Nov 8, 2015

Cytonn Investment has completed an analysis of all listed insurance companies in Kenya, which aimed at assessing the attractiveness of both the insurance sector and the specific listed insurance companies, which we officially released on 2^nd November 2015. As part of increasing our listed equities coverage, we turned our attention to the insurance sector. In our analysis of listed insurance companies, we seek to recommend to our investors which insurance companies are the most attractive for purchase, and stable from a franchise value and from a future growth opportunity perspective.

In Kenya there are a total of 50 insurance companies, 3 reinsurance companies, 198 insurance brokers, 4 reinsurance brokers and 5,155 insurance agents. Kenya’s insurance penetration stands at 3.0% compared to its peer-countries in the Sub-Saharan Africa region. Kenya has remained under-tapped in insurance, particularly within the middle to low-income bracket, which still remains informal.

The insurance sector has seen several regulatory changes in the last one year. The revised Insurance Act seeks to introduce new capitalization requirements for the (re) insurance companies in Kenya. The minimum paid-up-capital have been set at Kshs. 600 mn, Kshs. 400 mn, Kshs. 1.0 billion and Kshs. 500 mn for the general, long term, general business reinsurance and long term business reinsurance.

In general, the sector has continued to post growth. The Insurance balance sheet stood at Kshs 455.5 bn as of June 2015. The balance has recorded a 16.1% year-on-year growth compared to June 2014. Increased investment into the insurance sector, driven by mergers & acquisitions and capital injection has been the key driver for the balance sheet growth.

Total gross premium stood at Kshs 88 billion at June 2015, with general business accounting for 66.4% of the total gross written premium. Life business has registered a much stronger growth in premium, posting a 20.2% 4-year CAGR compared to 18.8% growth in general business. The much stronger growth in Life business is majorly driven by the increased uptake of insurance, particularly in the middle to upper income levels, a bracket that continues to support the overall insurance sector growth. The industry Retention Ratio for the life business stands 92.1% while the general business stands at 73.7%. Gross reinsured premium accounts for 10.5% of the total industry written premium.

The Kenyan insurance sector lags behind in penetration, and the inherent opportunity for growth remains high. This growth is supported by a number of drivers, which remain both common to the Kenyan and wider Sub-Saharan market:

1. Insurance Products Innovation: The industry players have continued to innovate products. With increased competition in the insurance sector, companies have come up with a number of insurance products to tap the narrow client base
2. Favourable Demographics: The Kenyan and regional population has a middle-class, which continues to demand insurance products and services. With increase in income levels and disposable, the population bracket is the key demographical driver for insurance industry growth
3. Adoption of alternative channels: Insurance players have been dynamic and fast in adopting to the new alternative channels for both distribution and premium collection. Banc-assurance, mobile and internet platforms have been the primary alternative channels which will drive down the cost of premium collection. For instance Britam collected 47% of gross written premium through bancassurance in 2014. The amendment in the Insurance Act has further allowed foreign banks to run the bancassurance model
4. Regional Expansion: Synonymous to Kenya, the general Sub-Saharan Africa insurance penetration remains low. Kenyan Listed insurance companies are looking to tap into this low penetration to drive further growth. However, we hold the view that Kenya has remained under-tapped and more emphasis should be put in growing insurance penetration in Kenya

Cytonn’s analysis covers the health and future expected performance of the financial institution, by highlighting their performance using metrics to measure Profitability, efficiency, diversification, risk appetite and solvency. In our analysis, we ranked the insurance companies based on two approaches:

1. Franchise value: which ranked the companies based on their Loss Ratio, Expense Ratio, Combined Ratio, Return on Average Tangible Equity, Ceded Premium Ratio, Solvency Ratio, Underwriting Leverage, Reserve Leverage Ratio, and Governance Score. In this ranking, the insurance are ranked by health, by looking at metrics for profitability, efficiency, diversification and risk appetite. The insurance companies are then assigned scores ranging from 1, which is the best performing (re)insurer in the metric, till 6, which is the worst performing (re)insurer. The scores from each (re)insurer are then summated, with the (re)insurer with the lowest total score emerging on top, and that with the highest score emerging at the bottom.
2. Total return: We used our analyst’s projections of the future performance, intrinsic valuation, of the insurance companies and dividend yield to derive total return.Potential upside for each (re)insurer based on the intrinsic valuation, and the current market price. The (re)insurer with the highest upside was ranked 1st, and that with the lowest upside, or greatest downside, was ranked last. Cytonn’s Analysts carry out this valuation, arriving at the actual value of each (re)insurer based on an underlying perception of its true value, including all aspects of the business, in terms of both tangible and intangible factors, and future growth expectations. This value may or may not be the same as the current market value.

We have introduced a Governance Score in our analysis. Governance Score measures the company’s internal controls, strength, integrity and experience of the board and management, and quality of strategic shareholders.

Based on the two approaches, Kenya Re ranked the highest driven by steady growth in earnings and low loss, expense and combined ratio. Kenya Re also ranked the best in underwriting & reserve leverage and solvency ratios. On intrinsic valuation, Kenya Re ranked the highest, with an expected total return of 21.2%. Pan Africa Insurance holdings ranked the lowest in the overall ranking underpinned by high loss and combined ratios and the lowest solvency ratio.

The table below shows the overall ranking of the two approaches.

Company	Franchise Value Score*	Total Return Score*	Weighted Score	Rank
Kenya Re	26	1	11.0	1
Jubilee Holdings	35	2	15.2	2
Liberty Kenya	35	6	17.6	3
Britam	41	3	18.2	4
CIC Group	46	5	21.4	5
Pan Africa	48	4	21.6	6

We have identified the following themes as key drivers of the Kenyan Insurance sector:

• Risk Based Supervision: With the proposed risk based supervision framework, we expect a consolidation of insurance companies, as the industry players synergize their books to meet the required statutory minimum requirements,
• Micro insurance: We expect the insurance players to progress towards tapping into this segment. The Kenyan informal sector offers a rich platform to tap into, with increasing disposable incomes. We expect the industry players to innovate on products that will be affordable and relevant to this segment,
• Devolved government: With the establishment of a devolved system of governance, we expect insurance uptake to increase at the county level, with (i) county governments taking up insurance services, and (ii) increased economic activity in the county level, driven by more economic activities at the county level,
• Mergers & Acquisitions: We expect mergers and acquisitions in the industry to accelerate in the medium term owing to the increase in the minimum capital requirements as highlighted in the finance bill 2015. Already a number of players have already merged and restructured to meet this new requirements.

*- For the detailed report, please download it here: Insurance Report


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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.