Insurance Industry Report

Transcription

1 Insurance Industry Report Growth on Life Premiums Analyst: Chief Dealer: Head of Institutional Trading Equities and Derivatives trader Willis Nalwenge Bernard Kung u Bernard Gichuru Brian Tanui nalwengew@aibcapital.com kungub@aibcapital.com gichurub@aibcapital.com tanuib@aibcapital.com (+254) (+254) (+254) (+254) CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 31

2 2018 Insurance Industry Report Contents 1.0 Preview of the Industry Market Movement: The Economy Insurance Industry Trend Kenya Insurance Industry: Industry Challenges: Britam Holding Plc CIC Insurance Group Limited Jubilee Holdings Limited Kenya Re-Insurance Corporation Limited Liberty Kenya Holdings Plc Sanlam Kenya Holdings Plc Research Disclosure List of Figures Figure 1: Economic Indicators... 5 Figure 2: Gross Insurance Premiums... 8 Figure 3: Insurance Penetration... 9 Figure 4: Gross Premium Income Proportion... 9 Figure 5: Insurance Industry Benefit and Claims Levels Figure 6: Long Term Insurance Key Ratios Figure 7: Short Term Insurance Key Ratios List of Tables Table 1: Valuation Summary... 3 Table 2: Fundamentals... 4 Table 3: Sector Index

3 2018 Insurance Industry Report Industry Stats Insurance Penetration FY 2017: 2.8% Total Industry Gross Premium: KES Bn 6.6% Long Term Business Gross Premium: KES 82.97Bn 13.6% Long Term Business Total Assets: KES Bn 15.8% Long Term Business Liabilities: KES Bn 18.3% Long Term Business Shareholders Funds: KES 45.96Bn 1.6% Short Term Business Gross Premium: KES Bn 2.5% Short Term Business Total Assets: KES Bn 3.6% Short Term Business Liabilities: KES Bn 2.7% Short Term Business Shareholders Funds: KES 70.40Bn 5.0% Analyst Willis Nalwenge 1.0 Preview of the Industry The insurance industry has undergone tremendous growth with 2017 Full Year Gross Premiums topping KES Bn,a 6.6% growth from KES Bn and a five year Compounded Annual Growth Rate (CAGR) of 10.0%. Life insurance FY-17 gross premiums were up 13.6% y/y while Short term insurance gross premiums marginally gained 2.5% insurance penetration as referenced by gross premiums as a ratio of Gross Domestic Product (GDP) remains low at 2.8% compared to Africa s penetration levels of c.3.5%. This has led to many insurance firms identifying Africa as a lucrative continent full of growth opportunities. Industry profitability saw Profits Before Tax (PBT) decline by 4.3% to KES 14.3Bn from KES 15.01Bn. Although Short Term Business saw a 35.9% increase in PBT, Long Term Business PBT plunged 42.1% due to a 24.1% increase in benefit payout. Of the 37 companies that are licensed by the Insurance Regulatory Authority (IRA) to conduct short term business, 7 posted losses before taxes while one did not file. Long term business saw 5 insurers make losses from 26 that are licensed. Investments by the industry insurers and reinsurers grew by 13.0% from KES Bn reported in the Q4-16 to KES Bn Q4-17 with a focus on government securities. With the recovery of the market, the industry is bound to witness improved investment return performance due to capital gains. The growth in the industry is a deliberate move by the players in terms of improved regulations, product development, insurance education in long term business specifically in pension, improved international trade and entry of new players. With further industry development, we project a 12% growth driven by economic growth, change in demography which will aid growth in long term business gross premium. Insurance penetration in 2018 will remain flat at 2.8%. In this report, we start by highlight the key trends that are expected to shape the insurance sector in 2018 and beyond. We then discuss the expected performance of the individual listed insurance based on the new outlook and present our updated financial projections and valuations. Below is a summary of the sector valuation. Specific insurance discussions start from page 11. Table 1: Valuation Summary Company Price 30-May-2018 Target Price Upside/downside Recommendation Britam Holdings Plc % HOLD CIC Insurance Plc % SELL Jubilee Holdings Plc % HOLD Kenya Reinsurance Corp Ltd % BUY Liberty Kenya Holdings Plc % HOLD Sanlam Kenya Plc % HOLD Source: NSE, AIB Capital nalwengew@aibcapital.com 3

4 31/Mar/17 30/Apr/17 31/May/17 30/Jun/17 31/Jul/17 31/Aug/17 30/Sep/17 31/Oct/17 30/Nov/17 31/Dec/17 31/Jan/18 28/Feb/18 31/Mar/ Insurance Industry Report Table 2: Fundamentals Name BVPS Price on Valuation Date P/B EPS P/E Forward PE Dividend FY 2017 Dvd Yld ROA ROE Britam Holdings Limited % CIC Insurance Group % Jubilee Holdings Ltd % Kenya Reinsurance Corp Ltd % Liberty Kenya Holding Ltd % Sanlam Kenya Plc % Median % Mean % Source: AIB 1.1 Market Movement: Table 3: Sector Index Insurance Sector Performance Insurance Sector Index NASI NSE-20 NSE Source: NSE, AIB Compared to the market, the insurance sector index has remained relatively flat, not responding to the overall market movements including the NSE 25 Index which has multiple insurance industry components. The low movement is due to poor investor sentiment in the sector. 4

