Kenya Re Report
This document was uploaded by user and they confirmed that they have the permission to share it. If you are author or own the copyright of this book, please report to us by using this DMCA report form. Report DMCA
Overview
Download & View Kenya Re Report as PDF for free.
More details
- Words: 8,837
- Pages: 16
Research Report 2008
Cyclical & volatile business
(Members of the NSE since 1954) 10th Floor, Loita House, Loita Street P.O. Box 45396-00100 Nairobi, Kenya Tel: +254-20-3240000 Fax: +254-20-218633 Website: www.dyerandblair.com
March 2008 Current Price: Kshs 15.10 Trailing PE: 16.41x Price range: Kshs 13.85 - Kshs 18.25 Profit after Tax
Loss ratio decreased to 34.07% in the 1st half of 2007 compared to 40.28% in the same period in 2006. In the same period, management expenses decreased to 9.50% from 10.66%
Research: Leah Nyambura Hetal S. Shah
+254 20 3240000 [email protected]
Kenya Re is on target to make approximately Kshs 807 million, excluding oneoff gains, after tax in 2007. A further growth of 14% is expected in the net profits in 2008. We expect the group to earn net profits of Kshs 922 million in 2008. The group’s net profits went up by 12% in the 1st half of 2007 to Kshs 435 million from Kshs 388 million in the same period in 2006. KPMG has been testing the company’s system and processes. Kenya Re will update its systems after KPMG’s advice by which the company should become more efficient. Increased efficiency will result in increased earnings. Though locally incorporated, the company operates in almost all the African countries except South Africa. It also serves the Middle East and Asia. It is continuously expanding and extending its service in the international market. However, the principal market of the Corporation is the Kenyan insurance market. It controls approximately 21% of the local market. Net underwriting profits have been volatile over the years. However, the average underwriting profits from 2002-2006 was approximately Kshs 400 million per year. Underwriting profits grew by 54.42% in the 1st half of 2007. Kenya Re has an extensive asset base of over Kshs 12.81 billion and is looking to expand the base. Investment income grew from approximately Kshs 491 million in 2005 to around Kshs 753 million in 2006. The new management is increasing its focus on matching the premiums with the risk and in turn improve its risk management. Reinsurance business is very volatile. The risk “tails” are getting fatter and catastrophes have been more frequent than historical records would predict. However, Kenya Re holds sufficient reserves to meet any plausible loss scenarios. Kenya Re will earn an extra income of Kshs 17 million in 2008 as it sold 2 properties above its estimated values. We project an EPS of Kshs 1.34 for 2007 and Kshs 1.56 for 2008.
Projections
1st Half Kshs (Million) 2005 2006 2007F 2008F 2007 Gross Premiums 2,613 3,035 1,619 3,189 3,546 Claims 924 1,523 551 1,237 1,454 Underwriting surplus 488 462 524 791 840 Investment income 491 753 252 536 595 Profits after tax 748 3901 435 807 936 Earnings Per share 0.72 1.34 1.56 We recommend Kenya Re as a buy as we feel that the group has sustainable growth prospects for the next 5 years. With improved risk management, increased marketing, control on management expenses, increased efficiency through new systems, we estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 936 million in 2008, a growth of 16% from 2007 earnings. We believe that the company will have good growth in underwriting income as well as investment income with lower loss ratios and continued growth in the economy once the political crisis is solved in Kenya. We estimate a price target of Kshs 23 for Kenya Re and thus recommend a strong buy.
Recommendation: BUY 1
Includes provision of Kshs 150 million.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
1
Research Report 2008
Kenya Re was established in December 1970 under the State Reinsurance Corporation Act of the Laws of Kenya Chapter 485. Kenya Re listed on the NSE on 27th August 2007, floating 240 million shares. The IPO was overwhelmingly oversubscribed, by about 405%, representing strong confidence in the company. The year 2007 therefore emerged as an important year in the company’s history.
The new management is focusing on matching its premiums with the risk.
The group’s underwriting profit has been volatile over the years.
Insurance is a cyclical and volatile business. The management has to perform at its best and continuously improve risk management strategies by matching the premiums to the risk. In the short run, the company can show higher profits with high turnover due to premiums. However, in the long run, poor risk management can lead to higher payment on claims and the company possibly can experience a loss in earnings. The new management is focusing on matching premiums with the risk. The group’s underwriting profit has been volatile over the years. There are unpredictable patterns of boom and bust. Heavy losses during bust periods force up premiums, which leads to relaxed attitudes toward risks, which in turn help bring about new cycles of losses. The cyclical nature is why industry players have to maintain huge reserves. The table below summarises the geographical presence of Kenya Re in the global business. Region Kenya Africa (excluding Kenya) Overseas TOTAL
Number of Countries 1 22 18 41
Number of companies 46 80 40 166
Source: Kenya Re (Dec 2006)
Industry Growth The insurance industry has been grown alongside the Kenyan economy. The Kenyan economy is doing well with GDP growth of 6.1% recorded in 2006 and 7.1% in 2007. Unskilled labour is languishing as wages have stagnated, while food, housing and transport costs have spiralled. However, the middle class has been doing well so far. So far, 2008 looks like a difficult year. However, most of the assets destroyed by political violence were never insured. Kenya Re’s insurance classes can be divided into fire, accident, marine, aviation, motor (commercial and private), and life insurance. It earns most of its premiums from fire and accidents, followed by 14.68% from Life insurance, 9.36% from motor insurance, 7.93% from marine insurance, and 0.35% from insurance on aviation.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
2
Research Report 2008
% of Gross Prem ium s earned to Total Gross Prem ium earned, Sept 2007
Kenya Re earns most of its premiums from fire and accident insurance.
Life 14.68% Aviation 0.35% Marine 7.93%
Fire 37.23%
Motor 9.36% Accident 30.45%
In the 1st 3 quarters of 2007, the group earned about Kshs 889 million from fire insurance and Kshs 727 million from insurance on accidents out of the total of Kshs 2,387 million earned on gross premiums. The increase in manufacturing activities has affected the insurance industry.
The number of newly registered cars and fuel consumption has been growing at double digit rates.
Rental prices have also been growing at double digits in the middle class enclaves
Kshs (Million) Fire Accident Motor Marine Aviation Life Total
2005 1,021 725 165 300 15 388 2,613
2006 1,166 908 183 265 17 497 3,035
Sep-07 889 727 224 189 8 350 2,387
Insurance clients can be divided into corporate and retail categories. Generally, most businesses take out some form of insurance. The increase in manufacturing activities has affected the insurance industry. When a company is buying new equipment, it will probably seek a trade insurance cover. Transporting the equipment will also call for more insurance. Prior to installation, the company will also look for a comprehensive cover to insure its new equipment. The number of newly registered cars and fuel consumption has been growing at double digit rates in spite of the high costs of fuel and vehicle maintenance. Rental prices have also been growing at double digits in the middle class enclaves of Lang’ata, South B and South C. Insurance is a middle and high income earner product. Increasing incomes for these two categories is good news for the industry. The revitalization of the life insurance sector is directly tied to the reversal of fortunes for the middle class of Kenya. Life insurance has also been growing at double digit rates in the past 3 years.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
3
Research Report 2008
Not heavily affected by the current crisis in the country.
Kenya Re is not affected heavily by the recent uncertainty in the country. As per the management, the company is not liable to pay any heavy claims for the damages that happened during the unrest. Kenya Re will still be able to meet its premiums target for 2008. We believe that the claims will probably increase in 2008, thus the loss ratio will increase marginally. Its investment income will be volatile over the year. The stock market has been reacting to the ongoing political talks and has been volatile. Once the situation is resolved, we believe that the NSE will gain stability and Kenya Re in turn will earn good returns from the market. We anticipate that the company will have a growth of about 5% in gross premiums in 2007 from the previous year and an 11% growth in 2008. Thus, we expect that Kshs 3,189 million in 2007 and Kshs 3,546 million in 2008 will be earned by the group as gross premiums.
Kenya Re benefits from 18% compulsory ceding of all treaty insurance business from all insurance companies in Kenya.
A lot of companies give them about 80% of their business, not just 18%.
Local, Regional and International Business
Kenya Re benefits from 18% compulsory ceding of all treaty insurance business from all insurance companies in Kenya. Most of the companies give them about 80% of their business, not just 18%. The group has a market share of about 21% of premiums collected locally. In 20072, from the total gross premiums that Kenya Re earned, about 67.71% of its gross premiums were earned from the Kenyan market, 18.24% from the African region and the rest, 14.05% from the international market, i.e. Middle East and Asia. % of gross prem ium s earned of total gross prem ium s, Dec 2007
International (Middle East & Asia) 14.05%
Kenya Re earned about 67.85% of its total gross premiums earned from the Kenyan market.
