Law Union & Rock Insurance Plc (‘LURI’) recorded an above average performance in 9M 2018 relative to its industry peers – based on key financial ratios –, hence our ‘BB’ rating. Given the foregoing as well as an upside of 163.625% to its target price, we recommend a BUY on its shares.
…Performance Driven by Core Busines
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LURI’s performance was driven by improved efficiency of its core underwriting business as total underwriting profit grew by 12.03% to N0.80 billion given a decline in combined ratio to 70.48% from 72.48% as at 9M 2017 (better than industry average of 75.71%).
The improved core performance was however dragged by a decline in investment income by 14.87% to N0.69 billion which translated to lower investment yield of 8.47% compared to 11.10% in 9M 2017 but better than industry average yield of 7.05% while insurance margin fell to 70.62% from 81.64% in 9M 2017, albeit, better than industry average of 56.81%.
To boost future earnings, given its size in the industry, the tier 3 insurance player would have to shore up its technical expertise and capital base from its current N6.81 billion, according to regulatory guidelines, in order to participate in greater business opportuties such as group life assurance, engineeirng, marine, bonds credit guarantee and suretyship insurance apportioned for players in the tier 2 category.
In the interim, we expect LURI to advantage of the rising yield environment in order to boost profitability.