5 2018 Insurance Industry Report 2.0 The Economy The world economy is set to grow by 3.4% in According to the International Monetary Fund (IMF), risks to the global growth forecast appear broadly balanced in the near term, but remain skewed to the downside over the medium term. On the upside, the cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other. On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence. A possible trigger is a faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates. If global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a buildup of financial vulnerabilities in advanced and emerging market economies alike. Inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks (IMF, 2018). The Kenyan Economy is projected to rebound from the effects of the long electioneering period witnessed in The World Bank projects the GDP to go grow by 5.8% while African Development Bank (AfDB) putting the growth at 5.6%. Growth will be championed by rain driven agriculture, increase in trade industry due to improve consumer appetite and government spending. With the intended review of the capping law receiving challenges from the legislatures, the economy will continue to face head winds from stagnating private credit. Figure 1: Economic Indicators Economic Indicators GDP growth% Population Growth (%) Insurance Penetration (% GDP) General inflation% 91 Day T-Bill Rate 15.0% 10.0% 5.0% 0.0% e 2018p Source: CBK, IRA, AKI, AIB Population growth is set to remain stagnant at 2.8% with the population set to touch 51Mn in 2018 driven by migration and improved health conditions. Interest capping rate will limit the 91 day Treasury bill rate movement as major financial intuitions preferring to manage risk through government debt. With stable interest rate regime, insurance is bound to post positive results in investment income. The Central Bank Governor and the Treasury Secretary have hinted a repeal or review of the law that came to effect in late September We project the 2018 inflation to stand at 6.6%, remaining within the government target of 5%±2.5%. Securities Market: The NSE opened the year on the same momentum it closed in The NSE 20 Share index and the All Share Index gained 3.8% and 11.7% respectively in Q with a total of 2.13Bn shares trading and a turnover of KES 61.15Bn compared to 1.86Bn shares with a value of KES 37.06Bn in Q Local participation improved to 42.3% 5

6 2018 Insurance Industry Report from 26.7% seen in Q Net foreign sale of KES 9.52Bn in Q1-17 (Net Buy of KES 2.04BN Q1-17) have left the market value suppressed. We project the market to continue with the same momentum in Q2-18 driven banking stocks which remain vigilant on regulation around the Interest Rate Cap. The telecommunication sector with be a watched counter with reference to mobile money interoperability. In the first three months, bonds market moved KES Bn against KES Bn same period Movement in the government papers will remain depended on the interest rate capping as most banks opt to increased investment on government papers compared to growing their loan books issued creating high levels of subscriptions leading to stagnant rates. 6

7 2018 Insurance Industry Report 3.0 Insurance Industry Trend According to the Secretary General of African Insurance Organization, the African insurance industry was worth USD 64Bn as end of Current insurance penetration in Africa stands at c.3.5% with South Africa leading with a penetration of c.17% (Statista, 2018). In a continent hosting 10% of the world population, access to insurance products starts to increase in the upper middle income brackets as insurers target only 5% of those eligible. This creates opportunities as penetration will not approach mature-market levels any time soon. In spite of facing tough economic challenges and regulatory environment leading to insufficient capitalization of insurance, the insurance market will benefit from a growing educated population, change in cultural norms and change in family structure due to less reliance of extended family, increased urbanization, investment in infrastructure and exploitation of minerals, improved technology and distribution channels. Insurance sector growth is heavily dependent on economic growth. Slowdown in economy can impact insurance sector growth as it happened in In many households, insurance is not considered as a priority and interference in income makes insurance vulnerable to being dropped. Globally, the non-life sector premiums are set to grow by about 3% in 2018 stimulated by an improved economy and recovery of commodity prices. Emerging market is set to drive the growth. Life insurance premiums are set to grow faster (forecasted) than the non-life premiums sustained by fast growth in savings products in emerging market at 4.2% in Whilst global life reinsurance premiums are set to grow by 1% in 2018, growth in the emerging market is expected to be at a high of 8% driven by China which benefits from proactive government move to increase insurance penetration. 3.1 Kenya Insurance Industry: Key industry features: In 2017, the industry had of 52 players, 8,698 agents and 216 brokers. Kenyan insurance industry remain concentrated in the urban areas with Nairobi dominating with 65.1% and 77% of life and non-life insurance premiums as at end of Sales agency i.e. one on one sale is the most preferred mode of distribution of insurance products with insurance agents sourcing 51% of life business while brokers and direct business was 28% and 21% respectively. Under non life business, agents brought in 45% of business while 41% and 14% was sourced through brokers and direct business respectively. Agency power remains a major performance determinant with companies with a large agency force, especially in the life business, remains the most competitive company. Leveraging cost-efficient distribution channels, such as bancassurance, internet or mobile phone distribution, will be key to selling life insurance to a larger share of the population living in low income countries. 7

8 Insurance Industry Report The industry saw a 6.6% growth in gross premiums written to KES Bn in 2017 from KES Bn in The market has seen an upward trajectory with a five year CARG of 10%. The year on year growth was induced by 13.6% growth in Long Term Insurance compared to a 2.5% growth in Short Term business. Growth in long term business was driven by improved absorption in pension business and life assurance business which benefited from improved distribution channels. Development in the short term business was due to increase in marine and transit insurance (+34.4%), engineering (+14.7%) and aviation insurance (11.9%). Figure 2: Gross Insurance Premiums Insurance Industry Gross Premiums Long Term Business (KES Bn) Short Term Business (KES Bn) Total Gross Premiums (KES Bn) Insurance Penetration (% GDP) 4.0% % % e 2018p 2.5% Source: IRA, AKI, AIB With Insurance penetration has remained depressed to standing at 2.8% FY-2017 measured as a gross premiums as a percentage of Gross Domestic Product (GDP), penetration is expected to remain flat (2.8% FY-2018) due to growth of GDP (projected at 5.5%) despite anticipated growth in gross premium written. As per figure 2, we project a modest 9.6% growth in 2018 to KES Bn for an overall penetration levels of 2.8% (Long term- 1.70%, Short Term 1.11%) driven by: i. Growth of long term insurance on product innovation and education ii. Recovery of economy will help boost the upside of short term insurance 8

9 2018 Insurance Industry Report Figure 3: Insurance Penetration Kenya Insurance Penetration (% of GDP) Life Insurance Penetration Non-Life Penetration Overall Insurance Penetration 3.10% 3.02% 3.16% 2.05% 2.00% 2.02% 3.44% 2.28% GDP Rebasing in 2.93% 2.78% 2.75% 2.77% 2.88% 1.87% 1.80% 1.72% 1.66% 1.70% 1.05% 1.02% 1.08% 1.16% 1.06% 0.99% 1.03% 1.11% 1.17% e 2018p Source: IRA, AKI, AIB Short term business remains the dominant with 60% market share of gross written premiums. This has fallen from 62.5%and 64.7% in 2016 and 2015 respectively as long term business growing from 35.3% to 37.5% and 40% in 2015, 206 and 2017 in that order. Figure 4: Gross Premium Income Proportion Source: IRA, AKI, AIB Growth in long term insurance is driven by i. Change of family structure from extended family setting to nuclear setting. ii. A growing middle class iii. Increase in the number of women in the working bracket currently standing at 48.5% of total labor force iv. Urbanization and introduction of the devolved government 9

