2014-08-13 Kenya Insurance Sector Update-2

Kenya Insurance Sector
August 2014 Update

Equity research | Kenya | Insurance
Scaling the Warren Buffett criterion
13 August 2014
The listed Kenya insurers are actively implementing various initiatives

concurrently. These include strategic acquisitions and partnerships, crossborder expansion, forays into property business, new business lines
(microinsurance) and debt capital raises to fund all these activities. Although the
insurers are currently still exceeding the Warren Buffett criterion for a
successful insurance business in terms of cost of float, these new strategies
could put pressure on underwriting margins in the next 2-3 years. Meanwhile,
half of the insurance stocks covered in our September 2013 initiation piece
(Against the odds) have since rallied by more than 100%, but there still seems
to be value in Kenya Re, Jubilee and Liberty in particular, as well as the OTCtraded UAP Insurance on which we initiate coverage in this note. Four insurers
now have a market capitalisation in the USD 200m - 500m range, while three are
averaging between USD 70,000 140,000 in daily value of shares traded.
Running the numbers

Our updated comparative ratio analysis of the insurers reveals that (a) With the
exception of Britam and contrary to well established perception, short term
insurance contributes far more to the bottom line than long term business does,
despite long term business being allocated the bigger proportion of investment
income (b) despite having higher net loss ratios than Britam, Jubilee and CIC have
consistently had the highest RoEs because they both have much lower expense
ratios than Britam (c) Jubilee and Liberty are the only insurers with solvency
margin ratios below 100% (d) Insurance RoAs continue to outperform the banks,
with Kenya Res RoA in the double digits (e) in contrast to the banks, regional
subsidiaries (especially Uganda and Tanzania) seem to be more profitable relative
to revenue generated compared to Kenya.
The latest and greatest

(a) The new Insurance Act should come into effect in the next 12 months, with a
focus on self-assessments and risk-based supervision and the regulator issuing
implementation guidelines much in the same way CBK does (b) despite Britam
only recognising half of the gains in Equity Banks share price in its P&L, the
impact of the 2014 rally in that share alone could match Britams FY13 earnings
(c) latest data indicates that microinsurance is exerting pressure on underwriting
margins (d) Britam, Jubilee and CIC will expand their operations in East, Central,
Southern and even West Africa in the next two years via inorganic acquisitions and
joint ventures.
Updated recommendations
We derive updated valuations from our risk-adjusted RoE-P/B regression analysis
and place BUY recommendations on Kenya Re (175% upside), Jubilee (50%
upside), Liberty (30% upside) and UAP (27% upside). We use the same model to
downgrade Britam to HOLD (4% upside), CIC (14% downside) to REDUCE and Pan
Africa (20% downside) to SELL.
Analyst:
Judd Murigi +254 20 276 2637
murigij@africanalliance.co.ke
Online:
https://aas.sharefile.com
Refer to important terms of use, disclaimers and disclosures on back page.

August 2014 Update
Table of contents
Investment thesis ...................................................................................................................... 3
Explaining the Warren Buffett criterion ............................................................................... 5
Valuation summary ............................................................................................................... 8
Industry update: Upgrading with a new Insurance Act ........................................................ 9
P&L analysis: Operating efficiency the RoE differentiator ................................................ 10
Balance Sheets reveal high solvency margins................................................................... 11
Short term business surprisingly outperforms long term ................................................ 12
Regional subsidiaries more profitable than Kenya? .......................................................... 13
Britam: Voracious appetite ................................................................................................. 14
UAP: The medicine men ...................................................................................................... 20
Kenya Re: Back to black...................................................................................................... 25
Jubilee: Gearing up for M&A............................................................................................... 29
CIC: Under pressure............................................................................................................ 33
Liberty Kenya: P&L noise continues ................................................................................... 37
Pan Africa: New moves ....................................................................................................... 41
13 August 2014
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August 2014 Update
Investment thesis
Still passing the Warren Buffett test, despite declining margins. Review of the
available 2013 underwriting performance (Britam, CIC and Kenya Re) reveals
contrasting trends. Britam which traditionally has had a vastly superior short term
underwriting margin over its peers saw its underwriting margin almost halved to 8%
in 2013, while CICs margin of 5% was its lowest since 2010 at least. One cause was
microinsurance which is a new medical insurance product targeting the low income
market and is still incurring significant losses due to low volumes and prevailing antiselection. On the positive side, Kenya Re bounced back to underwriting profitability in
2013. All things considered, the insurers are still maintaining a positive cost of float in
their short term insurance businesses, which means that they are effectively not only
meeting but surpassing Warren Buffetts criteria for a successful insurance business.
Warren Buffett regularly explains to Berkshire Hathaway shareholders that an
insurance business has value if its cost of float over time is less than the cost the
company would otherwise incur to obtain funds (for the Kenyan insurers, this
benchmark cost would be 10% which has been the average prevailing rate on
government treasuries over the last two years) Float refers the funds that an
insurance company has available for investment due to the time lag between receipt
of premium revenue and incurrence of claims as and when they occur. It is calculated
by deducting insurance-related assets (such as premiums recoverable and loss
recoverable from reinsurance) from insurance liabilities (such as claims & benefits
incurred but not paid, and unearned premiums). Cost of float is measured by
underwriting losses incurred. We use the concept of underwriting profit or loss only
for short term insurance, because the nature of long term insurance is such that
investment income is an integral element of the business and it would probably not be
appropriate to compare life insurance benefits with life insurance premiums alone.
Whilst Warren Buffett sets a benchmark of underwriting losses of up to 10% for a
successful insurance business, we find that the Kenya insurers are actually in positive
underwriting margin territory to start with.
Underwriting margin (underwriting profit/gross written premium)

Aviation Engineering
Britam
CIC
WIBA
Misc
Medical Micro* Total
FY13
14%
16%
15%
20%
19%
-12%
17%
20%
18%
10%
55%
9% -54%
FY12
21%
44%
-10%
69%
6%
10%
19%
36%
18%
22%
55%
7%
16%
FY11
17%
30%
12%
-91%
21%
7%
28%
38%
11%
72%
25%
-5%
18%
FY10
16%
11%
0%
-20%
25%
-27%
14%
37%
44%
9% -14%
5%
FY13
7%
46%
18%
-29%
26%
-8%
24%
16%
14%
34%
4%
-12%
FY12
11%
43%
34%
-17%
11%
-7%
17%
7%
23%
29%
7%
-6%
6%
FY11
3%
43%
16%
-73%
13%
0%
15%
27%
21%
32%
6%
-9%
8%
8%
11%
9%
65%
5%
15%
29%
14%
11%
14%
-14%
13%
33%
29%
2%
-2%
6%
FY13
38%
33%
46%
12%
32%
17%
43%
11%
-15% -33%
4%
7%
-29%
1%
FY10
Kenya Re
Fire
Fire
Motor
Motor Personal
Liability Marine
Theft
domestic industrial
private commercial accident
FY12
-217%
29%
37%
-4%
21%
7%
53%
-7%
-33% -26% 1424%
20%
-38%
-8%
FY11
564%
10%
-442%
-15%
51%
-8%
102%
28%
-29%
-334%
26%
-27%
-4%
FY10
-5%
10%
-723%
-15%
43%
-12%
177%
153%
-23% -18% 2340%
11%
18%
2%
Source: Association of Kenya Insurers, African Alliance Research. *For Britam, this is micro insurance. For CIC, this is described as micro solutions, and it is
unclear whether it encompasses micro insurance or not.
13 August 2014
Page 3 of 43

August 2014 Update
Theres still value despite significant rally in insurance shares. Since our initiation of
coverage in September 2013, insurance sector share prices have rallied by 200%
(Britam), 43% (Jubilee), 148% (CIC), 108% (Pan Africa), 16% (Kenya Re) and 50%
(Liberty). As such, we have been forced to cut our recommendation on a number of
these shares. Nevertheless, we still see significant value in Kenya Re, Jubilee, Liberty
based on their price-to-book ratios relative to their RoEs, as well as Britam due to
expected strong FY14 results.
New Insurance Act still on the way. The Insurance Regulatory Authority (IRA) is still
rolling out the risk-based supervision model using a more flexible regulatory
framework. The new Insurance Act, expected to become effective in the next twelve
months, will be much less prescriptive and the IRA will, just as the CBK does, issue
guidelines to direct insurers on how to apply the requirements of the Act.
13 August 2014
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August 2014 Update
Explaining the Warren Buffett criterion

We reproduce below some of Warren Buffetts explanations regarding assessment of
insurance companies:
What counts in insurance, our core business, is the amount of "Float" and its cost over
time.
Float is the total of loss reserves, loss adjustment expense reserves and unearned
premium reserves minus agents balances, prepaid acquisition costs and deferred
charges applicable to assumed reinsurance. And the cost of float is measured by our
underwriting loss.
"Float" is money that doesn't belong to us but that we temporarily hold. Float arises
because premiums are received before losses are paid, an interval that sometimes
extends over many years. loss events that occur today do not always result in our
immediately paying claims, because it sometimes takes many years for losses to be
reported (asbestos liability losses would be an example - the problems they signify lie
dormant for decades, before virulently manifesting themselves.), negotiated and settled.
During that time, the insurer invests the money. Insurance has provided a fountain of
funds with which we've acquired the securities and businesses that now give us an everwidening variety of earnings streams. This pleasant activity typically carries with it a
downside: The premiums that an insurer takes in usually do not cover the losses and
expenses it eventually must pay. That leaves it running an "underwriting loss", which is
the cost of float.
An insurance business has value if its cost of float over time is less than the cost the
company would otherwise incur to obtain funds. But the business is a lemon if its cost of
float is higher than market rates for money. If this cost (including the tax penalty) is higher
than that applying to alternative sources of funds, the value is negative. If the cost is lower,
the value is positive - and if the cost is significantly lower, the insurance business qualifies
as a very valuable asset.
We hold an exceptional amount of float compared to premium volume. Float is wonderful if it doesn't come at a high price. Its cost is determined by underwriting results, meaning
how the expenses and losses we will ultimately pay compare with the premiums we have
received. When an insurer earns an underwriting profit, float is better than free. In such
years, we are actually paid for holding other people's money. For most insurers, however,
life has been far more difficult: In aggregate, the property-casualty industry almost
invariably operates at an underwriting loss. When that loss is large, float becomes
expensive, sometimes devastatingly so.
Overall, our results have been good. True, we've had five terrible years in which float cost
us more than 10%. But in 18 of the 37 years Berkshire has been in the insurance business,
we have operated at an underwriting profit, meaning we were actually paid for holding
money. And the quantity of this cheap money has grown far beyond what I dreamed it
could when we entered the business in 1967 (Berkshire purchased National Indemnity
("NICO") in 1967).
For example, during 1990 we held about $1.6 billion of float slated eventually to find its
way into the hands of others. The underwriting loss we sustained during the year was $27
13 August 2014
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August 2014 Update
million and thus our insurance operation produced funds for us at a cost of about 1.6%.
There are important qualifications to this calculation - the fat lady has yet to gargle, let
alone sing, and we won't know our true 1967 - 1990 cost of funds until all losses from this
period have been settled many decades from now.
Since our float has cost us virtually nothing over the years, it has in effect served as equity.
Of course, it differs from true equity in that it doesn't belong to us. Nevertheless, let's
assume that instead of our having $3.4 billion of float at the end of 1994, we had replaced
it with $3.4 billion of equity. Under this scenario, we would have owned no more assets
than we did during 1995. We would, however, have had somewhat lower earnings because
the cost of float was negative last year. That is, our float threw off profits. And, of course,
to obtain the replacement equity, we would have needed to sell many new shares of
Berkshire. The net result - more shares, equal assets and lower earnings - would have
materially reduced the value of our stock. So you can understand why float wonderfully
benefits a business - if it is obtained at a low cost.
Accounting irony: Though our float is shown on our balance sheet as a liability, it has had a
value to Berkshire greater than an equal amount of net worth would have had.
The downward trend of interest rates in recent years has transformed underwriting losses
that formerly were tolerable into burdens that move insurance businesses deeply into the
lemon category. Some years back, float costing, say, 4% was tolerable because
government bonds yielded twice as much, and stocks prospectively offered still loftier
returns. Today, fat returns are nowhere to be found (at least we can't find them) and shortterm funds earn less than 2%. Under these conditions, each of our insurance operations,
save one, must deliver an underwriting profit if it is to be judged a good business.
Combined ratio and long tails
The combined ratio represents total insurance costs (losses incurred plus expenses)
compared to revenue from premiums.
Because the funds are available to be invested, the typical property-casualty insurer can
absorb losses and expenses that exceed premiums by 7% to 11% and still be able to break
even on its business. Again, this calculation excludes the earnings the insurer realizes on
net worth - that is, on the funds provided by shareholders. i.e. when the investment
income that an insurer earns from holding on to policyholders' funds ("the float") is taken
into account, a combined ratio in the 107-111 range typically produces an overall breakeven result, exclusive of earnings on the funds provided by shareholders.
However, many exceptions to this 7% to 11% range exist. For example, insurance covering
losses to crops from hail damage produces virtually no float at all. Premiums on this kind
of business are paid to the insurer just prior to the time hailstorms are a threat, and if a
farmer sustains a loss he will be paid almost immediately. Thus, a combined ratio of 100
for crop hail insurance produces no profit for the insurer.
At the other extreme, malpractice insurance covering the potential liabilities of doctors,
lawyers and accountants produces a very high amount of float compared to annual
premium volume. The float materializes because claims are often brought long after the
alleged wrongdoing takes place and because their payment may be still further delayed by
lengthy litigation. The industry calls malpractice and certain other kinds of liability
insurance "long-tail" business, in recognition of the extended period during which insurers
13 August 2014
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August 2014 Update
get to hold large sums that in the end will go to claimants and their lawyers (and to the
insurer's lawyers as well).
In long-tail situations a combined ratio of 115 (or even more) can prove profitable, since
earnings produced by the float will exceed the 15% by which claims and expenses overrun
premiums. The catch, though, is that "long-tail" means exactly that: Liability business
written in a given year and presumed at first to have produced a combined ratio of 115 may
eventually smack the insurer with 200, 300 or worse when the years have rolled by and all
claims have finally been settled.
The pitfalls of this business mandate an operating principle that too often is ignored:
Though certain long-tail lines may prove profitable at combined ratios of 110 or 115,
insurers will invariably find it unprofitable to price using those ratios as targets. Instead,
prices must provide a healthy margin of safety against the societal trends that are forever
springing expensive surprises on the insurance industry. Setting a target of 100 can itself
result in heavy losses; aiming for 110 - 115 is business suicide.
What's the preferable measure? Combined ratio or cost of float?
What should the measure of an insurer's profitability be? Analysts and managers
customarily look to the combined ratio - and it's true that this yardstick usually is a good
indicator of where a company ranks in profitability. We believe a better measure, however,
to be a comparison of underwriting loss to float developed.
This loss/float ratio, like any statistic used in evaluating insurance results, is meaningless
over short time periods: Quarterly underwriting figures and even annual ones are too
heavily based on estimates to be much good. But when the ratio takes in a period of years,
it gives a rough indication of the cost of funds generated by insurance operations. A low
cost of funds signifies a good business; a high cost translates into a poor business.
Profitability and low cost is all that counts (rather than underwriting volume (sales)
Property/casualty companies are judged by their cost of float. If our insurance operations
are to generate low-cost float over time, they must:
(a) underwrite with unwavering discipline (accept only those risks that you are able to
properly evaluate (staying within your circle of competence) and that, after you have
evaluated all relevant factors including remote loss scenarios, carry the expectancy of
profit. Ignore market-share considerations and be sanguine about losing business to
competitors that are offering foolish prices or policy conditions); and
(b) reserve conservatively; and
(c) avoid an aggregation of exposures that would allow a supposedly "impossible" incident
to threaten their solvency.
13 August 2014
Page 7 of 43

