BRITISH-AMERICAN2014 INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 I AM READY TABLE OF CONTENTS
Corporate Information 7 - 11 Who we are 12 - 13 Directors’ Report 14 Statement of Directors’ Responsibilities 15 Five Year Financial Review 16 - 18 Chairman’s Statement 20 - 22 Director of Insurance Business & 23 - 25 Managing Director’s statement Board of Directors 26
Management team 27
4 Statement of Corporate Governance 28 - 34 Risk Management Report 35 Corporate Social Responsibility 36 - 42 Report of the Consulting Actuary 44 Embedded Value 45 - 49 Independent auditors’ report 50 Financial Statements 51 Statement of profit or loss 51 Statement of comprehensive income 52
Statement of financial position 53 - 55 Statement of changes in equity 56 - 58 Statement of cash flows 59 Notes to the financial statements 60 - 114 Short- Term Insurance Business Revenue 115 Account
Long-Term Insurance Business Revenue 116 Account
5 Britam Tower
6 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 CORPORATE INFORMATION Directors Registered Office Peter K. Munga Chairman Britam Centre Dr. Benson I. Wairegi Group Managing Director Mara-Ragati road junction- Upper hill Stephen O. Wandera Director of Insurance Business P.O. Box 30375-00100 and Managing Director Nairobi Francis K. Muthaura Non- executive Dr. James N. Mwangi Non- executive Auditors Nduva Muli Non- executive Deloitte & Touche Tarun Ghulati Non- executive – Resigned Certified Public Accountants (Kenya) on 18 March 2015 Deloitte Place, Waiyaki Way, Muthangari Agnes N. Adhiambo Non- executive P.O. Box 40092 - 00100 Nairobi
Audit Committee Legal Advisors Agnes N. Odhiambo Chairperson Kaplan and Stratton Advocates Peter K. Munga Williamson House Nduva Muli 4th Ngong Avenue P.O. Box 40111, 00100 Nairobi Investments and Strategy Committee Peter K. Munga Chairman Daly and Figgis Advocates Dr. James N. Mwangi ABC Towers, ABC Place, 6th Floor Dr. Benson I. Wairegi P.O Box 40034-00100, Nairobi
Risk and Compliance Committee Consulting Actuaries Nduva Muli QED Actuaries & Consultants (Pty) Ltd Sandton, South Africa Compensation and Human Resource Committee Amb. Dr. Francis K. Muthaura Chairman Company Secretary Peter K. Munga Nancy K Kiruki Nduva Muli Certified Public Secretary (CPS (K)) Britam Centre P.O. Box 30375-00100 Nairobi
Nomination and Governance Committee Amb. Dr. Francis K. Muthaura Chairman Peter K. Munga
ICT Steering Committee Nduva Muli Chairman Dr. Benson I. Wairegi Dr. James N. Mwangi 7 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CORPORATE INFORMATION (Continued)
BANKERS INTERNATIONALLY RELATED PARTIES Commercial Bank of Africa Limited BRITISH-AMERICAN INVESTMENT CO. (MTIUS) LTD Upperhill 25 Pope Hennessy Street P.O Box 30347 - 00100 PO Box 331 Nairobi Port Louis Mauritius Equity Bank Limited Community Corporate BAI CO (MTIUS) LIMITED P.O. Box 75104-00200 British American Centre Nairobi 217 Royal road Curepipe Barclays Bank of Kenya Mauritius Barclays Plaza P.O. BOX 46661-00100 RELATED LOCAL COMPANIES Nairobi British-American Asset Managers Limited P.O Box 30375-00100 Citibank Kenya Limited Upper hill Upper hill Nairobi P.O. Box 30711-00100 Nairobi British-American Investment Company ( Kenya) Limited P.O Box 30375-00100 Standard Chartered Bank of Kenya Limited Upper hill Kenyatta avenue Nairobi P.O. Box 30001-00100 Nairobi Equity Group Holdings Limited P.O Box 75104-00200 Co-operative Bank of Kenya Limited Upper hill Upperhill Branch Nairobi P.O. Box 30415-00100 Nairobi Housing Finance Company of Kenya Limited P.O. Box 30088-00100 National Bank of Kenya Limited Nairobi Kisii Branch P.O. Box 2435-40200 Kisii
Housing Finance Company of Kenya Limited Kenyatta avenue P.O. Box 30088-00100 Nairobi
8 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 CORPORATE INFORMATION (Continued) BRANCH NETWORK
NAIROBI NAKURU EMBU Ambank House CK Patel Building Union Bank Bulding University Way Kenyatta Highway Kenyatta Highway P.O. Box 46942 P.O. Box 304-20110 P.O Box 1668-60100 Tel: (020)-226998/223287 Tel: (051) – 2212200 Tel: (068) -31839/31458 Fax: (020)-224691 Fax: (051) – 2217260 Fax: (068)-31864 [email protected] [email protected] [email protected]
NAIROBI KISUMU THIKA Barclays Plaza Mega Plaza Thika Arcade Loita Street Oginga-Odinga Road Kenyatta Avenue P.O. Box 20664 P.O. Box 1111 P.O Box 1487-01000 Tel: (020)-2224153/2224312 Tel: (057) – 45121 Tel: (067) - 21866/22768 Fax: (020)-2224691 Fax: (057) – 44034 Fax: (067) -21392 [email protected] [email protected] [email protected]
NAIROBI NYERI BUNGOMA Phoenix House Co-operative Bank Building HIBHO Plaza Kenyatta Avenue Kenyatta Road Moi Avenue P.O. Box 46942 P.O. Box 16-10100 P.O Box 104-50200 Tel: (020)-226998/223287 Tel: (061) – 2032154 Tel: (055) 30246/30397 Fax: (020)-2224691 Fax: (061) – 2032764 Fax: (055) 30243 [email protected] [email protected] [email protected]