10 Insurance Industry Report v. Financial sector deepening leading to an improved method of distribution of insurance products, collection and payment of premiums like bancassurance, online and mobile payment, vi. Product development bancassurance and last expense vii. Increase in international trade including marine trade. Short term insurance will see marine and transit insurance, aviation and engineering remain growth champions with increase in international trade and growing number of infrastructure projects. Claims and Benefits: Growth in long term insurance has led to an increase in percentage of its share paid out in claims and benefits. The market saw a total of KES 100.8Bn paid out in claims and benefits which was an increase of 11.1%. As per figure 5, the benefits paid under long term business increased to KES 45.9Bn representing 45.6% compared to KES 37Bn which was 40.8% of total insurance payment in Claims and Benefits. This was caused by a huge maturities claims that came due after completion of contract term. Figure 5: Insurance Industry Benefit and Claims Levels Total Industry Claims (KES Bn) Total Claims and Benefits Life Business Non-Life Business e Long term claims were driven by high total claims on matured policies a growth of 35.7% and a share of 75.0% of total claims and benefits paid in 2016 while there has been a surge in withdrawals for a96.4% surge and 16.5% share over the same period. In spite of the low insurance penetration, Kenya remains one of the best performing African countries in term of insurance coverage driven by: i. Cost efficient distribution channels, ii. Liberalized financial market with strong regulations, iii. Presence of foreign firms, strong regulation. There is still need to improve on product development to be able to capture all aspects of the economy including Micro, Small and Medium Enterprises (MSME) and agriculture sector. Growth of international trade will help drive short term business on the marine insurance platform. 10

11 2018 Insurance Industry Report Figure 6: Long Term Insurance Key Ratios LONG TERM INSURANCE Indicator Retention Ratio Commission Ratio Management Expense Ratio Shareholders' funds to Total Assets Return on Assets (ROA) Return on Equity (ROE) Long term insurance has managed a high retention rate of 93% on net premiums on gross premiums which is an indication of low risk ceded to the insurer. Commission ratio has declined to 6.94% as a percentage of net premiums. This has been necessitated by an increase on avenues for product distribution and decline in commission charged. Management ration eased to 15.58% on the benefit of digitization and streamlining of operations. A 35.4% drop in profits from KES 5.85Bn in FY 2016 to KES 3.78Bn in 2017 led to decline in ROA and ROE to 1.36% and 8.29% from 2.69% and 14.36% respectively. Of the service providers, 31.8% posted loses while 68.2% posted profits. Shareholders funds increased at a decreased rate of 1.6% to KES 45.96Bn from KES 45.26Bn over the same period of time. The value of total assets surged by 15.8% to KES Bn from KES Bn with due to a 41.5% growth in Outstanding Premiums, Quoted Ordinary Shares was up by 29.6% and government securities increased by 22.8%. Cash and cash balances increased by 64.5%. Figure 7: Short Term Insurance Key Ratios SHORT TERM INSURANCE RATIOS Indicator Retention Ratio Incurred Claims Ratio Commission Ratio Management Expense Ratio Combined Ratio Shareholders' funds to Total Assets Return on Assets (ROA) Return on Equity (ROE) In spite of increase in gross premiums, higher outward reinsurance premiums led to a decline on retention ration. This is a reflection of reduction of net risks retained by insurer s financial resources. Combined ratio eased on a decline of incurred claims. A 38.1% increase in Profits After Tax (PAT) in 2017 to KES 7.27Bn from KES 5.26Bn in This helped ROE and ROA recovered to 5.63% and 10.57% from 4.33% and 7.91% over the same period. This was due to PAT increasing faster than increase in shareholders funds and total assets. 3.2 Industry Challenges: Fraud: Fraud remains one of the greatest challenges facing the insurance industry. Estimates, generally put, indicate fraud at around 10% of the property or casualty insurance industry s incurred losses and loss adjustment expenses each year. Fraudulent claims are particularly prevalent in motor and medical claims although it is difficult to tell the exact magnitude of the menace. Premium Undercutting: Low insurance penetration has led to cut throat competition. This has caused industry players to undercut in product pricing in order to gain market share despite the risk that comes with product mispricing. Another cause of price undercutting is the high returns in the investment market. High returns in the investments market will lead to high profitability leading to increased retained earnings. In the era of risk base capitalization, companies will continue to undercut with the aim of compensating the decline in premiums by the high profit returns. Risk Based Capital: The Insurance Act has undergone various revisions in 2017 (The Insurance Act 2017). Changes related largely to harmonizing the risk-based capital provisions within the Act and the creation of perpetual licenses for insurance companies. The amendments will result in additional deduction to the capital available putting strain on Adequacy Ratio for most underwriters. It poses a major problem to the industry with regards to players who have continuously been making loss. This limits internal ability to raise capital cushion to cover risk held. This will force the regulator to review the priority in the industry with the need to have well capitalized, stable and secure industry while at the same time ensuring that only worthy players are left in the industry by culling non-compliant underwriters while maintaining calm. 11

12 2018 Insurance Industry Report The Insurance Regulatory Authority (IRA) in Kenya also issued the following guidelines to assist in the risk-based supervision: The Insurance (Valuation of Technical Provisions for General Business) Guidelines, The Insurance (Investments Management) Guidelines, 2017 The Insurance (Capital Adequacy) Guidelines, 2017 Regional regulators: Insurer s subsidiaries are facing challenges in the areas of operation. In Tanzania, insurance brokers must in future be at least two thirds (over 66%) owned and controlled by Tanzanian citizens. Customers have to pay insurance underwriters all premiums directly, even where they are using brokers. Insurance cover for a Tanzanian resident person or company may only be placed with a Tanzanian registered insurer. The exception to this is where classes of insurance are not available from a Tanzanian registered insurer. All ground transport insurance, marine insurance and air cargo insurance covers for Tanzanian imports must be effected by a Tanzanian insurer. The Development of the Marine Insurance: in spite of confirmation of the Treasury Cabinet Secretary require importers to use local insurers for marine insurance, marine insurance has failed to live up to its bill of rejuvenating the short term insurance. The line saw a 39.7% increase in premiums from KES 2.6Bn to KES 3.6Bn despite the value and volume of imports has risen significantly. 12

