2014-08-13 Kenya Insurance Sector Update-2

8/9/2019 2014-08-13 Kenya Insurance Sector Update-2

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Equity research | Kenya | Insurance

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Kenya Insurance SectorAugust 2014 Update

Scaling the Warren Buffett criterion 13 August 2014 The listed Kenya insurers are actively implementing various initiativesconcurrently. These include strategic acquisitions and partnerships, cross-border expansion, forays into property business, new business lines(microinsurance) and debt capital raises to fund all these activities. Although theinsurers are currently still exceeding the Warren Buffett criterion for asuccessful insurance business in terms of cost of float, these new strategiescould put pressure on underwriting margins in the next 2-3 years. Meanwhile,half of the insurance stocks covered in our September 2013 initiation piece(‘Against the odds’) have since rallied by more than 100%, but there still seemsto be value in Kenya Re, Jubilee and Liberty in particular, as well as the OTC-traded UAP Insurance on which we initiate coverage in this note. Four insurersnow have a market capitalisation in the USD 200m - 500m range, while three areaveraging between USD 70,000 – 140,000 in daily value of shares traded.

Running the numbersOur updated comparative ratio analysis of the insurers reveals that (a) With theexception of Britam and contrary to well established perception, short terminsurance contributes far more to the bottom line than long term business does,despite long term business being allocated the bigger proportion of investmentincome (b) despite having higher net loss ratios than Britam, Jubilee and CIC haveconsistently had the highest RoEs because they both have much lower expense

ratios than Britam (c) Jubilee and Liberty are the only insurers with solvencymargin ratios below 100% (d) Insurance RoAs continue to outperform the banks,with Kenya Re’s RoA in the double digits (e) in contrast to the banks, regionalsubsidiaries (especially Uganda and Tanzania) seem to be more profitable relativeto revenue generated compared to Kenya.

The latest and greatest(a) The new Insurance Act should come into effect in the next 12 months, with afocus on self-assessments and risk-based supervision and the regulator issuingimplementation guidelines much in the same way CBK does (b) despite Britamonly recognising half of the gains in Equity Bank’s share price in its P&L, theimpact of the 2014 rally in that share alone could match Britam’s FY13 earnings

(c) latest data indicates that microinsurance is exerting pressure on underwritingmargins (d) Britam, Jubilee and CIC will expand their operations in East, Central,Southern and even West Africa in the next two years via inorganic acquisitions and joint ventures.

Updated recommendationsWe derive updated valuations from our risk-adjusted RoE-P/B regression analysisand place BUY recommendations on Kenya Re (175% upside), Jubilee (50%upside), Liberty (30% upside) and UAP (27% upside). We use the same model todowngrade Britam to HOLD (4% upside), CIC (14% downside) to REDUCE and PanAfrica (20% downside) to SELL.

Analyst:Judd Murigi +254 20 276 2637 [email protected]

Online:https://aas.sharefile.com


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13 August 2014Page 2 of 43


Table of contentsInvestment thesis ...................................................................................................................... 3

Explaining the Warren Buffett criterion ............................................................................... 5 Valuation summary ............................................................................................................... 8 Industry update: Upgrading with a new Insurance Act ........................................................ 9 P&L analysis: Operating efficiency the RoE differentiator ................................................ 10 Balance Sheets reveal high solvency margins ................................................................... 11 Short term business surprisingly outperforms long term ................................................ 12 Regional subsidiaries more profitable than Kenya? .......................................................... 13 Britam: Voracious appetite ................................................................................................. 14

UAP: The medicine men ...................................................................................................... 20 Kenya Re: Back to black ...................................................................................................... 25 Jubilee: Gearing up for M&A ............................................................................................... 29 CIC: Under pressure ............................................................................................................ 33 Liberty Kenya: P&L noise continues ................................................................................... 37 Pan Africa: New moves ....................................................................................................... 41


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Investment thesis› Still passing the Warren Buffett test, despite declining margins. Review of the

available 2013 underwriting performance (Britam, CIC and Kenya Re) revealscontrasting trends. Britam which traditionally has had a vastly superior short termunderwriting margin over its peers saw its underwriting margin almost halved to 8%in 2013, while CIC’s margin of 5% was its lowest since 2010 at least. One cause wasmicroinsurance which is a new medical insurance product targeting the low incomemarket and is still incurring significant losses due to low volumes and prevailing anti-selection. On the positive side, Kenya Re bounced back to underwriting profitability in2013. All things considered, the insurers are still maintaining a positive cost of float in

their short term insurance businesses, which means that they are effectively not onlymeeting but surpassing Warren Buffett’s criteria for a successful insurance business.Warren Buffett regularly explains to Berkshire Hathaway shareholders that aninsurance business has value if its cost of float over time is less than the cost thecompany would otherwise incur to obtain funds (for the Kenyan insurers, thisbenchmark cost would be 10% which has been the average prevailing rate ongovernment treasuries over the last two years) Float refers the funds that aninsurance company has available for investment due to the time lag between receiptof premium revenue and incurrence of claims as and when they occur. It is calculatedby deducting insurance-related assets (such as premiums recoverable and lossrecoverable from reinsurance) from insurance liabilities (such as claims & benefitsincurred but not paid, and unearned premiums). Cost of float is measured by

underwriting losses incurred. We use the concept of underwriting profit or loss onlyfor short term insurance, because the nature of long term insurance is such thatinvestment income is an integral element of the business and it would probably not beappropriate to compare life insurance benefits with life insurance premiums alone.Whilst Warren Buffett sets a benchmark of underwriting losses of up to 10% for asuccessful insurance business, we find that the Kenya insurers are actually in positiveunderwriting margin territory to start with.

Underwriting margin (underwriting profit/gross written premium)

Aviation Engineering FiredomesticFire

industrial Liability MarineMotor

privateMotor

commercialPersonalaccident Theft WIBA Misc Medical Micro* Total

Britam FY13 14% 16% 15% 20% 19% -12% 17% 20% 18% 10% 55% 9% -54% 8%

FY12 21% 44% -10% 69% 6% 10% 19% 36% 18% 22% 55% 7% 16%FY11 17% 30% 12% -91% 21% 7% 28% 38% 11% 72% 25% -5% 18%

FY10 16% 11% 0% -20% 25% -27% 14% 37% 44% 9% -14% 5% 9%

CIC FY13 7% 46% 18% -29% 26% -8% 24% 16% 14% 34% 4% -12% 65% 5%

FY12 11% 43% 34% -17% 11% -7% 17% 7% 23% 29% 7% -6% 6%

FY11 3% 43% 16% -73% 13% 0% 15% 27% 21% 32% 6% -9% 8%

FY10 15% 29% 14% 11% 14% -14% 13% 11% 33% 29% 2% -2% 6%

Kenya Re FY13 38% 33% 46% 12% 32% 17% 43% 11% -15% -33% 4% 7% -29% 1%

FY12 -217% 29% 37% -4% 21% 7% 53% -7% -33% -26% 1424% 20% -38% -8%

FY11 564% 10% -442% -15% 51% -8% 102% 28% -29% 18% -334% 26% -27% -4%FY10 -5% 10% -723% -15% 43% -12% 177% 153% -23% -18% 2340% 11% 2%

Source: Association of Kenya Insurers, African Alliance Research. *For Britam, this is micro insurance. For CIC, this is described as ‘micro solutions’, and it isunclear whether it encompasses micro insurance or not.


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› There’s still value despite significant rally in insurance shares. Since our initiation ofcoverage in September 2013, insurance sector share prices have rallied by 200%(Britam), 43% (Jubilee), 148% (CIC), 108% (Pan Africa), 16% (Kenya Re) and 50%(Liberty). As such, we have been forced to cut our recommendation on a number ofthese shares. Nevertheless, we still see significant value in Kenya Re, Jubilee, Libertybased on their price-to-book ratios relative to their RoEs, as well as Britam due toexpected strong FY14 results.

› New Insurance Act still on the way. The Insurance Regulatory Authority (IRA) is stillrolling out the risk-based supervision model using a more flexible regulatoryframework. The new Insurance Act, expected to become effective in the next twelvemonths, will be much less prescriptive and the IRA will, just as the CBK does, issueguidelines to direct insurers on how to apply the requirements of the Act.


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Explaining the Warren Buffett criterionWe reproduce below some of Warren Buffett’s explanations regarding assessment ofinsurance companies:

‘What counts in insurance, our core business, is the amount of "Float" and its cost overtime.

Float is the total of loss reserves, loss adjustment expense reserves and unearnedpremium reserves minus agent’s balances, prepaid acquisition costs and deferredcharges applicable to assumed reinsurance. And the cost of float is measured by ourunderwriting loss.

"Float" is money that doesn't belong to us but that we temporarily hold. Float arisesbecause premiums are received before losses are paid, an interval that sometimesextends over many years. loss events that occur today do not always result in ourimmediately paying claims, because it sometimes takes many years for losses to bereported (asbestos liability losses would be an example - the problems they signify liedormant for decades, before virulently manifesting themselves.), negotiated and settled.During that time, the insurer invests the money. Insurance has provided a fountain offunds with which we've acquired the securities and businesses that now give us an ever-widening variety of earnings streams. This pleasant activity typically carries with it adownside: The premiums that an insurer takes in usually do not cover the losses andexpenses it eventually must pay. That leaves it running an "underwriting loss", which isthe cost of float.

An insurance business has value if its cost of float over time is less than the cost thecompany would otherwise incur to obtain funds. But the business is a lemon if its cost offloat is higher than market rates for money. If this cost (including the tax penalty) is higherthan that applying to alternative sources of funds, the value is negative. If the cost is lower,the value is positive - and if the cost is significantly lower, the insurance business qualifiesas a very valuable asset.