Africa (except Kenya) 18.24% Kenya 67.71%
Kenya Re attracts business from almost all the African countries except South Africa. Africa as a continent is currently experiencing real GDP growth at an average of over 5% a year due to factors such as; continued progress in cementing macroeconomic stability, the beneficial impact of debt relief, increased capital inflows, and rising oil production.
2
Data until 13th December 2007
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
4
Research Report 2008
Kenya Re has increased its focus on French-speaking countries, including Rwanda Burundi, Congo, Madagascar, etc. Rwanda’s premium income has more than doubled from Kshs 6.4 million in 2005 to Kshs 17.70 million in 2006. Kenya Re has increased its focus on French-speaking countries.
Rwanda is a country that is on a path of recovery following the genocide, and has since shown good GDP growth rates of over 6% annually3. There is a need for services in the country, one of them being good insurance and reinsurance. Senegal is another country which produced impressive growth in premium income of 429% in 2006 from 2005, coming in at Kshs 16.48 million in 2006, compared to Kshs 3.11 million in 2005. However, Kenya Re has not lost focus on its business in English-speaking countries and it continues to grow in these markets. Earlier in the year, Kenya Re had put into place aggressive marketing strategies to capture African markets outside of Kenya, as well as retain its existing market within Kenya. In the coming years, Kenya Re has a target to develop their market share and penetrate into Angola, Mozambique, Namibia, Sudan, Ghana, Cameroon, Senegal, The Gambia, Zambia and Botswana. In the Francophone Africa, they expect to grow in Tunisia, Algeria, Senegal, Togo and Gabon among others.
Kenya Re experienced a growth of 19% from local business and 11% from international business.
Kenya Re has realized a considerable growth in its gross premiums locally and internationally. It experienced a growth of 19% from local business and 11% from international business. Kenya Re’s international business is obtained largely through brokerage. For instance, the J. B. Boda Group, the largest and oldest reinsurance brokers in India, is the Indian broker for Kenya Re, providing the Corporation with quality business. The corporation has established service level standards to match international standards in order to bolster its foreign business. Gross prem ium s earned through local and international business
4,000 3,500
Kshs (Million)
3,000 2,500 2,000 1,500 1,000 500 2005
2006 Local
3
International
2007F
2008F
Total
Figures from World Economic Outook by International Monetary Fund, April 2007
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
5
Research Report 2008
Underwriting Profits, Investment Income and Profits after tax
Gross premiums earned have been increasing more or less steadily over the past five years.
The group’s profits have been volatile over the years as can be seen below. This is due to the earnings pattern from underwriting and investment income experienced by the company. Kenya Re earned higher income from investment in 2002, 2004 and 2006. We expect that in the next two years, it will earn more of its income from the underwriting business. We anticipate the net profits to increase to Kshs 807 million in 2007 and Kshs 936 million in 2008, a growth of 16% from 2007 earnings. Gross premiums earned have been increasing more or less steadily over the past five years. Investment income is also up over this time period, though this portion of their profits has been more volatile in its growth pattern. Profits after taxes were lower in 2006 than in 2005; however, this was due to the extraordinary gain that was booked in 2005 and the provisions of Kshs 150 million in 2006. Taking this into account, profits after tax did increase slightly in 2006, compared to 2005.
Underwriting profits As mentioned earlier, insurance business is a cyclical and a volatile business. It usually goes through a boom-bust cycle. The group’s underwriting profits have been volatile since 2002. It experienced a positive growth in 2003 and 2005 and a negative growth in 2002 and 2004. The main reason for this is high claims that it had to pay in 2002 and 2004 as shown in the table below.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
6
Research Report 2008 Kshs (Million) Gross Premiums Claims Loss ratio % Claims/GP
We expect an improvement in the loss ratio in the current year to 38.80% and an increase of it in 2008 to 41%.
We anticipate underwriting profits to grow by 71% in 2007 and 6% in 2008.
2002
2003
2004
2005
2006
2007F
1,339
1,680
1,823
2,613
3,035
3,189
2008F 3,546
770
458
766
924
1,523
1,237
1,454
57.51
27.26
42.03
35.35
50.17
38.80
41.00
The volatility in the underwriting profits is reflected in the highs and lows of the loss ratio over the years. For instance, in 2005, the loss ratio increased decreased to 35.35% from 42.03% in 2004 due to low payment in claims and higher growth in premiums. However, the opposite happened in 2006 and the loss ratio worsened to 50.17%. We believe that the insurance companies will continue growing in this manner. Therefore, we expect an improvement in the current year to 38.80%. It may deteriorate in 2008 to 41% due to the claims Kenya Re might have to pay as a result of the post election unrest. Nevertheless, we feel that the profits from underwriting will not have a negative growth rate but will grow marginally. In 2008, we estimate underwriting profits to increase to Kshs 840 million, a marginal growth of 6% from 2007 earnings. However, we anticipate it to grow by 71% in 2007 to Kshs 791 million from Kshs 462 million in 2006.
Kenya Re has a large investment portfolio of over Kshs 9.76 billion.
Investment Income Kenya Re has a large investment portfolio of over Kshs 9.76 billion, as of September 2007. Investment is an integral part of Kenya Re’s business, as the reinsurance premium income has to be reinvested to build up reserves and pay claims as they occur. Kenya Re is in the process of reducing its property portfolio, which currently makes up the largest portion of its investment portfolio, approximately 33.52% of their overall investment portfolio at the end of the 3rd quarter this year. Investment income has been volatile in the past five years. It went up in 2002, 2004 and 2006 and declined in 2003 and 2005. The income stream should grow over time as the company restructures its portfolio away from being concentrated so heavily in real estate. However, it is expected that the income stream will continue to be volatile as Kenya Re invests in real estate and listed and unlisted securities, which all have fluctuating prices. We expect the investment income to decrease by about 29% to Kshs 536 million in 2007 from Kshs 753 million in 2006. However, we expect it to grow by 11% in 2008 to Kshs 595 million compared to the income in 2007. Investment Portfolio 30th November 2007 AMOUNT ( KSHS) % of the total Short term deposits 745,384,817 7.64% Government securities 2,527,050,000 25.90% Investment property 3,270,000,000 33.52% Commercial mortgages 430,350,350 4.41% Equity (Unquoted cos.) 161,440,586 1.65% Equity (Quoted cos.) 2,621,907,777 26.87% TOTAL 9,756,133,530 100%
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
7
Research Report 2008
Mortgages form 4.41% of the total investments.
Equities form about 28.53% of total investments.
Kenya Re has a number of properties, some held for rent, and a few for sale. It has diversified in this respect with investments in undeveloped land, developments for sale, office blocks and residential properties. The Corporation is planning to divest from investments in properties and has put a number of properties for sale. Kenya Re will earn an estimated Kshs 621 million from the sale of this land and buildings. In February 2008, the company sold a building in Mombasa equivalent to a value of Kshs 190 million and a plot in Upper Hill equivalent to Kshs 82 million. The estimated cost of these buildings was about Kshs 255 million, thus Kenya Re will have an added income of Kshs 17 million in 2008. The management may increase in its investments in government securities, quoted equity and in short term deposits with the income received from the sale of properties. Kenya Re also gives mortgages to people who are interested in purchasing housing units developed by the company. The average rate charged on the mortgage is 14% per annum. The Corporation also provides loans to its employees to build or purchase houses. Mortgages form 4.41% of the total investments. Commercial mortgages given out have been increasing rapidly compared to the employee mortgages, which have been decreasing. Equities form about 28.53% of total investments, as of September 2007 and also bring in approximately 80% of investment income in the form of dividends.
Kenya Re’s investment portfolio in quoted equity has had a growth of about 16.83% of its value compared to the 8.84% drop in the NSE index between the end of 2006 and end of September 2007.
The unquoted equity could unlock additional value should some of these companies go public, or if the shares are sold to other investors privately. It is possible that the values of these investments are understated, given that they are valued at cost. Kenya Re’s investment portfolio in quoted equity has had a growth of about 16.83% of its value compared to the 8.84% drop in the Nairobi Stock Exchange (NSE) index between the end of 2006 and end of September 2007. However, it should be pointed out that approximately 59% of its portfolio is concentrated in one stock, East African Breweries, which exposes it to significant security specific risk. The corporation also invests in short-term deposits and government securities which formed about 7.64% and 25.90% of total investment income as of September 2007. Some of the government securities have realised gains due to recent tightening of interest rates. In 2007, Kenya Re has earned an average return of 6% on its short-term deposits and about 7.5% on its investment in government securities. Exceptional performance for the 1st Half year ended 30th June 2007
Kshs Gross Premiums Earned Net Premiums Earned Underwriting surplus Investment Income Profit after Tax Loss Ratio
June 2006 1,532 1,378 339 315 388
June 2007 1,619 1,500 524 252 435
Growth 5.62% 8.80% 54.42% -20.08% 12.12%
40.28%
34.07%
-6.21%
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
8
Research Report 2008
Profits after tax had a growth of 12.12% to in the 1st half of 2007 compared to the 1st half of 2006.
