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4 May, 2016

Following the release of the FY?2015 results by insurance firms, we have carried out an analysis on Kenya?s insurance sector to decipher any material changes from our H1?2015 Insurance Report. In our analysis of the insurance sector, we recommend to our investors which insurance firms are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective. See our FY'2015 insurance report here.

The report is themed "Given turbulence in banking, is all well in insurance?", as the insurance sector grapples with low penetration, slowing premium growth, increased cases of fraudulent claims and the required increase in capital following adoption of a risk based capital adequacy framework. In addition, with jitters having spread through Kenya?s banking sector following the placement of Chase Bank under receivership, the financial services industry as a whole has been hit by poor sentiment, including the insurance industry. The market is now more confident about the regulatory oversight in the banking sector and the Governor has been very open that CBK has to upgrade its regulatory capabilities. Is regulation and oversight in the insurance sector up to speed?

This week we give a quick status overview of the Kenya insurance sector 2015 financial performance, explain what is going on in the sector, and the sector?s outlook.

On the back of a growing and stable economic environment in Kenya, the country?s insurance sector has also experienced robust growth over the years, with the financial services sector in Kenya currently contributing 10.1% to Kenya?s GDP growth, from a 3.5% contribution 10-years ago. This is as a result of (i) convenience and efficiency through insurance firms adopting alternative channels for both distribution and premium collection such as bancassurance and improved agency networks, (ii) advancement in technology and innovation making it possible to make premium payments through mobile phones, and (iii) a demographic boost in Kenya, such as a growing middle class, which has led to increased disposable income, thereby increasing demand for insurance products and services.

Owing to the tough operating environment that was witnessed last year, where the bond market, represented by the FTSE bond index declined 14.6%, and the equities market, represented by NASI declined 10.7%, the insurance sector recorded a decline in core EPS growth of 39.1%, which was lower than the 7.6% core EPS growth recorded in 2014.

FY?2015 Listed Insurance Sector Metrics

Insurance Firm

Core EPS Growth

Net Premium Growth

Claims Growth

Loss Ratio

Expense Ratio


ROaE (b)

Kenya Re








CIC Insurance








Jubilee Insurance








Pan Africa








Liberty Holdings








Britam Group
















*Average is market cap weighted

(a) Return on average assets

(b) Return on average equity


There are three take-away points from the table above:

  1. While core EPS growth was negative at (39.1%), Kenya Re still managed to report respectable double digit EPS growth as it being the national reinsurer, insurance companies are required by law to cede to Kenya Re, guaranteeing top-line growth, while keeping costs low. CIC Insurance and Jubilee?s growth was relatively flat attributed to negative growth in the underwriting business, while being cushioned by investment income growth and decline in expenses. Pan Africa, Liberty Holdings and Britam all registered significant downside growth attributed to high expense growths as they acquired new business,
  2. Only Liberty Holdings registered a growth in net premiums accompanied by a decline in net claims. Kenya Re and Britam both reported an increase in premiums, however their growth in claims outpaced their growth in premiums. CI C, Jubilee and Pan Africa each registered a decline in premiums and claims from the previous year, and,
  3. Britam was the only insurer to report a negative return on equity of negative 5%, compared to an industry average of positive 12.4%.

On valuations, insurance companies are trading at a price to book of 1.3x compared to the banking sector which trades at 1.7x. A direct correlation can be seen in the performance of insurance stocks with that of the Nairobi Securities Index. However, in 2016, we have seen a decoupling, with banking valuations rising alongside the securities index, and insurance valuations dropping. We expect this to correct, with insurance valuations to rise through price rallies to the historical 1.7x book value.

Pan Africa and Liberty having the highest exposures in investment securities of 33.6% and 71.1%, respectively of their assets took a hit on their profitability given the bearish equities market in 2015. Kenya Re, Jubilee, CIC, and Britam had exposures of 9.3%, 15.8%, 21.9%, and 25.5%, respectively.

Following the strong growth achieved by the insurance sector over the last decade, there is need for the sector to transition into a more stable and sustainable sector. The Insurance Regulatory Authority (IRA) is at the forefront of this initiative, pushing for the observance of prudential guidelines, better corporate governance of financial institutions, increased transparency in reporting of results, and using a risk-based approach to capitalisation, with varying risk charges on respective investment options. As indicated in our FY?15 Insurance Report, the key areas of focus in the sector include the following;

  1. Over-insured with Low Penetration: The number of insurance companies in Kenya amount to 49 firms, which equates to about 1.1 insurance company for every 1 million Kenyans, a similar ratio to Kenya?s banking sector. However penetration still remains low at 3.0%, lower than the average of 3.8% in Africa, having remained at this figure for a number of years.

    This shows that insurance companies will have to improve their strategies to increase penetration. The core issue we see is to innovate into more relevant products to improve uptake. Significant opportunities remain in the Kenyan insurance market, with growth areas identified especially in commercial lines such as oil, real estate and infrastructure,

  2. Revenue Diversity: With an industry combined ratio average at 113.8%, insurance companies are not profitable from their core business and diversification of their revenues is key to profitability. In 2015, the economic environment was characterized by interest rate volatility and a decline in equity valuation in the stock market, leading to the erosion of value on investments by insurance firms. This has seen more players venturing into real estate to further diversify their revenue streams,
  3. Product Innovation: Insurance products are not tailored to the common consumer and lacks innovation to target customers with low disposable income. In order to increase penetration in the country, insurance firms must become more innovative with their products and distribution channels. This is expected to get a boost following the favorable uptake of micro insurance and bancassurance channels. The savings policies, such as education savings plans, when analyzed on a return basis are very suboptimal and are mostly purchased by people not sophisticated in financial matters. Product innovation is the single biggest disruptive opportunity we see in the sector, and,
  4. Regulation & Emphasis on Compliance: With the new Insurance Act, there is going to be increased regulation on capital adequacy and risk charges on respective investment options. This will increase risk-based analysis on investments, improved supervision on internal practices and lead to a more regulated insurance sector, thereby improving investor sentiment.

While there is a perception of a sector that is struggling, we are of the view that insurance companies have a lot they can do in order to register considerable growth and improve penetration in the country. Foremost, we expect an uptick in relationships between banks and insurance companies to introduce bancassurance as well as the integration of mobile money payments to allow for policy payments through this increasingly preferred transaction medium. We also expect that there will be increased regulation in the sector, as well as increased consolidation to reduce duplication of products by insurance companies. These efforts will improve revenue channels for insurance firms and uptake of insurance as a lifestyle and necessary expense.


Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.