Nigerian Insurance Market

1
INSURANCE FUTURE SUMMIT IN NIGERIA EMERGING
OPPORTUNITIES

• Nigerian Insurance Market
• Capital Market Perspectives

Prepared By
7 April 2008
2
Introduction

• Nigerias GDP has grown at an average rate of 6
  per annum over the past five years
• This economic growth coupled with recent reforms
  in the banking, pensions, capital markets,
  oil/gas and insurance sectors are creating
  significant new opportunities for risk
  underwriting business
• Measured by Gross Premium Income, the insurance
  market has grown on a compounded basis at only
  15 per annum over the last 5 years
• In the last twelve months to March 2008,
  insurance sector stock valuations have gone up
  185, versus 61 for the NSE All Share Index
• We see long term opportunity for genuine value
  creation in Nigerian insurance despite concerns
  of short term market exuberance

3
Economy Has Shown Stable GDP Growth
In recent years, Nigeria has witnessed stable GDP
growth averaging 6 per annum,
()
4
Amid Declining Inflation
with inflation declining to single digit levels.
5
GDP Has Benefited from Rising Oil Prices
High oil prices and economic reform are aiding
strong economic growth
6
Growth/Reform has Fueled Liquidity
and fuelling a domestic liquidity glut,
translating to strong demand for equities.
As at March 2008
7
Nigeria Insurance Market versus Africa
While Nigeria is one of the faster growing
insurance markets in Africa
8
Insurance Growth versus Banks
the insurance sector is still the slowest of the
Nigerian financial services sector.
9
Insurance Industry Structure

• Characterized by numerous players 49 at last
  count most of similar size and competitive
  positioning
• Average underwriter reported only N1.5bn of GPI
  in 2006
• Most premiums sourced from covering risks in same
  insurance class (life, motor, fire, marine,
  aviation, general accident and workmens
  compensation)
• Large number of insurance brokers (510 in 2006)
  who act as major intermediaries between corporate
  customers and underwriters
• Broker dominance ensures corporate premium
  payments are hardly ever received on time (53
  premiums receivables ratio in 2006)
• Industry is hence highly competitive (especially
  on pricing) considering slow growth of overall
  market size
• Industry also easy to enter for new players as
  evidenced by influx of commercial bank
  subsidiaries eager to take advantage of captive
  parent insurance business

Competitive and fragmented industry despite
recent capitalization and induced consolidation.
10
Key Drivers of Market Opportunity

• Banking Sector Consolidation
• Bigger Nigerian banks with greater risk appetite
  are lending more to middle class which will drive
  insurance cover for these loans.
• Pension Industry Reforms
• Compulsory group life insurance, and the market
  for annuities by pension account holders upon
  retirement will drive growth in life insurance
• Capital Markets Growth
• Strong growth in capital markets and financial
  assets will increase pool of insurable assets and
  individuals in Nigeria while creating investment
  and risk dispersion opportunities for insurance
  companies
• Local Content Participation in Oil and Gas
• Mandatory local content guidelines in the oil and
  gas sector will eventually open up huge market
  for local underwriters

But, we see a genuine long term market
opportunity for insurance business in Nigeria.
11
Insurance Sector Index versus NSE Index
The market appears to have priced in this long
term opportunity.
12
General Index versus Composite Index
The current pricing favors General Insurers over
the Composite Insurance segment.
13
Top 10 Insurers Shareholders Funds
Amounts in Billions of Naira
Leadway, WAPIC and IGI are the leading players by
shareholders funds.
Source Afrinvest Research, based on most recent
public data
14
Top 10 Insurers Gross Premium Income
Amounts in Billions of Naira
IGI, Leadway and WAPIC are also leaders by GPI.
Source Afrinvest Research, based on most recent
public data
15
Top 10 Insurers Market Capitalization
Amounts in Billions of Naira
Among listed underwriters, WAPIC is the most
capitalized followed by Goldlink and Niger.
Source Afrinvest Research, based 10th March
Share Prices
16
Top 10 Insurers 2009 P/E Ratio
P/E Multiples Valuation
Oasis, Equity and Linkage are the highest priced
stocks in the industry in terms of price to
earnings ratio.
Source Afrinvest Research, based 10th March
Share Prices
17
Sector Trading at Steep Multiples

• Insurance
• General insurance companies trade at generous P/E
  multiple of 48.8x 2008E earnings
• Composite underwriters are somewhat lower at
  39.0x 2008E earnings
• Banking
• Large cap Nigerian banks trade at multiple of
  21.7x 2008E earnings, while
• Mid-cap banks are at 20.9x 2008E earnings

The Nigerian stock market currently trades at a
P/E ratio of 20.5x 2008E earnings.
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Conclusions

• Sector trading at a significant premium to the
  overall market
• Aggressive players have used the capital markets
  window to raise large amounts of capital to
  invest in growth
• The expectation is that large and sustained
  spending on marketing PR (like in the banking
  sector) will generate greater market share
• We prefer measured operators with a clear market
  focus and deeper understanding of the long term
  nature of the insurance industry opportunity
• We believe that careful investments in people,
  systems, processes and delivery channels will be
  most value-adding

Insurance is not the new banking we recommend
caution in selecting insurance opportunities.
19
Thank You

• CONTACT INFORMATION
• Afrinvest (West Africa) Limited
• 12th Floor, Foreshore Towers
• 2A Osborne Road
• Ikoyi, Lagos
• Nigeria.
• info_at_afrinvestwa.com
• www.afrinvestwa.com
• Investment Research Fola Fagbule
  ffagbule_at_afrinvestwa.com
• Securities Trading Jude Chiemeka
  jchiemeka_at_afrinvestwa.com
• Investment Banking Olusegun Oso
  ooso_at_afrinvestwa.com
• Asset Management Winston Osuchukwu
  wosuchukwu_at_afrinvestwa.com

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