August 2014 Update
Valuation summary
Valuation metrics
Britam Jubilee
Market cap (USD m)

Daily liquidity (USD '000)
Price to book ratio (x, on FY13 NAV)
PE ratio (x, on FY13 EPS)
RoE, FY13
RoE, 2009 -2013 average
Dividend yield (on FY13 DPS)
Fair value (KES)
Upside/(downside) to current price
543
136
2.8
17.9
18%
14%
1.0%
25.91
4%
262
23
2.0
10.1
25%
31%
1.8%
568.28
50%
CIC
UAP Liberty
277
73
3.6
17.0
23%
24%
0.9%
7.89
-14%
267
1.6
14.0
14%
15%
1.5%
139.31
27%
106
18
1.7
9.0
22%
23%
5.6%
23.34
30%
Pan
Africa
Kenya
Re
137
18
3.6
9.5
44%
33%
3.6%
98.76
-20%
143
100
0.7
4.1
18%
18%
3.4%
48.87
175%
Source: Company filings, African Alliance research.
Fair value (KES)

FY13 NAV per share
Forecast annual NAV growth*
Forecast NAV - 2 years out
Exit price to book ratio (x)
Exit price
FY13 DPS
Forecast annual DPS growth*
Forecast DPS - next 2 years
Exit price + forecast dividends
Cost of equity*
Discount period
Discount factor at cost of equity
Fair value
Britam
Jubilee
CIC
UAP
8.96
25%
13.99
2.5
35.67
0.25
28%
0.41
36.08
18%
2.00
0.72
25.91
193.32
22%
287.73
2.8
809.07
7.00
15%
9.26
818.32
20%
2.00
0.69
568.28
2.56
35%
4.66
2.3
10.76
0.08
65%
0.23
10.99
18%
2.00
0.72
7.89
69.96
30%
118.24
1.6
191.77
1.70
14%
2.21
193.98
18%
2.00
0.72
139.31
Liberty Pan Africa

10.61
10%
12.84
2.4
30.24
1.00
50%
2.25
32.49
18%
2.00
0.72
23.34
34.77
13%
44.40
2.9
129.31
4.50
35%
8.20
137.51
18%
2.00
0.72
98.76
Source: Company filings, African Alliance research. * Based on average growth 2007-2013, as adjusted for
sustainability. ** Risk free rate 12%, beta 1.2, risk premium 5%.
P/B ratios down from historical levels
RoE vs P/B regression
Only Jubilee and Kenya Re are trading within historical

price-to-book ranges, while Liberty is not too far off
Jubilee, Kenya Re and Liberty look cheap relative to peers.

4.0
4.0
3.5
Pan Africa
CIC
Britam
Jubilee
Liberty
Kenya Re
Kenya Insurers: RoE vs P/B
3.5
CIC
Pan Africa
Britam
3.0
Price-to-book
3.0
2.5
2.0
1.5
2.5
Jubilee
2.0
UAP
Liberty
1.5
1.0
1.0
Kenya Re
0.5
0.5
Jun-14
Feb-14
Oct-13
Jun-13
Oct-12
Feb-13
Jun-12
Feb-12
Oct-11
Jun-11
Oct-10
Feb-11
Jun-10
Feb-10
Oct-09
Jun-09
10%
15%
20%
25%
30%
35%
Return on equity
Source: Company filings, African Alliance Research
13 August 2014
Page 8 of 43

August 2014 Update
Industry update: Upgrading with a new Insurance Act

The insurance bill for the new Insurance Act is expected to be tabled before parliament for
debate and approval possibly in 2Q14 or 1H15 at the latest. The main changes contained in
the Insurance Act are:
a. The current law is prescriptive and compliance-based while the envisaged law is riskbased.
b. The current law is detailed while the envisaged outlines the principles and the details
will be contained in regulations to be issued by the Insurance Regulatory Authority
(IRA).
c. Insurers will be required to have actuarial control, risk management, internal audit
and compliance functions. These functions will report quarterly to the board of
directors and will also compile and submit reports to the Insurance Regulatory
Authority (IRA).
d. Insurers will be required to conduct internal assessments so as to determine their
capital requirements based on risk and actuarial evaluations. As such the current
minimum capital requirement (10% of gross premiums) which applies across the
board will be replaced by different requirements for different insurers. The previous
capital requirements only took insurance risk into account, but the new regulations
factor in investment risk and operational risk as well.
From the above, it is apparent that the risk-based supervision model is premised upon
self-assessment and transparency. In order to enhance the integrity of the process, there
will be checks and balances such as back testing and forward testing of information
submitted.
In the meantime, The Insurance Motor Vehicle Third Party Risks (Amendment), Bill 2013
was passed into law under the current insurance Act. The amendment outlines a schedule
of structured payments of compensation to provide a maximum compensation in respect
of death or fix compensation for each body part based on individual income levels, nature
and extent of injury sustained and lower insurance premiums. This is aimed at curbing
collusion in facilitating fraudulent claims, although some insurance industry players
indicate that it has had the opposite effect in other countries.
13 August 2014
Page 9 of 43

August 2014 Update
P&L analysis: Operating efficiency the RoE differentiator

Our comparative P&L analysis table reveals that (a) Despite having higher net loss ratios
than Britam, Jubilee and CIC have the consistently highest RoEs due because they both
have much lower expense ratios than Britam (b) Only Britam makes more premiums from
long term insurance rather than short term insurance (c) Insurance RoAs continue to
outperform the banks, with Kenya Res RoA in the double digits (d) only Britam and UAP
saw higher premium growth in 2013 than in 2012 (e) Dividend payout ratios are largely at
or below 20%.
Gross premium revenue mix
FY13
FY12
FY11
Gross claims & benefits mix
FY13
FY12
FY11
Net earned premium growth
Net claims & benefits growth
Net claims/net premiums

(Short term insurance)
Investment income growth
Investment income/total income
Return on investments
(investment income + fair value
gains/losses)
Expenses & comms/premiums
RoA
RoE
Dividend payout
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
Short term insurance

Long term business
Long term business
Long term business
Long term business
Long term business
Long term business
Britam
Jubilee
CIC
43%
57%
42%
58%
38%
62%
25%
75%
41%
59%
38%
62%
30%
21%
35%
33%
136%
-41%
59%
59%
56%
26%
341%
-145%
42%
43%
-62%
25%
25%
-13%
57%
55%
53%
6%
8%
-8%
18%
24%
-20%
18%
18%
-14%
85%
15%
85%
15%
84%
16%
67%
33%
70%
30%
70%
30%
15%
28%
37%
28%
40%
9%
68%
69%
64%
55%
52%
-38%
31%
25%
22%
16%
14%
12%
27%
27%
28%
5%
5%
6%
25%
30%
31%
21%
20%
16%
70%
30%
70%
30%
65%
35%
68%
32%
68%
32%
60%
40%
26%
36%
51%
30%
47%
57%
65%
63%
56%
1%
169%
60%
13%
16%
9%
14%
16%
9%
32%
32%
34%
9%
11%
6%
23%
28%
17%
16%
16%
34%
UAP Liberty Pan Africa Kenya Re

89%
11%
91%
9%
92%
8%
79%
21%
81%
19%
83%
17%
38%
26%
25%
46%
35%
21%
77%
23%
78%
22%
75%
25%
76%
24%
47%
53%
71%
29%
2%
-6%
17%
129%
-4%
22%
26%
16%
13%
17%
11%
41%
43%
39%
6%
7%
7%
13%
16%
19%
12%
16%
23%
-18%
95%
-5%
7%
36%
40%
17%
20%
40%
44%
4%
3%
24%
21%
50%
25%
0%
100%
0%
100%
0%
100%
0%
100%
0%
100%
0%
100%
0%
55%
-7%
-4%
194%
-37%
103%
108%
57%
17%
1,168%
-118%
32%
27%
-5%
15%
17%
-2%
33%
29%
50%
7%
5%
4%
42%
29%
22%
35%
41%
43%
88%
12%
86%
14%
84%
16%
92%
8%
94%
6%
85%
15%
22%
23%
34%
16%
38%
44%
57%
62%
51%
-14%
49%
4%
24%
31%
27%
13%
19%
15%
39%
42%
41%
12%
13%
11%
18%
21%
17%
14%
10%
11%
13 August 2014
Page 10 of 43

August 2014 Update
Balance Sheets reveal high solvency margins

Our Balance Sheet analysis table reveals that (a) Jubilee and Liberty are the only insurers
with solvency margin ratios below 100% (c) Britam and Pan Africa have a high exposure to
equities compared to the other insurers (d) UAP and Kenya Re have a high exposure to
investment properties relative to the other insurers (e) Jubilee, Pan Africa and Kenya Re
have the highest exposure to government securities.
Britam Jubilee
Investments/claims & benefits liabilities
(solvency margin proxy)
Investments mix (% of total assets)
FY13
FY12
Claims & benefits liabilities mix