We hold an exceptional amount of float compared to premium volume. Float is wonderful -if it doesn't come at a high price. Its cost is determined by underwriting results, meaninghow the expenses and losses we will ultimately pay compare with the premiums we have

received. When an insurer earns an underwriting profit, float is better than free. In suchyears, we are actually paid for holding other people's money. For most insurers, however,life has been far more difficult: In aggregate, the property-casualty industry almostinvariably operates at an underwriting loss. When that loss is large, float becomesexpensive, sometimes devastatingly so.

Overall, our results have been good. True, we've had five terrible years in which float costus more than 10%. But in 18 of the 37 years Berkshire has been in the insurance business,we have operated at an underwriting profit, meaning we were actually paid for holdingmoney. And the quantity of this cheap money has grown far beyond what I dreamed itcould when we entered the business in 1967 (Berkshire purchased National Indemnity("NICO") in 1967).

For example, during 1990 we held about $1.6 billion of float slated eventually to find itsway into the hands of others. The underwriting loss we sustained during the year was $27


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million and thus our insurance operation produced funds for us at a cost of about 1.6%.There are important qualifications to this calculation - the fat lady has yet to gargle, letalone sing, and we won't know our true 1967 - 1990 cost of funds until all losses from thisperiod have been settled many decades from now.

Since our float has cost us virtually nothing over the years, it has in effect served as equity.Of course, it differs from true equity in that it doesn't belong to us. Nevertheless, let'sassume that instead of our having $3.4 billion of float at the end of 1994, we had replacedit with $3.4 billion of equity. Under this scenario, we would have owned no more assetsthan we did during 1995. We would, however, have had somewhat lower earnings becausethe cost of float was negative last year. That is, our float threw off profits. And, of course,to obtain the replacement equity, we would have needed to sell many new shares of

Berkshire. The net result - more shares, equal assets and lower earnings - would havematerially reduced the value of our stock. So you can understand why float wonderfullybenefits a business - if it is obtained at a low cost.

Accounting irony: Though our float is shown on our balance sheet as a liability, it has had avalue to Berkshire greater than an equal amount of net worth would have had.

The downward trend of interest rates in recent years has transformed underwriting lossesthat formerly were tolerable into burdens that move insurance businesses deeply into thelemon category. Some years back, float costing, say, 4% was tolerable becausegovernment bonds yielded twice as much, and stocks prospectively offered still loftierreturns. Today, fat returns are nowhere to be found (at least we can't find them) and short-

term funds earn less than 2%. Under these conditions, each of our insurance operations,save one, must deliver an underwriting profit if it is to be judged a good business.

Combined ratio and long tailsThe combined ratio represents total insurance costs (losses incurred plus expenses)compared to revenue from premiums.

Because the funds are available to be invested, the typical property-casualty insurer canabsorb losses and expenses that exceed premiums by 7% to 11% and still be able to breakeven on its business. Again, this calculation excludes the earnings the insurer realizes onnet worth - that is, on the funds provided by shareholders. i.e. when the investmentincome that an insurer earns from holding on to policyholders' funds ("the float") is taken

into account, a combined ratio in the 107-111 range typically produces an overall break-even result, exclusive of earnings on the funds provided by shareholders.

However, many exceptions to this 7% to 11% range exist. For example, insurance coveringlosses to crops from hail damage produces virtually no float at all. Premiums on this kindof business are paid to the insurer just prior to the time hailstorms are a threat, and if afarmer sustains a loss he will be paid almost immediately. Thus, a combined ratio of 100for crop hail insurance produces no profit for the insurer.

At the other extreme, malpractice insurance covering the potential liabilities of doctors,lawyers and accountants produces a very high amount of float compared to annualpremium volume. The float materializes because claims are often brought long after thealleged wrongdoing takes place and because their payment may be still further delayed bylengthy litigation. The industry calls malpractice and certain other kinds of liabilityinsurance "long-tail" business, in recognition of the extended period during which insurers


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get to hold large sums that in the end will go to claimants and their lawyers (and to theinsurer's lawyers as well).

In long-tail situations a combined ratio of 115 (or even more) can prove profitable, sinceearnings produced by the float will exceed the 15% by which claims and expenses overrunpremiums. The catch, though, is that "long-tail" means exactly that: Liability businesswritten in a given year and presumed at first to have produced a combined ratio of 115 mayeventually smack the insurer with 200, 300 or worse when the years have rolled by and allclaims have finally been settled.

The pitfalls of this business mandate an operating principle that too often is ignored:Though certain long-tail lines may prove profitable at combined ratios of 110 or 115,

insurers will invariably find it unprofitable to price using those ratios as targets. Instead,prices must provide a healthy margin of safety against the societal trends that are foreverspringing expensive surprises on the insurance industry. Setting a target of 100 can itselfresult in heavy losses; aiming for 110 - 115 is business suicide.

What's the preferable measure? Combined ratio or cost of float?What should the measure of an insurer's profitability be? Analysts and managerscustomarily look to the combined ratio - and it's true that this yardstick usually is a goodindicator of where a company ranks in profitability. We believe a better measure, however,to be a comparison of underwriting loss to float developed.

This loss/float ratio, like any statistic used in evaluating insurance results, is meaningless

over short time periods: Quarterly underwriting figures and even annual ones are tooheavily based on estimates to be much good. But when the ratio takes in a period of years,it gives a rough indication of the cost of funds generated by insurance operations. A lowcost of funds signifies a good business; a high cost translates into a poor business.

Profitability and low cost is all that counts (rather than underwriting volume (sales)Property/casualty companies are judged by their cost of float. If our insurance operationsare to generate low-cost float over time, they must:(a) underwrite with unwavering discipline (accept only those risks that you are able to

properly evaluate (staying within your circle of competence) and that, after you haveevaluated all relevant factors including remote loss scenarios, carry the expectancy ofprofit. Ignore market-share considerations and be sanguine about losing business to

competitors that are offering foolish prices or policy conditions); and(b) reserve conservatively; and(c) avoid an aggregation of exposures that would allow a supposedly "impossible" incident

to threaten their solvency.


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Valuation summary

Valuation metrics Britam Jubilee CIC UAP LibertyPan

AfricaKenya

ReMarket cap (USD m) 543 262 277 267 106 137 143Daily liquidity (USD '000) 136 23 73 18 18 100Price to book ratio (x, on FY13 NAV) 2.8 2.0 3.6 1.6 1.7 3.6 0.7PE ratio (x, on FY13 EPS) 17.9 10.1 17.0 14.0 9.0 9.5 4.1RoE, FY13 18% 25% 23% 14% 22% 44% 18%RoE, 2009 -2013 average 14% 31% 24% 15% 23% 33% 18%Dividend yield (on FY13 DPS) 1.0% 1.8% 0.9% 1.5% 5.6% 3.6% 3.4%Fair value (KES) 25.91 568.28 7.89 139.31 23.34 98.76 48.87Upside/(downside) to current price 4% 50% -14% 27% 30% -20% 175%Source: Company filings, African Alliance research.

Fair value (KES) Britam Jubilee CIC UAP Liberty Pan AfricaFY13 NAV per share 8.96 193.32 2.56 69.96 10.61 34.77Forecast annual NAV growth* 25% 22% 35% 30% 10% 13%Forecast NAV - 2 years out 13.99 287.73 4.66 118.24 12.84 44.40Exit price to book ratio (x) 2.5 2.8 2.3 1.6 2.4 2.9Exit price 35.67 809.07 10.76 191.77 30.24 129.31FY13 DPS 0.25 7.00 0.08 1.70 1.00 4.50Forecast annual DPS growth* 28% 15% 65% 14% 50% 35%Forecast DPS - next 2 years 0.41 9.26 0.23 2.21 2.25 8.20Exit price + forecast dividends 36.08 818.32 10.99 193.98 32.49 137.51Cost of equity* 18% 20% 18% 18% 18% 18%Discount period 2.00 2.00 2.00 2.00 2.00 2.00Discount factor at cost of equity 0.72 0.69 0.72 0.72 0.72 0.72Fair value 25.91 568.28 7.89 139.31 23.34 98.76

Source: Company filings, African Alliance research. * Based on average growth 2007-2013, as adjusted forsustainability. ** Risk free rate 12%, beta 1.2, risk premium 5%.

P/B ratios down from historical levels

Only Jubilee and Kenya Re are trading within historicalprice-to-book ranges, while Liberty is not too far off

RoE vs P/B regression

Jubilee, Kenya Re and Liberty look cheap relative to peers.

Source: Company filings, African Alliance Research

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Industry update: Upgrading with a new Insurance ActThe insurance bill for the new Insurance Act is expected to be tabled before parliament fordebate and approval possibly in 2Q14 or 1H15 at the latest. The main changes contained inthe Insurance Act are:

a. The current law is prescriptive and compliance-based while the envisaged law is risk-based.

b. The current law is detailed while the envisaged outlines the principles and the detailswill be contained in regulations to be issued by the Insurance Regulatory Authority(IRA).

c. Insurers will be required to have actuarial control, risk management, internal auditand compliance functions. These functions will report quarterly to the board ofdirectors and will also compile and submit reports to the Insurance RegulatoryAuthority (IRA).

d. Insurers will be required to conduct internal assessments so as to determine theircapital requirements based on risk and actuarial evaluations. As such the currentminimum capital requirement (10% of gross premiums) which applies across theboard will be replaced by different requirements for different insurers. The previouscapital requirements only took insurance risk into account, but the new regulationsfactor in investment risk and operational risk as well.

From the above, it is apparent that the risk-based supervision model is premised uponself-assessment and transparency. In order to enhance the integrity of the process, therewill be checks and balances such as back testing and forward testing of informationsubmitted.

In the meantime, The Insurance Motor Vehicle Third Party Risks (Amendment), Bill 2013was passed into law under the current insurance Act. The amendment outlines a scheduleof structured payments of compensation to provide a maximum compensation in respectof death or fix compensation for each body part based on individual income levels, natureand extent of injury sustained and lower insurance premiums. This is aimed at curbingcollusion in facilitating fraudulent claims, although some insurance industry playersindicate that it has had the opposite effect in other countries.


