Nov 14, 2021

Following the release of the H1’2021 results by Kenyan insurance firms, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed insurance companies and the key factors that drove the performance of the sector. In this report, we assess the main trends in the sector, and areas that will be crucial for growth and stability going forward, seeking to give a view on which insurance firms are the most attractive and stable for investment. As a result, we shall address the following:

1. Status of the Insurance Penetration in Kenya
2. Key Themes that Shaped the Insurance Sector in H1’2021,
3. Industry Highlights and Challenges,
4. Performance of The Listed Insurance Sector in H1’2021, and,
5. Conclusion & Outlook of the Insurance Sector.

Section I:  Status of the Insurance Penetration in Kenya

Insurance uptake in Kenya remains low compared to other key economies with the insurance penetration coming in at 2.3% as at December 2020, according to the September 2021 Financial stability report by Central Bank of Kenya (CBK). The low penetration rate, which is below the global average of 7.4%, is attributable to the fact that insurance is still seen as a luxury and mostly taken when it is necessary or a regulatory requirement. Insurance penetration in 2020 remained equal to 2019’s at 2.3% despite individuals and businesses cutting back on discretionary expenditure including insurance in the face of income volatility in the pandemic environment.

Source: CBK Financial Stability Reports

The chart below shows the insurance penetration in other economies across Africa:

Source: Swiss Re, AKI

Insurance penetration in Africa has remained relatively low, averaging 2.8% in 2020, mainly attributable to lower disposable income in the continent and slow growth of alternative distribution channels such as mobile phones to ensure wider reach of insurance products to the masses. South Africa remains to be a leader in insurance penetration in the continent, owing to a mature and highly competitive market, coupled with strong institutions and a sound regulatory environment.

Section II:  Key Themes that Shaped the Insurance Sector in H1’2021

In H1’2021, the country saw an improvement in the business environment, following the increased vaccine inoculation, coupled with the lifting and easing of COVID-19 measures that had been put in place in 2020. The improved operating environment led to the sector recording a 19.0% growth in gross premiums to Kshs 144.0 bn in H1’2021, from Kshs 121.0 bn in H1’2020. Insurance claims also increased by 22.5% to Kshs 71.8 bn in H1’2021, from Kshs 58.7 bn in H1’2020. During the period under review, the NASI index gained by 9.4% compared to a decline of 17.3% in H1’2020. This in turn helped to grow the insurance sector’s bottom line as a result of fair value gains in the equities investments.

Key highlights from the industry performance:

1. Convenience and efficiency through adoption of alternative channels for both distribution and premium collection such as Bancassurance and improved agency networks,
2. Advancement in technology and innovation making it possible to make premium payments and through mobile phones,
3. Continued recovery from the economic shocks that shrouded 2020 that has seen both individuals and businesses seek insurance uptake to cover for their activities, leading to growth in net premiums which increased by 18.9% to Kshs 113.5 bn, from Kshs 95.4 bn in H1’2020 and,
4. Increased investments income which significantly increased by 93.9% to Kshs 32.6 bn in H1’2021 from Kshs 16.8 bn in H1’2020, mainly attributable to the fair value gains on investments on equities in the capital markets.

On valuations, listed insurance companies are trading at a price to book (P/Bv) of 0.9x, lower than listed banks at 1.0x, but both are lower than their 16-year historical averages of 1.5x and 1.8x, for the insurance and banking sectors respectively. These two sectors are attractive for long-term investors supported by the strong economic fundamentals.

The key themes that have continued to drive the insurance sector include:

1. Technology and Innovation

Although the industry has been slow in adopting digital trends, the onset of the COVID-19 pandemic in FY’2020 saw the adoption of digital distribution of insurance products as a matter of necessity. Consequently, majority of insurance companies increasingly took advantage of the available digital channels to drive growth and increase insurance penetration in the country. According to Communications Authority of Kenya (CAK), the number of mobile subscribers as at June 2021 stands at 64.4 mn against a population of 48.7 mn, translating to a mobile penetration of 132.2%. The high mobile penetration implies that mobile phones provide a headroom and increases opportunities to distribute insurance products to the younger generation of consumers and those consumers that have not been served through traditional distribution methods. Given that the process of handling and inspecting claims manually is cumbersome and imperfect, the use of Artificial Intelligence (AI) assists in investigating the legitimacy of claims and identifying those that are fraudulent.  An example is Liberty Holdings which has been using AI to rollout e-policy documents, self-services for retail customers and collect customer feedback.