NAIROBI ELDORET MACHAKOS Timau Plaza, Argwingskodhek Road Imperial Court, Nairobi Road Kiamba Mall, Ngei Road P.O. Box 21428-00505 P.O. Box 1117 P.O.Box 1327-90100 Tel: (020) - 3860452/3/4/9 Tel: (053)-2030770 Tel: (044)21634/33 (020) - 3860452 Fax: (053)-2062914 [email protected] [email protected] [email protected]
NAIROBI KISII KITENGELA Victor House Uhuru Plaza Red Heron Centre 2nd Floor, Kimathi St Kisumu-Nairobi Road Namanga Road P.O. Box 10445-00400, Nairobi P.O. Box 252 P.O. Box 849 00242 M: +254- 0703-094029 Tel: (058) -30555 M: +254-0722-270553 Fax: (058) -30488 Fax: ( 020) 2005513 [email protected] [email protected] [email protected]
VOI Maghamba Plaza, 2nd Floor 2nd Floor P.O. Box 717-80300, Voi M: +254- 0703-094028 [email protected] 9 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CORPORATE INFORMATION (Continued) BRANCH NETWORK WESTLANDS MERU NYAHURURU Soin Arcade Kenyatta Highway Kenyatta Avenue Westlands P.O. Box 1224-60200 P.O.Box 397 20300 P.O. Box 20480, Nairobi Tel: (064) -32434 Tel: (065) - 2022165 Tel: (020) - 3744393/3750730 Fax: (064) -31312 Fax: (065) 2022166 Fax: (020) - 3743628 [email protected] [email protected] [email protected]
MALINDI NAIVASHA KAKAMEGA Malindi Complex Eagle Centre Mega mall Lamu Road MbariaKaniu Road Kisumu-Kakamega Road P.O. Box 1072-80200 P.O.Box 2329 – 20117 P.O.Box 511-50100 (042) 2833023 (050) – 2030513 Tel: 056-31839 M: +254 703 094 023 (050) 2030515 (056) 31839 [email protected] [email protected] [email protected]
ISIOLO NANYUKI BRANCH KITUI Halcha Building Silver Plaza Muli Mall, 1st Floor Moyale Road. Nairobi-Nanyuki Road Makuti Street P.O. BOX 706 – 60300 P.O. BOX 3123-10400 P.O. BOX 1669-90200 (064) 2833026 (062) 2833390 (044) 2833025 M: +254 - 703 094 026 M: +254 703 094 390 M: +254 703 094 025 [email protected] [email protected] [email protected]
MURANGA KERICHO MOMBASA CDM Centenary House Ark Plaza Biashara Bank Building Uhuru Avenue John Kerich Road Nyerere Street P.O.Box 202 - 10200 P.O.Box 1193-20200 P.O. Box 9013 M: +254-720-340038 (052) – 21421 Tel: (041) - 220321 (060) 2030074 [email protected] Fax: (041) -223558 [email protected] [email protected]
10 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 OUR BRAND
INTERNALIZE Values • Respect • Integrity • Continuous improvement & Innovation • Passion
VISION To be YOUR most trusted BRAND financial services partner POSITION Operating principles YOUR JOURNEY is our journey • Market leadership • Professionalism • Synergy • Operational excellence MISSION BRAND IDEA To provide outstanding fincancial services to our customers
EXTERNALIZE Personality • Visionary • Approachable
11 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY WHO WE ARE
OUR JOURNEY TO BUSINESS EXCELLENCE
With close to over 50 years of service in Kenya, British-American established as an investment holding company and assumed control Insurance Company (Kenya) Limited is the insurance subsidiary of British-American Insurance Company (Kenya) Limited and the newly company of British-American Investments Company (Kenya) Limited, formed investments advisory and asset management company, British- better known as Britam. American Asset Managers Limited.
Britam, the holding company, is a leading diversified financial services In 2008, a further rationalisation of the equity ownership of the group group, listed on the Nairobi Securities Exchange. The group has interests saw the majority of shares passing to Kenyan investors, with British- across the East and Southern Africa region, with offices in Kenya, American Insurance Company (Mtius) Limited remaining as a key Uganda, Tanzania, Rwanda, South Sudan, Mozambique and Malawi. strategic partner.
British-American Insurance Company started operations in Kenya in In 2010, Britam’s regional expansion started with the group venturing 1965 and has since undergone tremendous transformation, evolving into Uganda with the incorporation of Britam Insurance Company from a home service insurance company to its current position as a (Uganda) Limited. leading composite insurance company in Kenya providing all classes of insurance The year 2011 marked an important watershed in the history of the company, with the Group listing at the Nairobi Securities Exchange The company’s growth journey started in 1979, when British-American in a move aimed at unlocking the shareholders value, and attracting Insurance Company (Kenya) Limited was registered as a private limited additional capital for the group’s expansion strategy. liability company in Kenya in order to comply with the government’s directive that all branches of foreign owned insurance companies be Britam Insurance Company (South Sudan) Limited was incorporated incorporated locally. in 2012 and is licensed to underwrite all classes of life and non-life insurance products. Owing to organic growth and the incorporation of other subsidiary companies within the company, British-American Investments Company Britam Insurance Company (Rwanda) Limited was incorporated and (Kenya) Ltd was incorporated as a holding company in 1995. licensed in 2013 by the National Bank of Rwanda.
