Jun 23, 2024

Following the release of the FY’2023 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. Insurance Penetration in Kenya,
2. Key Themes that Shaped the Insurance Sector in FY’2023,
3. Industry Highlights and Challenges,
4. Performance of The Listed Insurance Sector in FY’2023, and,
5. Conclusion & Outlook of the Insurance Sector.

Section I: Insurance Penetration in Kenya

Insurance uptake in Kenya remains low compared to other key economies with the insurance penetration coming in at 2.4% as at FY’2023, according to the Q4’2023 Insurance Regulatory Authority (IRA) and the Kenya National Bureau of Statistics (KNBS) 2024 Economic Survey.  The low penetration rate, which is below the global average of 6.8%, according to Swiss RE institute, is attributable to the fact that insurance uptake is still seen as a luxury and mostly taken when it is necessary or a regulatory requirement. Notably, Insurance penetration increased by 0.1% points from 2.3% recorded in 2022, showcasing the economic recovery that saw an improved business environment in the country. The chart below shows Kenya’s insurance penetration for the last 13 years:

Source: Cytonn Research

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

*Data as of 2023

Source: Swiss Re, GCR Research, KNBS

Insurance penetration in Africa has remained relatively low, averaging 3.1% in 2022, 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 the 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 FY’2023

In FY’2023, the country witnessed a tough economic environment occasioned by elevated inflationary pressures with the average inflation rate increasing to 7.7% from 7.6% recorded in 2022. On the other hand, the overall GDP growth rate increased to 5.6% in 2023, from 4.9% recorded in 2022 according to the Central bank of Kenya. However, according to the  Q4’2023 Insurance Regulatory Authority Insurance industry report, the insurance sector showcased resilience recording a 16.7% growth in gross premium to Kshs 361.4 bn in FY’2023, from Kshs 309.8 bn in FY’2022. Insurance claims also increased by 13.3% to Kshs 94.0 bn in FY’2023, from Kshs 82.9 bn in FY’2022 and this was higher than the 2.4% growth recorded in FY’2022.

Notably, the general insurance business contributed 52.9% of the industry’s premium income compared to 47.1% contribution by long term insurance business. During the period, the long term business premiums increased by 20.7% to Kshs 170.0 bn, from Kshs 140.8 bn in FY’2022 while the general business premiums grew by 13.3% to Kshs 191.3 bn, from Kshs 168.9 bn in FY’2022.  Additionally, motor insurance and medical insurance classes of insurance accounted for 63.5% of the gross premium income under the general insurance business, compared to 64.4% recorded in FY’2022. As for long-term insurance business, the major contributors to gross premiums were deposit administration and life assurance classes accounting for 59.8% in FY’2023, compared to the 61.1% contribution by the two classes in FY’2022.

The NASI index declined by 27.7% in FY’2023, from a 23.7% gain recorded in FY’2022, leading to the deterioration of the insurance sector’s bottom line as a result of fair value losses in the equities investments. As such, the sector’s allocation quoted continue to reduce, with the proportion of quoted equities to total industry assets declining to 2.0% in FY’2023, from 2.8% in FY’2022.

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 ripple effects of the pandemic witnessed in 2020 that saw both individuals and businesses seek insurance uptake to cover for their activities, leading to growth in gross premiums which increased by 16.7% to Kshs 361.4 bn in FY’2023, from Kshs 309.8 bn in FY’2022 and,
4. The sector’s investments income increased by 17.4% to Kshs 69.7 bn in FY’2023, from Kshs 59.3 bn in FY’2022, mainly attributable to the 28.1% increase in investment income in the general insurance business to Kshs 15.0 bn, from Kshs 11.7 bn in FY’2022, coupled with a 14.8% increase in the investment income in the long-term to Kshs 54.7 bn, from Kshs 47.6 bn in FY’2022.

On valuations, listed insurance companies are trading at a price to book (P/Bv) of 0.6x, lower than listed banks at 0.8x, but both are lower than their 16-year historical averages of 1.3x and 1.6x, for the insurance and banking sectors respectively. These two sectors are attractive for long-term investors supported by the strong economic fundamentals. The chart below shows the price to book comparison for Listed Banking and Insurance Sectors:

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 2020 saw the adoption of digital distribution of insurance products as a matter of necessity. Consequently, majority of insurance companies continue to take advantage of the available digital channels to drive growth and increase insurance penetration in the country. In January 2023, the Association of Kenyan Insurers (AKI) announced that they had launched a website to help consumers learn more about insurance. This website is part of the various initiatives the Association and other players in the industry including the Insurance Regulatory Authority (IRA) are undertaking to increase knowledge and understanding of insurance so that consumers can make informed choices. Consumers often term insurance as difficult and complex to understand. This sentiment has been established through various studies carried out to establish reasons for low uptake of insurance, the latest being the 2021 FinAccess Survey. The survey found that there has been growth of insurance understanding with only 14.3% citing lack of understanding in 2021 compared to 40.9% in 2016.

