Insurance companies don’t make for great conversation fodder at parties. Trust me on this.
But few other businesses can match their potential for creating wealth.
Done correctly, the insurance business generates a steady stream of premium income that it may or may not be required to pay back to claimants at some future date.
In the meantime, it invests the cash and keeps the returns.
Reinsurers operate on the same model, but instead of insuring individuals and small businesses, they provide coverage to other insurance companies – helping to reduce their risk from major catastrophes or otherwise high levels of claims.
In Africa, where insurance penetration rates are the lowest in the world, such a business offers substantial upside potential to investors.
The Nigerian Stock Exchange is home to one particularly interesting opportunity that trades at a P/E ratio of 12.1 and a juicy 11.3% dividend yield.
An unassuming, under-appreciated Nigerian stock
Lagos-based Continental Reinsurance (CONTINSU:NL) is one of Africa’s largest reinsurers. It boasts 200 customers across the region, serving them from offices in Lagos, Douala, Abidjan, Tunis, Nairobi, and Gaborone.
The firm covers all sorts of risks, but its bread and butter is reinsuring non-life policies, primarily in Nigeria and Cameroon.
While the underlying business has been consistently profitable, its recent share performance hasn’t been anything to write home about. The stock is down 4.9% since the start of the year.
But Continental Re’s third quarter results suggest the shares might be worth a second look. Net premium revenue surged 25% in the first nine months of 2015 and underwriting profit (the cash the company pockets after covering claims and expenses) jumped 26%.
Unfortunately, substantially higher administrative expenses and receivables write-offs conspired to keep earnings growth to a modest 7.5%.
Still, the result translated into a healthy addition to investable float. Unearned premiums, which represent much of the capital the company can deploy, have nearly doubled over the past five years.
To buy, sell, or hold Continental Re
So, do the shares look like a bargain at their current price of NGN0.97 per stub?
I believe so. Here’s why.
Regulators in the company’s largest market, Nigeria, have made property insurance compulsory and now require that businesses provide life insurance to their workers if they employ more than four people.
With a population of some 170 million, these moves should translate into accelerated premium growth in the next few years.
Continental Re has grown its book value at annualized rate of 4.0% since the end of 2009.
That’s not at all exciting until you consider how much cash the company distributes to shareholders in the form of dividends. It paid NGN0.11 per share in 2014, an amount that appears well within reach again this year. This translates into a dividend yield of 11.3%.
If this payout is maintained at the same level over the next five years and the stock’s price/book ratio expands to 1.0 from its present level of 0.7, investors at today’s price stand a good chance of netting an annualized return in the neighborhood of 17-18%.
Performance like that may not enthrall your friends at parties, but it’ll do wonders for your nest egg.