In 1997, all the foreign held stake in British –American Insurance Company Following the successful acquisition of Real Insurance Company by the (Kenya) was acquired by British-American Insurance Company (Mtius) Group in 2014, British –American Insurance Company (Kenya) Limited Limited as part of a regional strategy of the British-American Group. today has a Pan African presence with sister companies in Kenya, Uganda, Tanzania, Rwanda, South Sudan, Mozambique, and Malawi. In 2004, British-American Investments Company (Kenya) Limited was
12 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 WHO WE ARE (Continued)
ACCOLADES AND RECOGNITION LOCAL RECOGNITION British-American Insurance Company (Kenya) Limited received both • Association of Kenya Insurers (AKI) Agent of the Year Awards - local and international recognition in 2014, as the company consolidated Company of the Year Award–2007 to 2014. and grew its presence locally and in the region. • Computer Society of Kenya ICT 2014 Excellence Awards- Use of ICT in Insurance Award. INTERNATIONAL RECOGNITION. • Stephen Wandera; CEO Support for ICT Award - Computer Society of Kenya ICT 2014 Excellence Awards. • Induction into the Palladium Hall of Fame for Executing Strategy. • Think Business Insurance Awards - Medical Underwriter of the Year Britam became the first company in Africa to receive this prestigious 2014. global honour, awarded to a very limited number of elite organizations • Dr. Benson Wairegi, Group Managing Director; Think Business who have achieved and sustained breakthrough performance Insurance - Awards Lifetime Achievement Award 2014. through use of the Kaplan - Norton Strategy management system. • QUDAL Quality medal Award - Best insurance company in Kenya, 2014 - This is an international recognition only awarded to products and companies which offer consumers the greatest level of quality. • Superbrands East Africa - 2009/10 and 2012/2014 - The first insurance Company in East Africa to receive the accolade. • Best insurance company in Kenya in 2013 and 2014 by Capital Finance International (CFI.co.), an international print and online journal reporting on business, economics and finance. • Best Life Insurance Company in Kenya 2013 and 2014 - World Finance Global Insurance Award
13 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY DIRECTORS’ REPORT
The Board of Directors has pleasure in submitting the annual report together with the audited financial statements of British American FINANCIAL RISK MANAGEMENT Insurance Company Kenya Limited (“the Company”) for the year ended OBJECTIVES AND POLICIES 31 December 2014, which disclose the state of affairs of the Company. The company’s activities expose it to a variety of financial risks, including INCORPORATION underwriting risk, credit risk and the effect of changes in debt and equity market prices, and interest rates. The company’s risk management The Company is incorporated in Kenya under the Companies Act programme focuses on the identification and management of risks and (Chapter 486 of the laws of Kenya) as a private limited liability company, seeks to minimise potential adverse effects on its financial performance. and is domiciled in Kenya. It was incorporated on 14 November 1979 These include the use of underwriting guidelines and capacity limits, under certificate of incorporation number C. 19921 under the Companies reinsurance planning, credit policy governing the acceptance of clients Act. and defined criteria for the approval of intermediaries and reinsurers. Investment policies are in place to enable optimal liquidity management PRINCIPAL ACTIVITIES and to maximise returns within an acceptable level of risk. Further, the internal audit, risk and compliance function helps to monitor that these The company underwrites all classes of long – term insurance business policies are followed. and short-term insurance business as defined by the Insurance Act (Chapter 487 of the Laws of Kenya), with the exception of industrial The company’s risk management objectives and policies are detailed in life insurance and aviation respectively. The Company also provides Note 4 to the financial statements. its customers with investment products designed to provide them with savings and retirement solutions. APPROVAL OF FINANCIAL STATEMENTS The financial statements of British American Insurance Company RESULTS FOR THE YEAR (Kenya) Limited for the year ended 31 December 2014 were approved and authorized for issue in accordance with a resolution of the Board of The results of the year are set out on page 51 of this Annual report and Directors on 24 April 2015 are summarized below: DIRECTORATE Shs’000 The Directors of the Company who served the office during the year and Profit before taxation 1,799,272 to the date of this report are set out on page 3 of this report. Taxation charge (515,937) Profit for the year 1,283,335 AUDITORS Deloitte & Touche were appointed as the Company’s auditors on The profit for the year of Shs. 1,283,335,000 (2013: Shs. 1,812,903,000) 5 November 2014 and have expressed willingness to continue in office has been added to the retained earnings. in accordance with the Section 159 (2) of the Kenyan Companies Act DIVIDEND and subject to section 56 (4) of the Insurance Act (Cap 487). BY ORDER OF THE BOARD At the Company’s Annual General Meeting, the Directors will recommend the approval and payment of a dividend of Shs. 700 million (2013: Shs 700 million).
Nancy Kiruki Company Secretary Nairobi 24 April 2015
14 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The Kenyan Companies Act requires the directors to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company as at the end of the financial year and of the operating results of the company for the year. It also requires the directors to ensure that the Company keeps proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company. They are also responsible for safeguarding the assets of the Company.
The directors are responsible for the preparation of financial statements that give a true and fair view in accordance with International Financial Reporting Standards and the requirements of the Kenyan Companies Act. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or errors, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
The directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the company and of its operating results. The directors further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of EDUCATION EXPENSES? financial statements, as well as adequate systems of internal financial control.
