Cornerstone Insurance Plc Stock Valuation

CORNERSTONE INSURANCE PLC

Ticker:                            CORNERST Nature of Business:      Financial  ServicesLocation :                              Nigeria
Recent Price:           NGN0.6452-Week High/Low: NGN0.75/0.46Estimated Fair Value:      NGN0.74-NGN1.62
Expected Return:      82.4%Consider Buy:                   Below NGN1.18Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
Cornerstone Insurance Plc (CORNERSTONE), a composite insurance company, was established on 26th July 1991. It became a public limited liability company in June 1997. CORNERSTONE offers general insurance, life insurance and leasing services through its three subsidiaries, namely FIN Insurance Company Limited, Hilal Takaful Nigeria Limited and Cornerstone Leasing and Investment Limited. FIN Insurance Company Limited, a general insurance company, was acquired by CORNERSTONE in 2015. The company started Takaful (Islamic) insurance in 2020.  Cornerstone Leasing and Investment Limited, which started providing leasing services in 2004, is currently not contributing to the revenue and profit of the group.

The major shareholders of CORNERSTONE are Banc-assure Limited and Capasure Limited.  Banc-assure Limited has a 48.5% equity stake in the company while Capasure Limited’s shareholding is 30.5%. 

Mr. Ganiyu Musa is the group managing director of CORNERSTONE. Mr. Segun Adebanji was appointed chairman of the board of directors in 2017. Dr. Ogechi Adeola became an independent non-executive director on 23rd February 2021; Mr. Tokunbo Bello resigned as an independent non-executive director on 31st  January 2022.

Investment Thesis
CORNERSTONE’s performance for the 2021 fiscal year was an improvement over the previous year. The net premium income of NGN8.7 billion declared in 2021 was equivalent to a 54.7% increase as against a 15% fall in the previous year. Underwriting profit, which lost 59.2% in 2020, gained 382% in 2021. Both Profit Before Tax (PBT) and Profit After Tax (PAT)  expanded.

CORNERSTONE acquired FIN Insurance Company Limited in 2015 in order to boost its non-life insurance business. And the company has recorded some improvements in the past five years. Over the past five years, gross premium written, gross premium income and underwriting profit from its non-life insurance business have grown at a compound annual rate of 16.1%, 17% and 21.9% respectively. 

However, the huge underwriting expenses and reinsurance costs have made it difficult for CORNERSTONE  to consistently grow its underwriting profit.  Underwriting profit has grown by 31.1% on a 3-Year Compound Annual Growth Rate basis in 2021 compared to a fall of 181.2% in the earlier year. In fact, it failed to grow its underwriting profit five times in the past ten years.  Though it is not capital intensive, CORNERSTONE finds it hard to consistently generate free cash flow for the shareholders due to the inability to produce positive operating cash flow on a regular basis. 

Valuation
The fair value of CORNERSTONE is between NGN0.74 and NGN1.62 per share.  We expect a return of 82.4% on the stock.

Financial Overview
The gross premium written from life insurance dropped 3.2% year-over-year to close at NGN5.4 billion in 2021. The non-life insurance business grew by 16.1% to NGN15.2 billion compared to the earlier year when it was NGN11.8  billion. Overall, the company’s gross premium written of NGN20.9 billion in 2021 amounted to a 19.3% increase over the prior year. 72.5% of gross premium written was attributable to the non-life business while 25.7% was traceable to the life insurance business. Takaful insurance produced 1.9% of gross premium written. 

Net fee and commission income increased by 37.7%  from NGN1.6 billion in 2020  to NGN2.2 billion in 2021. Non-life insurance, life insurance and Takaful insurance accounted for 66%, 32.9% and 1.1% of net fee and commission income respectively. Similarly, investment income added NGN451.5 million or 11.3% year-over-year. 

CORNERSTONE earned a gross premium of NGN17.8 billion, representing a 13.2% improvement over the NGN15.7 billion posted in the preceding fiscal year.  Net premium income jumped by 54.7% to NGN8.7 billion in spite of a 21.6% rise in reinsurance cost to NGN11.8 billion. Reinsurance cost for the whole business amounted to 66.1% of gross premium income in 2021 compared to 61.6% in the previous year. The reinsurance cost to gross premium income for life insurance and Takaful insurance rose by 28% and 18.7% respectively to close at 64.8% and 40% at 2021 year-end. The reinsurance cost to gross premium income for the non-life business, by contrast,  dropped from 75.9% in 2020 to 67.1% in 2021.

The company made an underwriting profit of NGN5.3 billion in 2021 compared to NGN1.1 billion in the prior year. The underwriting profit was tantamount to 25.1%  of gross premium written (2020:6.2%) and 29.5% of gross premium income (2020: 6.9%). The PBT of NGN3.7 billion represented a leap of 111.7% as against a 56% fall in the previous year. PAT gained 61.1 percent to NGN3.5 billion at the 2021 year-end. Both PBT and PAT margins increased to 17.3% and 16.4% respectively in the year 2021.  

CORNERSTONE’s total assets and shareholders’ fund peaked at NGN49.3 billion and NGN20.5 billion respectively. Cash and cash equivalents, which stood at NGN14.4 billion,  added 23.5% year-over-year.  Insurance contract liabilities formed 68.5% of the total liabilities of the company (2020:71.8%). 84.1% of the total insurance contract liabilities of NGN19.7 billion is short-term in nature. The total liabilities of CORNERSTONE amounted to 58.5% of total assets and exceeded total equity by 40.8% in 2021. There is adequate coverage for the debt obligations of the company; the company, in our opinion,  is not insolvent.

Business Risk
CORNERSTONE derives all its earnings from Nigeria. Presently, there is low insurance penetration in the country. Harsh economic conditions, coupled with low purchasing power,  would worsen the situation. In addition, stiff competition in the industry would prevent CORNERSTONE from pricing above the competition.

Recommendation: Buy

In NGN thousands

Earnings Chart of Cornerstone Insurance Plc

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