Prestige Assurance Plc

PRESTIGE ASSURANCE PLC

Company Overview
PRESTIGE began operation as a Nigerian branch office of The New India Assurance Co. Limited in 1952. It was incorporated as a wholly-owned subsidiary of The New India Assurance Co. Limited in January, 1970 and named The New India Assurance Company (Nig.) Limited. It, however, ceded 60% of the company to Nigerians following the enactment of the Nigerian Enterprises Promotion Act of 1977. The company's named was changed to Prestige Assurance Plc in September, 1992.

The New India Assurance Co. Limited, Mumbai, now has 69.5% of the issued capital of PRESTIGE while Leadway Assurance Company Limited is in possession of 11.5% of its outstanding shares.

PRESTIGE, a general insurer, provides personal, commercial, industrial and liability insurance products such as motor insurance, personal accident, burglary, marine, aviation and professional indemnity insurance products.  The company launched Prestige Salary Protection Shield (PSPS) and mediclaim policies in the year. PSPS pays the holder salary for up to 2 years after  job loss; mediclaim is a health insurance policy.

Mr. Hassan T.M. Usman (Nigerian) is the chairman while Dr. Balla Swamy (India) is the chief executive officer. Mr. Sidharth Pradhan replaced Mr. Hermant G. Rokade as non-executive director on May 5, 2017.

Investment Thesis
It enjoys the financial, research and technical support of The New India Assurance Co. Limited, an insurer established in 1919 with strong presence in Asia and Africa.  The experience of PRESTIGE in the Nigerian insurance sector spans over six decades.

Earnings growth has been unstable. And the company has been accumulating losses since 2012. The value of accumulated losses at the end 2017 financial year stood at NGN347.3 million (2016:NGN776.5 million, 2015:NGN991.9 million).  This halted dividend payment. Consequently, the management has succeeded in seeking approval to write off the accumulated losses in 2018 so as to pave way for payment of dividends to shareholders.Earnings chart of Prestige Assurance

The downward trend in fee and commission income and increasing claims expenses have been resulting in underwriting losses before 2016. In 2017, underwriting profit increased for the first time since 2011. Underwriting profit as a percentage of gross premium written trails 25% of 2011(2010: 23.6%). Underwriting profit as a percentage of gross premium was 90 basis points less than 9.7% of the year before, 2016.

Company's performance has started getting better since 2016. Gross premium written profit improved by 7.6%, underwriting profit was NGN254.1 million compared to an underwriting loss of NGN422.3 million of 2015. Profit After Tax (PAT) was NGN222 million when compared to NGN145.3 million loss after tax of 2015.

Profit Before Tax (PBT) as a proportion of gross premium written increased from less than 1% in 2015 to 18.3 in 2017. In like manner, PAT as a percentage of gross premium written moved from a negative figure in 2015 to 14% in 2017. Returns also improved; Return on Equity (RoE) and Return on Assets (RoA) were 7.1% and 4.5% in 2017.

Management has started pursuing new product development and investing in technology so as to sustain the improved performance. However, we are of the opinion that management needs to aggressively improve its distribution network owing to intense competition in the sector.

Despite the difficult headwinds it has been facing, the company is trading below our fair value estimate of between NGN1 and NGN1.7 per share. We believe that if management does not relent on its efforts to revive the company, PRESTIGE would adequately compensate the patient investors.Graph of returns of Prestige Assurance

Valuation
PRESTIGE trades at 0.3 times and 6.3 times average book value per share and earnings respectively. We believe that PRESTIGE is worth between NGN1 and NGN1.7 per share. It currently trades below our fair value estimate and we believe it presents a buying opportunity for investors. Expected return on a share of the company is estimated at 66.3%.

Financial Overview
Gross premium rose from GNN2.6 billion to NGN3.8 billion, gaining 45.7% between 2016 and 2017. Over the last three years PRESTIGE has increased gross premium by 12.8% compared to a  drop of 14.8% of the prior year. Underwriting profit gained 32% to reach NGN335.4 million compared to a fall of 160.2% of the year before. The company was not able to make any profit (underwriting profit) after meeting insurance expenses from 2012 to 2015. The company only makes about 9% profit from gross premium collected on insurance policies. Operating profit of NGN706.2 million was twice the previous period's figure courtesy of a 98.9% increment of investment income. However, investment income accounted for less than 20% of the gross income generated by the company in the current year. Operating profit to gross premium ratio added 5.1% to end 2017 financial year at 18.5%.  PBT and PAT jumped by 105.1% and 139.6% respectively. PBT Profit margin was 14.7% compared to the previous year's figure of 9.8%. Likewise PAT margin got better by 4.8 percentage points.

Shareholders' fund, which has been growing unabated in the past five years, got to NGN7.5 billion and got 20.6% better year-on-year. The company has paid down its debt; debt outstanding as at December 2017 was NGN72.1 million. Borrowing was about 1% of shareholders' fund and 0.6% of total assets. PRESTIGE can pay interest obligations 85.9 times from its operating profits. However, cash flow from operations could not settle interest obligations due to difficulty in generating positive cash flow by the company.

Business Risk
There is intense competition in the insurance sector in Nigeria. In addition, many Nigerians have yet to embrace insurance. This has a negative effect on earnings growth. The business has an inherent risk and the occurrence of risks may wipe out its profits.

Recommendation: Buy

Vital statistics of Prestige Assurance