Nothing has come to the attention of the directors to indicate that the I AM READY company will not remain a going concern for at least the next twelve with Britam months from the date of this statement. I AM • INVESTMENTS READY • INSURANCE • PROPERTY Chairman Director
24 April 2015 24 April 2015
15 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY FIVE YEAR FINANCIAL REVIEW
2014 2013 Restated 2012 Restated 2011 2010 Shs’ Million Shs’ Million Shs’ Million Shs’ Million Shs’ Million Gross written premium 15,114 11,853 9,740 8,048 6,565
PROFIT OR LOSS ACCOUNT Gross earned premium 10,942 8,553 6,762 5,583 4,333 Net earned premium 9,952 7,555 5,893 4,923 3,658 Investment Income & other income 5,729 5,711 3,725 825 3,107 Total Income 15,681 13,266 9,618 5,748 6,765 Net claims and policy holder benefits 7,112 4,851 3,839 2,991 3,818 payable Other Operating and administrative 4,993 3,851 2,922 2,452 1,910 expenses Profit before share of the associate 1,540 2,359 1,246 1,071 1,037 Share of profit of the associate 259 174 147 79 - Profit before income tax 1,799 2,533 1,393 1,150 1,037 Income tax expense (516) (720) (283) (212) (146) Profit after income tax 1,283 1,813 1,110 938 891
STATEMENT OF FINANCIAL POSITION Share Capital 880 880 480 480 480 Total Equity 8,283 6,868 5,046 4,329 7,403 Total Assets 45,590 38,570 29,958 20,588 21,423
KEY INDICATORS Dividends 700 700 550 300 250 Dividends per share 0.8 0.8 1.15 0.625 0.52 Basic earnings per share 1.46 2.06 2.31 3.13 3.56
16 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 Gross Written Premium 15,114 2014 11,853 2013
9,740 28% 2012 8,048 2011 300 Figures in shillings, 6,565 Millions 2010
Net Claims and Policy holder Benefits Payable
7,112 2014 4,851 2013
3,839 47% 2012 2,991 2011 300 Figures in shillings, 3,818 Millions 2010
17 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY Total Assets
45,590 2014 38,570 2013
29,958 18% 2012 20,588 2011 Figures in shillings, 21,423 Millions 2010
Deposit Administration and Investment Contracts
3,653 2014 3,015 2013
2,694 21% 2012 2,226 2011 Figures in shillings, 2,106 Millions 2010
18 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 WITH OUR HERITAGE OF STRENGTH AND STABILITY YOU CAN CONFIDENTLY LEAN ON US. Our Products • Pensions • General Insurance • Life Insurance • Retirement Planning • Medical Insurance
19 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY www.britam.co.ke BritamEA BritamEA For expert financial advice, call us. Tel: 0703 094 000 CHAIRMAN’S STATEMENT
It is my pleasure to present to you the Annual Report and audited Financial Statements of our Company for the year ended 31 December 2014. REVIEW OF THE BUSINESS ENVIRONMENT According to the National Treasury, the macro-economic environment remained stable with an upward revision of growth in 2013 from 4.7% to 5.7%. This demonstrates resilience and expanded activities throughout the economy. The year 2014 however reflected lower than expected performance in real GDP growth, revenue collections, government securities, tourism among others. By September overall inflation had reduced to 6.6% compared to the previous months at 8.4% and 7.7% although annual inflation rate of 7.2% was higher than 4.7% in 2013.
The Shilling, like most other currencies depreciated against the strengthening US Dollar to over Shs.90. The Central Bank rate continued to be held at 8.5% to stabilize bank rates. Uptake of bank credit by the private sector increased by 24% compared to 16% the previous year. The NSE 20 share index increased to 5200 points from 4200 points the previous year. The economic growth forecast for 2014 by the Government was about 5.25%.
Devolution began to be entrenched during 2014 and was characterized by triumphs and challenges. Challenges included infrastructure, delay in release of funds from the National Government, under collection of county revenues, under capacity in staff, inadequate management controls and conflicts between the County Executive and the County Assembly. However, the positive impact of the devolved funds in development and micro economic activity was unquestionable.
The IMF has taken note of Kenya’s infrastructure development, increased interest by foreign investors including foreign insurance interests, and lower transaction costs driven by low cost mobile phone technology and projected an economic growth of around 5.8% for 2014. Manufacturing, transport and communications appear Peter K. Munga to be the primary drivers of growth whilst insecurity led to higher expenditure. A high current account deficit was evident; this was driven by capital goods imports particularly oil exploration and rail CHAIRMAN construction equipment. According to the IMF, the five principal drivers for positive economic growth are improved business conditions due to investment in energy and transportation, expansion of the EAC market with decisive steps in integration, reduced social strife due
20 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 to devolution and central government transfers, more dynamic SME Shs. 10.09bn from Shs.8.28bn. Commendably the portfolio value in sector due to strong financial inclusion and better access to credit and force increased by a healthy 27%. Despite the price wars prevailing higher agricultural productivity with reduced medium term vulnerability in the market, underwriting profits were registered in Group Life and to weather shocks due to irrigation projects. General Insurance. Our venture in Microinsurance continued to gain traction through the Linda Jamii product – a project in partnership with The IMF put Kenya’s estimated oil and gas reserves at levels similar to Changamka Microhealth and Safaricom. More work in this dimension Equatorial Guinea and Democratic Republic of Congo; if commercially promises to yield results that might ultimately compare with increased realized Kenya’s current account will swing to a surplus in five to six financial access in the banking sector. years. STRATEGIC IMPERATIVES INSURANCE INDUSTRY Our investment in our brand is now bearing fruit in strong brand According to Swiss Re’s Sigma, the global economy in 2015 will recognition. The company provides best practice standards in its continue to grow led by recovery in the USA where growth will be above operations for the region and is a centre of excellence for the other 3% despite fragility in the Euro zone. The Euro zone’s fragility is being insurance business units in the Britam Group. The continuing strength accentuated by the rise of the political left in countries like Greece and of our distribution particularly the financial advisory network has earned Spain as well as the extreme right in countries like Greece and France. respect from the market. Whilst the financial advisors number 2000, the bancassurance distribution and the partnership with brokers and agents Return on Equity from the main Non-Life insurance markets is expected provide a robust diversification in our channels. In keeping with the to be 7% compared to 8.4% in 2013. This is because of low investment increasing scope of the Group a new organizational design framework returns; the sustainability of this return could be affected by any large has been crafted through the facilitation of the global management catastrophe losses or changes in reserves. consulting firm, McKinseys. Meanwhile the business transformation driven by IT investment is forging ahead to provide additional long term Underwriting results will certainly have to improve for business to remain thrust to the business. sustainable. Real premium growth for 2015 is expected to be 1.4% in advanced economies and 8% in emerging markets. DIVIDEND For Life insurance the low yield environment is an even greater threat The Board of Directors is recommending a dividend for the year of due to reliance on investments for profitability. ROE will be 12%. Shs.700m (2013: Shs 700m) which is Shs 0.80 per share. Advanced economies and Old markets will grow premiums by 4% and 3% respectively in 2014 and 2015 compared to 9% and 10% growth OUTLOOK respectively for emerging markets. Analysts, researchers in government, the private sector and the IMF These challenges have spurred new product development particularly all agree that the outlook for the country is positive. The government savings products in the major markets, increased market penetration investment in infrastructure, energy and security is inspiring confidence and distribution. for the future. The devolution of government has spurred growth at the county level. The potential revenue from natural resource finds has The outlook in the Old markets is clearly quite bleak. Global market ignited public debate about taxation and allocation of future revenues growth outlook will therefore continue to focus on Emerging markets for whilst an RFP for a sovereign fund has been issued. Oil exploration has both Non-Life and Life Insurance. slowed down but continues to spread to additional areas of northern Kenya and the Rift Valley, with encouraging results. The impact of the fall FINANCIAL PERFORMANCE in the prices of oil and gas has been to slow oil and gas exploration but is expected to reduce inflation in 2015 and increase disposable income. Gross earned premiums increased by 28% from Shs.8.55bn to Shs.10.94bn compared to the previous year. Total revenues including Emerging market growth in insurance has attracted existing and new pension contributions increased from Shs.11.85bn to Shs.15.11bn. investors. The result will be seen in better products, distribution, Total assets increased from Shs.38.6bn to Shs.45.6bn. A cut-throat innovation and deeper penetration. The competitive environment will pricing environment at a time of our investment in IT-led business also see consolidation of the insurance industry – a process which we transformation reduced our profit before tax by 29% to Shs.1.799bn. have already led. Consolidation will result in more customer focus and (2013: Shs. 2.53b). orientation in the market.