The loss ratio dropped by 6.21% from 40.28% to 34.07% in the same period.
Kenya Re has performed well so far in the current year, meeting its targets. During the first half year result, income from net premiums increased by 8.80% from Kshs 1,378 million to Kshs 1,500 million. However, net investment income decreased by 20.08% to Kshs 252 million in 2007, compared to 315 million in 2006. Nevertheless, profits after tax had a growth of 12.12% to Kshs 435 million from Kshs 388 million. This is due to the fact that the total claims decreased by 10.67% in the first half year of 2007 compared to the same period last year. This brought the loss ratio down by 6.21% from 40.28% to 34.07%.
Peer Comparison Kenya Re has two peers; the PTA Reinsurance Corporation (ZEP Re) and African Reinsurance Corporation (Africa Re). In terms of size, Africa Re had the largest balance sheet with assets totalling Kshs 38.10 billion as at the end of 2006, followed by Kenya Re with total assets of Kshs 12.81 billion. ZEP Re is relatively small with assets amounting to Kshs 3.05 billion. Balance Sheet as at Dec 2006 Kshs (billion) Total Liabilities Shareholders Funds
Kenya Re 6.65 6.16
Africa Re 24.65 13.45
Zep Re 1.83 1.22
12.81
38.10
3.05
Total Assets
Source: Audited Company accounts
How do the Kenya Re ratios compare to those of industry peers? Kenya Re
Africa Re
Zep Re
2004
2005
2006
2004
2005
2006
2004
2005
2006
Loss Ratio = Claims/N.P.(%)
44.60
43.74
54.54
63.84
70.32
64.12
52.8
53.54
57.87
Management Expense/N.P.(%)
11.26
13.75
16.23
4.71
3.99
5.30
9.46
9.58
9.70
Provision for impairment/N.P. (%)
11.74
9.55
6.59
1.43
1.51
2.11
N/A
2.67
3.70
Insurance Ratios
Profitability Ratios ROA (%)
5.46
7.21
4.80
2.07
3.76
4.53
6.91
4.89
5.63
ROE (%)
10.98
13.48
8.78
7.51
11.17
12.83
16.81
12.21
14.03
Liquidity Ratios Current ratio
3.39
4.4
4.07
2.1
1.56
2.15
5.73
6.45
5.59
Quick ratio
2.29
2.96
3.23
2.1
1.56
1.78
5.73
6.45
5.54
Debt to assets
5.66
5.43
5.10
14.98
13.55
11.12
6.76
11.10
13.96
Debt to equity
11.39
10.15
9.33
54.41
40.27
31.48
15.95
27.67
34.80
Leverage Ratios
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
9
Research Report 2008
The loss ratio of Kenya Re was lower than all its peers for the 3 years analysed.
Loss ratio The loss ratio of Kenya Re was lower than all its peers for the years in comparison. In 2006, Kenya Re’s ratio was at 54.54%. ZEP Re’s ratio was 57.87% and Africa Re’s 64.12% for the same year. Kenya Re’s loss ratio worsened from 44.60% in 2004 and 43.74% in 2005 to 54.54% in 2006. However, in 2007 we expect the ratio to improve to 43.11% and slightly increase in 2008 to 45.20%. In 2006, Kenya Re earned Kshs 2.79 billion from net premiums, a growth of 32% from year 2005, but the claims increased by 65% from year 2005 to Kshs 1,523 million. The increase in 2006 can be attributable to large claims from the marine sector, and the fire insurance sector.
Kenya Re’s management expenses are much higher to that of its peers.
Management Expenses However, Kenya Re’s management expenses are much higher than that of its peers. The management expense ratio was 16.23% (taking out Kshs 150 million provisions) for Kenya Re in 2006 compared to 5.30% for Africa Re and 9.70% for Zep Re. Looking at these figures, it would seem that Kenya Re needs to work at bringing down its management costs to bring it more in line with the rest of the industry. The company has already started to work on this. In the 1st half of 2007, the ratio has reduced to 10.25%. We expect this to come back down to its historical average and possibly trend downwards further as improved efficiencies are achieved. We anticipate the ratio to drop to 9.92% in 2008. The management has introduced a voluntory early retirement scheme for staff members. There are about 30 staff members who currently fall into the early retirement category. The management expects the scheme to begin in 2008. The staff numbers will reduce if this strategy of the management is successful and we should see reduced costs and increased earnings in 2008. KPMG is currently looking at the group’s systems, processes and numbers. It will advice the company on improvements needed in the system for increased efficiency. Increased efficiency will in turn reduce the costs and increase the earnings which will trickle down to the share holders.
The provision for impairment on balances due to cedants and reinsurers is the highest for Kenya Re over the years compared.
Provision for impairment The provision for impairment on balances due to cedants and reinsurers is the highest for Kenya Re over the years compared. However, they have been on a decreasing trend over the last 3 years analysed. This implies that Kenya Re does not have to provide as much as it used to a few years back. This is due to a reduced number of impairments. Africa Re’s and Zep Re’s bad debt provision have been increasing but they are still lower than Kenya Re. In 2006, Kenya Re’s ratio was 6.59% whereas Africa Re’s was 2.11% and Zep Re’s was 3.70%.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
10
Research Report 2008
Profitability In terms of relative profitability, Kenya Re is higher than Africa Re but lower than Zep Re in 2006. Kenya Re’s Return on assets was 4.80% compared to Africa Re’s 4.53% and Zep Re’s 5.63%. The return on assets and return on equity have been volatile just like the trend of the net profits. In terms of relative profitability, Kenya Re is higher than Africa Re but lower than Zep Re in 2006.
Kenya Re’s returns are positive and although they were lower for 2006, the company has been earning solid profits on average. In 2006, Kenya Re earned a profit of approximately Kshs 540 million, excluding provisions, after tax. However, we would like to see the company improve its efficiency in producing returns from its equity and asset base and would like to see both ratios improve from their 2006 levels. Total assets of Kenya Re have been on an increasing trend. Over the last year, assets increased by 9% to Kshs 11.26 billion in December 2006 from Kshs 10.38 billion in December 2005. Shareholders funds have also been on the rise. They grew from Kshs 5.55 billion in 2005 to Kshs 6.15 billion in December 2006, an increase of 11%. Increases in these categories helps bring down the return on assets and return on equity ratios, unless net income is increased by a greater percentage.
Liquidity levels look good for Kenya Re, Africa Re and Zep Re.
Kenya Re’s liquidity has been increasing over the last 3 years.
Kenya Re’s leverage ratios have been decreasing.
Africa Re and Zep Re have higher debt ratios than Kenya Re.
Liquidity Liquidity levels look good for Kenya Re, Africa Re and Zep Re. Kenya Re and Zep Re in particular seem to be very well capitalized in terms of handling current cash needs due to their high current and quick ratios. Kenya Re’s liquidity has been increasing over the last 3 years. Their current ratio has been over 4 for the past couple of years, and the quick ratio has been right around 3 or above for 2005 and 2006, suggesting they can meet their short term obligations very easily and are not at a high risk of suffering insolvency. Leverage Kenya Re’s leverage ratios have been decreasing; illustrating that the company is lowly geared and has a solid capital base from which to operate. Africa Re and Zep Re have higher debt ratios than Kenya Re.
New Capital Requirements Before the budget was released in 2007, the minimum capital required for setting up a life insurance company was Kshs 50 million. The capital required for setting up a general insurance company was Kshs 100 million. Hence, Kshs 150 million was required to start an insurance company that does both life and general insurance. This capital requirement was inadequate, leading to the collapse of several firms. This has weakened the industry overall and helped contribute to a negative image of the industry as a whole.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
11
Research Report 2008
With the new capital requirements in place, Kenya Re will be able to reinsure stronger companies, leading to decreasing claims payments.
The 2007 Finance Bill raised the capital requirements to Kshs 150 million and Kshs 300 million for life and general insurance respectively. Thus, insurance companies will have to raise their capital to Kshs 450 million within the next 2 years in order to cover both lines of business. This will effectively lock out “briefcase outfits.” These small companies are prone to undercutting premiums and taking imprudent risks. They are detrimental to the health of the industry. The increased capital requirements should help improve the insurance industry, which should also create benefits for reinsurers. The increased capital requirements will have direct impact on Kenya Re. They should lead to stronger companies, more adequately capitalized, and thus more able to survive. This should improve the insurance industry overall, leaving Kenya Re to be able to reinsure stronger companies, leading to decreasing claims payments.
