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15 October, 2017

Following the release of the H1’2017 results by insurance firms, we have carried out an analysis on Kenya’s listed insurance companies to decipher any material changes from our FY’2016 Insurance Report. In our analysis of the insurance sector, we seek to give a view on which insurance firms are the most attractive and stable for investment from a franchise value and a future growth opportunity perspective. The report is themed "Sustaining Profitability in an Era of Heightened Regulation", as the insurance sector still struggles in the local market with low penetration levels, excessive duplication of products and increased capital requirements following full adoption of a risk based capital adequacy framework, as a result of the Insurance (Amendment) Act 2016.

The Kenyan economy has experienced stable growth expanding by 5.0% in Q2’2017, higher than Q1’2017 growth of 4.7%, with the Financial Services sector contributing 6.0% to Kenya’s GDP as at Q2’2017, slightly lower than the 6.1% recorded in Q2’2016. The slowdown is attributable to a slowdown in private sector credit growth and reduced profit margins in the banking sector, following the capping of interest rates, and thus the insurance sector will be key to support contribution of the financial services to Kenya’s economic growth.

The insurance sector has benefited from (i) convenience and efficiency through adoption of 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 growing middle class, which has led to increased disposable income, thereby increasing demand for insurance products and services. These factors have been key in driving growth of the sector despite reduced profitability and are set to continue going forward.

On valuations, insurance companies are trading at a price to book of 1.1x compared to the banking sector at 1.3x, which are below historical averages of 1.4x for the insurance sector, and 1.8x for the banking sector. This indicates that both sectors are attractive for long-term investors supported by the strong economic fundamentals and favourable investment environment.

Following the stable growth achieved by the insurance sector over the last decade, we expect the sector to transition into a more stable sector. This transition will enhance the capacity of the sector to sustain profitability, amidst the heightened regulation. The Insurance Regulatory Authority (IRA) has been at the forefront of this initiative, pushing for (i) the observance of prudential guidelines, (ii) better corporate governance of insurance companies, (iii) increased transparency in reporting of results, and (iv) adoption of a risk-based approach to capitalization, with varying risk charges on respective investment options. As indicated in our H1’2017 Insurance Report, the key areas of focus in the sector include the following;

  1. Operational Efficiency: Insurance companies in Kenya have been affected adversely by the rising levels of inefficiency in their operations in the recent past, as collection of premiums and distribution of products have emerged to be a costly affair for the insurers. Insurance penetration remains low at 2.8% currently, lower than the average of 3.5% in Africa, indicating that for insurance companies to penetrate the Kenyan market they will need to invest in better and efficient distribution channels.

The graph below highlights the rising levels of inefficiencies in the sector since 2014, which the firms operating in the sector need to cap to steer growth and sustain profitability;

*Market cap weighted average

The listed insurance sector expense ratio is more than 50%, indicating more than half of insurance company revenues are used up in administration and distribution expenses, and with loss ratios above 50%, insurance companies are struggling to eke out a profit from their core business.

  1. Product Innovation: With the industry combined ratio average at 126.1%, insurance companies are not profitable from their core business, and diversification to alternative revenue streams has been key to their profitability. Insurance products in the market are not tailored to the common consumer and players in the market lack the much needed innovation in product offerings, tailored to meet the needs of their target customers. The informal sector in the country is uninsured leaving a gap for insurance firms to tap into, as most products are currently tailored towards the formal sector and mainly the growing middle class. The value addition area we see is innovation into more relevant products to improve uptake, while also maintaining effective channels of distribution for these products. In the recent past, we have witnessed increased partnerships between insurance firms and banks, with players in the sector aiming to target the banks’ large base of customers to sell their insurance products, the most recent being Standard Chartered Bank’s partnership with Sanlam Kenya. Significant opportunities remain in the Kenyan insurance market, with growth areas identified especially in commercial lines such as oil, real estate and infrastructure.
  1. Regulation & Compliance: With the new Insurance Act (Insurance Amendment Act 2016), there has been put in place requirements for increased regulation on capital adequacy and risk charges on respective investment options, that insurance and reinsurance firms will be required to maintain capital in relation to their risk of liabilities held. This will lead to increased risk-based analysis on investments, improved supervision on internal practices and a more regulated insurance sector, thereby improving investor sentiment. In addition, insurance and reinsurance firms will from January 2018 be issued with perpetual licenses saving them the cost of annual license renewal fee, joining the banking sector, which already uses the model since 2015. According to the Financial Services Authority Bill (2017), all financial services firms excluding banks will be regulated by the Financial Services Authority (FSA), and in our view this move is likely to see increased transparency in the financial services industry.
  1. Capital Raising Initiatives: The move to a risk based capital adequacy framework is likely to lead to capital raising initiatives by some players in the sector to shore up capital. The solvency margins on the listed insurance space have declined from a high of 30.1% in 2014, to 28.7% in H1’2016, and to 27.8% in H1’2017, indicating that assets have been growing faster than shareholder’s funds. With the new capital adequacy assessment framework, capital is likely to be critical to ensuring stability and solvency of the sector to ensure the businesses are a going concern. In September, Britam Holdings announced a deal to raise Kshs 5.7 bn from Africinvest III, a special purpose vehicle (SPV) managed by Africinvest Capital Partners Management II, and we expect more players to undertake capital raising initiatives to boost their capital; and a rise in mergers and acquisitions in the coming years.