The embedded value of the long term business increased by 22% to
21 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CHAIRMAN’S STATEMENT (continued) ACKNOWLEDGEMENT I would like to thank our customers for their great support which has contributed to the success witnessed in 2014. We will continue to develop unique and innovative products that make their lives better. I would also like to thank our business partners, insurance brokers and agents and the Insurance Regulatory Authority. I would also like to acknowledge my fellow directors for their work and wisdom during such a period of rapid growth.
I also wish to thank our staff and financial advisors for their effort and commitment.
Thank you very much.
Peter K. Munga CBS Chairman
24 April 2015
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22 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 DIRECTOR OF INSURANCE BUSINESS & MANAGING DIRECTOR’S REPORT GLOBAL INSURANCE MARKET REVIEW The Global Non-Life insurance industry continued to enjoy relief from catastrophe losses that affected underwriting results from 2008 to 2012. That trend elicited a genre of research and publications about the drivers of increasing claims volumes. The positive result of the last two years’ experience was an improvement in underwriting profitability, according to Swiss Re’s Sigma research. This was underpinned by an increase in premium rates which was just as well because investment returns were muted. In the USA moderate premium rate increases were offset by slightly higher losses which in turn militated against any reserve releases. Faced with combined ratios of 99% and 102% for P&C and Accident low reserve releases put pressure on underwriting profitability. Europe fared better as rate increases in Motor business and fewer catastrophe and storm losses resulted in combined ratios of about 95%.
The Japanese market fared better in so far as claims were concerned than the previous year thereby yielding a better underwriting result. Australia was faring quite well due to improvements in property risks but the verdict is still out on impact of the December 2014 fires that affected New South Wales.
Swiss Re Sigma bewails the impact of what it describes as weak investment returns affecting overall global profitability. The main asset class for insurances in the predominant old markets – fixed income securities – offers low returns and is risky. Other asset classes elevate volatility. Investment returns at 9% of net premiums for Non-Life are at the lowest ebb compared to an average of 13.5% GROUP LIFE POLICY between 1999 and 2007. The only relief will be the emerging markets which will in 2015 and 2016 be expected to hoist global experience by accelerating premium growth to 2.8% and 3.2%. Although strong capital development is likely to lead to less reinsurance and more price competition stricter solvency regulations and higher capital requirements including the looming implementation of Solvency II P I AM READY U L GRO IFE will result in rate hardening. Reserves may have to be strengthened meaning that
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U • PROPERTY mean that challenging times lie ahead. Improved balance sheets were partly driven by the impact of declining interest rates on mark-to-market values of fixed income REGIONAL DIRECTOR - INSURANCE investments. Guarantees made by life companies in low interest environments are a risk to profitability, capitalization and solvency. Life insurers have therefore been shifting their portfolio mix toward assets like infrastructure, private equity, and joint ventures in the quest for higher returns.
23 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY DIRECTOR OF INSURANCE BUSINESS & MANAGING DIRECTOR’S REPORT (Continued)
Whilst Life real premium income grew by 3.9% in advanced and older Total assets increased from Shs.38.6bn to Shs.45.6bn representing a 18% markets in the West and the East the growth in emerging markets was increase. 9.1% driven by emerging Asian countries. Premiums increased by 15.7%, 6%, 3.6% in China, India and Latin America. The growth for Africa was ORDINARY LIFE INSURANCE only 1.8%. In advanced countries savings rather than protection business drove the sales. Whilst it is fairly obvious that many people around the Unit linked premiums were Shs.0.99bn against Shs.1.17bn in 2013, being world are uninsured or underinsured optimal customer reach through a 14% decrease. Conventional life premiums were Shs.5.006bn compared products, underwriting, distribution and customer orientation is still very to Shs.3.774bn representing an increase of 33% over 2013. Production much wanting. Swiss Re estimates the global gap in mortality protection in increased from shs.1.7bn API to Shs.2.1bn API, an increase of 23% over the event of a primary breadwinner as US$86 trillion. 2013. We won the AKI Agent Company of the Year Award for the 7th consecutive year. We are poised to win for the eighth time in respect of the Ebola has had no material impact on mortality experience of insurance companies. West Africa has very low insurance penetration and the year 2014 based on our increased production and productivity. The number exposure of insurance companies has been minimal. The total number of Financial Advisors in the company has now reached a threshold of 2,000. of cases confirmed, 10,000, resulted in 4,500 deaths. The outbreak is believed to have been contained, transmission to other regions was limited and proto vaccines are already in use. The view is that this disease will not SUPERANNUATION materially impact the insurance industry in the future. Pension contributions increased from Shs.1.85bn to Shs.2.65bn, a very significant increase of 43%. We are certainly among the fastest growing in KENYA INSURANCE INDUSTRY REVIEW this exciting segment of the long term market. The global themes of old market maturity, rapid emerging market growth As more and more Kenyans plan for their retirement driven by the rate, better premium rating, underwriting profitability, investment asset alternatives, innovative products and distribution and more rigorous demographic structure, increased urbanization and the law, this business regulation are very clear in Kenya. 