2. Regulation

To ensure that the sector benefits from a globally competitive financial services sector, the regulator has been working through regulation implementations to address some of the perennial, as well as emerging problems in the sector. The COVID-19 environment proved challenging especially on the regulatory front, as it was a balance between remaining prudent as an underwriter and adhering to the set regulations given the negative effect the pandemic. Regulations used for the insurance sector in Kenya include the Insurance Act cap 487 and its accompanying schedule and regulations, Retirement Benefits Act CAP 197 and The Companies Act. In H1’2021, regulation remained a key aspect affecting the insurance sector and the key themes in the regulatory environment include;

1. IFRS 9 - IAS 39, Financial Instruments Recognition and Measurement was replaced with IFRS 9, Financial Instruments to address the classification and measurement of financial instruments, impairment, and hedge accounting. The guidelines introduce new classification and measurement especially for financial assets, necessitating insurers to make judgements to determine whether financial investments are measured at amortised cost or fair value and whether gains and losses are included in the profit or loss or other comprehensive income. The new impairment model under IFRS 9 is based on expected credit losses and subsequently, all financial assets will carry a loss allowance, meaning that insurers will have to provision higher for impairment losses. Many insurance companies have opted to use the temporary exemption from implementation of IFRS 9, by continuing to apply IAS 39, but the temporary exemption expires January 2023. IFRS 9 will enable insurance companies to develop appropriate models for their customer debtors and develop plans that will help them lower their credit risk in the future,
2. IFRS 17- The standard establishes the principle for recognition, measurement, presentation and disclosure of insurance contracts with the objective of ensuring insurance companies provide relevant information that faithfully represents the contracts. However, as a way to protect the insurance industry from the negative effects of the pandemic the International Accounting Standards Board (IASB), the international body responsible for setting up financial reporting standards deferred its implementation to be effective from January 2023 or earlier. The standard, having replaced IFRS 4, is expected to give better information on profitability by providing more insights about current and future profitability of insurance contracts. Separation of financial and insurance results in the income statement will allow for better analysis of core performance for the entities and allow for better comparability of insurance companies, and,
3. Risk Based Supervision - IRA has been implementing risk-based supervision through guidelines that require insurers to maintain a capital adequacy ratio of at least 200.0% of the minimum capital by 2020. The regulation requires insurers to monitor the capital adequacy and solvency margins on a quarterly basis, with the main objective being to safeguard the insurer’s ability to continue as a going concern and provide shareholders with adequate returns. We expect more mergers within the industry as smaller companies struggle to meet the minimum capital adequacy ratios. We also expect insurance companies to adopt prudential practices in managing and taking on risk and reduction of premium undercutting in the industry as insurers will now have to price risk appropriately.

3. Capital Raising and share purchase

The move to a risk based capital adequacy framework presented opportunities for capital raising initiatives mostly by the small players in the sector to shore up their capital and meet compliance measures. With the new capital adequacy assessment framework, capital is likely to be critical to ensuring stability and solvency of the sector to ensure the businesses are a going concern. In May 2021, Allianz and Jubilee Holdings announced the completion of acquisition of 66.0% stake in Jubilee General Insurance Company (property and casualty) with the exception of medical in Kenya, Uganda, Tanzania, Burundi and Mauritius, for a total consideration of Kshs 10.8 bn. We expect that this amount will be ploughed back in to the company as part of the capital boost to grow other business lines.

Section III: Industry Highlights and Challenges

Following the stable growth achieved by the insurance sector over the last decade, we expect the sector to experience sustained gradual growth on the back of an improving economy and subsequent growth in insurance premiums, which will enhance the capacity of the sector to sustain profitability. The following activities were undertaken by the Insurance Regulatory Authority (IRA), in line with their mandate of regulating and promoting development of the insurance sector;

1. Industry Circulars

In H1’2021, IRA issued 2 circulars to the industry focusing on the Private Security Regulations Act No. 13 of 2016 and enhanced medical insurance policy wordings. The circular on enhancing medical insurance policy wordings, was as a result of heightened complaints and enquiries from policyholders and beneficiaries of medical insurance covers where their claims were declined by insurers. The contentious issues were centered on; i) chronic and pre-existing conditions, waiting period of the medical insurance covers, and, iii) authorization for admission to hospital.  IRA addressed the complaints by redefining the terms for the above issues and directed all medical underwriters to review their medical insurance contracts and harmonize as provided for in the circular. Additionally, as a risk mitigation measure, insurers were advised to provide for payment of COVID-19 vaccination for their medical insurance clients.

