How do you spend N97 for every N100 of gross operating income generated? Scratch that, how do you post a profit of N1 billion, yet 90% of it came from the value of your investment in another company? WAPIC Insurance may have realised an impressive 129% rise in profits in the first 9 months of the year, but it still has questions to answer.
The company released its 2019 9–month results, posting a pre-tax profit of N1 billion up from N475 million reported the same period last year. Most of the profits (N984 million) however came from its investee associate, Coronation Capital. Back that out and its 9–month profit was just N102 million. One could argue that insurance companies are expected to make money from investments in solid companies such as Coronation Capital. Despite this, its return on average equity was still disappointing.
In its latest results, Return on Average Equity was a paltry 6% (8% annualized), significantly poor when you consider the company’s potentials. Unfortunately, this has been the case for years now. Return on Equity was 2% in 2018, 9% in 2017, 8% and 2% in 2016 and 2015 respectively. As you may have guessed, keeping costs down has been a major challenge.
WAPIC Plc has significantly high operating expenses as a percentage of gross operating income. The company keeps 44% of insurance premiums net claims as underwriting profits—one of the best in the industry. Unfortunately, it spends all of it on operating expenses, most of which are hard to decipher.
In its expense breakdown, it lists about N817.5 million (2018 9–Month: N405 million) as “office expenses” while another N131 million was listed as “annual dues”. Depreciation, a non-cash item, was N317.8 million, reflective of holding on to assets that are not generating enough income to cover its amortized cost.
Rising expenses have also been a bit of a norm at the digitally-focused insurance company. Between 2015 and 2018, operating expenses rose from N3 billion to N4.9 billion 63% or 17% annually. On the contrary, gross operating income rose by 26% over the 4-year period. Something needs to give, and very soon indeed. WAPIC announced a planned rights issue and looks to raise about N5 billion. This will inevitably increase its net assets if consummated, piling more pressure on its ability to deliver higher returns on equity.
What does it need to do? It needs to sweat its assets better, starting from its long list of investment securities. Earning N3 billion on assets with a book value of N30 billion is simply not enough to cover its lofty expenses. Unfortunately, finding investments that deliver juicy returns to cover their costs is hard to find. The equities market is an aberration and government securities yielding get lower by the day. The alternative is to cut costs, which could be painful and grueling for employees. Nevertheless, it needs to make a choice—sooner rather than later.
At 34kobo WAPIC and trading at 4x trailing earnings per share, the company has little room to wriggle if it prefers to value the stock higher. It’s currently down 15% in the last year and could remain the same till the end of the year. Investors who wish to buy the stock need to continue to demand that WAPIC does more about cost-cutting or grow revenues to fulfill its potentials. Most importantly, it’s running out of time.