Analysis: AIICO Insurance, who is buying?

A visit to AIICO Insurance Plc’s website homepage reveals a vividly depicted ‘Buy Now” phrase. Underneath these words are captivating images highlighting a slew of products and services offered by the company.

It’s hard not to get convinced to buy any of the products if you focus on the images and their underlying messages. AIICO, by the way, also just announced plans to sell something else.

Last week, the company reported that it was seeking shareholders’ approval to raise N3.5 billion at its next EGM scheduled for March 5th. Shareholders had, in May 2016, given the directors’ approval to raise additional capital up to N25 billion. The fundraising is also in compliance with NAICOM’s capital requirements for insurance companies.

For AIICO, this means meeting N18 billion in shareholders’ funds. AIICO’s shareholders fund as of December 2019 was about N26.9 billion only. So why then is the company selling shares again to its shareholders? The devil is in the details.

A closer look at its N26.9 billion shareholder fund composition shows that N5.2 billion and another N3.5 billion are classified under deposit for shares and revaluation reserves respectively. Back these out and the Shareholder Fund is down to just around N18.2 billion.

Technically, it needs to raise capital if it wants a buffer, as one would expect, above the minimum capital of N18 billion. This perhaps explains the need for a capital raise.

But why raise capital when they have a deposit for shares of N5.2 billion included in their balance sheet? According to AIICO, “the deposit for shares represents amounts received by the company from its recent private placement, in which Leap Frog Investment Limited and AIICO Bahamas Limited invested a combined amount of N5.38 b into the company on 12 December 2019. Amount received is kept in dedicated account by the issuing house, Stanbic capital pending the receipt of the final approval by SEC.”

AIICO did not issue any press release or notify shareholders on the Nigerian Stock Exchange that it had consummated this investment.

The purchase consideration is made up of 4.4 billion ordinary shares of N0.50 each at N1.20 per share by way of a special/private placement. So why bother raising more equity? These are questions that only the management of the 56-year-old insurance company can explain in the no distant future, but we can speculate.

To be fair, AIICO has not had a public offer in recent memory and only conducted rights issues just 3 times, with the last being in 2006. AIICO owes the IFC N2.42 billion which it obtained in 2015.

The loan also has embedded an option to convert, in the event that there is a change in control or sale of a substantial part of the company’s assets or business. The option incidentally expired in December 2019. Thus, shareholders could get significantly diluted if it does not pay off IFC. The deal with Leap Frog may preclude the company from using the proceeds to pay off debts.

Raising capital from shareholders should therefore not be an arduous task, except of course you are one to ask yourself the tenable question, what am I getting in return? AIICO has posted 20% plus return on average equity, despite its many challenges.

AIICO shares have returned 13.8% YTD and appear undervalued. Shareholders will be quick to remember what happens to share prices whenever a capital raise is being considered. May the bulls have the day.

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