2. Recently Developed or Repackaged Insurance Products

In H1’2021, 10 new or repackaged insurance products were filed by various insurance companies and approved by IRA. The onset of COVID-19 and uncertainty that came along with the pandemic accelerated the repackaging of insurance products where 4 or 40.0% of the 10 products were medical plans, while life products accounted for 6 or 60.0% of the total new/repackaged products.

Industry Challenges:

• Fraud: Insurance fraud is an intentional deception committed by an applicant or policy holder for financial gain. Recent years have seen an increase in fraudulent claims especially in medical and motor insurance, with estimates indicating that one in every five medical claims are fraudulent mainly through inflated medical bills and hospitals making patients take unnecessary tests. In H1’2021, 45 fraud cases were reported, with fraudulent motor accident injury claims accounting for 15.6%, followed by theft by agents at 11.1%. The sector has been adopting the use of block chain and artificial intelligence to curb fraud within the sector, as well as most companies setting up their own assessment centres across the country so as to better determine the actual compensation,
• Increased loss ratios: the loss ratios have been increasing as the Insurers in the country have been facing losses in their core business, following the increase in claims outpacing increase in premiums.

In H1’2021, under the long term business, net claims and policyholder’s benefits increased by 29.0% to Kshs 39.4 bn, from Kshs 30.1 bn in H1’2020, while net premiums grew by a slower 22.9% to Kshs 54.6 bn from 44.4 bn in H1’2020. As a result, the loss ratios for long term business increased to 72.2% in H1’2021 from 68.8% in H1’2020. This may be attributable to higher pension payouts as a result of the pandemic’s adverse effects on employment and income levels, as well as, higher life claims occasioned by cancellation of policies due to lower affordability.

General business was also affected by the increase in loss ratios, with general insurance claims increasing by 15.3% to Kshs 32.4 bn in H1’2021, from Kshs 28.1 bn in H1’2020. On the other hand, premiums for general insurance business grew by a paltry 6.3% to Kshs 48.6 bn in H1’2021, from Kshs 45.6 bn in H1’2020. As a result, loss ratio for general insurers increased by 5.2% points to 66.8% in H1’2021, from 61.6% in H1’2020. The increase was attributable to increase in motor classes’ claims by 52.7% in H1’2021, which can be partly tied to easing of travel restrictions around the country which allowed for unabated movement. As a result of this, accidents increased and claims increased too,

• Cut throat competition: The local insurance sector is served by 56 insurance companies offering the same products, despite the low insurance penetration in the country. The battle for market share has seen some insurers resort to underhand methods of gaining competitive advantage, such as premium undercutting which refers to the practice where an insurance company secretly offers clients unrealistically low premiums in order to gain competitive advantage and to protect their market share. This is a major driver of underwriting losses suffered by the industry. The regulator announced in March 2021, that plans to engage a consultant to relook at the industry pricing are still underway. This however comes on the back drop of declining insurance penetration that could be worsened by increased premiums pricing. Some industry players have argued price fixing will kill innovation and that the industry players should be left free to set their own prices,
• Dwindling trust from insurance consumers: During H1’2021, IRA received 819 complaints, 360 in Q1’2021 and 459 in Q2’2021, lodged against insurers by policyholders and beneficiaries, with general insurance accounting for a lion’s share of the complaints at 596 complaints (72.8%), while long term insurers recorded 223 (27.2%) complaints against them. The complaints range from insurance companies failing to settle claims and constant haggling over terms of insurance contracts, fueling the public mistrust against insurers and increasing insurance apathy in the country,
• Regional regulators: Subsidiaries of Kenyan insurance companies are facing challenges in the areas of operation. For instance, in Tanzania, insurance brokers are required to be at least two-thirds (67.0%) owned and controlled by citizens of Tanzania. In Kenya, regulation on capital has made it difficult for smaller insurance companies to continue operating without increasing their capital or merging in order to raise their capital base.

Section IV: Performance of the Listed Insurance Sector in H1’2021

The table below highlights the performance of the listed insurance sector, showing the performance using several metrics, and the key take-outs of the performance.

Listed Insurance Companies H1'2021 Earnings and Growth Metrics
Insurance	Core EPS Growth	Net Premium growth	Claims growth	Loss Ratio	Expense Ratio	Combined Ratio	ROaE	ROaA
CIC Group	177.3%	0.5%	7.0%	81.3%	50.8%	132.1%	3.4%	0.6%
Jubilee Holdings	146.2%	10.0%	42.1%	109.6%	30.4%	140.0%	12.5%	3.1%
Britam Holdings	123.0%	2.4%	15.8%	78.5%	79.4%	157.8%	1.7%	0.3%
Sanlam Kenya	68.8%	45.9%	64.9%	92.8%	47.1%	140.0%	(19.3%)	(0.9%)
Liberty Holdings	(20.4%)	(5.7%)	32.5%	75.0%	84.3%	159.3%	3.1%	0.7%
*H1'2021 Weighted Average	127.6%	6.3%	29.1%	92.8%	53.8%	146.6%	6.2%	1.6%
**H1'2020 Weighted Average	(280.5%)	5.1%	6.5%	75.0%	48.8%	123.8%	2.0%	0.6%
*Market cap weighted as at 11/11/2021
**Market cap weighted as at 30/09/2020