(% of total assets)
FY13
FY12
Investments growth
Claims & benefits liabilities growth
NAV growth
FY13
FY12
FY11
Investment properties
Government securities
Public equities
Unquoted shares
Unit trusts
Bank deposits
Associate companies
Public equities
Unquoted shares
Unit trusts
Bank deposits
Associate companies
Insurance contracts
Deposit admin contracts
Investment contracts
Unearned premiums
Insurance contracts
Deposit admin contracts
Investment contracts
Unearned premiums
FY13
FY12
FY11
FY13
FY12
FY11
FY13
FY12
FY11
135%
131%
140%
8%
17%
29%
17%
6%
5%
19%
31%
17%
6%
6%
26%
17%
14%
4%
29%
16%
14%
4%
32%
35%
-6%
28%
44%
15%
36%
46%
-19%
CIC
UAP Liberty Pan Africa Kenya Re
92%
90%
89%
7%
31%
12%
121%
123%
125%
21%
14%
175%
187%
130%
34%
14%
13%
10%
11%
8%
28%
11%
20%
6%
18%
15%
33%
13%
11%
12%
13%
25%
37%
26%
12%
30%
16%
8%
10%
26%
35%
24%
35%
14%
14%
9%
11%
31%
25%
30%
30%
23%
27%
33%
30%
20%
22%
14%
29%
58%
16%
32%
54%
22%
27%
65%
14%
32%
77%
14%
40%
24%
23%
27%
150%
0%
70%
73%
125%
117%
121%
4%
26%
21%
18%
245%
241%
217%
23%
27%
10%
21%
15%
5%
25%
21%
9%
25%
23%
10%
25%
18%
33%
35%
8%
32%
6%
38%
20%
27%
38%
8%
32%
7%
41%
13%
-14%
43%
59%
28%
26%
52%
8%
27%
24%
16%
21%
7%
18%
28%
4%
15%
19%
12%
20%
9%
12%
22%
11%
19%
27%
13%
17%
14%
14%
23%
27%
9%
13 August 2014
Page 11 of 43

August 2014 Update
Short term business surprisingly outperforms long term

An analysis of operating segment profitability shows that (a) With the exception of Britam
and contrary to well established perception, short term insurance contributes far more to
the bottom line than long term business does, this despite long term business being
allocated the bigger proportion of investment income.
Net premium revenue mix
FY13
FY12
FY11
Investment income allocation FY13
FY12
FY11
Segment profit contribution
FY13
FY12
FY11

Long term business
Long term business
Long term business
Long term business
Asset management
Property
Corporate & other
Long term business
Asset management
Property
Corporate & other
Long term business
Asset management
Property
Corporate & other
Long term business
Asset management
Property
Corporate & other
Long term business
Asset management
Property
Corporate & other
Long term business
Asset management
Property
Corporate & other
Britam
Jubilee
CIC
40%
60%
39%
61%
34%
66%
5%
77%
78%
22%
80%
20%
78%
22%
21%
77%
69%
31%
68%
32%
64%
36%
67%
33%
51%
44%
23%
77%
0%
100%
0%
100%
0%
100%
0%
100%
3%
14%
4%
58%
21%
71%
53%
40%
32%
68%
0%
100%
37%
1%
30%
27%
67%
52%
43%
27%
73%
0%
100%
93%
8%
52%
31%
66%
34%
0%
100%
89%
1%
49%
21%
97%
3%
0%
100%
108%
-11%
82%
18%
69%
16%
57%
8%
7%
13%
22%
24%
5%
0%
49%
-17%
22%
-3%
0%
99%
UAP
Liberty Pan Africa Kenya Re

88%
12%
87%
13%
85%
15%
0%
100%
13 August 2014
Page 12 of 43

August 2014 Update
Regional subsidiaries more profitable than Kenya?

The geographical segment analysis table reveals that regional subsidiaries (especially
Uganda and Tanzania) seem to be more profitable relative to revenue generated compared
to Kenya.
Net premium revenue mix
FY13
FY12
FY11
Net profit contribution
FY13
FY12
FY11
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Kenya
Uganda
South Sudan
Tanzania
Rwanda
Burundi
Mauritius
Britam
Jubilee
97%
2%
1%
76%
9%
11%
99%
1%
3%
79%
9%
CIC
UAP
84%
75%
15%
10%
86%
10%
100%
1%
81%
9%
Liberty Pan Africa Kenya Re
73%
15%
9%
2%
1%
16%
14%
71%
20%
9%
88%
12%
9%
55%
35%
9%
61%
34%
75%
26%
4%
2%
-5%
82%
96%
6%
6%
84%
4%
50%
48%
4%
18%
16%
70%
8%
1%
91%
9%
-3%
13 August 2014
Page 13 of 43

August 2014 Update
Britam: Voracious appetite

Despite an expected surge in finance costs arising from the bond, Britams
earnings this year should be lifted considerably by the rally in Equity Banks
share. The company continues to be on an expansion spree, with the
acquisition of Real Insurance giving it access to at least three new geographies
in the region. The company has also been reported as mulling over acquiring a
stake in the Kenyan operations of Nigerian insurer Continental Re. Meanwhile,
Britam has raised KES 6bn (USD 70m) via a medium term bond to fund the
companys property plans as well as regional subsidiaries. The share has
rallied 200% since our initiation in September but we now update our
recommendation to HOLD because, while the price-to-book ratio is rather high
relative to its RoE, we expect that RoE could recover significantly due to the
Equity Bank share.
We anticipate strong 1H14 and FY14 earnings despite surge in finance

costs. Britam has raised KES 6bn from its five-year medium term note at a
13% fixed interest rate. The bond proceeds will be used for property (50%),
strategic private equity transactions (40%, such as the 2013 Acorn and 2014
Housing Finance deals) as well as ICT and regional investments (10%). The
bond will cost Britam KES 680m, or 20% of FY13 PAT, yet the income from
the related property investments will probably only start coming through in
2016 via revaluations as the properties start to develop. Hence there will be
an earnings drag. However, the 50% ytd rise in Equity Banks share price
will earn Britam approximately KES 2.7bn (one half of 10% of the increase
in Equity Bank market cap this year) alone due to Britams 10% stake
(Britam accounts for half of the changes in fair value of its Equity Bank
stake through OCI, hence the overall KES 5.5bn gain wont all go through
the P&L). The KES 2.7bn is equivalent to 90% of Britams FY13 earnings
and should therefore more than compensate for the interest expense on
the bond.
Consummating Real, but will it add value? Britams acquisition of a 99%

stake in Real Insurance, a purely short term insurer, for a purchase
consideration of KES 1.4bn (USD 16m, paid via 60% cash and 40% equity)
was completed on August 1st. Britam is acquiring Real Insurance so as to
move its short term market share position as well as to penetrate the
Tanzania market (where Real has 26% market share) and other regional
markets where Real has a presence, like Mozambique and Malawi. Britam
is now focussed on talent mapping probably to identify and eliminate
duplicated roles, and may appoint McKinsey as integration consultants.
Reals net income has averaged 3% of Britams in recent years, so it does
not appear that there will be significant earnings accretion in the near
term, especially considering integration costs that will be incurred over the
next two years. Britam management however see opportunities to improve
Reals performance by professionalising the working culture there as well
as improving the expense management process.
Conti Re next up? Britam was recently reported in the media as looking to
acquire a 30% stake in Continental Re. We understand however that this
would be a private equity transaction of Britams asset management
business and not an investment by the holding company.
*** HOLD ***

Current price
KES
25.00
Fair value
KES
25.91
Upside/(downside)
Target price
KES
Price return
Dividend yield (ntm)
1%
Forecast total return
21%
4%
30.05
20%
12 month high/low
KES
YTD performance
25.00/7.90
63%
1yr performance
217%
Issued shares
1,891
Market cap (m)
USD
Free float
543
20%
Free float market cap(m)
USD
109
Monthly value traded
USD
3.0
Year end
December
Bloomberg
BRIT KN
Reuters
BRIT NR
13 August 2014
Page 14 of 43

August 2014 Update
Property strategy. Britam plans to deploy the bond proceeds across its five property
themes which encompass commercial mixed use, residential housing, master planned
developments, budget hotels and shopping malls. To this end, Britam plans to utilize its
21-acre land bank in Ngong, 10 acres on Mombasa road (in Nairobi) and 2 acres in the
prime Kilimani area of Nairobi. Britam is targeting the lower middle income segment and
the informal business sector rather than the top end of the market where demand may be
softer.
Superior underwriting margins could see some pressure. As outlined in our initiation of
coverage note (Kenya Insurance Sector: Against the odds) published in September last
year, Britams underwriting margins are often double or triple those of its competition.
The companys ratio of premium earned to loss insured is also usually double that of its
peers, although this came down significantly in 2013. Management put these disparities
down to prudent underwriting profitable insurance categories like personal accident and
motor commercial insurance (the latter often from bancassurance) form a large
proportion of the companys premiums. High-severity categories of insurance such as fire
industrial and marine insurance are heavily re-insured, and Britam also earns
reinsurance commissions as well. Britam also forfeits potential customers (and the
related premiums) where the risk is deemed to be too high, in categories such as group
life insurance. Unlike other insurers who will underwrite risky customers and aim to
compensate on the investment income side, Britam insists on making underwriting profit
on its own before factoring in investment income. Reliable payment of claims ensures
recurring customers. However, the insurers foray into microinsurance is expected to
compress margins somewhat until the business line generates sufficient volumes because
this line is predominantly focussed on medical insurance and is experiencing considerable
anti-selection (people signing up for the policies tend to be those that are more likely to
fall sick) at this stage.
Housing Finance to become a subsidiary, well, almost. Britams planned acquisition of
Equity Banks 25% stake in Housing Finance will see the insurer now own 46% of HF. The
acquisition of the additional stake in HF should also result in an additional 5% annual
earnings accretion to Britams bottom line going forward, and possibly top line as well if
Britam elects to that it has sufficient control of HF to account for it as a subsidiary despite
being short of an ownership stake. The acquisition of HF is aligned with Britams property
strategy in terms of financing (now that HF will be a deposit taker) and development and
will also help grow the retail bancassurance target market.
13 August 2014
Page 15 of 43

August 2014 Update
Short term insurance metrics: Britam vs Real

Gross
Fire
Fire
premium mix Aviation Engineering domestic industrial Liability Marine
Britam FY12
FY11
FY10
Real
FY12
FY11
FY10
Market share
Britam FY12
FY11
FY10
Real
FY12
FY11
FY10
Reinsurance
ratio
Britam FY12
FY11
Real
FY12
FY11
Net loss ratio

Britam FY12
Real
FY12
Underwriting
margin
Britam FY12
FY11
FY10
Real
FY12
FY11
FY10
0%
0%
0%
0%
0%
0%
4%
3%
3%
11%
6%
4%
2%
2%
2%
1%
2%
2%
5%
5%
5%
9%
16%
11%
1%
1%
1%
2%
3%
1%
6%
6%
6%
6%
2%
2%
Fire
Fire
Aviation Engineering domestic industrial Liability Marine
0%
0%
0%
0%
0%
0%
5%
4%
4%
9%
4%
4%
5%
4%
4%
3%
3%
3%
2%
2%
2%
3%
4%
3%
1%
1%
1%
4%
3%
2%
7%
6%
5%
5%
1%
1%
Fire
Fire
82%
52%
67%
61%
33%
34%
18%
23%
81%
78%
83%
59%
74%
79%
36%
13%
82%
80%
86%
71%
Fire
Fire
37%
11%
11%
27%
155%
198%
-200%
38%
48%
105%
Fire
Fire
21%
17%
16%
-2%
24%
-49%
44%
30%
11%
25%
-16%
24%
-10%
12%
0%
-18%
-7%
-34%
69%
-91%
-20%
6%
1%
60%
6%
21%
25%
-12%
21%
-15%
Motor
Motor Personal
private commercial accident Theft WIBA Misc Medical Total
13%
17%
17%
21%
28%
32%
23%
25%
22%
21%
26%
26%
12%
15%
14%
6%
6%
11%
3%
3%
3%
2%
2%
2%
2%
2%
3%
4%
5%
6%
2%
2%
2%
1%
5%
3%
27% 100%
19% 100%
23% 100%
14% 100%
1% 100%
0% 100%
Motor
Motor Personal
3%
3%
3%
4%
4%
4%
4%
4%
3%
3%
3%
3%
12%
13%
10%
5%
3%
6%
3%
3%
3%
2%
1%
1%
2%
1%
1%
2%
2%
2%
2%
2%
2%
1%
4%
3%
7%
5%
6%
2%
0%
0%
4%
4%
3%
3%
3%
3%
Motor
Motor Personal
4%
3%
3%
3%
3%
3%
2%
2%
43%
31%
65%
69%
3%
7%
1%
2%
4% 7%
3% 8%
3% 71%
5% 18%
2%
3%
35%
-11%
20%
19%
33%
21%
Motor
Motor Personal
63%
61%
49%
43%
12% 52% 36% 6%