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P&L analysis: Operating efficiency the RoE differentiatorOur comparative P&L analysis table reveals that (a) Despite having higher net loss ratiosthan Britam, Jubilee and CIC have the consistently highest RoEs due because they bothhave much lower expense ratios than Britam (b) Only Britam makes more premiums fromlong term insurance rather than short term insurance (c) Insurance RoAs continue tooutperform the banks, with Kenya Re’s RoA in the double digits (d) only Britam and UAPsaw higher premium growth in 2013 than in 2012 (e) Dividend payout ratios are largely ator below 20%.

Britam Jubilee CIC UAP Liberty Pan Africa Kenya ReGross premium revenue mix FY13 Short term insurance 43% 85% 70% 89% 77% 0% 88%

Long term business 57% 15% 30% 11% 23% 100% 12%

FY12 Short term insurance 42% 85% 70% 91% 78% 0% 86%Long term business 58% 15% 30% 9% 22% 100% 14%


Gross claims & benefits mix FY13 Short term insurance 25% 67% 68% 79% 76% 0% 92%Long term business 75% 33% 32% 21% 24% 100% 8%



Net earned premium growth FY13 30% 15% 26% 38% 2% 0% 22%FY12 21% 28% 36% 26% -6% 55% 23%FY11 35% 37% 51% 25% -7% 34%

Net claims & benefits growth FY13 33% 28% 30% 46% -5% -4% 16%FY12 136% 40% 47% 35% 7% 194% 38%FY11 -41% 9% 57% 21% -37% 44%

Net claims/net premiums FY13 59% 68% 65% 103% 57%(Short term insurance) FY12 59% 69% 63% 108% 62%

FY11 56% 64% 56% 57% 51%Investment income growth FY13 26% 55% 1% 17% -18% 17% -14%

FY12 341% 52% 169% 129% 95% 1,168% 49%FY11 -145% -38% 60% -4% -118% 4%

Investment income/total income FY13 42% 31% 13% 22% 36% 32% 24%FY12 43% 25% 16% 26% 40% 27% 31%FY11 -62% 22% 9% 16% -5% 27%

Return on investments FY13 25% 16% 14% 13% 17% 15% 13%(investment income + fair value FY12 25% 14% 16% 17% 20% 17% 19%gains/losses) FY11 -13% 12% 9% 11% -2% 15%Expenses & comms/premiums FY13 57% 27% 32% 41% 40% 33% 39%

FY12 55% 27% 32% 43% 44% 29% 42%FY11 53% 28% 34% 39% 50% 41%

RoA FY13 6% 5% 9% 6% 4% 7% 12%FY12 8% 5% 11% 7% 3% 5% 13%FY11 -8% 6% 6% 7% 4% 11%

RoE FY13 18% 25% 23% 13% 24% 42% 18%FY12 24% 30% 28% 16% 21% 29% 21%FY11 -20% 31% 17% 19% 22% 17%

Dividend payout FY13 18% 21% 16% 12% 50% 35% 14%FY12 18% 20% 16% 16% 25% 41% 10%FY11 -14% 16% 34% 23% 43% 11%


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Balance Sheets reveal high solvency marginsOur Balance Sheet analysis table reveals that (a) Jubilee and Liberty are the only insurerswith solvency margin ratios below 100% (c) Britam and Pan Africa have a high exposure toequities compared to the other insurers (d) UAP and Kenya Re have a high exposure toinvestment properties relative to the other insurers (e) Jubilee, Pan Africa and Kenya Rehave the highest exposure to government securities.

Britam Jubilee CIC UAP Liberty Pan Africa Kenya ReInvestments/claims & benefits liabilities FY13 135% 92% 121% 175% 70% 125% 245%(solvency margin proxy) FY12 131% 90% 123% 187% 73% 117% 241%

FY11 140% 89% 125% 130% 121% 217%

Investments mix (% of total assets) FY13 Investment properties 8% 7% 21% 34% 4% 23%Government securities 17% 31% 14% 14% 21% 26% 27%Public equities 29% 12% 13% 7% 21% 10%

Unquoted shares 18% 18%Unit trusts 17%

Bank deposits 6% 10% 20% 6% 21% 15%Associate companies 11%

FY12 Investment properties 5% 8% 18% 33% 5% 25%Government securities 19% 28% 15% 13% 28% 25% 23%

Public equities 31% 11% 11% 4% 21% 10%Unquoted shares 15% 9%

Unit trusts 17%Bank deposits 6% 12% 26% 12% 25% 18%

Associate companies 6% 13%Claims & benefits liabilities mix FY13 Insurance contracts 26% 25% 30% 16% 33% 32% 20%(% of total assets) Deposit admin contracts 17% 37% 8% 35% 6%

Investment contracts 14% 8% 38%Unearned premiums 4% 10% 24% 14% 12%

FY12 Insurance contracts 29% 26% 35% 14% 27% 32% 22%Deposit admin contracts 16% 35% 9% 38% 7%

Investment contracts 14% 8% 41%Unearned premiums 4% 11% 22% 14% 11%

Investments growth FY13 32% 31% 14% 32% 13% 43% 19%FY12 35% 25% 29% 77% -14% 59% 27%FY11 -6% 30% 58% 14% 28% 13%

Claims & benefits liabilities growth FY13 28% 30% 16% 40% 19% 26% 17%

FY12 44% 23% 32% 24% 12% 52% 14%FY11 15% 27% 54% 23% 8% 14%NAV growth FY13 36% 33% 22% 27% 20% 27% 23%

FY12 46% 30% 27% 150% 9% 24% 27%FY11 -19% 20% 65% 0% 16% 9%


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Short term business surprisingly outperforms long termAn analysis of operating segment profitability shows that (a) With the exception of Britamand contrary to well established perception, short term insurance contributes far more tothe bottom line than long term business does, this despite long term business beingallocated the bigger proportion of investment income.

Britam Jubilee CIC UAP Liberty Pan Africa Kenya ReNet premium revenue mix FY13 Short term insurance 40% 78% 69% 64% 0% 88%

Long term business 60% 22% 31% 36% 100% 12%FY12 Short term insurance 39% 80% 68% 67% 0% 87%

Long term business 61% 20% 32% 33% 100% 13%FY11 Short term insurance 34% 78% 0% 85%

Long term business 66% 22% 100% 15%Investment income allocation FY13 Short term insurance 5% 21% 51% 23% 0%

Long term business 77% 77% 44% 77% 100%Asset management

Property 3%Corporate & other 14%

FY12 Short term insurance 4% 21% 53% 32% 0%Long term business 58% 71% 40% 68% 100%Asset management

PropertyCorporate & other 37%

FY11 Short term insurance 1% 27% 52% 27% 0%Long term business 30% 67% 43% 73% 100%

Asset managementProperty

Corporate & other 69%Segment profit contribution FY13 Short term insurance 16% 93% 52% 66% 0%

Long term business 57% 8% 31% 34% 100%Asset management 8%


FY12 Short term insurance 22% 89% 49% 97% 0%Long term business 24% 1% 21% 3% 100%Asset management 5%


FY11 Short term insurance -17% 108% 82% 0%Long term business 22% -11% 18% 100%Asset management -3%



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Regional subsidiaries more profitable than Kenya?The geographical segment analysis table reveals that regional subsidiaries (especiallyUganda and Tanzania) seem to be more profitable relative to revenue generated comparedto Kenya.

Britam Jubilee CIC UAP Liberty Pan Africa Kenya ReNet premium revenue mix FY13 Kenya 97% 76% 73% 84%

Uganda 2% 9% 15%South Sudan 1% 9%

Tanzania 11% 2% 16%Rwanda 1%Burundi

Mauritius 3%FY12 Kenya 99% 79% 75% 86%

Uganda 1% 9% 15%South Sudan 10%

Tanzania 10% 14%RwandaBurundi

Mauritius 1%FY11 Kenya 100% 81% 71% 88%

Uganda 9% 20%South Sudan 9%

Tanzania 12%RwandaBurundi

Mauritius 9%Net profit contribution FY13 Kenya 55% 75% 82%


Tanzania 9% 2% 18%Rwanda -5%Burundi

MauritiusFY12 Kenya 61% 96% 84%



MauritiusFY11 Kenya 50% 70% 91%



Mauritius -3%


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Britam: Voracious appetite Despite an expected surge in finance costs arising from the bond, Britam’searnings this year should be lifted considerably by the rally in Equity Bank’sshare. The company continues to be on an expansion spree, with theacquisition of Real Insurance giving it access to at least three new geographiesin the region. The company has also been reported as mulling over acquiring astake in the Kenyan operations of Nigerian insurer Continental Re. Meanwhile,Britam has raised KES 6bn (USD 70m) via a medium term bond to fund thecompany’s property plans as well as regional subsidiaries. The share hasrallied 200% since our initiation in September but we now update ourrecommendation to HOLD because, while the price-to-book ratio is rather highrelative to its RoE, we expect that RoE could recover significantly due to theEquity Bank share.

› We anticipate strong 1H14 and FY14 earnings despite surge in financecosts. Britam has raised KES 6bn from its five-year medium term note at a13% fixed interest rate. The bond proceeds will be used for property (50%),strategic private equity transactions (40%, such as the 2013 Acorn and 2014Housing Finance deals) as well as ICT and regional investments (10%). Thebond will cost Britam KES 680m, or 20% of FY13 PAT, yet the income fromthe related property investments will probably only start coming through in2016 via revaluations as the properties start to develop. Hence there will bean earnings drag. However, the 50% ytd rise in Equity Bank’s share pricewill earn Britam approximately KES 2.7bn (one half of 10% of the increasein Equity Bank market cap this year) alone due to Britam’s 10% stake(Britam accounts for half of the changes in fair value of its Equity Bankstake through OCI, hence the overall KES 5.5bn gain won’t all go throughthe P&L). The KES 2.7bn is equivalent to 90% of Britam’s FY13 earningsand should therefore more than compensate for the interest expense onthe bond.

