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| Cytonn’s Chief Investments Officer Elizabeth N. Nkukuu, CFA |
Cytonn
Investments has released their FY’2016 Insurance Sector Report, which
ranks Kenya Reinsurance as the most attractive insurance company from a
financial health perspective and intrinsic value perspective. The franchise
score measures the broad and comprehensive business strength of the company and
the intrinsic score measures the total return potential. Sanlam Kenya ranked
lowest, ranking lowest in both franchise and intrinsic value score.
The report is themed “Operational Efficiency & Product Innovation key to Growth of the Sector in an era of Heightened Regulation.” The theme was around three key factors. First, there has been an increase in regulation in the Insurance sector, namely the adoption of a risk based supervision framework, which will lead to changes in capital requirements, as insurance companies will be required to hold capital that matches the risks they insure. Second, high expense levels are pushing the core insurance business into loss making territory. As such, there is a push towards operational efficiency, with insurance companies adopting alternative distribution channels, especially through mobile, that will reduce expenditure on collecting premiums and disbursing claims. Lastly, product innovation is key to growth in the sector and increasing insurance penetration levels in the country, through targeting citizens with low disposable income and doing away with irrelevant insurance products that are not tailor made to consumers.
The report by Cytonn saw CIC Group drop from top position in the H1’2016 Report to rank 4th, affected by a poor return on average tangible equity, low levels of diversification and lower ability to absorb sudden large shocks owing to a high ratio of claims to shareholder’s funds. Sanlam retained its bottom position as a result of poor return on tangible equity, low solvency ratio, low underwriting leverage, and high claims to shareholder’s funds. On potential total return, Liberty Holdings and Britam Holdings held the first and second positions with total potential returns of 21.3% and 20.8%, respectively, while Sanlam Kenya registered the lowest total potential return, with a potential downside of 14.9%.
Speaking during the report release, Cytonn’s Chief Investments Officer Elizabeth N. Nkukuu, CFA, said that the analysis is to determine which insurance companies are the most attractive and stable for investment from a franchise value and from a future growth opportunity perspective. “Technology and innovation is a driving factor in the sector and thus we expect improved product innovation and operational efficiency to drive profitability and thus growth of the sector amidst the heightened regulation. The growth of the middle class, adoption of alternative distribution channels and regional expansion are also key contributors to the growth of the sector,” said Elizabeth.
“Following the adoption of a risk based framework, the sector is set to experience an increase in mergers and acquisitions mainly targeting small and weaker insurance companies in the Insurance sector in Kenya. Product innovation targeting specific sectors is also expected to gather pace mainly in sectors such as oil exploration and mining activities. Premiums continue to experience strong growth with growth in Life business premiums outpacing General business in 2016. Despite the sector remaining attractive with vast potential, we have witnessed the insurance sector grappling with low penetration, with Kenya’s penetration standing at 3.0% compared to South Africa’s 14.1%,” said Maurice Oduor, Cytonn’s Investments Manager.
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