13 Britam Holding Plc Recommendation: HOLD Target Price: KES Price on 30 th May 2018: KES Potential Upside/Downside: 5.7% 52-week Trading Range: KES to KES 9.05 BVPS: Dividend Cover: 0.7x Dividend Yield 2.6% EPS: KES 0.26 P/B 1.28x P/E 51.54x ROaA 0.6% ROaE 2.6% Shares Outstanding: 2,523.49Mn Float: 17.3% Britam Holding Plc We open the valuation of Britam Holding Plc with a HOLD recommendation based on a target price of KES for an upside of 5.7% from the current KES The company has been trading below its book value (BVPS 10.45) after the insurer changed from Gross Premium Valuation (GPV) to Net Premium Valuation (NPV) that led to an increase in net insurance benefit by 150% in 2016 forcing a heavy payout from reserves. We project the insurer to contain payouts to replenish its reserves. This has caused the counter to trade at a high PB (1.28x) which is bound to correct itself. In spite of short term insurance dominating in terms of gross premiums (FY-17 at 55.4%), long term insurance is bound to grow at a faster rate 12.2% (against ST Insurance growth of 10.0%). We expect the contribution rations to remain fairly even. Retention ration will remain at a high at 87%. Long term retention rate will remain at the 85%-87% region suppressed by lower retention in short term business. Acquisition of new mandates saw assets under management (AUM) increase by 18.4% to KES Mn from KES Mn FY-16 boosted by synergies the company enjoys. Local vs Regional: Life business of the Kenyan subsidiary contributed 45.9% of the total Gross Earned Premium and Fund Management Fees with the General insurance contributing 33.5%. Regional office share was at 16.8% while the asset management and property arms of the company brought in 3.5% and 0.3% of revenues respectively. With the recovery of the economy, the property arm is bound to recover from posting a loss of KES 72.36Mn boosted by sales. Growing Bottom Line: With the valuation change from Gross Premium Valuation (GPV) to Net Premium Valuation (NPV) that led to an increase in net insurance benefit by 150% in 2016, the company in bound to see a surge in Profit After Tax (PAT) after change from NPV to GPV methodology resulted in a reduction of the actuarial valuation of the long term liabilities by KES 5.24Bn as at 1 January We forecast PAT margins to shoot to 24% in from 2.6% in FY This will push the EPS upwards to 2.28 from 0.26 in Operating Expense ratio is set to return to its historical levels of 39.0% in 2018 from 36.2% with pressure form salaries and wages. This is set to tempter down with additional use in technology. Claims and benefits payout will normalize to 32.8% from 61.2% in Investment income is set to contribute 19.5% of total income having contributed 21.5% in This will be suppressed by movement in income generated from government securities and deposits from banks due to the interest rate capping law. Balance Sheet Growth: Surge in retained earnings and reserves from the long term business will champion shareholders equity growth by 16.8%. Total assets are set to grow at 13.0% with high investments in government securities. Strength in Numbers: The Company has maintained the top position as market leader in Long Term Insurance with a 22.1% holding as at end of 2017 and 5 th position in Short Term Business with 6.4%. In Asset management, was 2nd with 18.7% market share. The group s strength lies on the large number of branches (66 in total), large outreach in the region as they operate in 7 countries, large size of financial advisors (more than 3,800) who are the main drivers of the business. With the strength in resources, the company is bound to maintain its market share in the industry as a whole. The insurer will continue taking advantage of economies of scale in growing its regional business. 13

14 Britam Holding Plc The size and regional growth with push operating margin upwards to 33.7% from 32.6% in FY-17. The climb will be contained by digitalization of essential services. Commission payable will remain stagnant at 15.1% of gross premiums due to improved product distribution channels and collections. Forecasting and Valuation: British American Investment Company (AMOUNTS IN KES '000) 2016A 2017A 2018E 2019E 2020E CONSOLIDATED INCOME STATEMENT GROSS PREMIUMS 20,291,844 23,298,311 26,094,108 29,225,401 32,732,449 NET PREMIUMS EARNED 17,393,585 20,298,120 22,440,933 25,133,845 28,149,907 NET EARNED PREMIUMS AND MGMT FEE 18,322,819 21,058,750 23,328,133 26,127,509 29,230,077 NET INCOME 22,360,214 27,836,674 31,838,947 35,525,184 39,500,160 NET CLAIMS & POLICYHOLDER BENEFITS PAYABLE 5,001,165 12,498,761 7,371,062 8,477,703 9,733,974 TOTAL EXPENSES 18,563,362 27,023,837 25,602,446 28,906,247 32,604,037 PBT 4,239, ,843 6,236,501 6,618,937 6,896,124 PROFIT/(LOSS) FOR THE YEAR 2,480, ,474 4,365,551 4,633,256 4,827,286 (AMOUNTS IN KES '000) 2016A 2017A 2018E 2019E 2020E CONSOLIDATED BALANCE SHEET CAPITAL EMPLOYED Share capital 193, , , , ,348 Share premium 4,263,412 7,706,782 13,502,052 13,502,052 13,502,052 Other reserves 11,874,244 13,579,959 13,579,959 13,579,959 13,579,959 Retained earnings 897, ,832 3,672,478 7,216,919 10,909,793 Proposed Dividend 581, , , , ,220 Shareholders' Funds 17,810,373 22,592,744 31,890,057 35,434,498 39,127,372 Non-controlling interests 67,223 77,266 77,266 77,266 77,266 Total equity 17,877,596 22,670,010 31,967,323 35,511,764 39,204,638 REPRESENTED BY: TOTAL ASSETS 83,642,609 99,024, ,383, ,619, ,127,023 LIABILITIES TOTAL LIABILITIES 65,765,013 76,354,847 89,104,535 97,591, ,154,272 NET ASSETS 17,877,596 22,670,010 26,278,650 30,028,685 33,972,751 (AMOUNTS IN KES '000) 2016A 2017A 2018E 2019E 2020E CONSOLIDATED CASHFLOWS Cash generated from operations 2,485,976 2,271,998 4,671,839 5,393,968 5,229,955 Net cash generated from operating activities 5,017,387 7,941,982 13,024,515 11,649,082 14,656,053 Net cash used in investing activities (4,470,511) (5,871,067) (18,596,391) (11,449,226) (11,733,574) Net cash generated from/ (used in) financing activities 652, ,223 2,509, , ,004 Net increase/ (decrease) in cash and cash equivalents 1,199,764 2,456,138 (3,062,848) 561,718 3,336, A 2017A 2018E 2019E 2020E GROWTH RATE Gross Premiums Growth Rate 3.5% 14.8% 12.0% 12.0% 12.0% Long Terms Insurance 19.4% 26.2% 12.3% 11.3% 12.9% Short Term Insurance -6.1% 6.0% 12.9% 11.6% 10.9% Net Premiums 6.2% 16.7% 10.6% 12.0% 12.0% RETURN RATIOS ROaE 14.0% 2.6% 16.0% 13.7% 12.9% Growth YoY % -81.4% 514.2% -14.1% -5.9% ROaA 3.1% 0.6% 4.1% 3.8% 3.6% Growth YoY % -81.2% 605.1% -6.4% -6.5% BVPS