› Consummating Real, but will it add value? Britam’s acquisition of a 99%stake in Real Insurance, a purely short term insurer, for a purchaseconsideration of KES 1.4bn (USD 16m, paid via 60% cash and 40% equity)was completed on August 1 st. Britam is acquiring Real Insurance so as tomove its short term market share position as well as to penetrate theTanzania market (where Real has 26% market share) and other regionalmarkets where Real has a presence, like Mozambique and Malawi. Britamis now focussed on talent mapping probably to identify and eliminateduplicated roles, and may appoint McKinsey as integration consultants.Real’s net income has averaged 3% of Britam’s in recent years, so it doesnot appear that there will be significant earnings accretion in the nearterm, especially considering integration costs that will be incurred over thenext two years. Britam management however see opportunities to improveReal’s performance by professionalising the working culture there as wellas improving the expense management process.

› Conti Re next up? Britam was recently reported in the media as looking toacquire a 30% stake in Continental Re. We understand however that thiswould be a private equity transaction of Britam’s asset managementbusiness and not an investment b the holdin com an .

*** HOLD ***

Current price KES 25.00

Fair value KES 25.91Upside/(downside) % 4%

Target price KES 30.05Price return % 20%

Dividend yield (ntm) % 1%Forecast total return % 21%

12 month high/low KES 25.00/7.90YTD performance % 63%1yr performance % 217%

Issued shares m 1,891Market cap (m) USD 543Free float % 20%Free float market cap(m) USD 109Monthly value traded USD 3.0

Year end December

Bloomberg BRIT KNReuters BRIT NR


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Property strategy . Britam plans to deploy the bond proceeds across its five propertythemes which encompass commercial mixed use, residential housing, master planneddevelopments, budget hotels and shopping malls. To this end, Britam plans to utilize its21-acre land bank in Ngong, 10 acres on Mombasa road (in Nairobi) and 2 acres in theprime Kilimani area of Nairobi. Britam is targeting the lower middle income segment andthe informal business sector rather than the top end of the market where demand may besofter.

Superior underwriting margins could see some pressure . As outlined in our initiation ofcoverage note (‘Kenya Insurance Sector: Against the odds’) published in September lastyear, Britam’s underwriting margins are often double or triple those of its competition.The company’s ratio of premium earned to loss insured is also usually double that of its

peers, although this came down significantly in 2013. Management put these disparitiesdown to prudent underwriting – profitable insurance categories like personal accident andmotor commercial insurance (the latter often from bancassurance) form a largeproportion of the company’s premiums. High-severity categories of insurance such as fireindustrial and marine insurance are heavily re-insured, and Britam also earnsreinsurance commissions as well. Britam also forfeits potential customers (and therelated premiums) where the risk is deemed to be too high, in categories such as grouplife insurance. Unlike other insurers who will underwrite risky customers and aim tocompensate on the investment income side, Britam insists on making underwriting profiton its own before factoring in investment income. Reliable payment of claims ensuresrecurring customers. However, the insurers foray into microinsurance is expected tocompress margins somewhat until the business line generates sufficient volumes because

this line is predominantly focussed on medical insurance and is experiencing considerableanti-selection (people signing up for the policies tend to be those that are more likely tofall sick) at this stage.

Housing Finance to become a subsidiary, well, almost . Britam’s planned acquisition ofEquity Bank’s 25% stake in Housing Finance will see the insurer now own 46% of HF. Theacquisition of the additional stake in HF should also result in an additional 5% annualearnings accretion to Britam’s bottom line going forward, and possibly top line as well ifBritam elects to that it has sufficient control of HF to account for it as a subsidiary despitebeing short of an ownership stake. The acquisition of HF is aligned with Britam’s propertystrategy in terms of financing (now that HF will be a deposit taker) and development andwill also help grow the retail bancassurance target market.


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Short term insurance metrics: Britam vs Real

Grosspremium mix Aviation Engineering

Firedomestic

Fireindustrial Liability Marine

Motorprivate

Motorcommercial

Personalaccident Theft WIBA Misc Medical Total

Britam FY12 0% 4% 2% 5% 1% 6% 13% 23% 12% 3% 2% 2% 27% 100%FY11 0% 3% 2% 5% 1% 6% 17% 25% 15% 3% 2% 2% 19% 100%FY10 0% 3% 2% 5% 1% 6% 17% 22% 14% 3% 3% 2% 23% 100%

Real FY12 0% 11% 1% 9% 2% 6% 21% 21% 6% 2% 4% 1% 14% 100%FY11 0% 6% 2% 16% 3% 2% 28% 26% 6% 2% 5% 5% 1% 100%FY10 0% 4% 2% 11% 1% 2% 32% 26% 11% 2% 6% 3% 0% 100%

Market share Aviation Engineering Firedomestic Fireindustrial Liability Marine Motorprivate Motorcommercial Personalaccident Theft WIBA Misc Medical TotalBritam FY12 0% 5% 5% 2% 1% 7% 3% 4% 12% 3% 2% 2% 7% 4%

FY11 0% 4% 4% 2% 1% 6% 3% 4% 13% 3% 1% 2% 5% 4%FY10 0% 4% 4% 2% 1% 5% 3% 3% 10% 3% 1% 2% 6% 3%

Real FY12 0% 9% 3% 3% 4% 5% 4% 3% 5% 2% 2% 1% 2% 3%FY11 0% 4% 3% 4% 3% 1% 4% 3% 3% 1% 2% 4% 0% 3%FY10 0% 4% 3% 3% 2% 1% 4% 3% 6% 1% 2% 3% 0% 3%

Reinsuranceratio Aviation Engineering

Firedomestic


Motorprivate

Motorcommercial


Britam FY12 82% 33% 81% 74% 82% 4% 3% 43% 3% 4% 7% 2% 20%

FY11 52% 34% 78% 79% 80% 3% 3% 31% 7% 3% 8% 3% 19%Real FY12 67% 18% 83% 36% 86% 3% 2% 65% 1% 3% 71% 35% 33%

FY11 61% 23% 59% 13% 71% 3% 2% 69% 2% 5% 18% -11% 21%

Net loss ratio Aviation EngineeringFire

domesticFire


privateMotor

commercialPersonalaccident Theft WIBA Misc Medical Total

Britam FY12 37% 11% 155% -200% 48% 63% 49% 12% 52% 36% 6% 48% 47%Real FY12 11% 27% 198% 38% 105% 61% 43% 57% 77% 47% 63% 12% 49%

Underwritingmargin Aviation Engineering

Firedomestic


Motorprivate

Motorcommercial


Britam FY12 21% 44% -10% 69% 6% 10% 19% 36% 18% 22% 55% 7% 16%FY11 17% 30% 12% -91% 21% 7% 28% 38% 11% 72% 25% -5% 18%FY10 16% 11% 0% -20% 25% -27% 14% 37% 44% 9% -14% 5% 9%

Real FY12 -2% 25% -18% 6% -12% 10% 27% -10% -22% 12% 69% -2% 6%FY11 24% -16% -7% 1% 21% 0% 14% -14% 9% 6% 10% 16% 4%FY10 -49% 24% -34% 60% -15% -1% 21% -7% 40% 21% 15% 2%


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Britam ratios

FY08 FY09 FY10 FY11 FY12 FY13Premium income to total income 76% 86% 41% 146% 51% 51%Investment income to total income 14% 5% 52% -62% 43% 42%

Britam P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13

Gross earned premium revenue 26% 19% 15% 29% 22% 29%

Net earned premium revenue 39% 17% 12% 35% 21% 30%

Investment and other income -80% -62% 2315% -145% 141% 26%

Total income -24% 3% 136% -62% 247% 29%

Gross claims and benefits payable 9% 24% 91% -42% 197% 3%

Net claims and benefits payable 10% 26% 93% -41% 136% 33%

Expenses and commissions 35% 21% 5% 30% 27% 35%

Profit before tax -84% -198% 954% -160% 265% 12%

Profit after tax -88% -273% 741% -172% 229% 5%

RoA** 2% -3% 13% -8% 8% 6%

RoE** 4% -7% 34% -20% 24% 18%

Earnings per share* -88% -273% 741% -172% 229% 5%

Dividend per share* 0% 0% 67% 35% 68% 0%

Dividend payout ratio** 73% 119% 39% 23% 16% 12%

Change in NAV 12% -19% 103% -19% 46% 36%*Based on current number of issued shares. **Actual ratio, not change in ratio


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Britam investment income mix FY08 FY09 FY10 FY11 FY12 FY13Total 100% 100% 95% 100% 100% 100%Fair value gains/(losses) on financial assets at fair value through profit or loss -30% -296% 76% 159% 60% 53%Interest from government securities 23% 95% 5% -14% 13% 13%Other interest receivable 31% 78% 3% -5% 3% 2%Fair value gain on investment property 34% 84% 2% -10% 4% 16%Dividends receivable from equity investments 23% 97% 5% -20% 9% 9%Rental income from investment properties 9% 28% 1% -2% 1% 1%Realised losses on available for sale financial assets 0% -3% 0% 0% 0% 0%Realised gains on sale of non-current assets 1% 1% 0% 0% 0% 0%Interest on bank deposits 5% 15% 1% -11% 10% 3%Sale of investment property 0% 0% 0% 0% 0% 0%Realised gain on government securities at fair value 3% 1% 2% 0% 0% 0%Realised gains/losses on quoted investments at fair value through P&L 3%Realised gains on sale of unit trusts 1%Other 0% 0% 0% 3% 1% 0%

Britam balance sheet composition (expressed as a % of assets) FY08 FY09 FY10 FY11 FY12 FY13Investment properties 6% 7% 5% 5% 5% 8%Quoted shares at fair value through profit and loss 33% 28% 30% 17% 17% 16%Unit trusts through profit and loss 6% 13% 17% 17% 17% 17%Quoted shares at fair value through other comprehensive income 26% 20% 24% 13% 14% 13%Government securities held to maturity 5% 10% 8% 17% 19% 17%

Insurance contract liabilities 30% 30% 25% 29% 29% 26%Amounts payable under deposit administration contracts 12% 17% 13% 16% 16% 17%

Liabilities under investment contracts 5% 10% 13% 12% 14% 14%Unearned premium reserve 3% 3% 3% 4% 4% 4%


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UAP: The medicine men e initiate coverage on UAP Insurance with a BUY recommendation. Currently

rading on the OTC market rather than the NSE itself, UAP is the third largestshort term insurer in Kenya. The company has managed to post impressiveunderwriting profits despite insuring tricky segments such as fire industrial andmedical insurance. The company has also turned around its life and medicalinsurance businesses by improving management as well as internal processesand the overall customer experience. Risks include a high dependence onmedical insurance and underwriting more risk than its peers relative topremiums earned. UAP is issuing a KES 2bn bond and also intends to list viaintroduction in 2H15.