2014 is expected to only repeat the will continue to provide excellent opportunity for growing the value market premium growth rate of 21% that was registered in 2013 despite proposition for our customers. We have been able to provide the highest attempted rate corrections to stem underwriting losses from Motor Private returns on Guaranteed Funds for 3 years running. business. This will take the industry to over Shs.155bn in premiums. Industry profits are likely to continue to be significantly weighted towards GROUP LIFE investments rather than underwriting. The poor outlook for returns in the advanced markets amidst evidence that the emerging markets are Group Life earned premiums increased from Shs.1.237bn to Shs.1.453bn now driving global growth has awakened intense interest in the Kenya representing a 17% growth from 2013. This market continues to display all market from foreign investors. Not least in their considerations must be the signs of an overcrowded innovative market and margins are dropping. the diverse natural resource finds that have led institutions like the IMF to estimate Kenya’s still unexplored, uncommercialised oil reserves as equal We have taken measures to address the risks posed by these challenges. to Equatorial Guinea. The regulatory requirements for less concentrated shareholdings and higher risk based capital are also believed to have MEDICAL INSURANCE provided opportunities for consolidation. Medical insurance premium increased from Shs.0.986bn to Shs.1.122bn, a COMPANY FINANCIAL PERFORMANCE growth of 14%. Our approach to this business will continue to confront its inherent volatility with appropriate tactics to maintain an underwriting profit HIGHLIGHTS whilst optimizing market share. Total revenues were Shs.15.114bn compared to Shs. 11.853bn representing an increase of 28% over 2013. GENERAL INSURANCE Gross earned premiums increased from Shs.8.553bn to Shs.10.942bn, an General insurance premium increased from shs.2.659bn to shs.3.4749bn, increase of 28%. an increase of 31%.The market premium rates are very soft due to intense Profit before tax was Shs.1.799bn compared to Shs.2.53bn representing a competition and price undercutting. decrease of 29% over 2013. Embedded value for the life business increased by 22 % to Shs.10.09bn from Shs.8.28bn.
24 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 MICROINSURANCE ACCOLADES Microinsurance revenues grew at 114% to Shs.399m from Shs.187m Whilst our peerless performance in Life Business continued we repeated in 2013. We launched our partnership with Safaricom and Changamka achievements of the previous year by winning the 2014 CFI Best Insurance Microhealth targeted at pioneering breakthrough products that will be Company in Kenya and the 2014 World Finance Best Life Insurance Company in innovative in design, distribution and benefits delivery. Kenya. We also won the KIM OPI Customer Orientation and Marketing Award for the third consecutive year. We were the second ranked insurance company and CHANNEL DEVELOPMENT ninth overall in the Deloitte Best Company to Work For Survey. During the year we ran several promotions targeted towards leveraging the productivity of new satellite branches and distribution partners. We REORGANISATION DESIGN also initiated contact with county governments by reviewing our structure The acquisition of Real Insurance group provided the occasion for an in depth and driving a high level of energy in engagement. We are seeing a steady integration and organisational redesign. The plan is to segregate the existing increase in production from our initiatives. business into Life and General Companies subject to regulatory approval in 2015. McKinsey were appointed to carry out organisation redesign addressing ACTUARIAL a group corporate centre role distinguished by being fit for purpose in providing profit and loss autonomy whilst ensuring that subsidiary oversight is aligned to Our actuarial department is in full compliance with the considerable scope shareholder risk appetite with risk taxonomy translated into clear operational of work required by the Actuarial Guidelines issued by the Insurance and financial controls. This will give rise to new roles and responsibilities within Regulatory Authority. This department carries out critical financial work the company and the wider group. The identity of the group as one Company, including investment analysis, asset/liability management, actuarial one brand shall remain. valuations, experience investigations, product development, and analysis of embedded value among others. OUTLOOK RISK Increasing consolidation in the market has been triggered by regulatory Through effective Enterprise Risk Management we seek to minimize the requirements as well as the commercial outlook for the industry and the adverse impact of risks on our business objectives and enable the Company country at large. The industry has recorded one of the highest rates of sustained to leverage market opportunities effectively. premium growth globally despite the prevalence of fragmented market shares. The optimism expressed by the IMF of the size and commercial viability of oil Our Enterprise Risk Management Framework places a strong emphasis on finds not to mention other natural resources have also found expression in the accountability, responsibility, independence, reporting, communication and increase in DFI. Considerable investment is being made by the government transparency, both internally and with all our key external stakeholders. into renewable energy and infrastructure. The collapse of oil prices in late 2014 The principal elements of the Enterprise Risk Management Framework promises higher consumer purchasing power in 2015. A projected growth rate are risk identification and assessment; risk measurement mitigation and of 5-6% for 2015 on our lower middle income economy is expected. monitoring; and risk reporting. Britam has acquired ERM software which is aligned with the best market ACKNOWLEDGEMENTS practice requirements to identify, assess and monitor risks in the group at strategic, business and process levels. This system enables dynamic I would like to thank the Chairman, Mr. Peter Munga CBS, the Board, and risk management and monitoring of risk on an enterprise-wide basis. We the Group Managing Director, Dr. Benson Wairegi for their leadership. I have issued an RFP for the development of our ERP and Capital Adequacy would also like to thank our staff, channels and above all our customers Framework, aiming to provide independent assurance that we will be best for their support. Special thanks go to the CEO, and Commissioner of of breed. Insurance, Insurance Regulatory Authority, Mr. Sammy Makove, for his continued support and direction. INFORMATION TECHNOLOGY Thank you. Our business transformation strategy is being led by IT. We launched the business transformation strategy in October 2014. The strategy is meant to ensure that Britam grows profitably and sustainably. Key benefits of the strategy will include differentiated customer service, increased efficiency, improved management reporting and decision making and product innovation. Business and IT teams have been seconded on full time basis towards this project at a Stephen O. Wandera dedicated project office. As an IT led transformation all system projects have Regional Director of Insurance Business been contracted and the project management team is being supported by PwC. Deliverables will begin coming on stream in 2015. 24 April 2015
