CIC Insurance Group Ltd announced their audited results for the period ended 31st December 2014 on 13th March 2015:
RECOMMENDATION: SELL, Fair Value KES 5.9 (36.2% Downside)
Robust Top Line: 24.0% Growth in Gross Written Premiums to KES 13.7 Billion, while Net Earned Premiums shot up 34.5% to KES 12.3 Billion: In the latest financial year CIC’s net earned premiums now account for 84.8% of total income up from 84.1% in 2013. The group has maintained robust premium growth at a 5 year CAGR of 38.0% driven by nationwide distribution at competitive rates as well as perennial reduction of reinsurance ceded to only 8.6% of gross earned premiums FY14 (10.0% FY13) down from 14.4% in 2011. This limited spreading of claims risk favors the top line but leaves the bottom line exposed to earnings erosion.
Lackluster Risk Management: Claims surge by 43.6% to KES 8.6 Billion : Claims expense once again outpaced premium growth indicative that the insurer is likely to be; experiencing underwriting losses, facing a serious challenge of fraudulent claims and is heavily weighted towards relatively risky insurance classes such as medical and motor vehicle. At a 5 year CAGR of 42.2%, lack of claims management is a primary weakness in the companies’ operations, diminishing shareholder returns. Operating expenses have also expanded 42.7% to KES 3.4 Billion in line with expansion of the insurance business regionally. As a result, CIC has hired Deloitte to consult on a restructuring process in a bid to boost operating efficiency. Operating profit margins are at a low of 10.4% (16.6% FY13) while Return on Capital Employed (ROCE) dropped to 8.18%. Total expenses which grew 42.6% to KES 13.1 Billion eroded an alarming 90.5% of total income.
Bottom Line: Pre-tax Profit Dips 16.8% to KES 1.4 Billion, Profit after Tax (PAT) Down 16.6% to KES 1.1 Billion: This translates to a marginal 9.6% pre-tax profit margin and 7.5% PAT margin. Return on Equity (ROE) dropped to 16.1% (22.6% FY13). Earnings per share (EPS) consequently fell to KES 0.4 (KES 0.6 FY13) thus the stock is trading at 21.9x earnings and a price-to-book of 3.4x, way above the insurance sector average p/e of 14.4x and p/b of 2.43x. These high trading multiples without concurring earnings growth signal a looming downward correction of the share price.
Outlook: Management having identified weaknesses in operations efficiency and claims management will embark on a restructuring process that will reflect a one off expense in the current financial year with long term benefits. We anticipate proper utilization of KES 4.9 Billion net proceeds from the corporate bond issued in 2014 should sustain business expansion and grow investment income – currently reliant on interest from deposits with financial institutions worth KES 8.5 Billion. Dividends declared of KES 0.1 yields merely 1.1%. Book closure for dividend payment is on the 20th of May with payment due on or about 19th June 2015.