Prospects ♦
The company’s main strategy is to reduce management expenses and increase earnings. The management has introduced Voluntary Early Retirement Scheme for staff members. There are about 30 staff members currently who fall into the early retirement category. The management expects this to begin in 2008. The staff numbers will reduce if this strategy is successful and we will see reduced costs and increased earnings in 2008.
♦
KPMG is currently looking at the group’s systems, processes and numbers. It will advice the company on improvements needed in the system for increased efficiency. Increased efficiency will in turn reduce the costs and increase the earnings which will trickle down to the share holders.
♦
The compulsory ceding of 18% provides the corporation with a guaranteed source of business until 2011 or full privatisation, whichever takes place first.
♦
Kenya Re is now lead by strong and competent management. We expect that the management team will improve the risk management and hold down the growth in claims.
♦
Staff is constantly motivated to perform better due to performance contracts.
The management has introduced Voluntary Early Retirement Scheme for staff members.
Kenya Re will experience improved efficiency and increased earnings once it has installed new systems.
The management team is focussing on improving the risk management systems and hold down the growth in claims.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
12
Research Report 2008
♦
Kenya Re will be able to tap further into the life business due to the growth in disposable incomes of regional residents.
♦
Kenya Re plans to aggressively continue to attract more business from the West African Region.
♦
Powerful marketing should allow Kenya RE to increase market share in existing markets.
♦
Kenya Re has about Kshs 700 million invested in Dollar and Sterling Pounds. The company will gain on these investments if the Kenyan Shilling depreciates.
Risks
There is currently strong competition from global players like Swiss Re and Munich Re and competition is increasing from newer regional market participants.
Mismatch of Assets and Liabilities leads to interest rate risk.
♦
Investment in quoted shares has very high weighting in East African Breweries alone, about 59%.
♦
There is currently strong competition from global players like Swiss Re and Munich Re and competition is increasing from newer regional market participants. It will also face competition from Tanzanian and Ugandan markets due to new reinsurance companies developed there affecting their market share and in turn financial results.
♦
Implosion of the real estate market could harm the Kenya Re balance sheet.
♦
The Corporation is exposed to foreign currency exchange risk arising from changes to the exchange rates of various currencies.
♦
Mismatch of Assets and Liabilities leads to interest rate risk. Kenya Re’s assets are mostly short term in nature, while its liabilities are mostly long term. The value of their assets and liabilities will be affected by the level of interest rates. Longer term liabilities will be affected more than short term assets, due to their longer duration. If rates rise, the value of their existing assets will decrease and the value of liabilities will also decrease. The magnitude of the change of the liabilities will be larger than that of the assets. As a result, they will gain value due to this change. If rates fall, the reverse will happen. The mismatch in the duration of assets and liabilities means that adverse changes in interest rates can negatively impact the company.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
13
Research Report 2008
Technical analysis Weighted Moving Average Daily QKRIN.NR
27/08/2007 - 21/03/2008 (NBO) Price KES
Line, QKRIN.NR, Last Trade(Last) 12/03/2008, 15.10 WMA, QKRIN.NR, Last Trade(Last), 30 12/03/2008, 15.46 WMA, QKRIN.NR, Last Trade(Last), 60 12/03/2008, 15.46 WMA, QKRIN.NR, Last Trade(Last), 60 12/03/2008, 15.46
17.6 KRE price movement 17.2 16.8 30 day w eighted moving average
16.4
16 15.6 15.2 14.8 14.4 60 day M/average 14 .12 27 03
10
17
24
01
08 15
Sep 07
22
29
05
12
Oct 07
19
26
03
Nov 07
10 17 24 07
Dec 07
14
21
28
Jan 08
04
11
18
25
Feb 08
03
10
17
Mar 08
This indicator is used to identify price trends and trend reversals. If the Moving Average is sloping down and prices are below the Moving Average then prices are considered to be in a downtrend. When a short term period Moving Average crosses above a long term period Moving Average, an investor should BUY. When a long term period Moving Average crosses above a short term period Moving Average, an investor should exit. In this case, there have been two crossovers. In the mid December 2007, the short term 30 day period moving average (MA) crossed from below the long term moving average (60 days). This was a SELL signal. In early Feb this year the short term MA crossed above the long term period MA emanating a BUY signal. In the last few trading sessions, the short term MA can be seen to be crossing above the long term MA. In early march short term MA crossed the long term MA from below indicating the SELL signal. However, currently it seems that the short term MA is just about to go above the long term MA from below which would then reflect a bullish signal.
Relative Strength Index (RSI) Daily QKRIN.NR
15/11/2007 - 27/02/2008 (NBO) V alue KES
RSI, QKRIN.NR, Last Trade(Last), 14, Wilder Smoothing 25/02/2008, 49.228
80 70 60 50 40 30 20 10 .123 19
26
03
November 2007
10
17
24
December 2007
07
14
21
January 2008
28
04
11
18
25
February 2008
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
14
Research Report 2008
The RSI is a price-following oscillator that ranges between 0 and 100. If the RSI is above 70 then the market is considered to be overbought, and an RSI value below 30 indicates that the market is oversold. From September to December 2007, the RSI was fluctuating between 30 and 70. Then it went above 70 on 24th December 2007 indicating an overbought condition which was a sell signal. The moving average also confirmed this signal when the short term MA crossed the long term MA from below. In early February this year RSI approached 30 indicating a buy signal which was also confirmed by momentum. From late February to date, the RSI has been fluctuating in between 30 and 70 indicating good counter performance.
Momentum Daily QKRIN.NR
15/10/2007 - 12/03/2008 (NBO) Value KES
Mom, QKRIN.NR, Last Trade(Last), 14 12/03/2008, 0.00
1 0.5
Momentum line is not far away from zero.
0 -0.5 -1 -1.5 -2 -2.5 -3 .12 15
22
29
Oct 07
05
12
19
Nov 07
26
03
10
17
Dec 07
24 07
14
21
Jan 08
28
04
11
18
25
03
10
Feb 08
A Momentum analysis is an oscillator that measures the rate at which prices are changing over an observation period (as defined in the parameters). It measures whether prices are rising or falling at an increasing or decreasing rate. The momentum calculation subtracts the current price from the price a set number of periods ago. This positive or negative difference is plotted above or below a zero line. Momentum analysis indicates overbought and oversold conditions. An overbought or oversold market is one where the prices have risen or fallen too far and are therefore likely to retrace. If the Momentum line moves to a very high value above the zero line, this is a sign of an overbought market. If the momentum line moves to a very low value below the zero line this is a sign of an oversold market. An overbought condition was experienced on December 24th 2007; the volume of shares traded on that day was 1.1M. The RSI also confirmed this signal. Oversold was experienced on end of January this year thus a buy signal. Currently, the momentum line is not too far away from zero, thus indicating a hold signal.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
15
Research Report 2008
Future outlook
We estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 953 million in 2008, a solid growth of 18% from 2007 earnings.
Kshs (Million) Gross Premiums Claims Underwriting surplus Investment income Profits after tax Earnings Per share
2005 2,613 924 488 491 748
2006 3,035 1,523 462 753 3904
1st Half 2007 1,619 551 524 252 435 0.72
2007F 3,189 1,237 791 536 807 1.34
2008F 3,546 1,454 840 595 936 1.54
The group is expected to achieve a gross premium income of Kshs 3,189 million in 2007 and Kshs 3,546 million in 2008 as compared to Kshs 3,035 for year 2006. This is a growth of 5% and 11% from premiums earned in 2006 and 2007 respectively. The growth is expected to be driven by increasing market share through increased acceptances in existing markets. Increasing international market share is of particular importance as it will help to dampen any potential negative effects of the removal of mandatory cessions in the future. Underwriting profits are expected to increase by 71% in 2007 and 6% in 2008 due to improved risk management. Investment income should be able to improve as the company divests some of its real estate holdings and invests in higher yielding assets. We would also like to see the company diversify its equity portfolio as this could also unlock potentially higher returns, which would improve the firm’s bottom line.
We feel that the group has sustainable growth prospects for the next 5 years.
We recommend Kenya Re as a buy as we feel that the group has sustainable growth prospects for the next 5 years. With improved risk management, increased marketing, control on management expenses, increased efficiency through new systems, we estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 936 million in 2008, a growth of 16% from 2007 earnings. We believe that the company will have good growth in underwriting income as well as investment income with lower loss ratios and continued growth in the economy once the political uncertainty in the country is resolved. We estimate a price target of Kshs 23 for Kenya Re and thus recommend a strong buy.