› Introducing UAP. Short term insurance comprises 90% of the company’srevenues, with life insurance making up 10%. Medical, motor and fireindustrial insurance account for almost 80% of short term premiums, whilegroup life encompasses approximately 70% of the company’s life insurancebusiness. UAP has operations in Kenya, Uganda and South Sudan (where ithas a 40% market share, all short term insurance) and is owned by a mix oflocal (Centum) and international private equity funds as well as localbusinessmen. UAP also has a sizeable property portfolio including thebuildings in which Equity Bank and Telkom Kenya are headquartered.Meanwhile, UAP Towers which will be one of the tallest buildings in sub-saharan Africa is slated for completion in May next year.

› What we like about UAP. UAP’s loss ratio of 52% in 2012 was better than theindustry average of 56% as well as peers Jubilee and CIC. The company’sunderwriting margins are better than any of the listed insurers, with theexception of Britam, and the company is able to churn underwriting profitsin tricky segments such as fire industrial and medical insurance.

› What are the potential hazards? Medical insurance comprised 40% of thecompany’s short term insurance premiums in 2012. The life business is also70% skewed towards the ultra-competitive group life insurance. UAP’s ratioof premium earned to loss insured is much lower than that of peers,indicating that the company assumes much higher risk in relation to its

premium revenues. The company also has lower actuarial surplusescompared to its peers.

› Capital raise was done for regional and property strategies. In 2012, UAPraised KES 750m (USD 9m) via a public offer and an additional KES 4bn(USD 46m) from private equity funds Swedfund, AfricInvest and Aureos. Themonies are being used to expand the company’s operations in Rwanda,Tanzania and the DRC (brokerage only in this case) as well as to fund thecompany’s property projects in Kenya, Rwanda and South Sudan.

› What’s the strategy going forward? UAP’s strategy is focussed ondiversifying revenues (organic & inorganic growth, growing in investmentmanagement, and geographic expansion), managing costs (via a shared

services centre) and service excellence (product innovation anddistribution).

*** BUY ***





12 month high/low KESYTD performance %1yr performance %

Issued shares m 211Market cap (m) USD 267Free float % 10%Free float market cap(m) USD 27Monthly value traded USD

Year end December

BloombergReuters


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UAP ratios (short term insurance business)

Grosspremium mix Aviation Engineering

Firedomestic


Motorprivate

Motorcommercial


FY12 0% 2% 2% 13% 2% 2% 17% 17% 2% 3% 4% 3% 32% 100%FY11 0% 2% 2% 13% 3% 3% 19% 20% 3% 3% 5% 2% 25% 100%FY10 0% 2% 2% 11% 2% 4% 20% 22% 3% 3% 6% 3% 22% 100%

Market share Aviation EngineeringFire

domesticFire


privateMotor

commercialPersonalaccident Theft WIBA Misc Medical Total

FY12 0% 5% 10% 10% 9% 5% 8% 6% 4% 6% 6% 7% 15% 8%FY11 0% 6% 10% 10% 9% 6% 8% 6% 4% 6% 6% 5% 13% 8%FY10 0% 6% 10% 8% 5% 7% 8% 6% 4% 6% 7% 6% 12% 7%


Firedomestic


Motorprivate

Motorcommercial


FY12 67% 17% 77% 50% 39% 3% 4% 28% 24% 4% 86% 2% 19%


Firedomestic


Motorprivate

Motorcommercial


FY12 7% 24% 26% 10% 61% 62% 47% 49% 39% 20% 76% 60% 52%

Underwritingmargin Aviation Engineering

Firedomestic


Motorprivate

Motorcommercial


FY12 37% 24% 13% 23% 2% 0% 18% -12% 14% 37% -2% 2% 9%FY11 -7% 45% 20% 11% 40% 8% 22% 12% -7% 30% 10% -7% 11%

FY10 17% 16% 7% 11% 12% -9% 13% 38% 30% 28% 5% -19% 3%


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Other UAP ratios

FY08 FY09 FY10 FY11 FY12 FY13Premium income to total income 79% 81% 74% 77% 69% 71%Investment income to total income 12% 12% 20% 16% 26% 22%

UAP P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13



Investment and other income -64% 33% 120% -4% 129% 17%

Total income -1% 29% 37% 20% 40% 34%

Gross claims and benefits payable 8% 62% 33% 8% 52% 41%

Net claims and benefits payable 16% 72% 24% 21% 35% 46%


Profit before tax -55% -38% 183% 54% 44% 27%

Profit after tax -63% -36% 225% 36% 50% 31%

RoA** 4% 2% 6% 7% 7% 6%

RoE** 6% 4% 13% 19% 16% 13%

Earnings per share* -66% -39% 209% 68% 45% 29%

Dividend per share* -49% 0% 0% 0% 0% 0%


Change in NAV -16% -10% 27% 0% 150% 27%*Based on current number of issued shares. **Actual ratio, not change in ratio


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UAP premium mix FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 100% 100% 100% 100% 100% 100%Short term business: 92% 91% 94% 92% 91% 89%Engineering 4% 5% 3% 4% 4% 3%Fire 16% 13% 13% 14% 12% 13%Liability 3% 3% 3% 2% 2% 3%Marine 6% 6% 4% 4% 3% 3%Motor 29% 30% 35% 34% 36% 30%Workmen's compensation 3% 5% 6% 7% 5% 4%Personal accident (includesmedical up to 2010) 24% 23% 23% 21% 21% 20%Theft 6% 6% 7% 4% 4% 4%Medical 5%Others 1% 2% 1% 3% 3% 3%Long term insurance business 8% 9% 6% 8% 9% 11%Ordinary life 1% 4% 2% 3% 4% 5%Group life 7% 5% 4% 5% 5% 7%Outward reinsurance -24% -23% -20% -23% -21% -23%Net earned premium 76% 77% 80% 77% 79% 77%

UAP premium growth FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 19% 27% 30% 23% 28% 37%Short term business: 18% 31% 27% 22% 24% 36%Long term insurance business 31% -7% 63% 32% 68% 41%

UAP claims mix FY08 FY09 FY10 FY11 FY12 FY13

Total 97% 100% 100% 100% 100% 100%Short term business 95% 89% 81% 83% 81% 79%Engineering 2% 5% 5% 0% 8% 0%Fire 4% 2% 8% 6% 5% 6%Liability 1% 0% 1% 3% 0% 0%Marine 4% 4% 3% 2% 4% 2%Motor 43% 38% 30% 34% 27% 25%Workmen's compensation 1% 2% 3% 4% 2% 2%Personal accident (includesmedical up to 2010) 32% 32% 28% 30% 4% 1%

Theft 7% 4% 3% 4% 2% 3%Medical 27% 37%Others 1% 1% 1% 1% 2% 4%

Long term insurance business 3% 11% 19% 17% 19% 21%Death, maturity and benefitspayable 4% 5% 8% 8% 9% 9%

Increase in policy owners'liabilities -1% 2% 8% 7% 7% 10%

Interest payable on depositadministration and unit linkedinvestment contracts

0% 4% 3% 2% 3% 1%

Amounts recoverable fromreinsurers -15% -10% -16% -6% -16% -13%

Net insurance benefits and claims 85% 90% 84% 94% 84% 87%

UAP claims & policyholdersbenefits growth FY08 FY09 FY10 FY11 FY12 FY13

Gross claims 8% 62% 33% 8% 52% 41%Short term claims 11% 53% 21% 10% 48% 38%Long term claims -63% 550% 130% -2% 70% 52%


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UAP investment income mix FY08 FY09 FY10 FY11 FY12 FY13Total 100% 100% 100% 100% 100% 100%Interest from government securities 23% 19% 10% 12% 15% 18%Bank deposit interest 7% 8% 4% 7% 12% 12%Loan interest receivable 2% 3% 2% 1% 1% 1%Rental income from investment properties 37% 38% 18% 20% 9% 9%Miscellaneous income 3% 1% 0% 1% 0% 0%Gain in foreign exchange -3% -1% 0% 3% 0% -2%Interest on debentures 0% 0% 0% 0% 3% 4%Fair value gains on investment properties 49% 24% 33% 66% 47% 40%Fair value (losses)/gains on equity assets at fair value through profit or loss 0% 18% 9% -23% 8% 16%Dividends receivable from equity investments 21% 0% 0% 13% 7% 5%Realised gains on sale of financial assets 23% 3% 0% 0% 0% 0%Fair value (losses)/gains on government securities assets at fair valuethrough profit or loss -61% -12% 23% 0% 1% 0%Investment fees -3% -5%

UAP balance sheet composition (expressed as a % of assets) FY08 FY09 FY10 FY11 FY12 FY13Investment properties 29% 30% 26% 35% 33% 34%Receivables arising out of direct insurance arrangements 6% 6% 6% 7% 8% 7%Equity instruments 29% 24% 27% 17% 0% 0%Equity investment at fair value through OCI 0% 0% 0% 0% 11% 13%Government securities 10% 11% 11% 12% 13% 14%Deposits with financial institutions 5% 7% 7% 5% 12% 6%

LiabilitiesPayables under deposit administration contracts 8% 10% 12% 12% 9% 8%Insurance contract liabilities 16% 18% 17% 19% 14% 16%Unearned premium 16% 18% 18% 19% 14% 14%


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Kenya Re: Back to black In 2013, Kenya Re generated underwriting profits in its short termreinsurance business, which was the first time it did so since 2010. This wasattributed to strong premium growth in fire industrial as well as medicalinsurance, unlike previous years when claim growth in these categoriesexceeded premium growth. Kenya Re also incurred minimal claims from theJKIA fire due to the excess of loss protection arrangements it was with itsretrocessors. The fact that Kenya Re’s business is overwhelmingly treaty-based also shields the reinsurer from large losses. Meanwhile, thecompany’s mandatory cession expires next year but we think it is likely to berenewed. We upgrade our recommendation to BUY.

