AXA Mansard: Afrinvest Spots Upsides, Sees End to Dividend Drought
Equity analysts at Afrinvest, a leading investment banking firm, positive feel about AXA Mansard Plc traction, earnings outlook resulted in a buying rating after the company is noted to have shed weight but improved margin.
Explaining it new love for the company stock, Afrinvest said AXA Mansard Plc is a member of the AXA group, was initially incorporated in Nigeria as a private limited liability company “Heritage Assurance” and licensed as a composite insurer by NAICOM in 2004.
Following the acquisition of a majority stake of 56.0% in the Company by Guaranty Trust Bank (GTB), the name was changed to Guaranty Trust Assurance limited, analysts added.
Checking through its background, it was noted that the Company was later listed on the Nigerian Stock Exchange in 2009 and in line with the CBN guidelines for banks to either divest from non-banking subsidiaries or form holding companies in 2012, GTB divested from the Company.
In 2014, AXA acquired Assur Africa Holdings which held a 77.0% stake in the Company, hence, the Company changed its name and corporate identity to AXA Mansard Insurance Plc in 2015.
Financial Performance and Outlook Earnings Growth
Mansard’s gross premium written (GPW) increased by 9.1% year on year to ₦47.6 billion, which Afrinvest considered as the slowest pace of growth reported in 5 years.
It said the slow-paced growth was dragged by a contraction of 5.9% in life insurance premiums to ₦7.5 billion which contributed 42.2% to the Company’s GPW.
AXA MANSARD PLC
On the other hand, non-life insurance premiums, which contributed 15.7%, remained flat at ₦20.1 billion year on year. However, the HMO business sustained growth, with premiums up 28.4% to ₦20.0 billion and contributed 42.1% to overall GPW in 2020.
Similar to 2019 where the Company earned 95.4%, gross premium earnings (GPE) came in at ₦45.50 billion in 2020 representing 95.7% of GPW.
“Over the next 5 years, we expect GPW to expand at a cumulative average growth rate (CAGR) of 12.0%, slower than the pace of 18.1% recorded over the last 5 years.
“This is especially due to the halt in the underwriting of the annuity business since 2019 and slower growth expected in the non-life business in 2021.
“We anticipate that the HMO business would remain the group’s ‘cash cow’ as premiums expand in line with increased awareness of health insurance benefits”, Afrinvest said.
Underwriting costs and Claims Ratio
Afrinvest recalled that in 2020, Mansard’s claims ratio tapered 2.6 percentage points year on year to 63.9% due to a decline in claims from the non-life segment which was in line with declining premiums from that segment.
It said reinsurance recovery remains abysmal at 4.3% against average of 24.9% in 2016/19 as the Company retains more risk internally. Underwriting expenses rose 24.3% to ₦5.7 billion and represented 12.4% (2019: 11.0%) of GPW in 2020.
Equity analysts observed that acquisition cost fell 17.8% to ₦2.6 billion as economic activities were halted in Q2:2020 and premiums from the more retail-focused non -life insurance segment flattened.
But maintenance costs spiked 328.3% to ₦1.1billion and the Company recorded ₦1.9 billion in actuarial valuation losses on its individual life and annuity reserves.
“Over our forecast horizon, we estimate an average claims ratio of 64.7%, same as reported over 2016/20”, Afrinvest said.
The investment firm added that the HMO business would continue to lead in terms of claims payout given the nature of the contracts and increased awareness of health insurance plans.
Underwriting expenses as a proportion of GPW is also forecasted to average 11.7% over the same period, rising above 11.3% in 2016/2020.
Efficiency and Margin
On the back of the decline in claims in 2020, Afrinvest analysts said in their report that combined ratio fell 2.1 percentage points year on year to 81.8% resulting in improving efficiency margins although expense ratio inched higher by 53 basis points to 17.9%.
On the positive side, the company’s underwriting margin improved 18 basis points to 23.4% as well as net and pretax profit margin which rose 3.1 and 4.7 percentage points respectively to 23.4% and 15.0% in 2020.
In a similar vein, return on average equity and return on average asset increased 3.0 and 1.4 percentage point year on year respectively to 15.2% and 4.8%.
“We expected sustained underwriting profitability over the forecast period (2021 – 2025) as we have seen in the past, and average underwriting margin is expected to print at 28.1% , above 2016/20 average of 24.6%”, Afrinvest analysts stated.
The investment banking firm added that its expectation is hinged on Mansard’s strong risk management framework.
Investment Assets and Yield
As yields in the fixed income market remained sub-optimal in 2020 and in tandem with the industry experience, yield on Mansard’s yield-earning assets declined further by 85 basis points to 6.7% in 2020 despite a 5.5% uptick in these assets.
Analysts said the increase was majorly boosted by a 68.4% increase in bonds (sovereign and corporates) to ₦21.6 billion which is justified given that rates on treasury bills crashed to less than 1% in 2020.
“In 2021, we have seen improvements in the yield environment and we believe that rates should maintain an uptrend going forward especially as federal government seek increased domestic borrowing to plug budget deficit gap”, Afrinvest said.
Liquidity, Contingency and Solvency Analysis
Speaking to the company’s liquidity, Afrinvest said although the AXA Mansard set aside ₦21.6 billion in contingency reserve as stipulated by regulation.
“We noticed an abysmal reserve-to-profit ratio of 1.6% compared to 2014 – 2018 average of 21.1% and we believe this is due to organic recapitalisation efforts of the Company”.
Analysts highlighted that AXA Mansard also withheld dividends payment in 2019 and 2020 and is currently adequately capitalised according to NAICOM’s specifications.
“In terms of liquidity, we saw significant improvement in the current ratio from 2.6x in 2019 to 4.6x in 2020 due to higher cash balance”, Afrinvest said.
Similarly, cash and quick ratios inched marginally higher to 0.6x and 0.2x respectively in 2020. Solvency margin improved to 454.5% in 2020 compared with 372.2% in 2019 and remained comfortably above the 100% regulatory minimum.
Outlook and Valuation
According to Afrinvest, Mansard remains a big player in the composite insurance space and has maintained underwriting profitability and operational efficiency over the years.
“We observe that the Company withhold dividends payment in 2019 and 2020 and we suspect that it is due to capitalisation of profits to meet new minimum capital requirements. The Company is now adequately capitalised and we believe the impressive operational performance would be sustained.
“We believe Mansard would resume dividend payment in 2021 after capitalising profits in 2019/20 to meet recapitalisation benchmark”, analysts said. Due to these, Afrinvest assumes a stable payout ratio of 25.0% over the forecast period and analysts said they obtained a target price of ₦0.93.
AXA Mansard: Afrinvest Spots Upsides, Sees End to Dividend Drought