57% 77% 47% 63%
48% 47%
12% 49%
Motor
Motor Personal
10%
7%
-27%
10%
0%
-1%
19%
28%
14%
27%
14%
21%
36%
38%
37%
-10%
-14%
-7%
18%
11%
44%
-22%
9%
40%
22%
72%
9%
12%
6%
21%
55%
25%
-14%
69%
10%
15%
7% 16%
-5% 18%
5% 9%
-2% 6%
16% 4%
2%
13 August 2014
Page 16 of 43

August 2014 Update
Britam ratios
FY08
FY09
FY10
FY11
FY12
FY13
76%
14%
86%
5%
41%
52%
146%
-62%
51%
43%
51%
42%
Britam P&L trend (y/y change)
FY08
FY09
FY10
FY11
FY12
FY13
Gross earned premium revenue
26%
19%
15%
29%
22%
29%
Net earned premium revenue
39%
17%
12%
35%
21%
30%
Investment and other income
-80%
-62%
2315%
-145%
141%
26%
Total income
-24%
3%
136%
-62%
247%
29%
9%
24%
91%
-42%
197%
3%
Net claims and benefits payable
10%
26%
93%
-41%
136%
33%
Expenses and commissions
35%
21%
5%
30%
27%
35%
Profit before tax
-84%
-198%
954%
-160%
265%
12%
Profit after tax
-88%
-273%
741%
-172%
229%
5%
RoA**
2%
-3%
13%
-8%
8%
6%
RoE**
4%
-7%
34%
-20%
24%
18%
Earnings per share*
-88%
-273%
741%
-172%
229%
5%
Dividend per share*
0%
0%
67%
35%
68%
0%
Dividend payout ratio**
73%
119%
39%
23%
16%
12%
Change in NAV
12%
-19%
103%
-19%
46%
36%
Premium income to total income

Investment income to total income
Gross claims and benefits payable
*Based on current number of issued shares. **Actual ratio, not change in ratio
13 August 2014
Page 17 of 43

August 2014 Update
Britam premium mix
FY08
FY09
FY10
FY11
FY12
FY13
Gross premiums
Long term insurance premiums
Ordinary life premiums
Group life premiums
Short term insurance business
premiums
Motor premiums
Personal accident and medical
premiums
Fire premiums
Marine premiums
Other short term premiums
Outward reinsurance
Net earned premium
100%
74%
59%
15%
100%
66%
51%
16%
100%
62%
48%
14%
100%
62%
46%
16%
100%
58%
41%
16%
100%
57%
43%
14%
26%
34%
38%
38%
42%
43%
6%
11%
14%
15%
17%
15%
12%
14%
14%
13%
15%
15%
3%
2%
3%
-12%
88%
3%
2%
4%
-13%
87%
3%
3%
5%
-16%
84%
3%
3%
5%
-12%
88%
3%
2%
5%
-13%
87%
3%
2%
8%
-12%
88%
Britam premium growth
FY08
FY09
FY10
FY11
FY12
FY13
26%
27%
26%
19%
56%
7%
15%
30%
7%
29%
28%
30%
22%
36%
13%
29%
31%
28%
FY08
FY09
FY10
FY11
FY12
FY13
100%
100%
100%
100%
100%
100%
75%
66%
76%
94%
36%
45%
31%
28%
33%
40%
13%
12%
29%
29%
21%
19%
6%
8%
15%
9%
22%
35%
17%
25%
-32%
23%
30%
38%
17%
15%
3%
1%
3%
-6%
-2%
-4%
94%
41%
8%
6%
1%
24%
1%
-25%
-1%
-25%
75%
25%
10%
10%
0%
1%
4%
-4%
-1%
-3%
96%

Short term business
Long term insurance business
Britam claims mix
Claims and policy holders benefits
composition:
Long term business
Death, maturity and surrender
benefits
Bonuses
Increase in policy holders'
liabilities
Interest payments/increase
(decrease) in unit value
Short term insurance business
Motor
Fire
Marine
Other
Less reinsurer's share:
Long term business
Short term business
Net insurance benefits and claims
25%
8%
13%
1%
1%
2%
-9%
-3%
-6%
91%
34%
17%
9%
1%
2%
4%
-8%
-3%
-4%
92%
24%
12%
8%
2%
0%
1%
-7%
-2%
-4%
93%
Britam claims & policyholders

benefits growth
FY08
FY09
FY10
FY11
FY12
FY13
9%
46%
1%
24%
71%
9%
91%
33%
121%
-42%
-6%
-28%
197%
222%
14%
3%
-39%
31%
Gross claims
Short term claims
Long term claims
13 August 2014
Page 18 of 43

August 2014 Update
Britam investment income mix
FY08
FY09
FY10
FY11
FY12
FY13
Total
Fair value gains/(losses) on financial assets at fair value through profit or loss
Interest from government securities
Other interest receivable
Fair value gain on investment property
Dividends receivable from equity investments
Rental income from investment properties
Realised losses on available for sale financial assets
Realised gains on sale of non-current assets
Interest on bank deposits
Sale of investment property
Realised gain on government securities at fair value
Realised gains/losses on quoted investments at fair value through P&L
Realised gains on sale of unit trusts
Other
100%
-30%
23%
31%
34%
23%
9%
0%
1%
5%
0%
3%
100%
-296%
95%
78%
84%
97%
28%
-3%
1%
15%
0%
1%
95%
76%
5%
3%
2%
5%
1%
0%
0%
1%
0%
2%
100%
159%
-14%
-5%
-10%
-20%
-2%
0%
0%
-11%
0%
0%
100%
60%
13%
3%
4%
9%
1%
0%
0%
10%
0%
0%
0%
0%
0%
3%
1%
100%
53%
13%
2%
16%
9%
1%
0%
0%
3%
0%
0%
3%
1%
0%
Britam balance sheet composition (expressed as a % of assets)
FY08
FY09
FY10
FY11
FY12
FY13
Quoted shares at fair value through profit and loss
Unit trusts through profit and loss
Quoted shares at fair value through other comprehensive income
Government securities held to maturity
6%
33%
6%
26%
5%
7%
28%
13%
20%
10%
5%
30%
17%
24%
8%
5%
17%
17%
13%
17%
5%
17%
17%
14%
19%
8%
16%
17%
13%
17%
Insurance contract liabilities

Amounts payable under deposit administration contracts
Liabilities under investment contracts
Unearned premium reserve
30%
12%
5%
3%
30%
17%
10%
3%
25%
13%
13%
3%
29%
16%
12%
4%
29%
16%
14%
4%
26%
17%
14%
4%
13 August 2014
Page 19 of 43

August 2014 Update
UAP: The medicine men

We initiate coverage on UAP Insurance with a BUY recommendation. Currently
trading on the OTC market rather than the NSE itself, UAP is the third largest
short term insurer in Kenya. The company has managed to post impressive
underwriting profits despite insuring tricky segments such as fire industrial and
medical insurance. The company has also turned around its life and medical
insurance businesses by improving management as well as internal processes
and the overall customer experience. Risks include a high dependence on
medical insurance and underwriting more risk than its peers relative to
premiums earned. UAP is issuing a KES 2bn bond and also intends to list via
introduction in 2H15.
Introducing UAP. Short term insurance comprises 90% of the companys

revenues, with life insurance making up 10%. Medical, motor and fire
industrial insurance account for almost 80% of short term premiums, while
group life encompasses approximately 70% of the companys life insurance
business. UAP has operations in Kenya, Uganda and South Sudan (where it
has a 40% market share, all short term insurance) and is owned by a mix of
local (Centum) and international private equity funds as well as local
businessmen. UAP also has a sizeable property portfolio including the
buildings in which Equity Bank and Telkom Kenya are headquartered.
Meanwhile, UAP Towers which will be one of the tallest buildings in subsaharan Africa is slated for completion in May next year.
What we like about UAP. UAPs loss ratio of 52% in 2012 was better than the
industry average of 56% as well as peers Jubilee and CIC. The companys
underwriting margins are better than any of the listed insurers, with the
exception of Britam, and the company is able to churn underwriting profits
in tricky segments such as fire industrial and medical insurance.
What are the potential hazards? Medical insurance comprised 40% of the
companys short term insurance premiums in 2012. The life business is also
70% skewed towards the ultra-competitive group life insurance. UAPs ratio
of premium earned to loss insured is much lower than that of peers,
indicating that the company assumes much higher risk in relation to its
premium revenues. The company also has lower actuarial surpluses
compared to its peers.
Capital raise was done for regional and property strategies. In 2012, UAP
raised KES 750m (USD 9m) via a public offer and an additional KES 4bn
(USD 46m) from private equity funds Swedfund, AfricInvest and Aureos. The
monies are being used to expand the companys operations in Rwanda,
Tanzania and the DRC (brokerage only in this case) as well as to fund the
companys property projects in Kenya, Rwanda and South Sudan.
Whats the strategy going forward? UAPs strategy is focussed on

diversifying revenues (organic & inorganic growth, growing in investment
management, and geographic expansion), managing costs (via a shared
services centre) and service excellence (product innovation and
distribution).
*** BUY ***

Current price
KES
110.00
Fair value
KES
139.31
Upside/(downside)
Target price
KES
Price return
2%
50%
27%
48%
12 month high/low
KES
YTD performance
1yr performance
Issued shares
Market cap (m)
USD
Free float
211
267
10%
USD
USD
Year end
162.99
27
December
Bloomberg
Reuters
13 August 2014
Page 20 of 43

August 2014 Update
UAP ratios (short term insurance business)

Gross
Fire
Fire
premium mix Aviation Engineering domestic industrial Liability Marine
FY12
FY11
FY10
Market share
FY12
FY11
FY10
Reinsurance
ratio
FY12
Reinsurance
ratio
FY12
Underwriting
margin
FY12
FY11
FY10
0%
0%
0%
2%
2%
2%
2%
2%
2%
13%
13%
11%
2%
3%
2%
2%
3%
4%
Fire
Fire
0%
0%
0%
5%
6%
6%
10%
10%
10%
10%
10%
8%
9%
9%
5%
5%
6%
7%
Fire
Fire
67%
17%
77%
50%
39%
Fire
Fire
7%
24%
26%
10%
61%
Fire
Fire
37%
-7%
17%
24%
45%
16%
13%
20%
7%
23%
11%
11%
2%
40%
12%
Motor
Motor Personal
17%
19%
20%
17%
20%
22%
2%
3%
3%
3%
3%
3%
4%
5%
6%
3%
2%
3%
32% 100%
25% 100%
22% 100%
Motor
Motor Personal
8%
8%
8%
6%
6%
6%
4%
4%
4%
6%
6%
6%
6%
6%
7%
7%
5%
6%
15%
13%
12%
8%
8%
7%
Motor
Motor Personal
3%
4%
28% 24%
4% 86%
2% 19%
Motor
Motor Personal
62%
47%
49% 39% 20% 76%
60% 52%
Motor
Motor Personal
0%
8%
-9%
18%
22%
13%
-12% 14% 37% -2%

12% -7% 30% 10%
38% 30% 28% 5%
2% 9%
-7% 11%
-19% 3%
13 August 2014
Page 21 of 43

August 2014 Update
Other UAP ratios

FY08
FY09
FY10
FY11
FY12
FY13
79%
12%
81%
12%
74%
20%
77%
16%
69%
26%
71%
22%
FY08
FY09
FY10
FY11
FY12
FY13
19%
27%
30%
23%
28%
37%
20%
33%
24%
25%
26%
38%
-64%
33%
120%
-4%
129%
17%
-1%
29%
37%
20%
40%
34%
8%
62%
33%
8%
52%
41%
16%
72%
24%
21%
35%
46%
26%
15%
30%
9%
42%
30%
Profit before tax
-55%
-38%
183%
54%
44%
27%
Profit after tax
-63%
-36%
225%
36%
50%
31%
RoA**
4%
2%
6%
7%
7%
6%
RoE**
6%
4%
13%
19%
16%
13%
Earnings per share*
-66%
-39%
209%
68%
45%
29%
Dividend per share*
-49%
0%
0%
0%
0%
0%
73%
119%
39%
23%
16%
12%
-16%
-10%
27%
0%
150%
27%