Recommendation: BUY
4
Includes provision of Kshs 150 million.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
16
Cyclical & volatile business
(Members of the NSE since 1954) 10th Floor, Loita House, Loita Street P.O. Box 45396-00100 Nairobi, Kenya Tel: +254-20-3240000 Fax: +254-20-218633 Website: www.dyerandblair.com
March 2008 Current Price: Kshs 15.10 Trailing PE: 16.41x Price range: Kshs 13.85 - Kshs 18.25 Profit after Tax
Loss ratio decreased to 34.07% in the 1st half of 2007 compared to 40.28% in the same period in 2006. In the same period, management expenses decreased to 9.50% from 10.66%
Research: Leah Nyambura Hetal S. Shah
+254 20 3240000 [email protected]
Kenya Re is on target to make approximately Kshs 807 million, excluding oneoff gains, after tax in 2007. A further growth of 14% is expected in the net profits in 2008. We expect the group to earn net profits of Kshs 922 million in 2008. The group’s net profits went up by 12% in the 1st half of 2007 to Kshs 435 million from Kshs 388 million in the same period in 2006. KPMG has been testing the company’s system and processes. Kenya Re will update its systems after KPMG’s advice by which the company should become more efficient. Increased efficiency will result in increased earnings. Though locally incorporated, the company operates in almost all the African countries except South Africa. It also serves the Middle East and Asia. It is continuously expanding and extending its service in the international market. However, the principal market of the Corporation is the Kenyan insurance market. It controls approximately 21% of the local market. Net underwriting profits have been volatile over the years. However, the average underwriting profits from 2002-2006 was approximately Kshs 400 million per year. Underwriting profits grew by 54.42% in the 1st half of 2007. Kenya Re has an extensive asset base of over Kshs 12.81 billion and is looking to expand the base. Investment income grew from approximately Kshs 491 million in 2005 to around Kshs 753 million in 2006. The new management is increasing its focus on matching the premiums with the risk and in turn improve its risk management. Reinsurance business is very volatile. The risk “tails” are getting fatter and catastrophes have been more frequent than historical records would predict. However, Kenya Re holds sufficient reserves to meet any plausible loss scenarios. Kenya Re will earn an extra income of Kshs 17 million in 2008 as it sold 2 properties above its estimated values. We project an EPS of Kshs 1.34 for 2007 and Kshs 1.56 for 2008.
Projections
1st Half Kshs (Million) 2005 2006 2007F 2008F 2007 Gross Premiums 2,613 3,035 1,619 3,189 3,546 Claims 924 1,523 551 1,237 1,454 Underwriting surplus 488 462 524 791 840 Investment income 491 753 252 536 595 Profits after tax 748 3901 435 807 936 Earnings Per share 0.72 1.34 1.56 We recommend Kenya Re as a buy as we feel that the group has sustainable growth prospects for the next 5 years. With improved risk management, increased marketing, control on management expenses, increased efficiency through new systems, we estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 936 million in 2008, a growth of 16% from 2007 earnings. We believe that the company will have good growth in underwriting income as well as investment income with lower loss ratios and continued growth in the economy once the political crisis is solved in Kenya. We estimate a price target of Kshs 23 for Kenya Re and thus recommend a strong buy.
Recommendation: BUY 1
Includes provision of Kshs 150 million.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
1
Research Report 2008
Kenya Re was established in December 1970 under the State Reinsurance Corporation Act of the Laws of Kenya Chapter 485. Kenya Re listed on the NSE on 27th August 2007, floating 240 million shares. The IPO was overwhelmingly oversubscribed, by about 405%, representing strong confidence in the company. The year 2007 therefore emerged as an important year in the company’s history.
The new management is focusing on matching its premiums with the risk.
The group’s underwriting profit has been volatile over the years.
Insurance is a cyclical and volatile business. The management has to perform at its best and continuously improve risk management strategies by matching the premiums to the risk. In the short run, the company can show higher profits with high turnover due to premiums. However, in the long run, poor risk management can lead to higher payment on claims and the company possibly can experience a loss in earnings. The new management is focusing on matching premiums with the risk. The group’s underwriting profit has been volatile over the years. There are unpredictable patterns of boom and bust. Heavy losses during bust periods force up premiums, which leads to relaxed attitudes toward risks, which in turn help bring about new cycles of losses. The cyclical nature is why industry players have to maintain huge reserves. The table below summarises the geographical presence of Kenya Re in the global business. Region Kenya Africa (excluding Kenya) Overseas TOTAL
Number of Countries 1 22 18 41
Number of companies 46 80 40 166
Source: Kenya Re (Dec 2006)
Industry Growth The insurance industry has been grown alongside the Kenyan economy. The Kenyan economy is doing well with GDP growth of 6.1% recorded in 2006 and 7.1% in 2007. Unskilled labour is languishing as wages have stagnated, while food, housing and transport costs have spiralled. However, the middle class has been doing well so far. So far, 2008 looks like a difficult year. However, most of the assets destroyed by political violence were never insured. Kenya Re’s insurance classes can be divided into fire, accident, marine, aviation, motor (commercial and private), and life insurance. It earns most of its premiums from fire and accidents, followed by 14.68% from Life insurance, 9.36% from motor insurance, 7.93% from marine insurance, and 0.35% from insurance on aviation.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
2
Research Report 2008
% of Gross Prem ium s earned to Total Gross Prem ium earned, Sept 2007
Kenya Re earns most of its premiums from fire and accident insurance.
Life 14.68% Aviation 0.35% Marine 7.93%
Fire 37.23%
Motor 9.36% Accident 30.45%
In the 1st 3 quarters of 2007, the group earned about Kshs 889 million from fire insurance and Kshs 727 million from insurance on accidents out of the total of Kshs 2,387 million earned on gross premiums. The increase in manufacturing activities has affected the insurance industry.
The number of newly registered cars and fuel consumption has been growing at double digit rates.
Rental prices have also been growing at double digits in the middle class enclaves
Kshs (Million) Fire Accident Motor Marine Aviation Life Total
2005 1,021 725 165 300 15 388 2,613
2006 1,166 908 183 265 17 497 3,035
Sep-07 889 727 224 189 8 350 2,387
Insurance clients can be divided into corporate and retail categories. Generally, most businesses take out some form of insurance. The increase in manufacturing activities has affected the insurance industry. When a company is buying new equipment, it will probably seek a trade insurance cover. Transporting the equipment will also call for more insurance. Prior to installation, the company will also look for a comprehensive cover to insure its new equipment. The number of newly registered cars and fuel consumption has been growing at double digit rates in spite of the high costs of fuel and vehicle maintenance. Rental prices have also been growing at double digits in the middle class enclaves of Lang’ata, South B and South C. Insurance is a middle and high income earner product. Increasing incomes for these two categories is good news for the industry. The revitalization of the life insurance sector is directly tied to the reversal of fortunes for the middle class of Kenya. Life insurance has also been growing at double digit rates in the past 3 years.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
3
Research Report 2008
Not heavily affected by the current crisis in the country.
Kenya Re is not affected heavily by the recent uncertainty in the country. As per the management, the company is not liable to pay any heavy claims for the damages that happened during the unrest. Kenya Re will still be able to meet its premiums target for 2008. We believe that the claims will probably increase in 2008, thus the loss ratio will increase marginally. Its investment income will be volatile over the year. The stock market has been reacting to the ongoing political talks and has been volatile. Once the situation is resolved, we believe that the NSE will gain stability and Kenya Re in turn will earn good returns from the market. We anticipate that the company will have a growth of about 5% in gross premiums in 2007 from the previous year and an 11% growth in 2008. Thus, we expect that Kshs 3,189 million in 2007 and Kshs 3,546 million in 2008 will be earned by the group as gross premiums.
Kenya Re benefits from 18% compulsory ceding of all treaty insurance business from all insurance companies in Kenya.
A lot of companies give them about 80% of their business, not just 18%.
Local, Regional and International Business
Kenya Re benefits from 18% compulsory ceding of all treaty insurance business from all insurance companies in Kenya. Most of the companies give them about 80% of their business, not just 18%. The group has a market share of about 21% of premiums collected locally. In 20072, from the total gross premiums that Kenya Re earned, about 67.71% of its gross premiums were earned from the Kenyan market, 18.24% from the African region and the rest, 14.05% from the international market, i.e. Middle East and Asia. % of gross prem ium s earned of total gross prem ium s, Dec 2007
International (Middle East & Asia) 14.05%
Kenya Re earned about 67.85% of its total gross premiums earned from the Kenyan market.
Africa (except Kenya) 18.24% Kenya 67.71%
Kenya Re attracts business from almost all the African countries except South Africa. Africa as a continent is currently experiencing real GDP growth at an average of over 5% a year due to factors such as; continued progress in cementing macroeconomic stability, the beneficial impact of debt relief, increased capital inflows, and rising oil production.
