in its core operations.
- NEM Insurance: NEM reported a stronger pre-tax profit of N15.709 billion (50% above forecast), representing a 168% increase from 2023. NEM also achieved a solid profit of N18.44 billion from its insurance services, spending only 73% of its revenue on claims, which highlights better control of operational costs.
Investment Income and Net Results:
- AIICO: AIICO led in investment income, earning N24.815 billion (28% YoY growth), boosted by foreign exchange gains of N11.524 billion. The company posted net investment results of N11.318 billion.
- NEM Insurance: NEM earned N2.941 billion in investment income, with a modest foreign exchange gain of N308 million, resulting in net investment results of N2.503 billion.
Despite AIICO’s higher investment income, NEM’s overall net results (N20.922 billion) surpassed AIICO’s (N13.775 billion), thanks to its stronger insurance service performance.
Valuation and Investment Appeal:
- NEM Insurance: NEM’s stock has a higher price-to-book ratio (P/B of 0.87x), signaling investors are paying more for each unit of its assets. However, NEM boasts a high return on equity (67%), meaning it effectively converts investments into profit. Additionally, NEM has a solid price-to-free-cash-flow (P/FCF) ratio of 3.3x, signaling a strong cash flow generation capacity for reinvestment or dividend payouts.
- AIICO Insurance: AIICO’s stock is cheaper, with a P/B ratio of 0.69x, suggesting it’s undervalued relative to its assets. However, AIICO has a negative price-to-free-cash-flow ratio (-2.12x), indicating that it’s not currently generating enough cash from its operations, which could signal potential future funding challenges or the need to raise capital.
Share Price and Dividend Yield Performance:
- AIICO: AIICO offers a strong total return of 54.17% in 2024, reflecting impressive share price growth. This makes it appealing for growth-oriented investors.
- NEM Insurance: NEM provides a 7.06% dividend yield, offering consistent returns to income-focused investors who prefer regular payouts.
Conclusion:
- AIICO Insurance: While AIICO offers attractive capital appreciation through share price growth, its challenges in generating cash flow and covering operational costs make it a riskier bet for long-term sustainability.
- NEM Insurance: NEM presents a more balanced investment with stronger profitability, better cost control, and a solid dividend yield. It is more attractive to investors seeking stability, profitability, and regular income.
In conclusion, NEM Insurance stands out as the better option for investors seeking financial stability, profitability, and long-term growth. However, AIICO may appeal to those looking for high growth potential, despite the financial risks involved.
