Securities Africa: Kenya Insurance Sector Value Update
Wednesday, 13 November 2013
We update our share recommendations for the insurance sector following release of both FY12 and 1H13 performance numbers. Since our last valuation report in January 2013, the sector has witnessed strong price re-ratings (sector up 62% YTD outperforming the NSE 20 index at 21% YTD). Average daily value traded has also improved from KES1.59m in 2012 to KES3.53m YTD. We remain optimistic about the sector underpinned by continued strong growth in gross earned premium (22% CAGR in five years) and increased investment income driven by improvement in returns from equity (All share index up 42% YTD), bonds and property investments. The major concern for investors is the low dividend payout due to the need for reinvestment to increase penetration (average sector payout at 21.5% vs. 30.7% banking sector average).

FY12 performance better than expected; steady performance in 1H13
FY12 average sector EPS came in 35% above forecast, driven mainly by higher than expected investment income (33.1% above forecast). CIC insurance outperformed by the largest margin (+133%), while Pan Africa underperformed (-27.1%). On premium growth, CIC Insurance outperformed forecast by 6.92%, while Liberty underperformed forecast by 3.55%.

Average sector claims came in 19.86% above forecast. FY12 sector average claims to premium ratio decreased to 42% (vs. 43% in FY11 and against forecast of 47%). Kenya Re registered the highest increase in claims (FY12 claims to premium ratio up to 61% from 49% in FY11) driven by an increase in motor insurance claims, while Liberty registered the highest decline in claims (FY12 claims to premium ratio down to 36% from 47% in FY11) due to re-pricing within its medical insurance business.

Against total industry premiums, listed insurance company's gained market share (combined short term premium shares 29.62% vs. 27.76% in FY11, combined long-term premium shares 71.11% vs. 69.40% in FY11).

In 1H13, our sector PAT grew by 62% y/y on average, driven by 24% rise in investment and other income. Net earned premiums grew at slow rate of 10% dampened by a contraction in life insurance premiums. Claims climbed 14% y/y and operating expenses increased by 13% y/y.

Share price performance
YTD, Liberty Holdings has outperformed,registering 94% rise in its share price while CIC has witnessed the slowest growth at 30%. Britam has been traded the most (USD 21.3m, 40% of sector total) and it has recorded the highest net foreign inflows (USD 6.53m, 75% of sector total).

Valuations and recommendations
We retain our buy recommendationfor the sector. Against our revised valuations, sector upside stands at 30%. We have revised our forecast earnings upwards by an average of 53% for FY13 (83% increase in investment income, and 6% increase in gross earned premiums), following strong 1H13 performance. In addition to revised forecast earnings, we have cut our risk premium from 7% to 6% thus reducing our cost of equity to 15% from 16%.

We have a buy recommendation across all the listed insurance companies, with Pan Africa offering the highest upside (+38.4%). Liberty Holdings (+37.8%) is our second pick, followed by CIC (+36%), Britam (+31%) and Kenya Re (+30%). Against FY12 earnings, the sector trades at an avg. 7.36x PE and 1.69x PB, whilst against FY13 forecasts, the sector trades at 5.66x PE and 1.29x PB.

We have adjusted CIC Insurance fair value the most (82% to KES6.13). Reasons for the adjustment include an increase in FY13 forecast short term insurance market from 6.9% to 8.5% FY13, following strong performance FY 12 (Market share rose to 8% vs. 6.5% FY11, and against 6.8% forecast).

We initiate coverage on Jubilee Insurance (FV KES341.02, upside +19%). Against our fair value, forward (FY13) PE and PB stand at 8.2x and 2.0x, respectively. On gross premium, Jubilee ranks first in our universe of six listed insurance companies (it accounts for 31% of sector gross earned premiums) and offers the widest geographic diversification with operations in Kenya, Uganda, Tanzania, Burundi and Mauritius.

For more information, contact:

Securities Africa Research
Securities Africa | 69 Front Street | Hamilton HM12
Main: +1 441 278 7620 | Fax: +1 441 295 6735
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