25 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY BOARD OF DIRECTORS
Peter K. Munga, CBS Amb. Dr. Francis K. Muthaura, MBS, EGH Dr. Benson I. Wairegi, EBS Chairman Non-Executive Director Group Managing Director
Dr. James Mwangi Nduva Muli, EBS Agnes N. Odhiambo Non-Executive Director Non-Executive Director Non-Executive Director
Tarun Ghulati Stephen O. Wandera Non-Executive Director Regional Director of Insurance Business
26 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 MANAGEMENT TEAM
Stephen O. Wandera Regional Director of Insurance Business
Joseph Kiuna Kennedy B. Aosa Ambrose Dabani CEO Britam General Insurance Director, International Business General Manager - Life & Pensions
Charles Muyodi Joseph Gathogo Daniel Mugao General Manager - Microinsurance Country Sales Manager- Country Sales Manager- Life Business General Insurance
Mary Mundia Cecilia N. Kilonzo Kwameh N. Anyona Chief Accountant - Chief Accountant- Operations Manager, Life General Business Life Business
27 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY STATEMENT OF CORPORATE GOVERNANCE
British-American Insurance Company (Kenya) Limited continues to fulfil responsibilities in the best interest of the Company, its shareholders, its corporate governance obligations and responsibilities in the best customers, business partners and the wider community. Our corporate interests of the Company and its clients. We are committed to the highest values and ethics are entrenched in our strategic and business objectives standards of corporate governance and business ethics and recognize that and are focused on transforming and accelerating growth in value for the good corporate governance is key to the enhancement of our business benefit of all our stakeholders. performance. The Board of Directors seeks to discharge its duties and
Corporate Governance Framewok™
Business Practices Monitoring and Ethics
Disclosure and Board of Dirctors Transparency COMMUNICATION and Committees
Risk and Performance Legal and Management Regulatory
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BOARD OF DIRECTORS Amb. Dr. Francis Kirimi Muthaura (Non- The Board of Directors normally meets at least once every quarter and is Executive Director) chaired by a non-executive Chairman. The Board comprises a balance of executive and non- executive directors each of whom brings a wide A career diplomat and civil servant, he was first appointed to the Britam range of skills and experience, independent judgment and a considerable Board of Directors on 15th August 2013. Until his retirement in 2012, Amb. knowledge to the board’s discussion. Dr. Muthaura was the Permanent Secretary, Head of Public Service and secretary to the Cabinet, Government of Kenya. He holds a Bachelor of The Board has a formal schedule of matters reserved for it. The Directors Arts Degree in Economics, Political Science and a Post Graduate Diploma receive appropriate and timely information so that they can maintain full in International Relations, University of Nairobi. and effective control over strategic, financial, operational, compliance and governance matters. He has vast public and private sector management and leadership experience gained through assignments both locally and internationally. He Ultimately, the Board determines the Company’s strategic objectives, is also the chairman of the LAPSSET Corridor Development Authority. values, key policies and procedures in accordance with best practice. It is responsible for establishing and maintaining the overall internal controls In recognition of his distinguished public service, he was awarded “Moran of financial, operational and compliance functions as well as monitoring of Burning Spear” by the retired president Daniel Arap Moi and the “Elder performance of the executive management. of Golden Heart” by the retired president Mwai Kibaki.
The Board has delegated the authority for day-to-day management of the Dr. Benson I. Wairegi, EBS Company to the Regional Director. However, it retains overall responsibility for the Company’s financial performance, compliance with laws and (Group Managing Director) regulations, and monitoring of its operations as well as ensuring competent management of the business. Dr. Wairegi holds a Honorary Doctorate Degree from Kenyatta University, a Masters of Business Administration degree and Bachelor of Commerce Peter K. Munga, CBS degree from the University of Nairobi and is a Certified Public Accountant. He is the Vice-Chairman of Equity Bank Limited and also a Director of (Non-Executive - Chairman) Housing Finance Company of Kenya Limited (HF). Mr. Munga is a retired Deputy Secretary in the Government of Kenya. He is the Chancellor of Kenyatta University Council and former chairman He holds an Honorary Doctorate in Business Administration (Honoris of the Association of Kenya Insurers (AKI) and former board member of the Causa) from United Graduate College and Seminary. He is a Certified Board of Trustees of the Insurance Training and Education Trust (ITET). Public Secretary with vast experience in both public and private sector management. He also holds the Yara Prize for a Green Revolution in African Dr. James N. Mwangi, CBS Laureate 2009 award. (Non-Executive Director) Mr. Munga is the Chairman of Equity Bank Limited, Chairman of National Oil Corporation of Kenya (NOCK), Chairman of Micro-Enterprise Support Dr. Mwangi is the CEO and Managing Director of Equity Bank Limited. He Programme Trust (MESPT), Chairman of Kenya Genetic Resource Centre holds five honorary doctorate degrees in recognition of his contributions (KAGRC), Chairman of Equatorial Nut Processors Limited and Chairman of to the Kenyan society. He holds a Bachelor of Commerce degree from the Fresho International Limited. University of Nairobi and is a Certified Public Accountant. Dr. Mwangi has been honoured thrice with Presidential national awards. He is a graduate of He is an enterprising businessman and runs the Pioneer Group of Schools. Advanced Management Programme (Strathmore- IESE Business School, Barcelona, Spain).