› Fire industrial and medical insurance drive turnaround, as doesreceivables. Kenya Re’s underwriting profit in short term business in 2013were driven largely by fire industrial and medical insurance, whosegrowth in premiums exceeded growth in claims, unlike the previous yearswhen the converse occurred. Strong premium growth in personal accidentand miscellaneous insurance categories also contributed to thisturnaround. In addition, the company had a much lower impairmentexpense for its receivables. We also note that the company’s excess ofloss protection from its retrocessors meant that the net claim incurredfrom 2013 airport fire claim was only KES 30 million, even though Kenya

Re had a 20% share of the KES 1.9bn gross fire claim. Kenya Re’sretrocessors include General Insurance Corporation of India, as well asthe likes of Korean Re, African Re and Lloyds Securities. Although this is ahigh severity and therefore high risk reinsurance class, it appears thatKenya Re has excess of loss retrocession policies in place that shield itfrom incurring massive claims. In addition, 98% of Kenya Re’s business istreaty (as opposed to facultative) business, which means that Kenya Reonly retains the first level of losses and hence is less exposed. Kenya Rederives a significant proportion (30%) of its premiums from fire industrialinsurance because it is a well-developed class of insurance in this regionand mainly relates to property. Most insurers would want to reinsure ahuge proportion of fire industrial insurance due to the severity of potentiallosses. Meanwhile, the company incurred underwriting losses in personalaccident insurance because the government introduced an Injury BenefitsAct under which employees are compensated for 96 months of earnings,and as such there is need to revisit the pricing of premiums.

› Expiring mandatory cession should get renewed. Kenya Re enjoys 18%mandatory cession in Kenya, meaning that insurers in Kenya have to cedeat least 18% of their reinsurance premiums to Kenya Re. Kenya Rehowever enjoys 25-30% market share in Kenya (overall, Kenya contributesabout half of Kenya Re’s premium revenues), meaning there is asignificant element of optional share in addition to the compulsory share.The mandatory cession however expires at the end of 2015, and Kenya Re

is lobbying for a renewal. Given that Kenya Re’s competitors also enjoymandatory cessions in Kenya, we would expect that Kenye Re’scompulsory share be extended further.

*** BUY ***




Dividend yield (ntm) % 3.4%Forecast total return % 224%


Issued shares m 700Market cap (m) USD 143Free float % 40%Free float market cap(m) USD 57Monthly value traded USD 2.2

Year end December

Bloomberg KNRE KNReuters KNRE NR


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Kenya Re ratios


Kenya Re P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13



Investment and other income -2% 10% 48% -14% 82% -14%

Total income 12% 4% 31% 24% 30% 10%


Net claims and benefits payable -4% 30% 12% 44% 38% 16%

Expenses and commissions -9% 10% 62% 12% 14% 2%

Profit before tax 66% -18% 13% 23% 45% 11%

Profit after tax 79% -11% 16% 24% 46% 7%

RoA** 11% 9% 10% 11% 13% 12%

RoE** 19% 15% 16% 17% 21% 19%

Earnings per share* 79% -11% 16% 24% 46% 7%

Dividend per share* 43% 0% -30% 0% 33% 50%


Change in NAV 15% 10% 16% 9% 27% 23%*Based on current number of issued shares. **Actual ratio, not change in ratio


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Kenya Re premium mix FY08 FY09 FY10 FY11 FY12 FY13

Gross earned premium 100% 100% 100% 100% 100% 100%Short term business: 83% 83% 85% 84% 86% 88%Motor private 0% 0% 0% 0% 0% 0%Motor commercial 7% 7% 7% 6% 5% 5%Fire domestic 0% 0% 0% 0% 0% 0%Fire industrial 36% 38% 38% 36% 33% 32%Personal accident 4% 5% 8% 7% 6% 8%Theft 10% 8% 8% 7% 7% 7%Miscellaneous 8% 8% 6% 5% 5% 6%Liability 2% 2% 1% 1% 1% 1%Engineering 8% 9% 8% 9% 9% 7%Workmen compensation 0% 0% 0% 0% 0% 0%Marine 8% 7% 7% 8% 7% 7%Aviation 0% 0% 1% 0% 0% 0%Medical 0% 0% 0% 5% 12% 15%Long term business: 17% 17% 15% 16% 14% 12%Ordinary life 1% 1% 1% 2% 2% 2%Superannuation 15% 16% 14% 14% 12% 10%Less: retrocession premiums -9% -7% -6% -6% -5% -5%Net earned premium 91% 93% 94% 94% 95% 95%

Kenya Re premium growth FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 6% 8% 23% 34% 22% 21%Short term business: 8% 8% 26% 33% 25% 24%Long term insurance business -1% 11% 9% 41% 7% 4%

Kenya Re claims mix FY08 FY09 FY10 FY11 FY12 FY13Claims and policy holders benefitscomposition: 100% 100% 100% 100% 100% 100%

Short term business: 90% 79% 83% 85% 94% 92%Motor private 0% 0% 0% 0% 0% 0%Motor commercial 8% 5% 6% 5% 8% 5%Fire domestic 0% 0% 0% 0% 0% 0%Fire industrial 31% 43% 41% 41% 31% 29%Personal accident 5% 5% 11% 11% 11% 10%Theft 8% 9% 7% 4% 10% 10%Miscellaneous 9% 7% 5% 2% 4% 5%Liability 2% 1% 0% 0% 1% 1%

Engineering 4% 3% 4% 5% 3% 3%Workmen compensation 0% 0% 0% 0% 0% 0%Marine 5% 5% 8% 11% 5% 4%Aviation 0% 0% 1% -1% 0% 0%Medical 0% 0% 0% 8% 22% 24%Provision for outstanding claims 17% 0% 0% 0% 0% 0%Long term business: 10% 21% 17% 15% 6% 8%Ordinary life 0% 0% 0% 0% 0% 0%Superannuation 20% 0% 0% 0% 0% 7%Other 0% 0% 12% 11% 11% 0%Change in actuarial liability -10% 0% 4% 4% -5% 0%Claims recoverable fromretrocessionaires -10% -7% -7% -10% -4% -10%

Net claims incurred 90% 93% 93% 90% 96% 90%


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Kenya Re claims & policyholders benefits growth FY08 FY09 FY10 FY11 FY12 FY13Gross claims 1% 25% 12% 48% 29% 24%Short term claims 15% 10% 18% 51% 44% 21%Long term claims -52% 159% -9% 36% -50% 65%

Kenya Re investment income mix FY08 FY09 FY10 FY11 FY12 FY13Investment income composition: 100% 100% 100% 100% 100% 100%Rental income from investment properties 25% 30% 23% 23% 18% 23%Interest on government securities 15% 19% 13% 16% 16% 31%Reclassification of fair value gain on valuation of AFS quoted equities 0% 0% 21% 11% 10% 11%Gain on disposal of available for sale quoted equity instruments 7% 10% 9% -1% 3% 3%Dividends receivable 6% 10% 6% 7% 4% 4%

Net foreign exchange gain/loss 0% 0% 0% 0% 0% 0%Interest on commercial mortgages 4% 4% 2% 2% 1% 2%Interest on deposits with financial institutions 2% 5% 6% 9% 20% 8%Interest on corporate bonds 0% 0% 0% 0% 0% 1%Gain on disposal of investment property 2% 0% 0% 0% 0% 0%Gain on disposal of non-current asset held for sale 1% 0% 0% 0% 10% 0%Other income 1% 1% 0% 0% 0% 0%Gain on disposal of inventories 1% 0% 0% 0% 0% 0%Interest on staff mortgages and loans 1% 1% 0% 0% 0% 0%Gain on disposal of equipment 0% 0% 0% 0% 0% 0%Fair value gains on revaluation of investment properties 35% 21% 18% 32% 16% 16%

Kenya Re balance sheet composition (expressed as a % of assets) FY08 FY09 FY10 FY11 FY12 FY13

Investment properties 28% 28% 27% 28% 25% 23%Receivables arising out of reinsurance arrangements 11% 10% 7% 7% 6% 7%Premium and loss reserves 2% 3% 3% 2% 1% 1%Mortgage loans 3% 3% 2% 2% 2% 3%Quoted equity instruments 16% 13% 15% 11% 10% 10%Government securities 20% 21% 16% 18% 23% 27%Deposits with financial institutions 7% 6% 16% 19% 18% 15%

LiabilitiesLong term reinsurance contract liabilities 14% 14% 12% 12% 9% 7%Short term reinsurance contract liabilities 14% 15% 13% 12% 13% 13%Unearned premiums 8% 8% 10% 11% 11% 12%


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Jubilee: Gearing up for M&A Jubilee insurance’s 10% earnings growth in 2013 was appreciableconsidering the company had its slowest premium growth in recent memoryand had to cope with yet another surge in policy holder benefits expense anda sizeable reduction in profit contribution from associates. Management havehinted at significant inorganic acquisition activity in the next 2-3 years, andrecent appointments of senior regional executives indicate that much of thismay well take place in the region. The share is trading at a low price-to-bookratio relative to its RoE (the most consistent among the listed insurers) andwe therefore upgrade our recommendation to BUY.