The key take-outs from the above table include;

1. Core EPS growth recorded a weighted growth of 127.6%, compared to a weighted decline of 280.5% in H1’2020. The increase in earnings was attributable to increased premiums during the period following robust recovery by the sector from the COVID-19 pandemic, coupled with gains recorded in the equities markets and higher yields from government papers,
2. The premiums grew at a faster pace of 6.3% in H1’2021, compared to a growth of 5.1% in H1’2020, while claims grew at an aggressive faster rate of 29.1% in H1’2021, from the 6.5% recorded in H1’2020 on a weighted average basis,
3. The loss ratio across the sector increased to 92.8% in H1’2021, from 75.0% in H1’2020, owing to increased claims in insurance sub sectors such as motor and medical and perennial challenges facing the industry such as fictitious claims and increased benefit payments from the life business owing to job layoffs,
4. The expense ratio increased to 53.8% in H1’2021, from 48.8% in H1’2020, owing to an increase in operating expenses,
5. The insurance core business still remains unprofitable, with a combined ratio of 146.6% as at H1’2021, compared to 123.8% in H1’2020, and,
6. On average, the insurance sector delivered a Return on Average Equity (ROaE) of 6.2%, an increase from a weighted Return on Average Equity of 2.0% in H1’2020.

Based on the Cytonn H1’2021 Insurance Report, we ranked insurance firms from a franchise value and from a future growth opportunity perspective with the former getting a weight of 40.0% and the latter a weight of 60.0%.

For the franchise value score, we included the earnings and growth metrics as well as the operating metrics shown in the table below in order to carry out a comprehensive review (the lower the score, the better the franchise):

Listed Insurance Companies H1'2021 Franchise Value Score
Insurance Company	Loss Ratio	Expense Ratio	Combined Ratio	Return on Average Capital Employed	Tangible Common Ratio	Franchise Value Score
Jubilee Holdings	109.6%	30.4%	140.0%	14.4%	18.4%	13
Sanlam Kenya	92.8%	47.1%	140.0%	(14.9%)	26.2%	22
Liberty Holdings	75.0%	84.3%	159.3%	4.9%	10.6%	23
Britam Holdings	78.5%	79.4%	157.8%	3.7%	4.1%	23
CIC Group	81.3%	50.8%	132.1%	4.5%	17.9%	24
Weighted Average H1'2021	92.8%	53.8%	146.6%	7.2%	18.7%

The Intrinsic Valuation is computed through a combination of valuation techniques, with a weighting of 40.0% on Discounted Cash-flow Methods, 40.0% on Residual Income and 20.0% on Relative Valuation.

The overall H1’2021 ranking is as shown in the table below:

Listed Insurance Companies H1'2021 Comprehensive Ranking
Insurance Company	Franchise Value Score	Intrinsic Value Score	Weighted Score	H1'2021 Ranking	FY'2020 Ranking
Jubilee Holdings	13	1	5.8	1	2
Sanlam Kenya	22	2	10.0	2	3
Liberty Holdings	23	3	11.0	3	1
Britam	24	4	12.0	4	5
CIC Group	23	5	12.2	5	4

Major Changes from the H1’2021 Ranking are;

1. Jubilee Holdings improved to position 1 in H1’2021 from position 2 in FY’2020 mainly due to the improvement in the franchise score in H1’2021, driven by reduction in expense ratio to 30.4% in H1’2021, from 56.3% in FY’2020. As a result, the combined ratio also declined to 140.0% in H1’2021, from 157.6% in FY’2020,
2. Sanlam improved to position 2 in H1’2021 from position 3 in FY’2020 mainly due to an improvement in its intrinsic value score wherein it recorded an upside of 4.0% on its share price of Kshs 11.5 as of 11^th November 2021, outperforming Liberty, Britam and CIC Group,
3. Liberty declined to position 3 in H1’2021 from position 1 in FY’2020 mainly due to declines in both the franchise and intrinsic value scores,
4. Britam Holdings improved to position 4 in H1’2021 from position 5 in FY’2020 mainly due to the improvement in the franchise score in H1’2021, driven by reduction in loss ratio to 78.5% in H1’2021, from 85.7% in FY’2020,
5. CIC Group declined to position 5 in H1’2021, from position 4 in FY’2020, on the back of a weaker franchise score driven by deterioration of its loss ratio to 81.3% in H1’2021, from 71.4% in FY’2020, and combined ratio to 132.1% in H1’2021, from 121.5% in FY’2020.

