We initiate coverage of the insurance sector with an analysis of the six listed insurance companies and an update on UAP that currently trades Over-The-Counter (OTC). The most prominent themes shaping industry developments are consolidation, regional expansion, and regulatory reform. Through a string of mergers and acquisitions, consolidation has become the favoured strategic option for increased premium generation, earnings diversification and regional expansion. It as a viable alternative to insolvency for smaller players. 


The current proposition to revise solvency requirements in line with the globally accepted “Solvency II” prudential guidelines is set to expose primary insurers with excessive risk exposures. If passed, the latest draft of the Finance Bill currently under deliberation, is set to adjust the uniform capital requirements to ratio based requirements similar to those that govern commercial banks under the “Basel II” guidelines and subsequently exert pressures on smaller players to remain solvent.

 Smaller players with an established niche with owners willing to relinquish their stakes for increased liquidity, make up the companies that are likely to be future acquisition targets.

With most equities having traded above their fundamentally based values, we expect weaker investment returns in 2014. Inflation remains 20 basis points (bps) shy of the Monetary Policy Committee’s (MPC) upper limit (7.5%), real returns on the short term end of the yield curve have also dwindled to 150.2 bps (91 day T- bill).

This will be a concern for most of the investment portfolios under coverage which are primarily gilt-edged. Rental yields have also declined across a number of urban centres. In an effort to maintain the current level of profitability, we expect greater attention towards pricing, operational efficiency and underwriting margins.

 Client management solutions, data analytics and shared service platforms form an operational drive to embed technology into the insurance business model. Pan Africa are working on a policy administration system set to go live in 2014 and Liberty are part of an Africa wide roll-out for an integrated finance and administration system.

 We see these initiatives generating bigger returns from the existing customer base and enhancing synergies for primary insurers with a diverse product offering. The East African region boasts some of the fastest growth rates in the world and is being complemented by a frontier market optimism that is resulting in increased private sector inflows. On the receiving end, is growing consumerism amongst a young demographic profile spread across six countries. The proliferation of distribution platforms that now include mobile phones, bancassurance and agents is set to add pace to increasing penetration levels. We observe these developments in outreach will increase premium generation in both the life and non-life segments.

Three of the five best performing stocks in 2013 came from the insurance sector. Will this rally continue into 2014? The answer lies in earnings sustainability and corporate actions that have effectively created a signaling effect to the market.


 Given the subdued outlook on the investment sector and Britam’s play on investment assets, we expect margin pressures on its bottom line. The ongoing acquisition of Real Insurance also poses a short-term risk on operational efficiency as the integration process unfolds. The potential for increased premium generation should excite investors but we also maintain concerns of client renewals. FY13 results show a 40.3% rise in operating expenses, and management guidance indicates this was a mixture of an increase in operating expenses in regional subsidiaries (Rwanda Sh70m & South Sh80m) that have not been supported by corresponding revenues.

After a string of acquisitions, earnings should normalize by 2016, so the short term focus is expected to be on underwriting quality. Using a price to book approach with an exit multiple of 1.54x and a relative PE valuation, we initiate coverage on Britam with a “HOLD” recommendation and a price target of KES 16.9.



Being the only Kenyan registered reinsurer, the 18% mandatory cessation of all treaty business has boosted top line growth (+21.4% – FY13). Market developments with respect to francophone countries will also see Kenya Re subsidiarise its West Africa office and add further growth to reinsurance premiums. Further extension in 2015 is highly probable. This assumption forms the basis of our upside case for Kenya Re (FY14F; +17.79% in premium growth) incorporating unchanged voluntary cessations from the existing primary insurers should the regulatory cessation expire. Key to note is this counter presents the lowest volatility over the last 12 months. Using a blended valuation of a price to book approach and a discounted PE valuation we arrive at a “BUY” recommendation and a target price of Sh28.6.



Having a 27% market share of the medical segment (18.26% of total premium generation – 2012), Jubilee demands a healthy share of the general premiums market share (11.3% – FY12) and management has declared efforts to replicate this success across regional markets. With 45.35% in non-domestic premium contribution FY13, we also see Jubilee having the broadest revenue base and ultimately view the insurer as a fulcrum on regional markets. Management guidance highlights a conservative approach to the more volatile investment assets coupled with a strategic focus on insurance. Premiums have grown at a 4 year CAGR of 26.48% and ROE remains at 21.58% (5 year low).