15 Britam Holding Plc MARGINS PAT Margin 14.3% 2.6% 19.5% 18.4% 17.1% Growth YoY % -81.8% 648.6% -5.2% -7.0% Pretax Margin 24.4% 4.3% 27.8% 26.3% 24.5% Growth (YoY) % -82.5% 551.5% -5.2% -7.0% EPS DPS Pay Out Rate 23.8% 143.5% 23.5% 23.5% 23.5% Retention Rate 76.2% -43.5% 76.5% 76.5% 76.5% PERFORMACE RATIO Retention Ratio 85.7% 87.1% 86.0% 86.0% 86.0% Commission Ratio 17.5% 15.1% 15.0% 15.0% 15.0% Cost to Income Ratio 47.6% 39.1% 38.8% 39.4% 40.0% Claims and Benefit Payout 28.8% 61.6% 32.8% 33.7% 34.6% Net Investment Income Ratio 13.3% 21.5% 24.4% 24.2% 23.9% Assumptions: For valuation, we used the Excess Equity Return method and P/E and P/B relative valuation. We assumed 10 year bond with YTM of %, equity risk premium of 5.5%, a beta of 1.07 (52 week average from Bloomberg) for a cost of equity of 18.7%. Cost of Debt was taken at 14.0%, equity to debt ratio of 65%, tax rate of 30% for a weighted average cost of capital of 15.6%. 2014A 2015A 2016A 2017A 2018E 2019E 2020E Excess Equity Return Beginning BVPS EPS 1.29 (0.50) Equity Charge 0.24 (0.09) Excess Equity Return 1.05 (0.41) Time Discounting Factor Estimated Fair Value Relative Valuation EPS 1.73 Average BVPS SSA Industry Median PE 9.19 SSA Industry Median PB 0.89 Estimated Fair Value Estimated Fair Value Valuation Method Excess Return on Equity % 5.27 Relative Valuation (P/E) % 3.97 Relative Valuation (P/B) % 4.93 Target Price Current Share Price Upside/(Downside) 5.8% Recommendation HOLD 15

16 CIC Insurance Group Plc Recommendation: SELL Target Price: KES 2.78 Price on 30 th May 2018: KES 4.70 Potential Upside/Downside: 40.7% 52-week Trading Range: KES 7.00 to KES 3.10 BVPS: 2.89 Dividend Cover: 1.5x Dividend Yield 2.6% EPS FY: KES 0.18 P/B 1.63x P/E 26.11x ROaA 1.7% ROaE 6.3% Shares Outstanding: 2,615.54Mn Float: 92.4% CIC Insurance Group Limited We initiate the value of CIC Insurance Group at KES 2.77 and a SELL recommendation on a downside of 41.1%% from the current KES We project gross income to grow by an average of 20% driven by rise 21.7% medical business, Life Business (+22.7%) with business from the Sacco movement and Group Credit Business (+21.9%) on rise in pension business. In spite of the positive outlook, the company s P/E of 26.11x and P/B 1.63x is way above industry median P/E of 17.66x and P/B 1.17x and BVPS of KES 2.89 an indication of overvaluation. The Top Line: gross premiums for General business saw a 25.6% bump from KES 8.4Bn FY-16 to KES 10.1Bn FY-17.The line of business contributed KES 335Mn in PBT. Life insurance saw a 9% growth in gross premiums to KES 4.1Bn from KES 3.8Bn over the same period with profits shooting up by 60% from KES 140Mn to KES 224Mn driven by high business retention and building on new business. We project gross income to grow by an average of 20% driven by rise 21.7% medical business, Life Business (+22.7%) with business from the Sacco movement and Group Credit Business (+21.9%) on rise in pension business. With growth of short term business, retention ratio will remain flat at the 85% range. General Insurance Business remains main premium contributor with 67.8%, Life 27.7% while regional business gross premiums stood at 4.5% of total gross premiums. On Profits Before Tax, General business topped with 64% PBT, Life business generating 43%. Assent Management injected 16% and regional business eroded 22% of the PBT. Improved profitability pushed FY-2017 ROaE up to 6.3% from 2.5% in We project this to further improve to 7.3% in FY The bottom line will be improved with stringent measure in operating expense, claims and benefits payment management. Expense management: the operating expense ratio stood at 52.8% a slight decline from 54.8% in We forecast the ratio to decline to a long term average of 46.4%. Claims expense rose by 21.4% to KES 7.8Bn 2017 due to private motor vehicle, public liability (Gikomba Market fires) and agriculture crop insurance claim following unprecedented drought in We expect claims to ease downwards to on with the new motor vehicle assessment centre (ease claims assessment and reduce on fraud), medical claim assessment system. The motor assessment centre set to be replicated in different parts of the country. Aggressive provisioning of KES 553Mn pushed Operating expense up by 8% to KES 4.2Bn Balance Sheet: increase in retained earnings and growth in statutory reserves led the 2.1% growth in Shareholders Equity. The two components will remain major driver due to increased earnings while payout ratio remains flat adding 5.9% while growth in life business will help grow the statutory reserves. Return on Average Equity (ROaE) inched up to 6.3% from 2.5% in We anticipate a 100bps upward move to 7.3% on faster growth of earnings compared to shareholders equity. Total Assets increased by 13.7% on deliberate growth in government securities and deposits in financial institutions. The Interest rate capping law and slowdown in the Nairobi Stock Exchange will continues to see focus on investment in government securities. Organic growth remains low at 2.2% with an anticipation to edge upwards to 3.2% in 2018 The insurer has initiated a drive to grow its medical insurance segment to capture additional market share from 6% in 2017 while continuing to enjoy market leadership in continues enjoy market leadership in Group Credit at 36% and Motor Commercial at 16

