Niger Insurance: Stock worth a penny is sold a penny

Kirk Leigh

Selling for 50 kobo on the Nigerian Stock Exchange (NSE), Niger Insurance is a penny stock. However, the fact that the stock price has remained horizontal for too long makes it a poor addition to a fund manager’s portfolio.
Penny stocks trade at low prices per share and investors pick them with the hope that they would appreciate in value over time and earn them good returns. Niger Insurance has been trading for 50k per share since November 30, 2015, the earliest date, which data can be got on and so cannot be associated with growth.

Portfolio managers look out for volatility as a major ingredient for selecting portfolios but without price movement, Niger Insurance is a no go area. As at the close of trading Friday, June 10, only 20 shares of the company were traded on the exchange.

The insurance sector has been a laggard in the stock market, a possible and plausible reason why the Niger Insurance stock remains stagnant.
It didn’t help matters that the company missed its own earnings target for the 2016 first quarter. The insurer set up in 1962 had forecast gross premium of N4.4 billion in the first quarter ending March 2016 but only managed half of that as it made gross premium of N2.16 billion, a sum which is 29 percent worse than the N3 billion it made in the equivalent quarter in 2015.

Where the insurer projected to make profit of N438 million, it made N158.5 million, which is 54 percent less than the profit achieved in the first quarter of 2015 at N342.7 million.
Unearned premium was better managed in the new quarter with a 92 percent improvement from N294.4 million to N22.33 million. The better management of unearned premium helped the company to a gross premium of N2.14 billion even if it is less than the N2.75 billion earned in the equivalent quarter in 2015.

The rising cost of reinsurance was to further hurt the company’s profits, slicing off as much as N147.4 million, a cut which is three times deeper than the N57.4 million of the equivalent quarter in 2015.

The chunky loss from reinsurance burden depressed net premium income to N1.9 billion, again less than that of the equivalent period but by 26.2 percent from N2.7 billion. After operating expense and tax, the company, whose name derived from one of the biggest rivers in the country, managed net profit of N158.5 million, which is less than half of the N342.7 earned in the equivalent quarter.
The first quarter results were expected to be a build-up to the 2015 financial year end results, when the company made N3.1 billion in earnings, better than the N3 billion made in the 2014 financial year.

The optimism was despite the company making less profit at N601 million compared to the N690 million of 2014, which led to an earnings per share of 7.76 kobo compared to 8.93 kobo same period last year.
But the market was alarmed recently when the insurer’s auditors, SIAO Chartered Accountants, flagged off its capital management framework.
“We draw your attention to the risk and capital management framework on page 47 of the financial statements. The group’s qualifying assets cover in its life business segment, based on the regulators measurement of admissible assets discloses a shortfall of N 4.089 billion.”

What this means is that Niger Insurance lacks capacity to insure what it currently insures. It needs some N4 billion to be able to cover the level of life insurance it is presently handling.

Admitting the shortfall, Niger Insurance said, “The group’s qualifying assets cover in its life business segment based on the regulators measurement of admissible assets discloses a shortfall of N4.089 billion. This is as a result of its huge investment in real estate over the years. The matter is being addressed through restructuring of statement of financial position and injection of fresh capital.”
Analysts are already touting the need for the company to visit the capital market to raise funds to cover the gap. While yet others say the recourse would be to convert assets into qualifying assets.

Whatever option the insurer chooses may not matter, what matters is the urgency with which the gap is covered.

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