CIC Insurance Group (NSE: CIC) FY17 Earnings Note
CIC Insurance Group Ltd (NSE: CIC) released its FY17 financial results reporting a 1.5x y/y growth in FY17 profit after tax to KES 478Mn. This was against our expected 2.7x y/y growth in PAT. A dividend of KES 0.12 per share is recommended to shareholders on register by 21st May 2018. The counter trades at a P/B of 1.9x compared to the industry median of 1.13x. We maintain our SELL Recommendation with a Target Price of KES 3.13. This represents a 44.1% downside potential.
Positives:
- Gross Earned Premiums (GEP) up 21.3% y/y: The Company posted impressive GEP growth of 21.3% y/y to KES 14.3Bn which came in line with our estimates (24.2% y/y). Net earned premiums rose 20.6% y/y to KES 12.1Bn. This implies a cessation rate of 15.6% (+54 bps y/y) in line with our FY17E of 15.4%. Based on the Insurance Regulatory Authority (IRA) Kenya FY17 statistics, CIC’s General Insurance business market share rose by 122bps in the year to 8.1%.
- Investment income and Commissions supported the total income:Investment income grew by 18.6% to KES 1.54Bn. Investment income contributed 10.0% to total income from 10.9% in FY16A. This was attributed to gains from the equities market in addition to stable returns from fixed income and rental income. There was a notable increase in equity investments (38.5% y/y) and in Government Securities (30.2% y/y). On the other hand, fees and commissions income recorded a 57.5% jump to KES 1.0Bn.
- High Growth on Claims: Claims ratio went up 46 bps y/y to 65.0%. Over 70% of claims emanate from general business. Net claims grew by 21.4% y/y to KES 7.86Bn against our estimates of KES 6.59Bn. Based on the IRA FY17 statistics, Motor private and Motor commercial claims paid stood at KES 1.9Bn (+35.7% y/y) and KES 1.3Bn (-8.3% y/y), respectively with both classes recording underwriting losses of KES 539.4Mn and 34.1Mn respectively.
- Receivables growth: Direct insurance and reinsurance receivables increased by 7.5% and 51.4% y/y to KES 1.5Bn and KES 1.4Bn respectively. We are cautious of this rise due to the 100.0% market risk charge attached to receivables over 30 days in calculation of Risk Based Capital. In our view, we expect the company to adopt a more aggressive approach on premium collections.
We reiterate a SELL recommendation on CIC Insurance Group Holdings based on a target price (TP) of KES 3.13, a 44.1% downside potential. Currently, CIC is trading at P/E and P/B multiples of 30.6x and 1.95x respectively against industry median P/E and P/B multiples of 11.35x and 1.25x respectively. Additionally, a current ROE of 2.5% is quite unappealing to investors.
In our Playbook 2018, we highlight the high claims exposure in spite of cessation rates averaging at 15.26% against an industry average of 30.1% as a key concern. The company is forced to bear a larger portion of claims incurred despite the leeway to spread risk further. High growth in claims due to high reliance on and exposure in loss making classes remains a key concern. Receivable growth also poses a risk under the new RBC requirements due to the risk charge attached to receivables.
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