UAP P&L trend (y/y change)
Total income

Change in NAV
13 August 2014
Page 22 of 43

August 2014 Update
UAP premium mix
FY08
FY09
FY10
FY11
FY12
FY13

Short term business:
Engineering
Fire
Liability
Marine
Motor
Workmen's compensation
Personal accident (includes
medical up to 2010)
Theft
Medical
Others
Ordinary life
Group life
Outward reinsurance
Net earned premium
100%
92%
4%
16%
3%
6%
29%
3%
100%
91%
5%
13%
3%
6%
30%
5%
100%
94%
3%
13%
3%
4%
35%
6%
100%
92%
4%
14%
2%
4%
34%
7%
100%
91%
4%
12%
2%
3%
36%
5%
100%
89%
3%
13%
3%
3%
30%
4%
24%
6%
23%
6%
23%
7%
21%
4%
21%
4%
1%
8%
1%
7%
-24%
76%
2%
9%
4%
5%
-23%
77%
1%
6%
2%
4%
-20%
80%
3%
8%
3%
5%
-23%
77%
3%
9%
4%
5%
-21%
79%
20%
4%
5%
3%
11%
5%
7%
-23%
77%
UAP premium growth
FY08
FY09
FY10
FY11
FY12
FY13
19%
18%
31%
27%
31%
-7%
30%
27%
63%
23%
22%
32%
28%
24%
68%
37%
36%
41%

UAP claims mix
FY08
FY09
FY10
FY11
FY12
FY13
Total
Short term business
Engineering
Fire
Liability
Marine
Motor
Personal accident (includes
medical up to 2010)
Theft
Medical
Others
Death, maturity and benefits
payable
Increase in policy owners'
liabilities
Interest payable on deposit
administration and unit linked
investment contracts
Amounts recoverable from
reinsurers
97%
95%
2%
4%
1%
4%
43%
1%
100%
89%
5%
2%
0%
4%
38%
2%
100%
81%
5%
8%
1%
3%
30%
3%
100%
83%
0%
6%
3%
2%
34%
4%
100%
81%
8%
5%
0%
4%
27%
2%
100%
79%
0%
6%
0%
2%
25%
2%
32%
32%
28%
30%
4%
1%
7%
4%
3%
4%
1%
3%
1%
11%
1%
19%
1%
17%
2%
27%
2%
19%
3%
37%
4%
21%
4%
5%
8%
8%
9%
9%
-1%
2%
8%
7%
7%
10%
0%
4%
3%
2%
3%
1%
-15%
-10%
-16%
-6%
-16%
-13%
85%
90%
84%
94%
84%
87%
UAP claims & policyholders

benefits growth
FY08
FY09
FY10
FY11
FY12
FY13
Gross claims
Short term claims
Long term claims
8%
11%
-63%
62%
53%
550%
33%
21%
130%
8%
10%
-2%
52%
48%
70%
41%
38%
52%
13 August 2014
Page 23 of 43

August 2014 Update
UAP investment income mix
FY08
FY09
FY10
FY11
FY12
FY13
Total
Bank deposit interest
Loan interest receivable
Miscellaneous income
Gain in foreign exchange
Interest on debentures
Fair value gains on investment properties
Fair value (losses)/gains on equity assets at fair value through profit or loss
Realised gains on sale of financial assets
Fair value (losses)/gains on government securities assets at fair value
through profit or loss
Investment fees
100%
23%
7%
2%
37%
3%
-3%
0%
49%
0%
21%
23%
100%
19%
8%
3%
38%
1%
-1%
0%
24%
18%
0%
3%
100%
10%
4%
2%
18%
0%
0%
0%
33%
9%
0%
0%
100%
12%
7%
1%
20%
1%
3%
0%
66%
-23%
13%
0%
100%
15%
12%
1%
9%
0%
0%
3%
47%
8%
7%
0%
100%
18%
12%
1%
9%
0%
-2%
4%
40%
16%
5%
0%
-61%
-12%
23%
0%
1%
0%
-3%
-5%
UAP balance sheet composition (expressed as a % of assets)
FY08
FY09
FY10
FY11
FY12
FY13
Receivables arising out of direct insurance arrangements
Equity instruments
Equity investment at fair value through OCI
Deposits with financial institutions
29%
6%
29%
0%
10%
5%
30%
6%
24%
0%
11%
7%
26%
6%
27%
0%
11%
7%
35%
7%
17%
0%
12%
5%
33%
8%
0%
11%
13%
12%
34%
7%
0%
13%
14%
6%
Liabilities
Payables under deposit administration contracts
Unearned premium
8%
16%
16%
10%
18%
18%
12%
17%
18%
12%
19%
19%
9%
14%
14%
8%
16%
14%
13 August 2014
Page 24 of 43

August 2014 Update
Kenya Re: Back to black

In 2013, Kenya Re generated underwriting profits in its short term
reinsurance business, which was the first time it did so since 2010. This was
attributed to strong premium growth in fire industrial as well as medical
insurance, unlike previous years when claim growth in these categories
exceeded premium growth. Kenya Re also incurred minimal claims from the
JKIA fire due to the excess of loss protection arrangements it was with its
retrocessors. The fact that Kenya Res business is overwhelmingly treatybased also shields the reinsurer from large losses. Meanwhile, the
companys mandatory cession expires next year but we think it is likely to be
renewed. We upgrade our recommendation to BUY.
*** BUY ***
12 month high/low
KES
YTD performance
15%
1yr performance
4%
Issued shares
700
Market cap (m)
USD
Free float
USD
57
USD
2.2
Fire industrial and medical insurance drive turnaround, as does

receivables. Kenya Res underwriting profit in short term business in 2013
were driven largely by fire industrial and medical insurance, whose
growth in premiums exceeded growth in claims, unlike the previous years
when the converse occurred. Strong premium growth in personal accident
and miscellaneous insurance categories also contributed to this
turnaround. In addition, the company had a much lower impairment
expense for its receivables. We also note that the companys excess of
loss protection from its retrocessors meant that the net claim incurred
from 2013 airport fire claim was only KES 30 million, even though Kenya
Re had a 20% share of the KES 1.9bn gross fire claim. Kenya Res
retrocessors include General Insurance Corporation of India, as well as
the likes of Korean Re, African Re and Lloyds Securities. Although this is a
high severity and therefore high risk reinsurance class, it appears that
Kenya Re has excess of loss retrocession policies in place that shield it
from incurring massive claims. In addition, 98% of Kenya Res business is
treaty (as opposed to facultative) business, which means that Kenya Re
only retains the first level of losses and hence is less exposed. Kenya Re
derives a significant proportion (30%) of its premiums from fire industrial
insurance because it is a well-developed class of insurance in this region
and mainly relates to property. Most insurers would want to reinsure a
huge proportion of fire industrial insurance due to the severity of potential
losses. Meanwhile, the company incurred underwriting losses in personal
accident insurance because the government introduced an Injury Benefits
Act under which employees are compensated for 96 months of earnings,
and as such there is need to revisit the pricing of premiums.
Current price
KES
17.80
Fair value
KES
48.87
Upside/(downside)
175%
Target price
KES
57.18
Price return
221%
3.4%
224%
Year end
20.50/14.35
143
40%
December
Bloomberg
KNRE KN
Reuters
KNRE NR
Expiring mandatory cession should get renewed. Kenya Re enjoys 18%

mandatory cession in Kenya, meaning that insurers in Kenya have to cede
at least 18% of their reinsurance premiums to Kenya Re. Kenya Re
however enjoys 25-30% market share in Kenya (overall, Kenya contributes
about half of Kenya Res premium revenues), meaning there is a
significant element of optional share in addition to the compulsory share.
The mandatory cession however expires at the end of 2015, and Kenya Re
is lobbying for a renewal. Given that Kenya Res competitors also enjoy
mandatory cessions in Kenya, we would expect that Kenye Res
compulsory share be extended further.
13 August 2014
Page 25 of 43

August 2014 Update
Kenya Re ratios
FY08
FY09
FY10
FY11
FY12
FY13

66%
22%
70%
23%
66%
26%
72%
18%
68%
26%
75%
20%
Kenya Re P&L trend (y/y change)
FY08
FY09
FY10
FY11
FY12
FY13
6%
8%
23%
34%
22%
21%
5%
11%
24%
34%
23%
22%
-2%
10%
48%
-14%
82%
-14%
Total income
12%
4%
31%
24%
30%
10%
1%
25%
12%
48%
29%
24%
-4%
30%
12%
44%
38%
16%
-9%
10%
62%
12%
14%
2%
Profit before tax
66%
-18%
13%
23%
45%
11%
Profit after tax
79%
-11%
16%
24%
46%
7%
RoA**
11%
9%
10%
11%
13%
12%
RoE**
19%
15%
16%
17%
21%
19%
Earnings per share*
79%
-11%
16%
24%
46%
7%
Dividend per share*
43%
0%
-30%
0%
33%
50%
20%
23%
14%
11%
10%
14%
Change in NAV
15%
10%
16%
9%
27%
23%
13 August 2014
Page 26 of 43

August 2014 Update
Kenya Re premium mix
FY08
FY09
FY10
FY11
FY12
FY13
Gross earned premium

Motor private
Motor commercial
Fire domestic
Fire industrial
Personal accident
Theft
Miscellaneous
Liability
Engineering
Workmen compensation
Marine
Aviation
Medical
Long term business:
Ordinary life
Superannuation
Less: retrocession premiums
Net earned premium
100%
83%
0%
7%
0%
36%
4%
10%
8%
2%
8%
0%
8%
0%
0%
17%
1%
15%
-9%
91%
100%
83%
0%
7%
0%
38%
5%
8%
8%
2%
9%
0%
7%
0%
0%
17%
1%
16%
-7%
93%
100%
85%
0%
7%
0%
38%
8%
8%
6%
1%
8%
0%
7%
1%
0%
15%
1%
14%
-6%
94%
100%
84%
0%
6%
0%
36%
7%
7%
5%
1%
9%
0%
8%
0%
5%
16%
2%
14%
-6%
94%
100%
86%
0%
5%
0%
33%
6%
7%
5%
1%
9%
0%
7%
0%
12%
14%
2%
12%
-5%
95%
100%
88%
0%
5%
0%
32%
8%
7%
6%
1%
7%
0%
7%
0%
15%
12%
2%
10%
-5%
95%
Kenya Re premium growth
FY08
FY09
FY10
FY11
FY12
FY13
6%
8%
-1%
8%
8%
11%
23%
26%
9%
34%
33%
41%
22%
25%
7%
21%
24%
4%
FY08
FY09
FY10
FY11
FY12
FY13
100%
100%
100%
100%
100%
100%
90%
0%
8%
0%
31%
5%
8%
9%
2%
4%
0%
5%
0%
0%
17%
10%
0%
20%
0%
-10%
79%
0%
5%
0%
43%
5%
9%
7%
1%
3%
0%
5%
0%
0%
0%
21%
0%
0%
0%
0%
83%
0%
6%
0%
41%
11%
7%
5%
0%
4%
0%
8%
1%
0%
0%
17%
0%
0%
12%
4%
85%
0%
5%
0%
41%
11%
4%
2%
0%
5%
0%
11%
-1%
8%
0%
15%
0%
0%
11%
4%
94%
0%
8%
0%
31%
11%
10%
4%
1%
3%
0%
5%
0%
22%
0%
6%
0%
0%
11%
-5%
92%
0%
5%
0%
29%
10%
10%
5%
1%
3%
0%
4%
0%
24%
0%
8%
0%
7%
0%
0%
-10%
-7%
-7%
-10%
-4%
-10%
90%
93%
93%
90%
96%
90%

Kenya Re claims mix
Claims and policy holders benefits
composition:
Motor private
Motor commercial
Fire domestic
Fire industrial
Personal accident
Theft
Miscellaneous
Liability
Engineering
Workmen compensation
Marine
Aviation
Medical
Provision for outstanding claims
Long term business:
Ordinary life
Superannuation
Other
Change in actuarial liability
Claims recoverable from
retrocessionaires
Net claims incurred
13 August 2014
Page 27 of 43

August 2014 Update
Kenya Re claims & policyholders benefits growth
FY08
FY09
FY10
FY11
FY12
FY13
Gross claims
Short term claims
Long term claims
1%
15%
-52%
25%
10%
159%
12%
18%
-9%
48%
51%
36%
29%
44%
-50%
24%
21%
65%
Kenya Re investment income mix
FY08
FY09
FY10
FY11
FY12
FY13
Investment income composition:

Interest on government securities
Reclassification of fair value gain on valuation of AFS quoted equities
Gain on disposal of available for sale quoted equity instruments
Dividends receivable
Net foreign exchange gain/loss
Interest on commercial mortgages
Interest on deposits with financial institutions
Interest on corporate bonds
Gain on disposal of investment property
Gain on disposal of non-current asset held for sale
Other income
Gain on disposal of inventories
Interest on staff mortgages and loans
Gain on disposal of equipment
Fair value gains on revaluation of investment properties
100%
25%
15%
0%
7%
6%
0%
4%
2%
0%
2%
1%
1%
1%
1%
0%
35%
100%
30%
19%
0%
10%
10%
0%
4%
5%
0%
0%
0%
1%
0%
1%
0%
21%
100%
23%
13%
21%
9%
6%
0%
2%
6%
0%
0%
0%
0%
0%
0%
0%
18%
100%
23%
16%
11%
-1%
7%
0%
2%
9%
0%
0%
0%
0%
0%
0%
0%
32%
100%
18%
16%
10%
3%
4%
0%
1%
20%
0%
0%
10%
0%
0%
0%
0%
16%
100%
23%
31%
11%
3%
4%
0%
2%
8%
1%
0%
0%
0%
0%
0%
0%
16%
Kenya Re balance sheet composition (expressed as a % of assets)
FY08
FY09
FY10
FY11
FY12
FY13
Receivables arising out of reinsurance arrangements
Premium and loss reserves
Mortgage loans
Quoted equity instruments
28%
11%
2%
3%
16%
20%
7%
28%
10%
3%
3%
13%
21%
6%
27%
7%
3%
2%
15%
16%
16%
28%
7%
2%
2%
11%
18%
19%
25%
6%
1%
2%
10%
23%
18%
23%
7%
1%
3%
10%
27%
15%
Liabilities
Long term reinsurance contract liabilities
Short term reinsurance contract liabilities
Unearned premiums
14%
14%
8%
14%
15%
8%
12%
13%
10%
12%
12%
11%
9%
13%
11%
7%
13%
12%
13 August 2014
Page 28 of 43

August 2014 Update
Jubilee: Gearing up for M&A

Jubilee insurances 10% earnings growth in 2013 was appreciable
considering the company had its slowest premium growth in recent memory
and had to cope with yet another surge in policy holder benefits expense and
a sizeable reduction in profit contribution from associates. Management have
hinted at significant inorganic acquisition activity in the next 2-3 years, and
recent appointments of senior regional executives indicate that much of this
may well take place in the region. The share is trading at a low price-to-book
ratio relative to its RoE (the most consistent among the listed insurers) and
we therefore upgrade our recommendation to BUY.
Regional M&A aspirations, and beyond. During its FY13 results

announcement Jubilee had stated its intention to acquire up to five
insurers in Kenya and the region over the next 3 years. Jubilee has also
appointed a Regional Senior Executive (who was up to that point heading
AIGs business in Kenya and before that worked for ACE Insurance in
South Africa) and a Regional CFO. Jubilee already has a presence in
Uganda, Tanzania, Burundi and Mauritius, hence the impending
acquisitions are more of a consolidation strategy rather than market
entry. Management also hinted that Jubilee has already held discussions
with three insurers, which means that the first acquisition may well take
place by 1H15 if not earlier. While acquisitions are preferred, Jubilee is
also looking at making a greenfield entry in West Africa.
Still the medical doctor. Despite a 25% growth in medical insurance

premiums to KES 6.3bn in FY13, Jubilee still made underwriting profits of
KES 470 million, which represented an underwriting margin of 7.5%. This
was a commendable feat in a business line where the majority of industry
players are still regularly incurring underwriting losses.
Associates still core to strategy despite reduced earnings. Jubilees

share of profit from associates was down 18% in 2013. This was driven by
reduced earnings from the Mauritius-incorporated IPS Cable Holdings as
well as PDML holdings of Kenya, the real estate company. Jubilee plans to
make residential and commercial property investments of KES 3.3bn in
Uganda and Tanzania using PDML and has already purchased the land.
Meanwhile, Jubilee continues to have stakes in companies such as
Seacom (fibre optic) and Bujagali (hydropower) where it has a satisfactory
and guaranteed IRR to meet its long term business obligations.
Top line slows down. Net premium growth of 15% in FY13 was the slowest
in at least the last six years. While life insurance had better growth, short
term insurance growth contracted, especially in the medical, motor and
fire insurance categories.
Claims growth outstrips premium growth by a wide margin once again.

Net claims grew by 28% in FY13. In FY12 net claims had grown by 40%
compared to 28% premium growth. The main reason for the rapid growth
in claims is increase in policy holders benefits in the pension/annuity
business.
*** BUY ***

Current price
KES
380.00
Fair value
KES
568.28
Upside/(downside)
Target price
KES
Price return
2%
75%
50%
659.20
73%
12 month high/low
KES
YTD performance
414/255
33%
1yr performance
35%
Issued shares
Market cap (m)
USD
60
262
Free float
USD
121
USD
0.5
Year end
46%
December
Bloomberg
JBIC KN
Reuters
JUB NR
13 August 2014
Page 29 of 43

August 2014 Update
Jubilee Holdings ratios

FY08
FY09
FY10
FY11
FY12
FY13
71%
21%
70%
23%
55%
39%
69%
22%
65%
25%
60%
31%
Jubilee P&L trend (y/y change)
FY08
FY09
FY10
FY11
FY12
FY13
38%
21%
20%
42%
28%
17%
35%
20%
8%
37%
28%
15%
14%
-24%
63%
25%
17%
17%
Total income
20%
22%
39%
8%
36%
26%
27%
24%
55%
20%
36%
36%
21%
25%
41%
9%
40%
28%
30%
19%
15%
38%
25%
14%
Profit before tax
12%
23%
84%
4%
26%
17%
Profit after tax
8%
27%
102%
4%
20%
10%
RoA**
4%
4%
7%
6%
5%
5%
RoE**
20%
26%
39%
31%
30%
25%
Earnings per share*
4%
29%
113%
3%
17%
7%
Dividend per share*
0%
11%
40%
0%
41%
14%
30%
26%
17%
16%
20%
21%
-17%
18%
47%
20%
30%
33%


Change in NAV
13 August 2014
Page 30 of 43

August 2014 Update
Jubilee premium mix
FY08
FY09
FY10
FY11
FY12
FY13
Gross premiums composition

Medical
Motor
Personal accident (2007 & 2008
includes medical)
Fire
Other
Long term business:
Ordinary life
Group life (2007 and 2008 includes
superannuation)
Pension/annuity
Outward reinsurance % of gross
premiums
Net earned premium
100%
83%
0%
20%
100%
84%
23%
20%
100%
83%
26%
18%
100%
84%
28%
20%
100%
85%
30%
20%
100%
85%
33%
21%
31%
25%
21%
21%
16%
14%
11%
21%
17%
7%
11%
6%
16%
7%
13%
5%
17%
8%
10%
7%
16%
8%
12%
7%
15%
8%
12%
5%
15%
8%
10%
5%
6%
6%
5%
5%
0%
4%
3%
2%
2%
2%
-30%
-30%
-37%
-39%
-39%
-40%
70%
70%
63%
61%
61%
60%
Jubilee premium growth
FY08
FY09
FY10
FY11
FY12
FY13
38%
40%
33%
21%
22%
14%
20%
19%
28%
42%
45%
27%
28%
29%
20%
17%
16%
24%
FY08
FY09
FY10
FY11
FY12
FY13
100%
100%
100%
100%
100%
100%
68%
0%
24%
67%
26%
18%
58%
23%
13%
70%
26%
15%
70%
30%
20%
67%
26%
16%
30%
19%
7%
16%
12%
9%
5%
10%
32%
7%
1%
4%
12%
4%
10%
4%
10%
3%
10%
3%
10%
3%
6%
3%
9%
3%
14%
2%
8%
3%
16%
0%
0%
0%
0%
0%
8%
5%
4%
4%
2%
2%
0%
0%
0%
0%
0%
-18%
82%
3%
20%
2%
1%
17%
-18%
82%
3%
33%
5%
2%
26%
-25%
75%
2%
20%
7%
1%
12%
-32%
68%
4%
21%
4%
0%
17%
-30%
70%
2%
25%
2%
1%
22%
-34%
66%
FY08
27%
29%
23%
FY09
24%
22%
-51%
FY10
55%
33%
20%
151%
FY11
20%
45%
22%
-27%
FY12
36%
36%
20%
43%
FY13
36%
30%
20%
63%

Jubilee claims mix
Claims and policyholders benefits
(gross)
Medical
Motor
Personal accident (2007 & 2008
includes medical)
Fire
Other
Long term business:
Ordinary life
administration contracts
Group life (2007 and 2008 includes
'other superannuation')
Pension/annuity
Increase in policy holders benefits
Ordinary life
Group life
Pension/annuity
Recoverable from re-insurers:
Jubilee claims & policyholders
benefits growth
Gross claims
Short term claims
Long term claims
Increase in policyholders benefits
13 August 2014
Page 31 of 43

August 2014 Update
Jubilee investment income mix
FY08
FY09
FY10
FY11
FY12
FY13

Mortgage loan interest
Interest on policy loans
Rental income from investment properties (net of expenses)
Gain on sale of investments
Fair value gain on investment properties
Exchange loss
Realised gains on disposal of quoted shares
Realised gains on disposal of government securities
Other income
Net fair value gains on financial assets at fair-value-through-profit-and-loss
100%
1%
18%
33%
2%
16%
16%
10%
45%
-1%
0%
0%
1%
-41%
100%
0%
21%
27%
2%
14%
15%
0%
0%
0%
0%
0%
1%
20%
100%
0%
9%
15%
1%
6%
6%
0%
6%
1%
9%
2%
1%
43%
100%
0%
13%
41%
2%
10%
9%
0%
30%
4%
2%
0%
1%
-14%
100%
0%
19%
43%
2%
7%
6%
0%
6%
1%
2%
0%
2%
12%
100%
0%
10%
38%
1%
3%
4%
0%
3%
0%
5%
0%
1%
34%
Jubilee balance sheet composition (expressed as a % of assets)
FY08
FY09
FY10
FY11
FY12
FY13
Investment in associates
Quoted shares at fair value through profit and loss
Government securities at amortised cost
Reinsurers' share of insurance contract liabilities
12%
11%
19%
15%
14%
7%
11%
16%
13%
18%
14%
7%
9%
13%
17%
21%
11%
8%
9%
13%
10%
27%
7%
10%
8%
13%
9%
28%
12%
10%
7%
11%
10%
31%
10%
11%

Payable under deposit administration contracts
29%
30%
10%
28%
32%
11%
25%
34%
11%
28%
33%
12%
26%
35%
11%
25%
37%
10%
13 August 2014
Page 32 of 43

August 2014 Update
CIC: Under pressure

CICs disappointing FY13 earnings growth was attributable to declining
investment income and thinning underwriting margins. The insurer may
potentially restore investment returns via a suggested foray into equities but
underwriting margins may remain under pressure with the continued focus
on medical and especially micro insurance. Meanwhile, the stage is set for a
corporate bond issue (the rights issue plans have been shelved) in 2H14 as
the insurer joins the race for property investments and regional expansion.
The share has however rallied 125% since our initiation in 4Q13 and we
downgrade our recommendation to REDUCE.
Hints at more aggressive investing strategy as conservatism hurts

earnings growth. FY13 earnings growth of 1% was the slowest in at least
the last six years and was caused primarily by a 9% contraction in interest
income as bank deposit interest earned fell following the normalisation of
the interest rate environment in 2013 in contrast to the high rate
environment that prevailed in 2012. The CEOs statement in the annual
report specifically pinpoints an intention to have a greater exposure to
equities going forward so as to restore investment returns.
Underwriting margins fall as medical overtakes motor insurance. CICs
overall underwriting margin of 5% in 2013 was the lowest in at least the
last four years. This can be attributed to medical insurance which is
poised to become the insurers biggest revenue line in the next two years.
Medical insurance comprised only 3% of short term insurance premiums
in 2010 but now comprises 18% and actually overtook motor private
insurance in 2012. It is now only second to motor commercial insurance in
CICs short term insurance business mix. CICs medical insurance
underwriting margin of -12% was double that of 2012 and the worst
performance since at least 2010. With CIC focussed on micro insurance,
the loss making trend in medical insurance could persist for another 2-3
years. Further, despite a commendable reduction in dependence on the
high risk motor private insurance, underwriting margins in this segment
declined marginally in FY13 to -8%.
Debt over equity. In May 2014 the insurers shareholders resolved to

double the authorised share capital from KES 3bn to KES 6bn in
preparation for a rights issue that should take place in 2H14. However,
management has subsequently clarified that in the interests of time, it will
issue a KES 5bn bond instead.
Whats the money for? CIC like many of its peers is focused on property
investments and regional expansion. The CIC Plaza II building located in
the prime Upper Hill area was completed in FY13. CIC is also finalising its
real estate blueprint that will see the company set up commercial and
residential developments on 700 acres of land in semi-rural and rural
areas. Regional expansion is also gaining traction with entry into South
Sudan, Uganda, Tanzania and Malawi expected in FY14. To this end, CIC
has already entered into a joint venture with Malawi Union of Savings and
Credit Co-operatives (Muscco).
*** REDUCE ***

