Lasaco Assurance Plc Stock Valuation

LASACO ASSURANCE PLC

Ticker:                            LASACONature of Business:      InsuranceLocation :                              Nigeria
Recent Price:           NGN1.03   52-Week High/Low: NGN1.65/1.10Estimated Fair Value:      NGN0.90-NGN1.75
Expected Return:      60.0%Consider Buy:                   Below NGN1.33Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
Lasaco Assurance Plc (LASACO), formerly Lagos State Assurance Company Limited, was incorporated in December 1979. It was authorised to carry out insurance business in July 1980. LASACO went public in 1991  and its shares were subsequently listed on the Nigerian Stock Exchange. The company became a composite insurance company following the acquisition of a life insurance business license in 2007. Ibile Holdings Limited and Canon Properties & Investment Limited are the two major shareholders of the company with 27.7% and 12.7% equity stakes respectively.

Mrs. Olateju Phillips chairs the board of directors of LASACO. .Mr. Razzaq Abiodun was named managing director on 20th April 2021 due to the resignation of Mr. Segun Balogun. Messrs Ademoye Shobo and Adeniyi Saliu joined the board as executive director and non-executive director respectively in the 2021 fiscal year. Mr. Akin Odusami, a non-executive director, resigned in February 2022.

Investment Thesis
LASACO is one of the foremost insurance companies in Nigeria. It provides both life and general insurance services to both individuals and corporate organisations. The gross premium has been on the rise because the company has been underwriting more insurance policies. However, high underwriting expenses have made it difficult for  LASACO to consistently grow its underwriting profit. Over the past three years, underwriting expenses have outpaced underwriting income resulting in thinning underwriting profit margin. 

The life insurance business segment of the company is growing in prominence. It produced 54.7% of LASACO’s gross premium written in 2021 ( 2020:57.1) and 56.5% of underwriting profit  (2020:50.4%). Gross premium written from life insurance expanded at a compound annual growth rate (CAGR) of  29.1% over the past three years while the non-life insurance segment achieved a marginal increase of 2.2% in the same period. Underwriting profit from life insurance has improved by a 3-year CAGR of 6.3% as against a 17.4% decrease for the non-life business. However, Profit Before Tax (PBT) from its life insurance business dropped 70.5 percent year-over-year compared to a fall of 48.8% in the prior year. The PBT for the segment was  NGN136 million or 48.1% of total PBT in 2021, down from  NGN460.5 million or 66.1% of total PBT  in the preceding financial year. 

There is low penetration of insurance in Nigeria owing to ignorance of the benefits of insurance, lack of trust in the industry, low per capita income and so on. But we believe that stronger regulation, creation of awareness and continued enforcement of the compulsory insurance policies can increase the adoption of insurance products in the country. Besides, the recapitalisation exercise spearheaded by the regulator, National Insurance Commission (NAICOM) will give the company the opportunity to shore up its capital and strengthen its capacity to underwrite more policies, especially marine, oil and gas insurance policies. 

LASACO is not overburdened by debt;  it is adequately capitalised and solvent. The company has reinsurance agreements in place that have helped in settling claims made by its clients. The claims incurred in the past five fiscal years totalled NGN23.8 billion; the company recovered a total of NGN10.3 billion from reinsurers and only absorbed claims expenses of NGN13.5 billion or 56.9% of total claims incurred over the past five years.

Valuation
A share of LASACO should trade between NGN0.90 and NGN1.75 based on our analysis. And a  return of 60% is expected on the stock. The company’s stock is currently trading close to its estimated fair value. We recommend a buy below NGN1.33 per share.

Financial  Overview
The gross premium of NGN12.6 billion earned by LASACO  in 2021 was equivalent to a year-over-year improvement of 14.7%. The life insurance segment produced a premium income of  NGN7 billion or 56% of the company’s gross premium income (2020:NGN6.2 billion or 56.3% of gross premium income). Group life insurance was responsible for most of the premium from life insurance; Group life insurance produced a gross premium income of  NGN7 billion while the gross premium earned from individual life insurance was NGN29.6 million. The gross premium income from the non-life insurance business grew from NGN4.8 billion in 2020 to NGN5.5 billion in 2021.  

Fee and commission income, which accounted for   11.7% of the underwriting income of LASACO, grew by NGN48.2 million to NGN1.1 billion in the 2021 fiscal year.  Investment income gained 18.8% to close at NGN656.2 million. However, underwriting profit declined by 13.6%  in 2021 compared to a 14% decrease in the prior year because undertaking expenses outgrew underwriting income. Underwriting profit from non-life business dropped 24.3% year-over-year to NGN742.1 million while underwriting profit from life business fell 3.1% to NGN965.5 million. The  PBT of the company fell by 59.4%  from NGN696.4 million in 2020 to NGN282.7 million in 2021. In the same vein, Profit After Tax (PAT) lost NGN418 million to NGN261.4 million.

LASACO’s underwriting profit was 13.6% of gross premium earned, down from 18% in the preceding year. Total assets were NGN24 billion in the year under consideration, up from NGN20.5  billion in the earlier year. In addition, the shareholders’ fund added  44.9% to NGN11.3 billion.

General accident, motor, and oil & gas insurance produced the bulk of the premiums earned by LASACO from the general insurance business. Though it declined by 17.9% year-over-year, oil and gas insurance was the highest contributor of gross premium income to non-life insurance; a premium income of NGN1.2 billion from oil and gas amounted to 22.2% of gross premium income from non-life insurance business in 2021 (2020:31.2%). The gross premium earned from motor insurance jumped by 73.4% from NGN583.2 million in 2020 to NGN1 billion in 2021. General accident produced a gross premium income of NGN1.2 billion, 5.7% up from the prior year. But oil and gas produced an underwriting loss of NGN337.1 million in the 2021 fiscal year as against an underwriting profit of NGN310 million in the previous year. A huge claim settlement resulted in an underwriting loss of NGN1.3 billion from fire insurance. Altogether underwriting profit from the non-life insurance business was NGN742.1 million or 43.5% of the total underwriting profit of LASACO.

Business Risk
LASACO is susceptible to competitive pressure which can hurt its earnings and margins going forward.  Besides, the low insurance penetration rate in Nigeria could impact gross premium income and underwriting profit adversely. Huge claims settlement could wipe out its profits. The company faces regulatory risk as the sector is highly regulated.

Recommendation: Buy

In NGN thousands
Earnings Chart of Lasaco Assurance Plc

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