17 CIC Insurance Group Plc 17%. Establishment of a real estate will add to the number of revenue generating stream. Sacco Movement: CIC Insurance continues to embrace the Co-Operative movement to drive business. Its set to cede regional ownership from 98% in Uganda and 85% in Malawi to the country s respective Saccos. It currently owns 69% in the South Sudan subsidiary with the country s co-operative movement owning 31%. This will give it a platform to grow business, especially its Group Credit business. Regional Footprint: Regional business will see Malawi lag South Sudan and Uganda with the later expected to break even in Regulatory guidelines on Risk Based Capital and Cash and Carry policy Uganda with Malawi introducing solvency computation laws and requirement for additional capital injection will create the business platform for the two countries. Forecasting and Valuation: CIC INSURANCE COMPANY MODEL (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED INCOME STATEMENT TOTAL GROSS EARNED PREMIUMS 11,814,012 14,336,192 17,203,430 19,783,945 22,553,697 NET PREMIUMS EARNED 10,031,301 12,094,997 14,588,509 16,776,785 19,125,535 NET INCOME 13,017,360 15,600,262 17,599,109 20,041,136 22,779,234 NET CLAIMS & POLICYHOLDER BENEFITS PAYABLE 6,469,473 7,856,468 9,461,887 10,861,386 12,697,732 TOTAL EXPENSE 12,261,684 14,431,152 16,144,000 18,380,935 20,909,680 PROFITS FOR THE YEAR BEFORE TAX 114, , ,109 1,010,201 1,219,554 PROFIT/(LOSS) FOR THE YEAR 188, , , , ,688 (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED BALANCESHEET CAPITAL EMPLOYED Share capital 2,615,578 2,615,578 2,615,578 2,615,578 2,615,578 Share premium 162, , , , ,179 Statutory reserve 1,034,836 1,112,043 1,112,043 1,112,043 1,112,043 Contingency reserve 2, Translation- Fair Value Reserves (378,372) (417,893) (417,893) (417,893) (417,893) Fair value reserve (217,888) (265,610) (265,610) (265,610) (265,610) Revaluation surplus 109, , , , ,423 Retained earnings 4,012,652 4,227,820 4,477,527 4,870,799 5,410,618 TOTAL EQUITY 7,479,463 7,637,108 7,886,815 8,280,087 8,819,906 REPRESENTED BY: TOTAL ASSETS 26,928,523 30,630,520 31,926,344 33,401,921 35,615,530 TOTAL LIABILITIES 19,449,060 22,993,412 24,039,529 25,121,833 26,795,624 NET ASSETS 7,479,463 7,637,108 7,886,815 8,280,087 8,819,906 (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED STATEMENT OF CASHFLOWS Net cash generated from operating activities 455,474 1,764,219 1,155,391 1,296,544 1,427,956 Net cash used in investing activities 537,646 (2,257,631) (692,213) (1,215,092) (1,483,326) Net cash generated from/ (used in) financing activities (925,148) (909,073) (146,903) (50,909) 47,079 Net increase/ (decrease) in cash and cash equivalents 67,972 (1,402,485) 316,275 30,543 (8,291) 17

18 CIC Insurance Group Plc 2016A 2017A 2018F 2019F 2020F GROWTH RATE Gross Premiums Growth Rate -6.5% 21.3% 20.0% 15.0% 14.0% Long Terms Insurance 10.4% 12.4% 15.2% 13.2% 13.4% Short Term Insurance -12.8% 25.6% 22.1% 15.7% 14.2% Net Premiums -6.5% 20.6% 20.6% 15.0% 14.0% RETURN RATIO ROaE 2.5% 6.3% 7.3% 8.7% 10.0% Growth YoY -83.7% 157.5% 14.7% 20.5% 14.1% ROaA 0.7% 1.7% 1.8% 2.2% 2.5% Growth YoY -84.5% 129.0% 8.4% 20.2% 14.3% MARGINS PAT Margin 1.9% 4.0% 3.9% 4.2% 4.5% Growth YoY -82.3% 110.9% -2.3% 9.1% 5.9% Pretax Margin 1.1% 4.3% 5.5% 6.0% 6.4% Growth (YoY) -90.9% 276.4% 28.6% 9.1% 5.9% EPS 7.2% 18.3% 21.5% 27.0% 32.6% DPS 10.5% 12.0% 12.0% 12.0% 12.0% Pay Out Rate 145.9% 65.6% 55.7% 44.4% 36.8% Retention Rate -45.9% 34.4% 44.3% 55.6% 63.2% PERFORMACE RATIO Retention Ratio 84.9% 84.4% 84.8% 84.8% 84.8% Commission and Expense Ration 54.8% 52.8% 44.3% 43.3% 41.4% Commission Ratio 13.0% 14.8% 13.6% 12.8% 12.5% Claims and Benefit Payout 64.5% 65.0% 64.9% 64.7% 66.4% Assumptions: For valuation, we used the Excess Equity Return method and P/E and P/B relative valuation. We assumed 10 year bond with a YTM of %, equity risk premium of 5.5%, a beta of 1.62 (52 week average from Bloomberg) for a cost of equity of 21.7%. Cost of Debt was taken at 13.0%, equity to debt ratio of 59.9%, tax rate of 30% for a weighted average cost of capital of 16.7%. 2014A 2015A 2016A 2017A 2018F 2019F 2020F Excess Equity Return Beginning BVPS EPS Equity Charge Excess Equity Return Time Discounting Factor Estimated Fair Value Relative Valuation EPS 0.22 BVPS 3.02 Industry Median PE 9.19 Industry Median BV 0.89 Estimated Fair Value 1.98 Estimated Fair Value 2.69 Valuation Method Excess Return on Equity % 1.28 Relative Valuation (P/E) % 0.50 Relative Valuation (P/B) % 1.01 Target Price 2.78 Current Share Price 4.70 Upside/(Downside) -40.7% Recommendation Sell 18