2
Data until 13th December 2007
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
4
Research Report 2008
Kenya Re has increased its focus on French-speaking countries, including Rwanda Burundi, Congo, Madagascar, etc. Rwanda’s premium income has more than doubled from Kshs 6.4 million in 2005 to Kshs 17.70 million in 2006. Kenya Re has increased its focus on French-speaking countries.
Rwanda is a country that is on a path of recovery following the genocide, and has since shown good GDP growth rates of over 6% annually3. There is a need for services in the country, one of them being good insurance and reinsurance. Senegal is another country which produced impressive growth in premium income of 429% in 2006 from 2005, coming in at Kshs 16.48 million in 2006, compared to Kshs 3.11 million in 2005. However, Kenya Re has not lost focus on its business in English-speaking countries and it continues to grow in these markets. Earlier in the year, Kenya Re had put into place aggressive marketing strategies to capture African markets outside of Kenya, as well as retain its existing market within Kenya. In the coming years, Kenya Re has a target to develop their market share and penetrate into Angola, Mozambique, Namibia, Sudan, Ghana, Cameroon, Senegal, The Gambia, Zambia and Botswana. In the Francophone Africa, they expect to grow in Tunisia, Algeria, Senegal, Togo and Gabon among others.
Kenya Re experienced a growth of 19% from local business and 11% from international business.
Kenya Re has realized a considerable growth in its gross premiums locally and internationally. It experienced a growth of 19% from local business and 11% from international business. Kenya Re’s international business is obtained largely through brokerage. For instance, the J. B. Boda Group, the largest and oldest reinsurance brokers in India, is the Indian broker for Kenya Re, providing the Corporation with quality business. The corporation has established service level standards to match international standards in order to bolster its foreign business. Gross prem ium s earned through local and international business
4,000 3,500
Kshs (Million)
3,000 2,500 2,000 1,500 1,000 500 2005
2006 Local
3
International
2007F
2008F
Total
Figures from World Economic Outook by International Monetary Fund, April 2007
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
5
Research Report 2008
Underwriting Profits, Investment Income and Profits after tax
Gross premiums earned have been increasing more or less steadily over the past five years.
The group’s profits have been volatile over the years as can be seen below. This is due to the earnings pattern from underwriting and investment income experienced by the company. Kenya Re earned higher income from investment in 2002, 2004 and 2006. We expect that in the next two years, it will earn more of its income from the underwriting business. We anticipate the net profits to increase to Kshs 807 million in 2007 and Kshs 936 million in 2008, a growth of 16% from 2007 earnings. Gross premiums earned have been increasing more or less steadily over the past five years. Investment income is also up over this time period, though this portion of their profits has been more volatile in its growth pattern. Profits after taxes were lower in 2006 than in 2005; however, this was due to the extraordinary gain that was booked in 2005 and the provisions of Kshs 150 million in 2006. Taking this into account, profits after tax did increase slightly in 2006, compared to 2005.
Underwriting profits As mentioned earlier, insurance business is a cyclical and a volatile business. It usually goes through a boom-bust cycle. The group’s underwriting profits have been volatile since 2002. It experienced a positive growth in 2003 and 2005 and a negative growth in 2002 and 2004. The main reason for this is high claims that it had to pay in 2002 and 2004 as shown in the table below.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
6
Research Report 2008 Kshs (Million) Gross Premiums Claims Loss ratio % Claims/GP
We expect an improvement in the loss ratio in the current year to 38.80% and an increase of it in 2008 to 41%.
We anticipate underwriting profits to grow by 71% in 2007 and 6% in 2008.
2002
2003
2004
2005
2006
2007F
1,339
1,680
1,823
2,613
3,035
3,189
2008F 3,546
770
458
766
924
1,523
1,237
1,454
57.51
27.26
42.03
35.35
50.17
38.80
41.00
The volatility in the underwriting profits is reflected in the highs and lows of the loss ratio over the years. For instance, in 2005, the loss ratio increased decreased to 35.35% from 42.03% in 2004 due to low payment in claims and higher growth in premiums. However, the opposite happened in 2006 and the loss ratio worsened to 50.17%. We believe that the insurance companies will continue growing in this manner. Therefore, we expect an improvement in the current year to 38.80%. It may deteriorate in 2008 to 41% due to the claims Kenya Re might have to pay as a result of the post election unrest. Nevertheless, we feel that the profits from underwriting will not have a negative growth rate but will grow marginally. In 2008, we estimate underwriting profits to increase to Kshs 840 million, a marginal growth of 6% from 2007 earnings. However, we anticipate it to grow by 71% in 2007 to Kshs 791 million from Kshs 462 million in 2006.
Kenya Re has a large investment portfolio of over Kshs 9.76 billion.
Investment Income Kenya Re has a large investment portfolio of over Kshs 9.76 billion, as of September 2007. Investment is an integral part of Kenya Re’s business, as the reinsurance premium income has to be reinvested to build up reserves and pay claims as they occur. Kenya Re is in the process of reducing its property portfolio, which currently makes up the largest portion of its investment portfolio, approximately 33.52% of their overall investment portfolio at the end of the 3rd quarter this year. Investment income has been volatile in the past five years. It went up in 2002, 2004 and 2006 and declined in 2003 and 2005. The income stream should grow over time as the company restructures its portfolio away from being concentrated so heavily in real estate. However, it is expected that the income stream will continue to be volatile as Kenya Re invests in real estate and listed and unlisted securities, which all have fluctuating prices. We expect the investment income to decrease by about 29% to Kshs 536 million in 2007 from Kshs 753 million in 2006. However, we expect it to grow by 11% in 2008 to Kshs 595 million compared to the income in 2007. Investment Portfolio 30th November 2007 AMOUNT ( KSHS) % of the total Short term deposits 745,384,817 7.64% Government securities 2,527,050,000 25.90% Investment property 3,270,000,000 33.52% Commercial mortgages 430,350,350 4.41% Equity (Unquoted cos.) 161,440,586 1.65% Equity (Quoted cos.) 2,621,907,777 26.87% TOTAL 9,756,133,530 100%
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
7
Research Report 2008
Mortgages form 4.41% of the total investments.
Equities form about 28.53% of total investments.
Kenya Re has a number of properties, some held for rent, and a few for sale. It has diversified in this respect with investments in undeveloped land, developments for sale, office blocks and residential properties. The Corporation is planning to divest from investments in properties and has put a number of properties for sale. Kenya Re will earn an estimated Kshs 621 million from the sale of this land and buildings. In February 2008, the company sold a building in Mombasa equivalent to a value of Kshs 190 million and a plot in Upper Hill equivalent to Kshs 82 million. The estimated cost of these buildings was about Kshs 255 million, thus Kenya Re will have an added income of Kshs 17 million in 2008. The management may increase in its investments in government securities, quoted equity and in short term deposits with the income received from the sale of properties. Kenya Re also gives mortgages to people who are interested in purchasing housing units developed by the company. The average rate charged on the mortgage is 14% per annum. The Corporation also provides loans to its employees to build or purchase houses. Mortgages form 4.41% of the total investments. Commercial mortgages given out have been increasing rapidly compared to the employee mortgages, which have been decreasing. Equities form about 28.53% of total investments, as of September 2007 and also bring in approximately 80% of investment income in the form of dividends.
Kenya Re’s investment portfolio in quoted equity has had a growth of about 16.83% of its value compared to the 8.84% drop in the NSE index between the end of 2006 and end of September 2007.
The unquoted equity could unlock additional value should some of these companies go public, or if the shares are sold to other investors privately. It is possible that the values of these investments are understated, given that they are valued at cost. Kenya Re’s investment portfolio in quoted equity has had a growth of about 16.83% of its value compared to the 8.84% drop in the Nairobi Stock Exchange (NSE) index between the end of 2006 and end of September 2007. However, it should be pointed out that approximately 59% of its portfolio is concentrated in one stock, East African Breweries, which exposes it to significant security specific risk. The corporation also invests in short-term deposits and government securities which formed about 7.64% and 25.90% of total investment income as of September 2007. Some of the government securities have realised gains due to recent tightening of interest rates. In 2007, Kenya Re has earned an average return of 6% on its short-term deposits and about 7.5% on its investment in government securities. Exceptional performance for the 1st Half year ended 30th June 2007
Kshs Gross Premiums Earned Net Premiums Earned Underwriting surplus Investment Income Profit after Tax Loss Ratio
June 2006 1,532 1,378 339 315 388
June 2007 1,619 1,500 524 252 435
Growth 5.62% 8.80% 54.42% -20.08% 12.12%
40.28%
34.07%
-6.21%
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
8
Research Report 2008
Profits after tax had a growth of 12.12% to in the 1st half of 2007 compared to the 1st half of 2006.