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 effects 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 FY’2023, regulation remained a key aspect affecting the insurance sector and the key themes in the regulatory environment include;

1. IFRS 17- IFRS 9, Financial Instruments was replaced with 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 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,
2. 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 2022, Sanlam Limited, a South African financial services group listed on the Johannesburg Stock Exchange, announced that it had entered into a definitive Joint Venture agreement for a term of 10 years with Allianz SE, with the aim to leverage on the two entities footprints in Africa and create a leading Pan-African financial services group, with an estimated equity value of Kshs 243.7 bn. Key to note, Sanlam Limited, indirectly owns 100.0% in Hubris Holdings Limited, which is the majority shareholder in Sanlam Kenya Plc, a listed insurance and financial services entity on the Nairobi Stock Exchange. The initial shareholding split of the Joint Venture was announced to be 60:40, Sanlam Limited to Allianz respectively, with the effective date of the proposed transaction being within 12-15 months of the announcement, subject to relevant approvals. However, given the length of the Agreement we expect that the Joint Venture will provide for Sanlam Kenya Plc, Allianz General Insurance Kenya and Jubilee General Insurance (which Allianz owns the majority stake in – 66.0%), to combine operations to grow their market share, asset base and bottom lines.

Section III: Industry Highlights and Challenges

The insurance industry has experienced steady growth over the last decade, as a result, we anticipate sustained moderate growth on the back of an improving economy and subsequent rise in insurance premiums, which will strengthen the sector's ability to sustain profitability.

In FY’2023, the Insurance Regulatory Authority (IRA) accepted 4 new or repackaged insurance products filed by various insurance companies in accordance with their duty of regulating and supporting the development of the insurance sector. In the new products, three were general insurance products of medical and motor covers, with one an investment product in education.

In addition, in September 2023, the Retirement Benefits Authority (RBA) approved seventeen Life Insurance Companies to receive NSSF Tier 2 contributions. This approval follows the implementation of the National Social Security Fund (NSSF) Act, 2013. The objective of this Act is to review and enhance the minimum rate of contributions that will guarantee better accumulation of funds and thus better benefits at retirement.

Industry Challenges:

• Insurance fraud: Insurance Fraud is an intentional deceit performed by an applicant or policyholder for financial advantage. In recent years, there has been an upsurge in fraudulent claims, particularly in medical and motor insurance, with estimates indicating that one in every five medical claims are fraudulent. This is mainly through exaggerating medical costs and hospitals by making patients undergo unnecessary tests. In FY’2023, 56 fraud instances were reported, with fraudulent motor accident injury claims accounting for 21.4% of the total. Fraudsters also collude with hospitals to make false claims, fake surgeries and treatments, while health-care providers overcharge insured patients. To combat fraud, the sector has adopted the usage of block chain and artificial intelligence,
• IFRS Reporting: With the new system of financial reporting being effected for the Fy’2023 reporting, insurance companies experienced challenges adhering and adapting to the new rules, with some, e.g. Jubilee Holdings, having to postpone the release of their results because of this. Additional training and personnel hiring costs were also incurred by the companies,
• High loss ratios: Core insurance business performance has been dwindling, mainly attributable to the high loss ratios. In FY’2023, loss ratios under the long-term insurance business increased by 22.2% to 3.1 bn, from 2.6 recorded in FY’2022, mainly attributable to 10.9% increase in claims to Kshs 86.1 bn, from Kshs 77.6 bn in FY’2022, that outpaced the 12.4% increase in net premiums to Kshs 128.8 bn, from Kshs 114.6 bn in FY’2022. However, the loss ratios under the general insurance business remained relatively unchanged from the 67.9% recorded in FY’2022,
• Declining consumer confidence in the insurance industry: In FY2023, IRA received 440 complaints from policyholders and beneficiaries lodged against insurers. The general insurance accounting for majority of the complaints at 77.5%, while long-term insurers recording 22.5%. The complaints range from insurance companies failing to settle claims and constant haggling over terms of insurance,
• High Market competition: Despite low insurance penetration in the country, the sector is served by 57 insurance companies offering the same products. Some insurers have resorted to shady tactics in the fight for market dominance, such as premium undercutting, which is involves offering clients implausibly low premiums in order to gain competitive advantage and protect their market share. This is a significant factor in the industry's underwriting losses. Plans to hire a consultant to review industry pricing in March 2021 were retaliated against by the regulator, but the plans are still in the works. However, this is against a background of weak insurance uptake, which could be made worse by higher premium prices. Industry participants have debated pricing, and,
• Regulation compliance: Due to laws on capital requirements, smaller insurance businesses have found it challenging to operate without raising capital or combining to expand their capital base. Additionally, the implementation of IFRS 17, are expensive since accounting and actuarial systems need to be updated and realigned.