Current price
KES
9.20
Fair value
KES
Upside/(downside)
7.89
Target price
KES
9.15
Price return
-1%
1%
0%
-14%
12 month high/low
KES
YTD performance
52%
1yr performance
89%
Issued shares
2,616
Market cap (m)
USD
Free float
USD
56
USD
1.6
Year end
9.75/4.45
277
20%
December
Bloomberg
CIC KN
Reuters
CIC NR
13 August 2014
Page 33 of 43

August 2014 Update
CIC ratios
FY08
FY09
FY10
FY11
FY12
FY13
89%
9%
90%
7%
90%
8%
89%
9%
82%
16%
84%
13%
FY08
FY09
FY10
FY11
FY12
FY13
13%
24%
42%
56%
34%
23%
12%
25%
44%
51%
36%
26%
86%
1%
31%
129%
47%
-9%
Total income
14%
23%
45%
53%
48%
22%
12%
33%
49%
58%
31%
9%
22%
35%
57%
47%
30%
15%
24%
39%
55%
26%
23%
Profit before tax
55%
27%
118%
30%
110%
1%
Profit after tax
41%
34%
106%
20%
138%
1%
RoA**
6%
6%
8%
6%
11%
9%
RoE**
26%
27%
27%
17%
28%
23%
Earnings per share*
41%
34%
106%
20%
138%
1%
Dividend per share*
4%
21%
182%
104%
11%
0%
16%
14%
20%
34%
16%
16%
Change in NAV
32%
31%
164%
65%
27%
22%

CIC P&L trend (y/y change)

13 August 2014
Page 34 of 43

August 2014 Update
CIC premium mix
FY08
FY09
FY10
FY11
FY12
FY13

General insurance:
CAR & engineering
Fire domestic
Fire industrial
Liability insurance
Marine & transit
Motor private
Motor commercial
Motor pool
Medical insurance
Personal accident
Theft insurance
Misc. accident
Micro solutions
Long term insurance:
Ordinary life
Group life
Outward reinsurance composition
Net earned premium
100%
51%
1%
1%
4%
0%
0%
15%
12%
0%
3%
5%
8%
2%
0%
0%
49%
4%
45%
-11%
89%
100%
56%
2%
1%
4%
0%
0%
16%
15%
0%
3%
5%
7%
2%
0%
0%
44%
4%
41%
-11%
89%
100%
59%
1%
1%
4%
0%
0%
19%
18%
0%
4%
3%
7%
2%
1%
0%
41%
5%
36%
-9%
91%
100%
65%
1%
1%
4%
0%
0%
20%
20%
0%
8%
2%
5%
2%
1%
0%
35%
5%
31%
-13%
87%
100%
70%
1%
1%
4%
1%
0%
16%
20%
0%
17%
2%
5%
2%
1%
0%
30%
4%
26%
-11%
89%
100%
70%
1%
1%
5%
2%
1%
14%
20%
0%
18%
2%
4%
2%
1%
0%
30%
4%
25%
-9%
91%
CIC premium growth
FY08
FY09
FY10
FY11
FY12
FY13
24%
36%
12%
42%
50%
31%
56%
71%
35%
34%
44%
14%
23%
24%
22%
FY08
FY09
FY10
FY11
FY12
FY13
100%
100%
100%
100%
100%
100%
47%
1%
1%
0%
-1%
0%
25%
10%
0%
2%
3%
5%
0%
0%
53%
42%
1%
0%
54%
0%
0%
1%
0%
0%
30%
13%
0%
2%
1%
4%
1%
0%
46%
32%
2%
0%
58%
0%
1%
1%
0%
0%
30%
15%
0%
3%
2%
4%
1%
0%
42%
32%
4%
0%
60%
0%
0%
1%
0%
0%
26%
18%
0%
7%
1%
4%
1%
0%
40%
25%
3%
0%
68%
0%
0%
0%
0%
0%
22%
19%
0%
19%
2%
3%
1%
1%
32%
22%
2%
0%
68%
1%
0%
1%
1%
0%
19%
15%
0%
26%
1%
3%
1%
0%
32%
24%
1%
0%
11%
12%
6%
12%
8%
6%
-18%
82%
-12%
88%
-7%
93%
-8%
92%
-10%
90%
-10%
90%

CIC claims mix
Net claims and policyholders
benefits payable
General insurance:
CAR & engineering
Fire domestic
Fire industrial
Liability insurance
Marine & transit
Motor private
Motor commercial
Motor pool
Medical insurance
Personal accident
Theft insurance
Misc. accident
Policyholders' benefits:
Life and health claims
Maturities
Surrenders
Actuarial adjustment of policy
holders liability
13 August 2014
Page 35 of 43

August 2014 Update
CIC claims & policyholders benefits growth
FY08
Gross claims
Short term claims
FY09
FY10
FY11
FY12
FY13
22%
42%
35%
44%
57%
63%
47%
66%
30%
31%
5%
23%
49%
20%
27%
CIC investment income mix
FY08
FY09
FY10
FY11
FY12
FY13

Interest on government securities held to maturity
Interest on staff loan receivables
Dividend income
Rental income from investment property
Fair value gains on investment property
Fair value (loss)/gain on equity investments at fair value through profit and loss
Amortisation/discount on government securities held to maturity
Other gains and losses
100%
47%
30%
3%
0%
7%
10%
-6%
0%
8%
100%
38%
35%
9%
0%
7%
0%
0%
0%
11%
100%
41%
24%
3%
0%
4%
0%
0%
0%
28%
100%
52%
41%
5%
2%
3%
0%
0%
0%
-2%
100%
16%
35%
1%
3%
1%
0%
0%
0%
44%
100%
22%
25%
2%
3%
1%
0%
0%
-2%
49%
CIC balance sheet composition (expressed as a % of assets)
FY08
FY09
FY10
FY11
FY12
FY13
Reinsurers' share of contract liabilities and reserves
Government securities held to maturity
6%
14%
25%
17%
6%
15%
23%
16%
12%
12%
15%
25%
12%
15%
22%
25%
18%
14%
15%
26%
21%
10%
14%
20%

Actuarial value of policyholder liabilities
37%
15%
17%
34%
15%
19%
22%
18%
12%
23%
19%
11%
23%
22%
12%
18%
24%
12%
13 August 2014
Page 36 of 43

August 2014 Update
Liberty Kenya: P&L noise continues

Libertys FY13 results reflected an impressive bounceback from 2012, but
there was a lot of noise in the P&L. Whilst premium income was relatively
flat (with a 77:23 mix between short term and life insurance), investment
income declined measurably. However this was more than offset by hefty
declines in net claims, commission expenses and income tax expense. The
insurers conservative strategy did results in significant claims protection
from large fire claims in 2013, although its reinsurers in Tanzania were
significantly impacted and have therefore adjusted their rates significantly.
Liberty also changed its accounting policy for financial instruments and
disposed of an associate company in Tanzania (and appears likely to dispose
of another one this year). We upgrade our recommendation to BUY.
Reduction in expenses drives FY13 earnings. Libertys 26% earnings

growth in 2013 was a strong recovery from a 14% earnings contraction in
FY12. While total income was down 9% due to a fall in investment income,
this was largely offset by a 20% decline in net claims incurred (again due
to a net reinsurance gain on an unusually large fire claim). Ultimately
what made the difference was a reduction in commissions payable,
financing costs and income tax expense.
Optional scrip dividend. Liberty retained the dividend at 40cts a share,
similar to FY12, but this was to be in the form of a scrip dividend to be
paid from the share premium account. The scrip dividend is like a bonus
issue and therefore results in more issued share capital. Shareholders
however had an option to elect for a cash dividend. Overall, the dividend
payout ratio was 20%.
Change in accounting policy for financial instruments has minimal P&L

impact. In 2013 Liberty reviewed its accounting policy for insurance
liabilities and matching assets in order to conform to the policies of its
ultimate holding company. As a result, a substantial proportion of the
companys financial assets were moved from an available-for-sale and
held-to-maturity classification to a fair-value-through-profit-or-loss
classification. The net effect was a 2% downward restatement of FY12 net
income.
Tanzania takes a hit. An unprecedented number of large claims on fire

and engineering policies in 2013 meant that underwriting profits were less
than half those in 2012, and overall PBT was less than one-third of FY12,
although earnings in that year were boosted by a one-off sale of an
associate company. Liberty is also in the process of reviewing its
shareholder agreements for another associate, namely Strategis
Insurance Limited, and expected to finalize the process in 1H14, although
there has been no announcement in this regard.
*** BUY ***

Current price
KES
17.90
Fair value
KES
23.34
Upside/(downside)
Target price
KES
Price return
46%
5.6%
51.6%
30%
26.14
12 month high/low
KES
YTD performance
-18%
1yr performance
48%
Issued shares
515
Market cap (m)
USD
106
Free float
USD
USD
0.4
Year end
Bloomberg
22.50/4.90
December
CFCI KN
Reuters
13 August 2014
Page 37 of 43

August 2014 Update
Liberty Kenya ratios

FY08
FY09
FY10
FY11
FY12
FY13
66%
29%
66%
26%
49%
40%
55%
36%
FY10
FY11
FY12
FY13
33%
9%
6%
20%
-6%
2%
4%
95%
-18%
Total income
20%
25%
-8%
21%
8%
122%
-9%
52%
-18%
33%
7%
-5%
Profit before tax
110%
17%
9%
Profit after tax
266%
-9%
27%
RoA**
4%
3%
4%
RoE**
23%
21%
24%
266%
-14%
26%
100%
0%
0%
25%
20%
-11%
9%
20%

Liberty P&L trend (y/y change)
FY08
FY09
Earnings per share*

Dividend per share*
Change in NAV
13 August 2014
Page 38 of 43

August 2014 Update
Liberty premium mix
FY11
FY12
FY13

Motor
Fire
Other
Long term business:
Retail life
Group life
Outward reinsurance
Net premiums
100%
75%
19%
20%
20%
16%
25%
20%
5%
-34%
66%
100%
78%
18%
22%
24%
14%
22%
17%
5%
-40%
60%
100%
77%
16%
21%
20%
20%
23%
16%
7%
-45%
57%
Liberty premium growth
FY11
FY12
FY13
33%
9%
14%
-5%
6%
5%
11%
FY11
FY12
FY13
100%
100%
100%
71%
18%
14%
29%
9%
28%
18%
47%
11%
0%
15%
14%
34%
12%
76%
7%
53%
9%
4%
18%
8%
10%
16%
9%
0%
1%
-27%
73%
0%
19%
-16%
84%
0%
6%
-64%
36%
FY11
FY12
FY13

Liberty claims mix
Claims and policyholders benefits
composition:
Motor
Fire
Others
Long term business:
Death, maturity and surrender benefits
administration contracts
Others
Change in insurance contract liabilities
Liberty claims & policyholders benefits
growth
Gross claims
22%
Short term claims

31%
92%
-12%
59%
207%
3%
Liberty investment income mix
FY11
FY12
FY13

Interest on bank deposits
Interest from corporate bonds and commercial paper
Interest on loans and receivables
Rental income from investment property
Gain on sale of financial investments
Fair value gain on investment property
Interest on policy loans
Dividend income
Impairment loss on available for sale investments
Others
100%
51%
8%
12%
5%
2%
15%
6%
100%
35%
11%
6%
4%
1%
4%
3%
9%
4%
0%
22%
100%
41%
18%
7%
1%
4%
17%
7%
4%
12%
0%
-12%
11%
-6%
-4%
13 August 2014
Page 39 of 43