The loss ratio dropped by 6.21% from 40.28% to 34.07% in the same period.
Kenya Re has performed well so far in the current year, meeting its targets. During the first half year result, income from net premiums increased by 8.80% from Kshs 1,378 million to Kshs 1,500 million. However, net investment income decreased by 20.08% to Kshs 252 million in 2007, compared to 315 million in 2006. Nevertheless, profits after tax had a growth of 12.12% to Kshs 435 million from Kshs 388 million. This is due to the fact that the total claims decreased by 10.67% in the first half year of 2007 compared to the same period last year. This brought the loss ratio down by 6.21% from 40.28% to 34.07%.
Peer Comparison Kenya Re has two peers; the PTA Reinsurance Corporation (ZEP Re) and African Reinsurance Corporation (Africa Re). In terms of size, Africa Re had the largest balance sheet with assets totalling Kshs 38.10 billion as at the end of 2006, followed by Kenya Re with total assets of Kshs 12.81 billion. ZEP Re is relatively small with assets amounting to Kshs 3.05 billion. Balance Sheet as at Dec 2006 Kshs (billion) Total Liabilities Shareholders Funds
Kenya Re 6.65 6.16
Africa Re 24.65 13.45
Zep Re 1.83 1.22
12.81
38.10
3.05
Total Assets
Source: Audited Company accounts
How do the Kenya Re ratios compare to those of industry peers? Kenya Re
Africa Re
Zep Re
2004
2005
2006
2004
2005
2006
2004
2005
2006
Loss Ratio = Claims/N.P.(%)
44.60
43.74
54.54
63.84
70.32
64.12
52.8
53.54
57.87
Management Expense/N.P.(%)
11.26
13.75
16.23
4.71
3.99
5.30
9.46
9.58
9.70
Provision for impairment/N.P. (%)
11.74
9.55
6.59
1.43
1.51
2.11
N/A
2.67
3.70
Insurance Ratios
Profitability Ratios ROA (%)
5.46
7.21
4.80
2.07
3.76
4.53
6.91
4.89
5.63
ROE (%)
10.98
13.48
8.78
7.51
11.17
12.83
16.81
12.21
14.03
Liquidity Ratios Current ratio
3.39
4.4
4.07
2.1
1.56
2.15
5.73
6.45
5.59
Quick ratio
2.29
2.96
3.23
2.1
1.56
1.78
5.73
6.45
5.54
Debt to assets
5.66
5.43
5.10
14.98
13.55
11.12
6.76
11.10
13.96
Debt to equity
11.39
10.15
9.33
54.41
40.27
31.48
15.95
27.67
34.80
Leverage Ratios
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
9
Research Report 2008
The loss ratio of Kenya Re was lower than all its peers for the 3 years analysed.
Loss ratio The loss ratio of Kenya Re was lower than all its peers for the years in comparison. In 2006, Kenya Re’s ratio was at 54.54%. ZEP Re’s ratio was 57.87% and Africa Re’s 64.12% for the same year. Kenya Re’s loss ratio worsened from 44.60% in 2004 and 43.74% in 2005 to 54.54% in 2006. However, in 2007 we expect the ratio to improve to 43.11% and slightly increase in 2008 to 45.20%. In 2006, Kenya Re earned Kshs 2.79 billion from net premiums, a growth of 32% from year 2005, but the claims increased by 65% from year 2005 to Kshs 1,523 million. The increase in 2006 can be attributable to large claims from the marine sector, and the fire insurance sector.
Kenya Re’s management expenses are much higher to that of its peers.
Management Expenses However, Kenya Re’s management expenses are much higher than that of its peers. The management expense ratio was 16.23% (taking out Kshs 150 million provisions) for Kenya Re in 2006 compared to 5.30% for Africa Re and 9.70% for Zep Re. Looking at these figures, it would seem that Kenya Re needs to work at bringing down its management costs to bring it more in line with the rest of the industry. The company has already started to work on this. In the 1st half of 2007, the ratio has reduced to 10.25%. We expect this to come back down to its historical average and possibly trend downwards further as improved efficiencies are achieved. We anticipate the ratio to drop to 9.92% in 2008. The management has introduced a voluntory early retirement scheme for staff members. There are about 30 staff members who currently fall into the early retirement category. The management expects the scheme to begin in 2008. The staff numbers will reduce if this strategy of the management is successful and we should see reduced costs and increased earnings in 2008. KPMG is currently looking at the group’s systems, processes and numbers. It will advice the company on improvements needed in the system for increased efficiency. Increased efficiency will in turn reduce the costs and increase the earnings which will trickle down to the share holders.
The provision for impairment on balances due to cedants and reinsurers is the highest for Kenya Re over the years compared.
Provision for impairment The provision for impairment on balances due to cedants and reinsurers is the highest for Kenya Re over the years compared. However, they have been on a decreasing trend over the last 3 years analysed. This implies that Kenya Re does not have to provide as much as it used to a few years back. This is due to a reduced number of impairments. Africa Re’s and Zep Re’s bad debt provision have been increasing but they are still lower than Kenya Re. In 2006, Kenya Re’s ratio was 6.59% whereas Africa Re’s was 2.11% and Zep Re’s was 3.70%.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
10
Research Report 2008
Profitability In terms of relative profitability, Kenya Re is higher than Africa Re but lower than Zep Re in 2006. Kenya Re’s Return on assets was 4.80% compared to Africa Re’s 4.53% and Zep Re’s 5.63%. The return on assets and return on equity have been volatile just like the trend of the net profits. In terms of relative profitability, Kenya Re is higher than Africa Re but lower than Zep Re in 2006.
Kenya Re’s returns are positive and although they were lower for 2006, the company has been earning solid profits on average. In 2006, Kenya Re earned a profit of approximately Kshs 540 million, excluding provisions, after tax. However, we would like to see the company improve its efficiency in producing returns from its equity and asset base and would like to see both ratios improve from their 2006 levels. Total assets of Kenya Re have been on an increasing trend. Over the last year, assets increased by 9% to Kshs 11.26 billion in December 2006 from Kshs 10.38 billion in December 2005. Shareholders funds have also been on the rise. They grew from Kshs 5.55 billion in 2005 to Kshs 6.15 billion in December 2006, an increase of 11%. Increases in these categories helps bring down the return on assets and return on equity ratios, unless net income is increased by a greater percentage.
Liquidity levels look good for Kenya Re, Africa Re and Zep Re.
Kenya Re’s liquidity has been increasing over the last 3 years.
Kenya Re’s leverage ratios have been decreasing.
Africa Re and Zep Re have higher debt ratios than Kenya Re.
Liquidity Liquidity levels look good for Kenya Re, Africa Re and Zep Re. Kenya Re and Zep Re in particular seem to be very well capitalized in terms of handling current cash needs due to their high current and quick ratios. Kenya Re’s liquidity has been increasing over the last 3 years. Their current ratio has been over 4 for the past couple of years, and the quick ratio has been right around 3 or above for 2005 and 2006, suggesting they can meet their short term obligations very easily and are not at a high risk of suffering insolvency. Leverage Kenya Re’s leverage ratios have been decreasing; illustrating that the company is lowly geared and has a solid capital base from which to operate. Africa Re and Zep Re have higher debt ratios than Kenya Re.
New Capital Requirements Before the budget was released in 2007, the minimum capital required for setting up a life insurance company was Kshs 50 million. The capital required for setting up a general insurance company was Kshs 100 million. Hence, Kshs 150 million was required to start an insurance company that does both life and general insurance. This capital requirement was inadequate, leading to the collapse of several firms. This has weakened the industry overall and helped contribute to a negative image of the industry as a whole.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
11
Research Report 2008
With the new capital requirements in place, Kenya Re will be able to reinsure stronger companies, leading to decreasing claims payments.
The 2007 Finance Bill raised the capital requirements to Kshs 150 million and Kshs 300 million for life and general insurance respectively. Thus, insurance companies will have to raise their capital to Kshs 450 million within the next 2 years in order to cover both lines of business. This will effectively lock out “briefcase outfits.” These small companies are prone to undercutting premiums and taking imprudent risks. They are detrimental to the health of the industry. The increased capital requirements should help improve the insurance industry, which should also create benefits for reinsurers. The increased capital requirements will have direct impact on Kenya Re. They should lead to stronger companies, more adequately capitalized, and thus more able to survive. This should improve the insurance industry overall, leaving Kenya Re to be able to reinsure stronger companies, leading to decreasing claims payments.
Prospects ♦
The company’s main strategy is to reduce management expenses and increase earnings. The management has introduced Voluntary Early Retirement Scheme for staff members. There are about 30 staff members currently who fall into the early retirement category. The management expects this to begin in 2008. The staff numbers will reduce if this strategy is successful and we will see reduced costs and increased earnings in 2008.
