Can AIICO keep profit hopes alive to full year in 2014?

AIICO Insurance has again raised the hopes of the investing community for a profitable operating year in 2014 with its first quarter report at the end of March. That was how the insurance company did last year when it opened the year at a good profit but closed it with a loss. Whether this year will be different or whether it will eventually follow the pattern of the preceding year places a big question mark on AIICO Insurance this year.

If Mr. Edwin Igbiti, managing director/chief executive officer of the company, maintains the first quarter growth rate to full year, this will be a big turnaround year for the company. If he loses grip again and lets profit performance go the way of the previous year, it will be another year of a big disappointment to shareholders. Companies with unpredictable profit outlook carry higher investment risk than others, which explains the insurance sector’s continuing lack of attractiveness in the equities market.

The company’s bottom line shows a 22.6% improvement from N746 million in the first quarter of last year to N915 million at the end of March. If the company maintains the current growth rate to full year, an after tax profit of N3.7 billion could be posted by AIICO Insurance in 2014. This will mean a big turnaround from the loss figure of N739 million in 2013.

The company has experienced a wide fluctuation in profit in recent years. Its loss position last year was a big fall from an after tax profit of N1.32 billion in 2012. The loss happened due to major increases in claims and underwriting expenses, which rose by 60.8% and 33.8% respectively against an improvement of only 13.3% in net premium income in the year.

The profit hopes for this year follow outstanding growths in net premium income and investment income plus a considerable drop in net claims expenses on a year-on-year basis in the first quarter. Underwriting expenses however continue to grow ahead of revenue due mainly to a surge in life fund estimate. A new pressure is also coming from management expenses.

At the end of the first quarter, the company generated net premium income of N6.96 billion. This represents a leap of N78.7% over the corresponding first quarter figure last year. Based on the current growth rate, full year net premium income is forecast at N28.9 billion for AIICO Insurance in 2014. This will be an accelerated growth of 58.6% over the N18.23 billion net premium income the company posted in 2013.

Against the 78.7% growth in net premium income in the first quarter, underwriting profit grew at a slow pace of 33.1% to N1.47 billion during the period. A major development that caused the slower growth of underwriting profit is an increase in life fund estimate to the tune of N3.72 billion, which was completely missing in the first quarter of last year. It accounted largely for a rise of 82.1% in total underwriting expenses, which amounted to N5.78 billion at the end of the first quarter.

The impact of the increased underwriting cost on the bottom line was significantly moderated by a drop in net claims expenses during the review period. Net claims expenses dropped by 61.7% to N785 million year-on-year at the end of the first quarter. This follows a drop of 33.2% in gross claims expenses and a big leap of 347.7% in claims expenses recovered at N685 million.

A further boost of the bottom line came from investment income, which swelled by 82.1% to N1.03 billion during the review period. This represents a more rapid growth than the 36.3% improvement in investment income recorded in the 2013 full year. The company’s portfolio of financial assets has expanded from N17.90 billion at the end of last year to N20.73 billion at the end of the first quarter.

At N1.08 billion in the first quarter, management expenses rose by 52.3% from the corresponding figure last year. This is indicating an accelerating growth for the current year compared with an increase of 11.2% in the 2013 financial year. Additional pressure on the bottom line is also coming from impairment loss on investments as well as provision on receivables, which were completely missing in the first quarter of the previous year.

The company earned 13 kobo per share at the end of the first quarter against 11 kobo per share in the corresponding quarter last year. Based on the projected net profit for the year, earnings per share is expected to be in the region of 53 kobo for AIICO Insurance at the end of 2014. The company had lost 11 kobo per share in the 2013 financial year.

AIICO Insurance is a watch candidate this year to see whether its promising first quarter earnings picture will be sustained or lost in the course of the year. The full year profit projection is achievable if the revenue-cost relationship established in the first quarter does not change significantly. In order to achieve it, Edwin Igbiti will have to earn a minimum of N928 million in net profit per quarter for the remaining three quarters of the year.