› Regional M&A aspirations, and beyond. During its FY13 resultsannouncement Jubilee had stated its intention to acquire up to fiveinsurers in Kenya and the region over the next 3 years. Jubilee has alsoappointed a Regional Senior Executive (who was up to that point headingAIG’s business in Kenya and before that worked for ACE Insurance inSouth Africa) and a Regional CFO. Jubilee already has a presence inUganda, Tanzania, Burundi and Mauritius, hence the impendingacquisitions are more of a consolidation strategy rather than marketentry. Management also hinted that Jubilee has already held discussionswith three insurers, which means that the first acquisition may well takeplace by 1H15 if not earlier. While acquisitions are preferred, Jubilee is

also looking at making a greenfield entry in West Africa.› Still the medical doctor. Despite a 25% growth in medical insurance

premiums to KES 6.3bn in FY13, Jubilee still made underwriting profits ofKES 470 million, which represented an underwriting margin of 7.5%. Thiswas a commendable feat in a business line where the majority of industryplayers are still regularly incurring underwriting losses.

› Associates still core to strategy despite reduced earnings. Jubilee’sshare of profit from associates was down 18% in 2013. This was driven byreduced earnings from the Mauritius-incorporated IPS Cable Holdings aswell as PDML holdings of Kenya, the real estate company. Jubilee plans tomake residential and commercial property investments of KES 3.3bn inUganda and Tanzania using PDML and has already purchased the land.Meanwhile, Jubilee continues to have stakes in companies such asSeacom (fibre optic) and Bujagali (hydropower) where it has a satisfactoryand guaranteed IRR to meet its long term business obligations.

› Top line slows down. Net premium growth of 15% in FY13 was the slowestin at least the last six years. While life insurance had better growth, shortterm insurance growth contracted, especially in the medical, motor andfire insurance categories.

› Claims growth outstrips premium growth by a wide margin once again.Net claims grew by 28% in FY13. In FY12 net claims had grown by 40%compared to 28% premium growth. The main reason for the rapid growthin claims is increase in policy holders benefits in the pension/annuitybusiness.

*** BUY ***





12 month high/low KES 414/255YTD performance % 33%1yr performance % 35%

Issued shares m 60Market cap (m) USD 262Free float % 46%Free float market cap(m) USD 121Monthly value traded USD 0.5

Year end December

Bloomberg JBIC KNReuters JUB NR


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Jubilee Holdings ratios


Jubilee P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13



Investment and other income 14% -24% 63% 25% 17% 17%

Total income 20% 22% 39% 8% 36% 26%




Profit before tax 12% 23% 84% 4% 26% 17%

Profit after tax 8% 27% 102% 4% 20% 10%

RoA** 4% 4% 7% 6% 5% 5%

RoE** 20% 26% 39% 31% 30% 25%

Earnings per share* 4% 29% 113% 3% 17% 7%



Change in NAV -17% 18% 47% 20% 30% 33%*Based on current number of issued shares. **Actual ratio, not change in ratio


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Jubilee premium mix FY08 FY09 FY10 FY11 FY12 FY13Gross premiums composition 100% 100% 100% 100% 100% 100%Short term business: 83% 84% 83% 84% 85% 85%Medical 0% 23% 26% 28% 30% 33%Motor 20% 20% 18% 20% 20% 21%Personal accident (2007 & 2008includes medical) 31% 25% 21% 21% 16% 14%

Fire 11% 11% 13% 10% 12% 12%Other 21% 6% 5% 7% 7% 5%Long term business: 17% 16% 17% 16% 15% 15%Ordinary life 7% 7% 8% 8% 8% 8%Group life (2007 and 2008 includessuperannuation) 10% 5% 6% 6% 5% 5%

Pension/annuity 0% 4% 3% 2% 2% 2%

Outward reinsurance % of grosspremiums -30% -30% -37% -39% -39% -40%

Net earned premium 70% 70% 63% 61% 61% 60%

Jubilee premium growth FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 38% 21% 20% 42% 28% 17%Short term business: 40% 22% 19% 45% 29% 16%Long term insurance business 33% 14% 28% 27% 20% 24%

Jubilee claims mix FY08 FY09 FY10 FY11 FY12 FY13Claims and policyholders benefits(gross) 100% 100% 100% 100% 100% 100%

Short term business: 68% 67% 58% 70% 70% 67%Medical 0% 26% 23% 26% 30% 26%Motor 24% 18% 13% 15% 20% 16%Personal accident (2007 & 2008includes medical) 30% 19% 7% 16% 12% 9%

Fire 5% 1% 10% 10% 6% 14%Other 10% 4% 4% 3% 3% 2%Long term business: 32% 12% 10% 10% 9% 8%Ordinary life 7% 4% 3% 3% 3% 3%Interest payable on depositadministration contracts 16% 0% 0% 0% 0% 0%

Group life (2007 and 2008 includes'other superannuation') 8% 5% 4% 4% 2% 2%

Pension/annuity 0% 3% 3% 2% 4% 2%Increase in policy holders benefits 0% 20% 33% 20% 21% 25%Ordinary life 0% 2% 5% 7% 4% 2%Group life 0% 1% 2% 1% 0% 1%Pension/annuity 0% 17% 26% 12% 17% 22%Recoverable from re-insurers: -18% -18% -25% -32% -30% -34%Net insurance benefits and claims 82% 82% 75% 68% 70% 66%

Jubilee claims & policyholdersbenefits growth FY08 FY09 FY10 FY11 FY12 FY13Gross claims 27% 24% 55% 20% 36% 36%Short term claims 29% 22% 33% 45% 36% 30%Long term claims 23% -51% 20% 22% 20% 20%Increase in policyholders benefits 151% -27% 43% 63%


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Jubilee investment income mix FY08 FY09 FY10 FY11 FY12 FY13Investment income composition: 100% 100% 100% 100% 100% 100%Mortgage loan interest 1% 0% 0% 0% 0% 0%Bank deposit interest 18% 21% 9% 13% 19% 10%Government securities 33% 27% 15% 41% 43% 38%Interest on policy loans 2% 2% 1% 2% 2% 1%Dividends receivable from equity investments 16% 14% 6% 10% 7% 3%Rental income from investment properties (net of expenses) 16% 15% 6% 9% 6% 4%Gain on sale of investments 10% 0% 0% 0% 0% 0%Fair value gain on investment properties 45% 0% 6% 30% 6% 3%Exchange loss -1% 0% 1% 4% 1% 0%Realised gains on disposal of quoted shares 0% 0% 9% 2% 2% 5%Realised gains on disposal of government securities 0% 0% 2% 0% 0% 0%Other income 1% 1% 1% 1% 2% 1%Net fair value gains on financial assets at fair-value-through-profit-and-loss -41% 20% 43% -14% 12% 34%

Jubilee balance sheet composition (expressed as a % of assets) FY08 FY09 FY10 FY11 FY12 FY13Investment properties 12% 11% 9% 9% 8% 7%Investment in associates 11% 16% 13% 13% 13% 11%Quoted shares at fair value through profit and loss 19% 13% 17% 10% 9% 10%Government securities at amortised cost 15% 18% 21% 27% 28% 31%Deposits with financial institutions 14% 14% 11% 7% 12% 10%Reinsurers' share of insurance contract liabilities 7% 7% 8% 10% 10% 11%

Insurance contract liabilities 29% 28% 25% 28% 26% 25%Payable under deposit administration contracts 30% 32% 34% 33% 35% 37%

Unearned premium reserve 10% 11% 11% 12% 11% 10%


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CIC: Under pressureCIC’s disappointing FY13 earnings growth was attributable to declininginvestment income and thinning underwriting margins. The insurer maypotentially restore investment returns via a suggested foray into equities butunderwriting margins may remain under pressure with the continued focuson medical and especially micro insurance. Meanwhile, the stage is set for acorporate bond issue (the rights issue plans have been shelved) in 2H14 asthe insurer joins the race for property investments and regional expansion.The share has however rallied 125% since our initiation in 4Q13 and wedowngrade our recommendation to REDUCE.

› Hints at more aggressive investing strategy as conservatism hurtsearnings growth. FY13 earnings growth of 1% was the slowest in at leastthe last six years and was caused primarily by a 9% contraction in interestincome as bank deposit interest earned fell following the normalisation ofthe interest rate environment in 2013 in contrast to the high rateenvironment that prevailed in 2012. The CEO’s statement in the annualreport specifically pinpoints an intention to have a greater exposure toequities going forward so as to restore investment returns.

› Underwriting margins fall as medical overtakes motor insurance. CIC’soverall underwriting margin of 5% in 2013 was the lowest in at least thelast four years. This can be attributed to medical insurance which ispoised to become the insurer’s biggest revenue line in the next two years.Medical insurance comprised only 3% of short term insurance premiumsin 2010 but now comprises 18% and actually overtook motor privateinsurance in 2012. It is now only second to motor commercial insurance inCIC’s short term insurance business mix. CIC’s medical insuranceunderwriting margin of -12% was double that of 2012 and the worstperformance since at least 2010. With CIC focussed on micro insurance,the loss making trend in medical insurance could persist for another 2-3years. Further, despite a commendable reduction in dependence on thehigh risk motor private insurance, underwriting margins in this segmentdeclined marginally in FY13 to -8%.