♦
KPMG is currently looking at the group’s systems, processes and numbers. It will advice the company on improvements needed in the system for increased efficiency. Increased efficiency will in turn reduce the costs and increase the earnings which will trickle down to the share holders.
♦
The compulsory ceding of 18% provides the corporation with a guaranteed source of business until 2011 or full privatisation, whichever takes place first.
♦
Kenya Re is now lead by strong and competent management. We expect that the management team will improve the risk management and hold down the growth in claims.
♦
Staff is constantly motivated to perform better due to performance contracts.
The management has introduced Voluntary Early Retirement Scheme for staff members.
Kenya Re will experience improved efficiency and increased earnings once it has installed new systems.
The management team is focussing on improving the risk management systems and hold down the growth in claims.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
12
Research Report 2008
♦
Kenya Re will be able to tap further into the life business due to the growth in disposable incomes of regional residents.
♦
Kenya Re plans to aggressively continue to attract more business from the West African Region.
♦
Powerful marketing should allow Kenya RE to increase market share in existing markets.
♦
Kenya Re has about Kshs 700 million invested in Dollar and Sterling Pounds. The company will gain on these investments if the Kenyan Shilling depreciates.
Risks
There is currently strong competition from global players like Swiss Re and Munich Re and competition is increasing from newer regional market participants.
Mismatch of Assets and Liabilities leads to interest rate risk.
♦
Investment in quoted shares has very high weighting in East African Breweries alone, about 59%.
♦
There is currently strong competition from global players like Swiss Re and Munich Re and competition is increasing from newer regional market participants. It will also face competition from Tanzanian and Ugandan markets due to new reinsurance companies developed there affecting their market share and in turn financial results.
♦
Implosion of the real estate market could harm the Kenya Re balance sheet.
♦
The Corporation is exposed to foreign currency exchange risk arising from changes to the exchange rates of various currencies.
♦
Mismatch of Assets and Liabilities leads to interest rate risk. Kenya Re’s assets are mostly short term in nature, while its liabilities are mostly long term. The value of their assets and liabilities will be affected by the level of interest rates. Longer term liabilities will be affected more than short term assets, due to their longer duration. If rates rise, the value of their existing assets will decrease and the value of liabilities will also decrease. The magnitude of the change of the liabilities will be larger than that of the assets. As a result, they will gain value due to this change. If rates fall, the reverse will happen. The mismatch in the duration of assets and liabilities means that adverse changes in interest rates can negatively impact the company.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
13
Research Report 2008
Technical analysis Weighted Moving Average Daily QKRIN.NR
27/08/2007 - 21/03/2008 (NBO) Price KES
Line, QKRIN.NR, Last Trade(Last) 12/03/2008, 15.10 WMA, QKRIN.NR, Last Trade(Last), 30 12/03/2008, 15.46 WMA, QKRIN.NR, Last Trade(Last), 60 12/03/2008, 15.46 WMA, QKRIN.NR, Last Trade(Last), 60 12/03/2008, 15.46
17.6 KRE price movement 17.2 16.8 30 day w eighted moving average
16.4
16 15.6 15.2 14.8 14.4 60 day M/average 14 .12 27 03
10
17
24
01
08 15
Sep 07
22
29
05
12
Oct 07
19
26
03
Nov 07
10 17 24 07
Dec 07
14
21
28
Jan 08
04
11
18
25
Feb 08
03
10
17
Mar 08
This indicator is used to identify price trends and trend reversals. If the Moving Average is sloping down and prices are below the Moving Average then prices are considered to be in a downtrend. When a short term period Moving Average crosses above a long term period Moving Average, an investor should BUY. When a long term period Moving Average crosses above a short term period Moving Average, an investor should exit. In this case, there have been two crossovers. In the mid December 2007, the short term 30 day period moving average (MA) crossed from below the long term moving average (60 days). This was a SELL signal. In early Feb this year the short term MA crossed above the long term period MA emanating a BUY signal. In the last few trading sessions, the short term MA can be seen to be crossing above the long term MA. In early march short term MA crossed the long term MA from below indicating the SELL signal. However, currently it seems that the short term MA is just about to go above the long term MA from below which would then reflect a bullish signal.
Relative Strength Index (RSI) Daily QKRIN.NR
15/11/2007 - 27/02/2008 (NBO) V alue KES
RSI, QKRIN.NR, Last Trade(Last), 14, Wilder Smoothing 25/02/2008, 49.228
80 70 60 50 40 30 20 10 .123 19
26
03
November 2007
10
17
24
December 2007
07
14
21
January 2008
28
04
11
18
25
February 2008
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
14
Research Report 2008
The RSI is a price-following oscillator that ranges between 0 and 100. If the RSI is above 70 then the market is considered to be overbought, and an RSI value below 30 indicates that the market is oversold. From September to December 2007, the RSI was fluctuating between 30 and 70. Then it went above 70 on 24th December 2007 indicating an overbought condition which was a sell signal. The moving average also confirmed this signal when the short term MA crossed the long term MA from below. In early February this year RSI approached 30 indicating a buy signal which was also confirmed by momentum. From late February to date, the RSI has been fluctuating in between 30 and 70 indicating good counter performance.
Momentum Daily QKRIN.NR
15/10/2007 - 12/03/2008 (NBO) Value KES
Mom, QKRIN.NR, Last Trade(Last), 14 12/03/2008, 0.00
1 0.5
Momentum line is not far away from zero.
0 -0.5 -1 -1.5 -2 -2.5 -3 .12 15
22
29
Oct 07
05
12
19
Nov 07
26
03
10
17
Dec 07
24 07
14
21
Jan 08
28
04
11
18
25
03
10
Feb 08
A Momentum analysis is an oscillator that measures the rate at which prices are changing over an observation period (as defined in the parameters). It measures whether prices are rising or falling at an increasing or decreasing rate. The momentum calculation subtracts the current price from the price a set number of periods ago. This positive or negative difference is plotted above or below a zero line. Momentum analysis indicates overbought and oversold conditions. An overbought or oversold market is one where the prices have risen or fallen too far and are therefore likely to retrace. If the Momentum line moves to a very high value above the zero line, this is a sign of an overbought market. If the momentum line moves to a very low value below the zero line this is a sign of an oversold market. An overbought condition was experienced on December 24th 2007; the volume of shares traded on that day was 1.1M. The RSI also confirmed this signal. Oversold was experienced on end of January this year thus a buy signal. Currently, the momentum line is not too far away from zero, thus indicating a hold signal.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
15
Research Report 2008
Future outlook
We estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 953 million in 2008, a solid growth of 18% from 2007 earnings.
Kshs (Million) Gross Premiums Claims Underwriting surplus Investment income Profits after tax Earnings Per share
2005 2,613 924 488 491 748
2006 3,035 1,523 462 753 3904
1st Half 2007 1,619 551 524 252 435 0.72
2007F 3,189 1,237 791 536 807 1.34
2008F 3,546 1,454 840 595 936 1.54
The group is expected to achieve a gross premium income of Kshs 3,189 million in 2007 and Kshs 3,546 million in 2008 as compared to Kshs 3,035 for year 2006. This is a growth of 5% and 11% from premiums earned in 2006 and 2007 respectively. The growth is expected to be driven by increasing market share through increased acceptances in existing markets. Increasing international market share is of particular importance as it will help to dampen any potential negative effects of the removal of mandatory cessions in the future. Underwriting profits are expected to increase by 71% in 2007 and 6% in 2008 due to improved risk management. Investment income should be able to improve as the company divests some of its real estate holdings and invests in higher yielding assets. We would also like to see the company diversify its equity portfolio as this could also unlock potentially higher returns, which would improve the firm’s bottom line.
We feel that the group has sustainable growth prospects for the next 5 years.
We recommend Kenya Re as a buy as we feel that the group has sustainable growth prospects for the next 5 years. With improved risk management, increased marketing, control on management expenses, increased efficiency through new systems, we estimate the net profits to increase to Kshs 807 million in 2007 and to Kshs 936 million in 2008, a growth of 16% from 2007 earnings. We believe that the company will have good growth in underwriting income as well as investment income with lower loss ratios and continued growth in the economy once the political uncertainty in the country is resolved. We estimate a price target of Kshs 23 for Kenya Re and thus recommend a strong buy.
Recommendation: BUY
4
Includes provision of Kshs 150 million.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein. Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the listed companies. The document is exclusively for our clients and duplication is not allowed.
16
Related Documents
Kenya Re Report
November 2019 3
Kenya Special Report
December 2019 7
Kenya
August 2019 44
Looting In Kenya-kroll Report(hapa Kenya Version)
August 2019 14