August 2014 Update
Liberty balance sheet composition (expressed as a % of assets)
FY11
FY12
FY13
Financial investments held to maturity

Fair value through profit or loss financial assets
Cash and bank balances
28%
19%
22%
21%
25%
21%
28%
19%
22%

Deposit administration liabilities
28%
38%
9%
27%
38%
8%
33%
35%
8%
13 August 2014
Page 40 of 43

August 2014 Update
Pan Africa: New moves

Pan Africa undertook new investments in 2013. The life insurer increased its
ownership of Family Bank to 5% and also bought out the other shareholders
in Sanlam Investments Kenya. 2013 also saw record RoA and RoE achieved on
the back of improvements in investment income and claims experience.
Reported EPS was up 80% y/y while embedded value earnings rose 116% over
2012. However, the company also retained the most risk it has in at least the
last seven years. The share is now trading at a very high price-to-book ratio
relative to its RoE and we therefore downgrade our recommendation to SELL,
even though the price-to-embedded value at 1H14 is much lower at 2.1x.
Investment in Family Bank now stands at 5%. In May 2014 Pan Africa
acquired an additional 1.4% stake to bring its total ownership of Family
Bank to 5%. The interest in Family Bank seems to be driven to a large
extent by a bancassurance strategy that will seek to benefit from the
banks credit growth.
And Sanlam Investments Kenya (SIM-K) is now a wholly owned
subsidiary. In September 2013 Pan Africa acquired the remaining 83%
that it did not own to bring its ownership of SIM-K to 100%. The purchase
consideration was USD 640,000 and no goodwill was recorded because
Pan Africa acquired SIM-Ks net assets at a small discount. Acquisition
related costs of USD 2.6m were however expensed during the year. SIM-K
earnings comprised less than 0.5% of group earnings in 2013.
Fair value gains and claims drive earnings performance. Pan Africas
80% EPS growth in 2013 was driven primarily by the double impact of an
8% increase in investment & other income and a 5% decrease in net
claims. Investment & other income rose due to interest income as well as
fair value gains on investment property and other investments. In line with
previous years, plot sales also boosted this income line. Gross claims
were actually up 35% but this was more than offset by a 39% decrease in
the actuarial value of market linked liabilities. The seemingly small
overall percentage changes in investment income and net claims
impacted the bottom line significantly because of the size of the numbers
involved, resulting in a 7% RoA and a 42% RoE, the highest for the
company in at least the last seven years. Embedded value earnings saw a
116% increase mainly due to the change in NAV for other subsidiaries.
Single premium business declined by 10% though, due to a large volume
of bulk annuities that were received in 2012 and not expected to recur the
following year. Overall, investment income contributed 71% to PBT (FY12:
61%) while life insurance made up the remainder. In 1H14 however,
earnings were down 52% as the large fair value gains of 2013 did not
recur and there was a 30% surge in claims and benefits.
Retaining more risk than ever. In 2013, Pan Africa only ceded 4% of its
insurance premiums to reinsurance. This was the lowest level of risk
retained in the last seven years, during which period 6-11% of premiums
were ceded to reinsurers. Capital adequacy remains strong, however, at
3.84 times the minimum regulatory requirement.
*** SELL ***

Current price
KES
124
Fair value
KES
98.76
Upside/(downside)
-20%
Target price
KES
Price return
4%
-6%
111.59
-10%
12 month high/low
KES
YTD performance
141/56
42%
1yr performance
132%
Issued shares
Market cap (m)
USD
96
137
Free float
USD
27
USD
0.4
Year end
Bloomberg
Reuters
20%
December
PAIL KN
PAFR NR
13 August 2014
Page 41 of 43

August 2014 Update
Pan Africa ratios

FY08
FY09
FY10
FY11
FY12
FY13

90%
8%
83%
14%
73%
23%
78%
-5%
65%
27%
60%
32%
Pan Africa P&L trend (y/y change)
FY08
FY09
FY10
FY11
FY12
FY13
21%
21%
27%
-5%
49%
-2%
26%
22%
26%
-7%
55%
0%
4%
-17%
16%
66%
79%
23%
Total income
9%
32%
43%
-13%
87%
8%
14%
44%
34%
-34%
176%
-7%
19%
47%
34%
-37%
194%
-4%
7%
11%
44%
22%
-14%
12%
Profit before tax
-108%
1013%
273%
-17%
51%
82%
Profit after tax
-148%
49%
311%
-25%
58%
79%
RoA**
-2%
2%
6%
4%
5%
7%
RoE**
-7%
11%
37%
22%
29%
42%
Earnings per share*
-148%
249%
311%
-25%
58%
79%
Dividend per share*
-100%
100%
76%
33%
50%
50%
0%
57%
24%
43%
41%
35%
-18%
-12%
38%
16%
24%
27%

Change in NAV
13 August 2014
Page 42 of 43

August 2014 Update
Pan Africa premium mix
FY08
FY09
FY10
FY11
FY12
FY13

Individual life
Group business/superannuation
Premium ceded to reinsurers:
Net premium income
100%
60%
40%
-8%
92%
100%
50%
50%
-7%
93%
100%
44%
56%
-8%
92%
100%
56%
44%
-10%
90%
100%
42%
58%
-6%
94%
100%
48%
52%
-4%
96%
Pan Africa premium growth
FY08
FY09
FY10
FY11
FY12
FY13

Individual life
21%
23%
18%
21%
1%
50%
27%
12%
41%
-5%
20%
-24%
49%
13%
94%
-2%
12%
-13%
Pan Africa claims mix
FY08
FY09
FY10
FY11
FY12
FY13

Individual life
Premium ceded to reinsurers
100%
60%
40%
-8%
92%
100%
50%
50%
-7%
93%
100%
44%
56%
-8%
92%
100%
56%
44%
-10%
90%
100%
42%
58%
-6%
94%
100%
48%
52%
-4%
96%
FY08
FY09
FY10
FY11
FY12
FY13
14%
91%
44%
-13%
34%
5%
-34%
32%
176%
19%
-7%
35%
-27%
-6%
34%
42%
3%
-90%
Pan Africa claims & policyholders benefits

growth
Gross claims and benefits growth
Gross claims growth
Claims and contract liabilities ceded to
reinsurers growth
Pan Africa investment income mix
FY08
FY09
FY10
FY11
FY12
FY13

Rental income, net of expenses
Dividend income
Interest on financial assets at fair value through
profit or loss
Interest on loans to related parties
Interest on other loans and receivables
Interest on held to maturity financial assets
Interest on cash and cash equivalents
Realised gains/(losses) on equity securities
Realised gains/(losses) on debt securities
Fair value (losses) and gains
100%
11%
12%
100%
4%
6%
100% -100%
2%
7%
4%
34%
100%
1%
4%
100%
1%
1%
108%
39%
11%
93%
13%
18%
0%
11%
17%
0%
52%
0%
-113%
0%
8%
22%
0%
0%
0%
21%
0%
5%
16%
1%
0%
0%
62%
0%
36%
143%
38%
0%
0%
-450%
0%
3%
21%
17%
0%
0%
41%
0%
2%
22%
13%
0%
0%
43%
FY08
FY09
FY10
FY11
FY12
FY13
Pan Africa balance sheet composition

(expressed as a % of assets)
Held to maturity financial assets
Financial assets at fair value through profit and
loss
8%
15%
19%
21%
25%
26%
50%
40%
37%
30%
31%
39%
0%
0%
12%
24%
25%
21%

Market linked (Investment contract) liabilities
61%
0%
32%
35%
30%
38%
30%
38%
32%
41%
32%
38%
13 August 2014
Page 43 of 43
Abbreviations
General
a
bn
BPS
COE
DPS
DY
e
EPS
f
FY
FY0n
k
LC
m
mth, mths
NAV
ntm
PAT
PBT
ROA
ROE
ttm
WACC
Currencies
actual / reported
billions
book value per share, equivalent to NAV
cost of equity
dividends per share
dividend yield
expected
earnings per share
forecast
financial year
financial year 200n
thousands
local currency
millions
month, months
net asset value per share
next twelve months
profit after tax
profit before tax
return on assets
return on equity
trailing twelve months
weighted average cost of capital
Banking sector
CASA
CIR
COF
LDR
LLR
NII
NIM
NIR
NPL
BWP
EGP
GBP
GHS
KES
LSL
MAD
MUR
MWK
NAD
NGN
RWF
SZL
TND
TZS
UGX
USD
XOF
ZAR
ZMK
Botswana pula
Egyptian pound
British pound
Ghanaian cedi
Kenyan shilling
Lesotho loti
Moroccan dirham
Mauritian rupee
Malawian kwacha
Namibia dollar
Nigerian naira
Rwandan franc
Swazi lilangeni
Tunisian dinar
Tanzanian shilling
Ugandan shilling
United States dollar
West African CFA franc
South African rand
Zambian kwacha
Industrial sector
Current & savings account to total deposits
Cost to income ratio
Cost of funds
Loans to deposits ratio
Loan loss reserve
Net interest income
Net interest margin
Non-interest revenue
Non-performing loans
ARPU
hl
LDA
PCC
RTD
Average revenue per user per month

Hectolitre (100 litre)
Legal drinking age
Per capital consumption
Ready to drink
Sources
Unless otherwise noted, financial information is sourced from subject company filings, market data is sourced from the
relevant exchange, and forecasts and analysis are prepared by African Alliance analysts.
Recommendation system
The African Alliance recommendation system is based on the difference between the current share price value (CSP), and the
fair value (FV) of the share as calculated by African Alliance. Rating categories are defined as follow:
(Buy
(Accumulate
(Hold
(Reduce
(Sell
FV more than 15% above CSP

FV between 5% and 15% above CSP
FV between -5% and 5% around CSP
FV between 5% and 15% below CSP
FV more than 15% below CSP
African Alliance Capital Markets Contact Details

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Analyst: Consumer & Leisure
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+254 721 557 071

+267 7219 1243
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+233 302 679 761/2
+233 24 7577 980

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Ghana
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Zambia
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Zambia
Corporate Access
Marang Pelotona
Research
Trading
Online
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Capital IQ:
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Factset:
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decisions that are inconsistent with the recommendations or views expressed in this research.
YES
Current investment banking relationship
Previous investment banking relationship
Company holding
Related party holding

Analysts holding
NO

2014-08-13 Kenya Insurance Sector Update-2

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Kenya Insurance Sector

August 2014 Update

Scaling the Warren Buffett criterion

The listed Kenya insurers are actively implementing various initiatives

Running the numbers

The latest and greatest

Refer to important terms of use, disclaimers and disclosures on back page.

Kenya Insurance Sector

Kenya Insurance Sector

Underwriting margin (underwriting profit/gross written premium)

Medical Micro* Total

-33% -26% 1424%

-23% -18% 2340%

Kenya Insurance Sector

Kenya Insurance Sector

Explaining the Warren Buffett criterion

Kenya Insurance Sector

Kenya Insurance Sector

Kenya Insurance Sector

Market cap (USD m)

Source: Company filings, African Alliance research.

Fair value (KES)

Liberty Pan Africa

P/B ratios down from historical levels

RoE vs P/B regression

Only Jubilee and Kenya Re are trading within historical

Jubilee, Kenya Re and Liberty look cheap relative to peers.

Kenya Insurers: RoE vs P/B

Source: Company filings, African Alliance Research

Kenya Insurance Sector

Industry update: Upgrading with a new Insurance Act

Kenya Insurance Sector

P&L analysis: Operating efficiency the RoE differentiator

Gross premium revenue mix

Gross claims & benefits mix

Net earned premium growth

Net claims & benefits growth

Net claims/net premiums

Investment income/total income

Expenses & comms/premiums

Short term insurance

UAP Liberty Pan Africa Kenya Re

Kenya Insurance Sector

Balance Sheets reveal high solvency margins

Claims & benefits liabilities mix

Claims & benefits liabilities growth

UAP Liberty Pan Africa Kenya Re

Kenya Insurance Sector

Short term business surprisingly outperforms long term

Net premium revenue mix

Investment income allocation FY13

Segment profit contribution

Short term insurance

Liberty Pan Africa Kenya Re

Kenya Insurance Sector

Regional subsidiaries more profitable than Kenya?

Net premium revenue mix

Net profit contribution

Liberty Pan Africa Kenya Re

Kenya Insurance Sector

Britam: Voracious appetite

We anticipate strong 1H14 and FY14 earnings despite surge in finance

Consummating Real, but will it add value? Britams acquisition of a 99%

*** HOLD ***

* HOLD *

* BUY *