Based on the above, we expect increased product innovation and operational efficiency in the sector to drive sustained profitability and thus stability of the sector amidst the heightened regulation.

Below are some operating metrics for listed insurance companies in Kenya as at H1’2017.

Listed Insurance Companies H1'2017 Earnings and Growth Metrics

Insurance Company

Core EPS Growth

Net Premium growth

Claims Growth

Loss Ratio

Expense Ratio



Jubilee Holdings








Liberty Holdings








Kenya Re








CIC Group








Britam Holdings








Sanlam Kenya*








H1’2017 Weighted Average








H1’2016 Weighted Average








*  Sanlam's EPS cannot be calculated since it registered a loss in 2016

* The weighted average is based on Market Cap as at 31st August, 2017

Key take outs from the table above include:

  • The average core EPS declined by 5.6% in H1’2017 from a growth of 69.4% in H1’2016 across the industry, mainly as a result of change in valuation methodology for long-term insurance liabilities using Gross Premiums as opposed to Net Premiums in the past effectively reducing provisions for future claims,
  • The loss ratio across the sector rose to 72.7% from 66.5% in H1’2016, despite introduction of tough measures by market players to reduce fraudulent claims,
  • The expense ratio dropped marginally to 54.3% from 55.5% in H1’2016, owing to a decrease in operating expenses amidst a robust growth in net premiums earned, and
  • On average, the insurance sector has delivered a Return on Average Equity of 10.9% a marginal improvement from 9.0% in H1’2016.

Based on the Cytonn H1’2017 Insurance Report, we ranked insurance firms from a franchise value and from a future growth opportunity perspective with the former getting a weight of 40% and the latter a weight of 60%. The ranking is as follows;



Franchise Value Total Score

Total Return Score

Composite FY'2016 Score

H1'17 Rank

FY'16 Rank

Kenya Re






Jubilee Holdings






Liberty Holdings






Britam Holdings






CIC Group






Sanlam Kenya






The key take-outs from the ranking were;

  • Kenya Re maintained the top position, ranking top in the franchise score category on the back of a strong combined ratio and solvency ratio, indicating better capacity to generate profits from its core business,
  • Liberty Holdings has moved two ranks up from position 5 to position 3 as a result of an improved franchise score, and recording the highest total return on intrinsic valuation,
  • Britam Holdings dropped two positions to rank 4th from position 2 in FY’2016 as a result of an increased expense ratio, declined profitability recording a return on tangible equity (ROaTE) of  10.8%, below the industry average of 11.5%, and,
  • Sanlam retained its bottom position ranking 6th in the franchise score category, and 5th in the total return score category.

For more details on the ranking, see our H1’2017 Insurance Report.

The sector continues to undergo transition mainly on the regulation front, which is critical for stability and sustainability of a conducive business environment for one of the key sectors of Kenya’s economy. We are of the view that insurance companies have a lot they can do in order to register considerable growth and improve the level of penetration in the country to the continental average of 3.5%, namely:

  1. We expect the synergy between banks and insurance companies to offer Bancassurance to continue as well as the integration of mobile money payments to allow for policy payments,
  2. Technology and innovation capabilities are set to be key anchors of growth for Sub-Saharan Africa in the coming years and thus it would be a great move for the sector to adopt mobile and online underwriting platforms enhancing convenience to customers in taking insurance policies thus raising the uptake of insurance products, and,
  3. 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 products to enhance the sustainability of profitability.