According to our risk adjusted performance analysis the counter’s volatility remains stable and we believe first half 2014 earnings announcements will bolster share price performance further. We also believe the company’s leading status in the insurance market is yet to be factored into the share price and using our price to book approach derived price of Sh475.7, recommend a “BUY”.


After a successful fund raising in 2012, that lifted share capital from Sh600m to Sh5.6bn, UAP has aggressively rolled out at its pan-African strategy, venturing into virgin territories like DRC Congo. The successful completions of property developments in South Sudan and Uganda have also boosted rental income that currently stands at Sh271m  FY13. We forecast Sh1.2bn annually in rental income after the completion of the Equatorial Tower in Juba and the UAHPL Tower in Nairobi scheduled for the end of 2015.

Investment properties which account for 34% of total assets have boosted net margins and supported a turnaround of the life business through rental income and revaluations which posted an operating margin (24.08% – FY13) for the second consecutive year. The acquisition of Century Insurance in Tanzania is also expected to lift non-domestic premium generation.

Currently trading at a P/B of 0.8x and an ROE of 12.26% we find support in our recommendation in the trailing valuation multiples. Management has not confirmed or suggested a listing date on the main market segment due to lack of board approval but we do expect a listing before the end of 2015. Using a relative PE valuation, we update our recommendation from a “HOLD” to a “BUY” with a target price of Sh133.8.

CIC Insurance

CIC’s Net Income FY13 grew by a mere 1.43% to Sh1.4bn despite impressive top line growth (+23.25% – FY13) in gross earned premiums which surpassed the Sh10bn mark for the first time. However, the effective low net income margin exposes operational risk whereby expenses such as claims have outpaced top line growth significantly eroding margins. The group’s success in employing a cooperative model stands out as a long term lucrative asset. Innovative products, regional expansion and strategic alliances with large organisations, place it in a position to sustain further growth in the insurance business. Considering the counter has gained 67.2% – YTD and a trailing P/E of 15.1x (27% premium on FY14F sector average) we recommend a HOLD with a target price of Sh9.1.

CFC Insurance

Liberty Kenya Holdings, parent to CFC Life Insurance and Heritage Insurance had a turnaround year, recording 28.92% – FY13 net income growth to Sh1.1 Bn. The performance was achieved via successful risk management resulting in a Sh5.5bn refund on claims paid by reinsurers. In line with their semi-niche market inclined towards corporate clientele, the results reflect a shifting focus to improving underwriting profit margins 8.5% – FY13 (3.2% FY12) rather than premium growth (+6.39% – FY13). A 17.32% dip in investment income against consistent accumulation of investment assets over the years has raised concern over the reserved investment approach.

Going forward continued focus on underwriting quality, a solid asset base and expansion of existing distribution channels will collectively support sustained profitability and cement its vision of long term stability. Using a blended valuation of a price to book approach and a PE valuation we arrive at a “BUY” recommendation and a target price of Sh20.2.

Pan Africa

Pan Africa, the only listed specialised life insurer, more than doubled FY13 net income to Sh1.25bn. This was driven by a 23.26% increase in investment income – through; interest earned on treasury bonds and sale of plots and a 32.83% rise in fair value gains on equities property and bonds rescuing a 2.14% drop in gross earned premiums. These diversified revenue streams are in line with the long term agenda to be a diversified financial services company. Heightened competition in the life insurance business is considerably threatening their market leadership position and has already culminated partially in 0.5% drop in premium growth. This has also been expressed through their declining renewal rate over the past two financial years. Conspicuously, the company has managed to keep expenses at bay despite the ongoing business expansion indicating high levels of internal efficiency. Going forward, high yields from a growing investment portfolio, ICT software system installation to further scale up efficiency levels and a step up in distribution efforts such as bancassurance with Family Bank will be key contributors to sustained profitability. We established a fair value estimate of Sh137.8 making it a “HOLD” at current prices.


Genghis Capital Ltd, PWC Tower, 4th Floor, Off Westlands Roundabout, Nairobi.


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