› Debt over equity. In May 2014 the insurer’s shareholders resolved todouble the authorised share capital from KES 3bn to KES 6bn inpreparation for a rights issue that should take place in 2H14. However,management has subsequently clarified that in the interests of time, it willissue a KES 5bn bond instead.

› What’s the money for? CIC like many of its peers is focused on propertyinvestments and regional expansion. The CIC Plaza II building located inthe prime Upper Hill area was completed in FY13. CIC is also finalising itsreal estate blueprint that will see the company set up commercial andresidential developments on 700 acres of land in semi-rural and ruralareas. Regional expansion is also gaining traction with entry into South

Sudan, Uganda, Tanzania and Malawi expected in FY14. To this end, CIChas already entered into a joint venture with Malawi Union of Savings andCredit Co-operatives (Muscco).

*** REDUCE ***


Fair value KES 7.89Upside/(downside) % -14%

Target price KES 9.15Price return % -1%



Issued shares m 2,616Market cap (m) USD 277Free float % 20%Free float market cap(m) USD 56Monthly value traded USD 1.6

Year end December

Bloomberg CIC KNReuters CIC NR


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CIC ratios


CIC P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13



Investment and other income 86% 1% 31% 129% 47% -9%

Total income 14% 23% 45% 53% 48% 22%

Gross claims and benefits payable 12% 33% 49% 58% 31%



Profit before tax 55% 27% 118% 30% 110% 1%

Profit after tax 41% 34% 106% 20% 138% 1%

RoA** 6% 6% 8% 6% 11% 9%

RoE** 26% 27% 27% 17% 28% 23%

Earnings per share* 41% 34% 106% 20% 138% 1%



Change in NAV 32% 31% 164% 65% 27% 22%*Based on current number of issued shares. **Actual ratio, not change in ratio


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CIC premium mix FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 100% 100% 100% 100% 100% 100%General insurance: 51% 56% 59% 65% 70% 70%CAR & engineering 1% 2% 1% 1% 1% 1%Fire domestic 1% 1% 1% 1% 1% 1%Fire industrial 4% 4% 4% 4% 4% 5%Liability insurance 0% 0% 0% 0% 1% 2%Marine & transit 0% 0% 0% 0% 0% 1%Motor private 15% 16% 19% 20% 16% 14%Motor commercial 12% 15% 18% 20% 20% 20%Motor pool 0% 0% 0% 0% 0% 0%Medical insurance 3% 3% 4% 8% 17% 18%Personal accident 5% 5% 3% 2% 2% 2%Theft insurance 8% 7% 7% 5% 5% 4%Workmen's compensation 2% 2% 2% 2% 2% 2%Misc. accident 0% 0% 1% 1% 1% 1%Micro solutions 0% 0% 0% 0% 0% 0%Long term insurance: 49% 44% 41% 35% 30% 30%Ordinary life 4% 4% 5% 5% 4% 4%Group life 45% 41% 36% 31% 26% 25%Outward reinsurance composition -11% -11% -9% -13% -11% -9%Net earned premium 89% 89% 91% 87% 89% 91%

CIC premium growth FY08 FY09 FY10 FY11 FY12 FY13Gross earned premium revenue 24% 42% 56% 34% 23%Short term business: 36% 50% 71% 44% 24%

Long term insurance business 12% 31% 35% 14% 22%

CIC claims mix FY08 FY09 FY10 FY11 FY12 FY13Net claims and policyholdersbenefits payable

100% 100% 100% 100% 100% 100%

General insurance: 47% 54% 58% 60% 68% 68%CAR & engineering 1% 0% 0% 0% 0% 1%Fire domestic 1% 0% 1% 0% 0% 0%Fire industrial 0% 1% 1% 1% 0% 1%Liability insurance -1% 0% 0% 0% 0% 1%Marine & transit 0% 0% 0% 0% 0% 0%Motor private 25% 30% 30% 26% 22% 19%Motor commercial 10% 13% 15% 18% 19% 15%

Motor pool 0% 0% 0% 0% 0% 0%Medical insurance 2% 2% 3% 7% 19% 26%Personal accident 3% 1% 2% 1% 2% 1%Theft insurance 5% 4% 4% 4% 3% 3%Workmen's compensation 0% 1% 1% 1% 1% 1%Misc. accident 0% 0% 0% 0% 1% 0%Policyholders' benefits: 53% 46% 42% 40% 32% 32%Life and health claims 42% 32% 32% 25% 22% 24%Maturities 1% 2% 4% 3% 2% 1%Surrenders 0% 0% 0% 0% 0% 0%Actuarial adjustment of policyholders liability

11% 12% 6% 12% 8% 6%

Recoverable from re-insurers: -18% -12% -7% -8% -10% -10%

Net insurance benefits and claims 82% 88% 93% 92% 90% 90%


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CIC claims & policyholders benefits growth FY08 FY09 FY10 FY11 FY12 FY13Gross claims 22% 35% 57% 47% 30%Short term claims 42% 44% 63% 66% 31%Increase in policyholders benefits 5% 23% 49% 20% 27%

CIC investment income mix FY08 FY09 FY10 FY11 FY12 FY13Investment income composition: 100% 100% 100% 100% 100% 100%Interest on government securities held to maturity 47% 38% 41% 52% 16% 22%Bank deposit interest 30% 35% 24% 41% 35% 25%Interest on staff loan receivables 3% 9% 3% 5% 1% 2%Dividend income 0% 0% 0% 2% 3% 3%Rental income from investment property 7% 7% 4% 3% 1% 1%Fair value gains on investment property 10% 0% 0% 0% 0% 0%

Fair value (loss)/gain on equity investments at fair value through profit and loss -6% 0% 0% 0% 0% 0%Amortisation/discount on government securities held to maturity 0% 0% 0% 0% 0% -2%Other gains and losses 8% 11% 28% -2% 44% 49%

CIC balance sheet composition (expressed as a % of assets) FY08 FY09 FY10 FY11 FY12 FY13Investment properties 6% 6% 12% 12% 18% 21%Reinsurers' share of contract liabilities and reserves 14% 15% 12% 15% 14% 10%Government securities held to maturity 25% 23% 15% 22% 15% 14%Deposits with financial institutions 17% 16% 25% 25% 26% 20%

Insurance contract liabilities 37% 34% 22% 23% 23% 18%Unearned premium reserve 15% 15% 18% 19% 22% 24%Actuarial value of policyholder liabilities 17% 19% 12% 11% 12% 12%


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Liberty Kenya: P&L noise continues Liberty’s FY13 results reflected an impressive bounceback from 2012, butthere was a lot of noise in the P&L. Whilst premium income was relativelyflat (with a 77:23 mix between short term and life insurance), investmentincome declined measurably. However this was more than offset by heftydeclines in net claims, commission expenses and income tax expense. Theinsurer’s conservative strategy did results in significant claims protectionfrom large fire claims in 2013, although its reinsurers in Tanzania weresignificantly impacted and have therefore adjusted their rates significantly.Liberty also changed its accounting policy for financial instruments anddisposed of an associate company in Tanzania (and appears likely to disposeof another one this year). We upgrade our recommendation to BUY.

› Reduction in expenses drives FY13 earnings. Liberty’s 26% earningsgrowth in 2013 was a strong recovery from a 14% earnings contraction inFY12. While total income was down 9% due to a fall in investment income,this was largely offset by a 20% decline in net claims incurred (again dueto a net reinsurance gain on an unusually large fire claim). Ultimatelywhat made the difference was a reduction in commissions payable,financing costs and income tax expense.

› Optional scrip dividend. Liberty retained the dividend at 40cts a share,similar to FY12, but this was to be in the form of a scrip dividend to be‘paid’ from the share premium account. The scrip dividend is like a bonusissue and therefore results in more issued share capital. Shareholdershowever had an option to elect for a cash dividend. Overall, the dividendpayout ratio was 20%.

› Change in accounting policy for financial instruments has minimal P&Limpact. In 2013 Liberty reviewed its accounting policy for insuranceliabilities and matching assets in order to conform to the policies of itsultimate holding company. As a result, a substantial proportion of thecompany’s financial assets were moved from an available-for-sale andheld-to-maturity classification to a fair-value-through-profit-or-lossclassification. The net effect was a 2% downward restatement of FY12 netincome.

› Tanzania takes a hit. An unprecedented number of large claims on fireand engineering policies in 2013 meant that underwriting profits were lessthan half those in 2012, and overall PBT was less than one-third of FY12,although earnings in that year were boosted by a one-off sale of anassociate company. Liberty is also in the process of reviewing itsshareholder agreements for another associate, namely StrategisInsurance Limited, and expected to finalize the process in 1H14, althoughthere has been no announcement in this regard.

*** BUY ***




Dividend yield (ntm) % 5.6%Forecast total return % 51.6%

12 month high/low KES 22.50/4.90YTD performance % -18%1yr performance % 48%

Issued shares m 515Market cap (m) USD 106Free float % 5Free float market cap(m) USD 6Monthly value traded USD 0.4

Year end December

Bloomberg CFCI KNReuters


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Liberty Kenya ratios

FY08 FY09 FY10 FY11 FY12 FY13Premium income to total income 66% 66% 49% 55%Investment income to total income 29% 26% 40% 36%

Liberty P&L trend (y/y change) FY08 FY09 FY10 FY11 FY12 FY13

Gross earned premium revenue 33% 9% 6%

Net earned premium revenue 20% -6% 2%

Investment and other income 4% 95% -18%

Total income 20% 25% -8%

Gross claims and benefits payable 21% 8% 122%

Net claims and benefits payable -9% 52% -18%

Expenses and commissions 33% 7% -5%

Profit before tax 110% 17% 9%

Profit after tax 266% -9% 27%

RoA** 4% 3

2014-08-13 Kenya Insurance Sector Update-2

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Transcript of 2014-08-13 Kenya Insurance Sector Update-2