Section IV: Performance of the Listed Insurance Sector in FY’2023

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.

Cytonn Report: Listed Insurance Companies FY’2023 Earnings and Growth Metrics
Insurance	Core EPS Growth	Net Premium growth	Claims growth	Loss Ratio	Expense Ratio	Combined Ratio	ROaE	ROaA
Britam	97.5%	61.5%	155.1%	73.7%	243.7%	317.4%	7.7%	1.0%
Liberty	190.5%	148.6%	42.0%	63.2%	35.3%	98.5%	7.4%	1.6%
CIC	817.6%	22.5%	118.0%	88.8%	112.7%	201.5%	18.9%	2.9%
Jubilee	(19.8%)	(52.2%)	21.9%	95.8%	237.9%	333.8%	8.9%	2.5%
Sanlam	(124.0%)	803.9%	(46.5%)	72.8%	88.1%	160.9%	(15.0%)	(0.4%)
*FY'2023 Weighted Average	116.0%	41.4%	83.3%	83.8%	203.1%	287.0%	4.9%	1.8%
**FY'2022 Weighted Average	377.4%	1.6%	1.9%	88.1%	52.5%	140.6%	7.0%	2.2%
*Market cap weighted as at 21/06/2024
**Market cap weighted as at 09/06/2023

The key take-outs from the above table include;

1. Core EPS growth recorded a weighted growth of 116.0%, compared to a weighted growth of 377.4%, in FY’2022. The sustained growth in earnings was attributable to increased premiums during the period following continued recovery by the sector from the impacts of the COVID-19 pandemic, coupled with higher yields from government papers,
2. The premiums grew at a significantly quicker pace of 41.4% in FY’2023, compared to a growth of 1.6% in FY’2022, while claims also grew at a higher rate of 83.3% in FY’2023, from the 1.9% recorded in FY’2022 on a weighted average basis,
3. The loss ratio across the sector decreased to 83.8% in FY’2023 from 88.1% in FY’2022,
4. The expense ratio increased significantly to 203.1% in FY’2023, from 52.5% in FY’2022, owing to an increase in operating expenses, a sign of decreased efficiency,
5. The insurance core business still remains unprofitable, with a combined ratio of 287.0% as at FY’2023, compared to 140.6% in FY’2022, and,
6. On average, the insurance sector delivered a Return on Average Equity (ROaE) of 4.9%, a decrease from a weighted Return on Average Equity of 7.0% in FY’2022. The chart below shows a comparison between the insurance and banking sector return on average equity;

*Data as of Q1’2024

Source: Cytonn Research

Based on the Cytonn FY’2023 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 ranking, 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:

Cytonn Report: Listed Insurance Companies FY’2022 Franchise Value Score
Insurance Co.	Loss Ratio	Expense Ratio	Combined Ratio	Return on Average Capital Employed	Tangible Common Ratio	Franchise Value Score	Ranking
Liberty Holdings	63.2%	35.3%	98.5%	(10.7%)	18.2%	14	1
Sanlam Kenya	72.8%	88.1%	160.9%	(13.6%)	2.3%	19	2
CIC Group	88.8%	112.7%	201.5%	19.2%	14.6%	20	3
Britam Holdings	73.7%	243.7%	317.4%	13.9%	13.6%	23	4
Jubilee Holdings	95.8%	237.9%	333.8%	9.3%	26.9%	29	5
*FY'2023 Weighted Average	83.8%	203.1%	287.0%	10.5%	18.9%

The Intrinsic Valuation is computed through a combination of valuation techniques, with a weighting of 40.0% on Discounted Cash-flow Methods, 35.0% on Residual Income and 25.0% on Relative Valuation. The overall FY’2022 ranking is as shown in the table below:

Cytonn Report: Listed Insurance Companies FY’2023 Comprehensive Ranking
Bank	Franchise Value Score	Intrinsic Value Score	Weighted Score	FY'2023 Ranking	FY'2022 Ranking
Sanlam Kenya	3	2	2.4	1	4
Jubilee Holdings	5	1	2.6	2	1
Liberty Holdings	1	4	2.8	3	3
CIC Group	4	3	3.4	4	2
Britam	2	5	3.8	5	5

Major Changes from the FY’2022 Ranking are;

1. Sanlam Kenya improved to position 1 in FY’2023 mainly due to the strong the franchise and intrinsic scores in FY’2022, driven by net premium growth to 803.9% in FY’2023, from a decline of 11.1% in FY’2022
2. Liberty Kenya Holdings maintained position 3 in FY’2023 driven by an improvement in franchise score, attributable to the improvement in the expense ratio to 35.3%, from 71.2%, taking the combined ratio to 98.5%, an improvement from the 133.1% recorded in FY’2022,
3. Britam Holdings maintained position 5 in FY’2023, mainly due to declines in intrinsic scores in FY’2023, driven by the deterioration in the loss ratio to 73.7%, from 66.1% in FY’2022. However, the combined ratio improved to 110.0%, from the 137.4% in FY’2022, and,
4. CIC Group declined to position 4 in FY’2022 from position 2 in FY’2022 mainly due to deterioration in both the franchise score and intrinsic value score.

Section V: Conclusion & Outlook of the Insurance Sector

The insurance industry has continued to struggle with low penetration rates, as well as a deteriorating business environment caused by rising interest rates, higher inflationary pressures and persistent currency depreciation. As a result, the level of disposable income among households has decreased. 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 also expect the insurance sector to maintain the culture of innovation achieved during the pandemic period while maintaining the customer centricity as the main focus of the sector’s operating model. As a result, we believe that in order to maintain profitability, the insurance industry will need to engage in careful balancing acts. Some of these things the industry can take to grow significantly and raise penetration in the nation include:

1. Partnerships and alternative distribution channels: We anticipate that underwriters will continue to form alliances and offer additional distribution channels in the future. This can be accomplished by collaborating with other financial services providers, such as fund managers who have moved into delivering insurance-linked products, in addition to the present bancassurance connection with banks. The insurance business can also use the penetration of bank products to promote their own products. Integration of mobile money payments to allow for policy payments is also predicted to continue due to the ease it provides, as well as the country's high mobile phone penetration; thus, insurance companies would wish to exploit this to improve penetration,
2. Regulations - To ensure the sector's solvency and sustainability, we anticipate more regulation from the regulatory body and other international stakeholders. Insurers must modify their insurance contract recognition techniques in advance of the implementation of IFRS 17.  The regulator's quest for the targeted capital adequacy levels will almost certainly result in further consolidations as insurers struggle to achieve the capital requirements, particularly for small firms. Furthermore, regulators, governments, and policymakers are working harder to make Environmental, Social, and Governance (ESG) standards a requirement in the insurance industry,
3. Innovation: To aid portfolio expansion and growth, insurers must harness the digital insurance solutions at their disposal in order to improve internal efficiency and accelerate time to market. As such, we anticipate cooperation between insurers and InsurTechs. For instance, in February 2024, Britam launched BetaLab, a new insurance innovation hub, as it aims to nurture budding InsurTech and fintech startups, and fast track product development in the industry. The lab’s mission is to incubate, innovate, and accelerate startups, nurturing and empowering innovation among internal staff, while also exploring innovation opportunities with insuretechs and fintechs,
4. Investment diversification - To improve earnings and reduce losses, underwriters should focus more on investment diversification through routes such as pension plans, unit trusts, fund management, and investment advisories. As indicated by rising combined ratios, insurers have suffered losses in their core business, with increases in underwriting expenditures and claims exceeding increases in premiums. In addition, we anticipate insurers will continue to investigate non-traditional asset types such as infrastructure, and,
5. Insurance awareness campaigns – Low insurance penetration is significantly impacted by the persistent information gap about insurance products and their significance. Insurance is still largely assumed to be regulatory compliance rather than a necessity. The regulators, insurers, and other stakeholders should enhance insurance awareness campaigns to increase understanding of insurance products. According to a survey commissioned by the Association of Kenya Insurers (AKI), the second largest contributor to low insurance uptake at 27.0% is a lack of knowledge of the various insurance products and their benefits. As such, there is a lot of headroom for insurers to educate, repackage, and tailor their products to different potential clients.

For more information, please read out FY’2023 Listed Insurance Sector full report.

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.