Section V: Conclusion & Outlook of the Insurance Sector

The sector has continued to suffer from low penetration rates which has been worsened by the pandemic and its effects on the economy and Kenyans’ disposable incomes. However, the sector continues to undergo transition where traditional models have been disrupted, mainly on the digital transformation, innovation and regulation front, which have positively impacted the outlook. We expect a steady growth in premiums as underwriters come up with products suited to the planning for unforeseen events like COVID-19, mainly in the medical and life businesses. On the other hand, the recovery and lifting up of restrictions will continue to spur increased uptake of motor vehicle and marine insurance. Claims are also expected to grow aggressively with full resumption of economic activities, particularly due to an expected increase in motor claims as travel restrictions ease and medical claims which have been on a constant increase. The insurance sector will have to perform delicate balancing acts to ensure that they remain profitable. We are of the view that insurance companies have a lot they can do in order to register considerable growth and improve the level of penetration in the country to the 2020 world average of 7.4%, some of this include:

1. We expect insurers to look into portfolio optimization to re-evaluate their products and services to plot paths of growth post-pandemic in order to remain profitable. This will enable insurers to focus on their core and profitable offerings and disposing non-core offerings. This could manifest through sale of business units considered unprofitable. One such example is Jubilee Holdings sale of its general insurance unit with the exclusion of its medical unit to Allianz. We expect this portfolio optimization to extend into offloading or reducing stake in non-profitable subsidiaries and associates. Products are also set to be affected as the underwriters extend focus to profitable products,
2. We expect most underwriters to continue their aggressive efforts towards increasing investment income through diversifying their investments through avenues such as pension schemes, unit trusts, fund management and investment advisories. This shift from only engaging in underwriting business is necessitated by the increasing combined ratios that have seen insurers’ suffer losses in their core business, with increase in underwriting expenses and claims outpacing the increase in premiums. On the investment front, we also expect insurers to continue to look into non-traditional asset classes such as infrastructure. An example is Jubilee Holdings investment in associates such as Bujagali hydropower plant in Uganda, PDM Holdings Ltd and IPS Cable Systems Ltd whose share of profits has been boosting its bottom-line. In H1’2021, Jubilee Holdings profits from associates increased by 92.9% to Kshs 0.8 bn in H1’2021, from Kshs 0.9 bn from Kshs 0.3 bn in H1’2020,
3. We expect robust insurance awareness campaigns by the insurers in order to increase knowledge of insurance products, among the masses, as there still remains a gap on insurance understanding. According to a survey commissioned by the Association of Kenya insurers (AKI), the 2^nd largest contributor to low insurance uptake at 27.0%, is lack of knowledge of the various insurance products and their benefits. This gives a lot of headroom for insurers, to educate, repackage, and tailor their products to different institutions and individuals,
4. We expect continued partnerships and alternative distribution channels, by linking with other financial services players including Fund managers who have ventured into offering insurance linked products as well as the current bancassurance relationship with Banks. Insurance companies will still want to leverage on the penetration of bank products to also push insurance products. Integration of mobile money payments to allow for policy payments is also expected to continue because of convenience which it provides and also mobile phone penetration in the country is high therefore insurance companies will want to leverage this to improve penetration,
5. We expect increased use of technological tools and innovations such as Artificial Intelligence and real time data in hyper personalization of insurance marketing so as to use customer information to customize content, products and services according to the customer wishes and preferences. This will also assist insurers in responding to changes in buying behaviours and tailoring products and services to the needs of the customers to ensure high customer retention in an era where new client acquisition remains difficult. We also expect to see increased inclusion of advancements like smart contracts through block chain that would help eliminate processing costs, reduce insurance fraud and fictitious claims and improve customer satisfaction through immediate claims payment, and,
6. We also expect that there will be increased regulation in the sector from the regulatory body and other international players to ensure its solvency and sustainability. Insurers have to adjust their insurance contract recognition methods in preparation to the coming into effect of IFRS 9 and IFRS 17 in January of 2023 or earlier. The concerted push by the regulator to have the desired capital adequacy levels will likely see increased consolidations as insurers struggle to reinstate their capital buffers following the effects of the pandemic.

For the H1’2021 Insurance Report, please download it here

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.