19 Jubilee Holdings Limited Recommendation: HOLD Target Price: KES Price on 30 th May 2018: KES Potential Upside/Downside: 9.7% 52-week Trading Range: KES to KES BVPS: Dividend Cover: 6.49x Dividend Yield 1.8% EPS FY-17: KES P/B 1.51x P/E 9.21x FY-17 ROaA 4.3% FY 17 ROaE 18.1% Shares Outstanding: 72.47Mn Float: 54.2% Jubilee Holdings Limited We initiate the value of Jubilee Insurance Group at KES and a HOLD recommendation on 9.7% downward move from the current valuation of KES The company is trading above BVPS (KES ) while the PB of 1.51x remains overvalued as per market median. The company has embarked in growing its regional business and injecting KES 4.4Bn in Bujagali Holding Power Company Limited 25.0%. We project gross income to grow by an average of 8.5% for the next 3 years. Recovery of General Business: Gross premium revenue marginally improved from 17.58Bn in 2016 to 19.19Bn in 2017 (9.17%) and a five year CAGR of 21.3%. General insurance will continue to dominate >80% of the insurer s gross premiums on the strength of economies of scale and ability to cross sell its products. We project group s gross premiums to grow by 11% driven by recovery of the general business. Across the region, Kenya will remain responsible for >65% of groups gross premiums while contributing c.30% of PBT. Focus on regional growth will see greater contribution in gross revenues to the group as regulatory and marketing of insurance catches up with the Kenyan market. The company has enjoyed an average efficient tax rate of 18% which we expect to remain in the near term. Associates have contributed >30% of total PBT. We expect the associated to continue to pay a huge role on the groups PBT. The earnings per share were up 19.3% from in FY-16 to in FY-17. Protecting its Turf: According to the Insurance Regulatory Authority (IRA) Q4-17 report, Jubilee Insurance cemented its position as the market leader in the general insurance business with a 9.20% FY-17 market share. Even though it retained its top position, its market share dropped from 11.32% in FY-16 after a 16.7% decline in gross premium. The heavy loss in market share were visible in Engineering (-55.2%), Aviation (-30.4%), Medicine (-26.1%) while they made a 119% gain in marine insurance market share. In spite of market loss in medical insurance (-26.1%), the company has maintained top market share with 17.35%. The regional player continues to benefit from its relationship with sister company providing medical service. The company s Fy-17 claims ration in medical insurance stood at 65% compared to the overall company s general insurance claims ration of 60% while industry s medical insurance claim levels standing at 71.6%. Although the company gained market share in Life Insurance industry to 15.26% FY-7 from 14.09% FY-16, it ceded ranking to come in third. The gain in life insurance was pushed by a 22.2% rise in overall premiums. We anticipate a slow growth in life insurance premiums with deceleration annuity business after a 584.8% growth in premiums to KES 1.78Bn from KES 0.26Bn FY-16. Total Equity increased from KES 21.42Bn in 2016 to 25.53Bn in % increment due to an increase in retained earnings and general reserves. Total Assets grew by 15.90% from KES to KES Bn over the same period owing to a proliferation in investments such as Government securities and Deposits with financial institutions. ROaA went up from 4.25% in 2016 to 4.33% in Similarly, ROaE increased from 17.59% to 18.14% over the same period. Regional Focus: The Company is adapting to an evolving business environment through focus on its regional business after appointing a regional Chief Executive Officer 19

20 Jubilee Holdings Limited to focus on regional operation in the five countries Kenya, Uganda, Tanzania, Burundi and Mauritius. This will help organically grow the regional business without further acquisition while mitigating market risk posed by focus on the Kenyan market. The insurer which is known to make investments in energy, technology and data injected KES 4.4Bn in Bujagali Holding Power Company Limited where it owns 25.0% stake. Jubilee Holdings Plc (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED INCOME STATEMENT GROSS PREMIUMS 26,907,645 28,328,848 29,886,935 32,576,759 36,160,202 NET PREMIUMS EARNED 17,581,229 19,193,864 19,874,812 22,021,889 24,371,976 NET INCOME 24,979,989 31,273,148 31,261,734 34,218,627 37,480,050 NET CLAIMS & POLICYHOLDER BENEFITS PAYABLE 20,206,865 25,127,276 23,748,158 26,289,444 29,029,410 TOTAL EXPENSES 21,848,036 27,294,880 26,269,445 29,194,765 32,176,832 PBT 4,562,705 5,160,970 6,174,990 6,206,564 6,485,919 PROFIT/(LOSS) FOR THE YEAR 3,675,947 4,230,310 4,322,493 4,344,595 4,540,143 (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED BALANCE SHEET CAPITAL EMPLOYED Share capital 329, , , , ,365 Reserves 2,769,487 3,096,997 3,096,997 3,096,997 3,096,997 Retained earnings 16,352,839 19,512,980 23,763,000 28,035,122 32,502,793 Proposed Dividend 494, , , , ,784 Shareholders' Funds 19,945,882 23,552,126 27,802,146 32,074,268 36,541,938 Non-controlling interests 1,475,787 1,678,524 1,678,524 1,678,524 1,678,524 Total equity 21,421,669 25,230,650 29,480,670 33,752,792 38,220,462 REPRESENTED BY: TOTAL ASSETS 90,567, ,967, ,193, ,126, ,707,431 TOTAL LIABILITIES 69,146,074 79,736,880 90,712,383 98,373, ,486,968 NET ASSETS 21,421,669 25,230,650 29,480,670 33,752,792 38,220,463 (AMOUNTS IN KES '000) 2016A 2017A 2018F 2019F 2020F CONSOLIDATED CASHFLOWS Cash generated from operations 2,878,508 5,056,388 15,549,548 13,080,067 14,390,018 Net cash generated from operating activities 1,674,592 4,015,068 13,697,051 11,218,097 12,444,242 Net cash used in investing activities (3,364,218) 3,014,206 (13,283,088) (10,759,927) (11,871,260) Net cash generated from/ (used in) financing activities (560,018) (566,606) (72,473) (72,473) (72,473) Net increase/ (decrease) in cash and cash equivalents (2,249,644) 6,462, , , ,509 GROWTH RATE A 2017A 2018F 2019F 2020F Gross Premiums Growth Rate 16.84% 5.28% 5.50% 9.00% 11.00% Net Premiums 18.18% 9.17% 3.55% 10.80% 10.67% RETURN RATIOS ROaE 17.59% 18.14% 15.80% 13.74% 12.62% Growth YoY 3.85% 3.12% % % -8.19% ROaA 4.25% 4.33% 3.84% 3.44% 3.27% Growth YoY 6.84% 1.79% % % -5.10% MARGINS PAT Margin 20.91% 22.04% 21.75% 19.73% 18.63% Growth YoY -0.34% 5.41% -1.32% -9.29% -5.58% Pretax Margin 8.14% 6.16% 5.95% 5.37% 4.85% Growth (YoY) 15.08% % -3.43% -9.75% -9.64% EPS

21 Jubilee Holdings Limited DPS Pay Out Rate 18.69% 16.59% 15.09% 15.01% 14.37% Retention Rate 81.31% 83.41% 84.91% 84.99% 85.63% PERFORMACE RATIO Retention Ratio 65.34% 67.75% 66.50% 67.60% 67.40% Commissions and Operating Expense 30.45% 24.43% 25.68% 24.48% 23.83% Claims and Benefit Payout % % % % % Commission Ratio 12.58% 12.01% 12.00% 11.70% 11.30% Valuation Assumptions: For valuation, we used the Excess Equity Return method and P/E and P/B relative valuation. We assumed 10 year bond with a YTM of %, equity risk premium of 5.5%, a beta of 0.24 (52 week average from Bloomberg) for a cost of equity of 15.1%. 2014A 2015A 2016A 2017A 2018F 2019F 2020F Beginning BVPS EPS Equity Charge Excess Equity Return Time Discounting Factor Estimated Fair Value Relative Valuation SSA Industry Media PE 9.19 SSA Industry Media P/B 0.89 FY 2018 EPS BPS Estimated Fair Value Estimated Fair Value Valuation Method Excess Return on Equity % Relative Valuation (P/E) % Relative Valuation (P/B) % Target Price Current Share Price Upside/(Downside) -9.7% Recommendation Hold 21

22 Kenya Re-Insurance Corporation Limited Recommendation: BUY Target Price: KES Price on 30 th May 2018: KES Potential Upside/Downside: 114.2% 52-week Trading Range: KES 23.5 to KES BVPS: Dividend Cover: 7.7x Dividend Yield 4.8% EPS FY-17: KES 5.11 P/B 0.48x P/E 3.46x ROaA 1.7% ROaE 6.3% Shares Outstanding: Mn Float: 40.0% Kenya Re-Insurance Corporation Limited We initiate the value of Kenya RE Corporation at KES and a BUY recommendation on an upside of 114.2% from the current KES The reinsurer trades at a BVPS of KES 37.01, PB 0.48x and P/E of 3.64x plus a strong ROaE of 13.9%, ROaA of 8.5% and a dividend yield of 4.8% compared to an industry average of 2.0%, 9.23% and 2.6% respectively which shows a significant undervaluation. In spite of the strong buy sentiment, we believe the government ownership, of over 60%, will continue to pose a reputational risk creating a discount dragging down market value. The reinsure has seen a strong growth with an 11.9% growth in FY-17 and to KES 14.83Bn compared to KES 13.24Bn in 2016; General Insurance premiums increased by 12.2% to KES 13.20Bn contributing 89% (88.2% FY-16) of gross premiums and KES 3.90Bn (85.6%) of PBT. Life insurance gross premiums improved by 10.0% to KES 1.63Bn with the business segment injecting KES 0.65Bn to the company s PBT. Although we anticipate an upward trend, we expect the growth to be at an average of the five year CAGR of 9.0% with a much lower PBT margin of c.33%. The reinsurer continues to benefit from the 20% business ceding by insurance companies. The mandatory cession ends in With long term insurance business growing at a faster trajectory compared to short term business worldwide, we anticipate long term business contribution to the business to continue to grow from the FY-17 11% higher than the five year CAGR of 8.4%. Claims and benefits paid surged 13.7% propelled by payments to earthquake that occurred in Nepal in 2016 and floods in the Asian regions. General business claims ratio stood at 58.4%, a upward move compared to 54.6% in FY As per 2017 IRA data, Kenya RE holds the top market share in the reinsurance business for both general and life insurance standing at 70.68% and 58.70% respectively. The Corporation has expanded its footprints to Zambia, Côte d Ivoire and the Asian market with regional business raking in c.50% if gross premiums. With little internal growth expected, we anticipate growth through acquisition of other reinsurance companies, especially in new territories, in order to shrug off any potential entry and grow shareholders value. The reinsurer continues focus more on growing retakaful business. This creates a new business frontier on boosting gross premiums. Major down play for Kenya Re is more of government interference on management. With >60% government ownership, the market might be pricing in a higher equity risk premiums (ERP) due to lack of control, poor investors sentiment in the sector, creating a market discount that continues to drag its value. Regional business will continue facing regulatory challenges especially in countries that requires insurance companies to re-insure a certain percentage of business with the local reinsurers. There is also the need for maintaining risk based capitalization in the particular markets forcing the company to maintain the pay out in order to maintain the required capitalization. Increase in competition saw a financial strength rating credit downgrade by A.M. Best to B (Fair) from B+ (Good). The long-term issuer rating was cut to bb+ from bbb-. The insurance-focused ratings agency revised the Credit Ratings to stable from negative as measured by Best s Capital Adequacy Ratio (BCAR) based on the improved capitalization after risk-adjusted capitalization. 22