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He was vested the First Class Chief of the Order of the Burning Spear Mr. Ghulati is the Group President and Chief Executive Officer of Bramer (CBS) national decoration - the highest presidential award to a civilian, Corporation Limited and provides leadership to the Presidents and Chief for outstanding contribution in economic development. He is currently Executives of BAI Co (Mtius) Limited, Bramer Banking Corporation Limited, the Chairman of Kenya’s Vision 2030 Delivery Board charged with the Bramer Asset Management Limited, Bramer Capital Brokers Limited and responsibility of ensuring Kenya becomes a middle income country with Bramer Global Services Limited. He is also the Vice Chairman of Bramer global high standards of living by the year 2030 and Chancellor of Meru Banking Corporation Limited and a director of over 25 subsidiary Boards of University of Science and Technology. the British-American Group. Mr. Ghulati is a committee member and Deputy Chairman of the London Chamber of Commerce Asian Business Association, He serves on several international bodies as an advisor or board member. a member of the UK Trade & Investment Global Entrepreneur India Advisory He has wide experience in the banking industry and inclusive finance. Group and a former board member of the Indus Entrepreneurs (TiE) Nduva Muli, EBS (Non-Executive and Stephen O. Wandera (Director of Independent Director) Insurance Business & Managing Director) Mr. Muli is the Principal Secretary ministry of Transport and Infrastructure Mr. Wandera is the Managing Director and Principal Officer of British- and the former Managing Director of Kenya Railways Corporation. American Insurance Company (Kenya) Limited. He is also the Director of He holds an Executive Master of Business Administration from Moi insurance business in the region. University, Nairobi Campus, a Bachelor of Land Economics from University He is a past Chairman of the Association of Kenya Insurers (AKI) and a of Aberdeen, Scotland and has done various leadership and management former Governor of the Kenya Private Sector Alliance (KEPSA). Mr. programmes from Cornell University. Wandera holds a Master of Business Administration and Bachelor of Arts Agnes N. Odhiambo (Non-Executive and degrees both from the University of Nairobi and is a Fellow of the Chartered Insurance Institute (FCII). Independent Director) Mrs. Odhiambo is the Controller of Budget of the Government of Kenya Nancy K. Kiruki (Company Secretary) and a Fellow of the Institute of Certified Public Accountants of Kenya Mrs. Kiruki is the Company Secretary and holds a Bachelor of Laws degree (ICPAK). She is also a member of the Association of Women Accountants of (LL.B) from the University of Nairobi and a Master of Laws degree (LL.M) Kenya (AWAK). She also serves as a Board Member of the Kenya Women from the University of Cape Town. She is an advocate of the High Court Microfinance Bank. She is the former Chief Executive Officer/Secretary to of Kenya, a Commissioner of Oaths, Notary Public and a Certified Public the Constituencies Development Fund Board. Secretary. She is also the Director; Legal and Human Resources. She joined Mrs. Odhiambo holds a Master of Business Administration degree and a the Company in 2008. Bachelor of Commerce degree both from the University of Nairobi and is a Certified Public Accountant of Kenya. Board Composition and Appointment Tarun Ghulati (Non-Executive Director) The Board of Directors consists of the Chairman who is also a non-executive director. Other than the Chairman, there are five non-executive directors Mr. Ghulati is a British citizen and holds a Masters Degree in Business and two executive directors. The Board maintains effective control over Administration. He has extensive international leadership experience gained strategic, financial, operational and policy issues. through assignments at a country, regional and global level with Citibank, HSBC, ING and UTI International Limited. Mr. Ghulati was part of the very The board of Directors maintains an appropriate balance of skills, experience, select international cadre with HSBC, and has worked in numerous countries independence and knowledge of the Company and its business to enable across Asia, Europe, the Middle East and Africa. His experience in strategy them discharge their respective duties and responsibilities effectively as development and relationship building with high net worth individuals in the well as be diverse on nationality, age, race and gender and each contributes private equity, mergers and acquisitions will be invaluable to the Britam Group independent judgment and knowledge to the Board discussions. On as it sets out on an ambitious pan-African regional expansion strategy and appointment, each Director is provided with a comprehensive and tailored portfolio diversification. induction process covering the Company’s business and operations and is
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provided with information relating to their legal and regulatory obligations. strategic objectives, ensuring establishment of the organizational structure and procedures to achieve the objectives, ensuring effective control over All non-executive Directors are required to submit themselves for re-election the Company and accounting to its Shareholders. in accordance with the Company’s Articles of Association. Separation of role of Chairman from Board Meetings - Information for Directors Chief Executive The Board deals with all significant matters including strategic direction for the Company, ensuring competent management of the business, internal The roles of Chairman and Chief Executive remain separate within the control, compliance with laws and regulations and reporting performance Company. The Chairman is responsible for managing the Board and to shareholders. providing leadership to the Company while the Regional Director is responsible to the Board for strategically overseeing and managing the The directors are given appropriate and timely information on key activities business units in the Company in accordance with instructions given by the of the business regularly and on request in order to carry out their roles. Board. The Regional Director directs the implementation of Board decisions Specifically, the directors are provided with all available information in and instructions and the general management of the business units with respect of items to be discussed at a meeting of the Board or committee the assistance of the management teams. prior to the meeting. The Board members have open access to management through the Chairman, Regional Director and Company Secretary. Regular Conflict of Interest presentations are made by management to the Board and Board Committee meetings and directors may seek briefing from management on specific The directors of the company are under a fiduciary duty to act honestly matters as well as seek independent professional advice. and in the best interests of the Company. Any business transacted with Britam must be at arm’s length and, fully disclosed to the Board, which Oversight Role of the Board must consider and approve it. A director must refrain from discussion or voting on matters of potential conflict of interest. The board provides strategic direction with a focus on consistent business performance in an atmosphere of transparency and accountability whilst Board Induction, Training and Evaluation also reviewing and monitoring proper corporate governance throughout the Company. The responsibilities of the Board are clearly spelt out in both the On appointment, each director is provided with a comprehensive and tailored Articles of Association of the Company and the Board Charter. induction process covering the Company’s business and operations and provided with information relating to their legal and regulatory obligations. The Board defines the purpose of the Company, its strategic intent, objectives and its values. It ensures that procedures and practices are in In pursuit of the objective of promoting board effectiveness, the board place to protect the Company’s assets and reputation. undertook a self-evaluation exercise facilitated by a consultant. The recommendations from this evaluation are being considered with a view to The Board retains full and effective control over the Company and monitors implementing them. Management’s implementation of the plans and strategies set by the Board. It ensures ethical behaviour and compliance with relevant laws Code of Business Conduct and regulations, audit and accounting principles, corporate policies and procedures and the Code of Ethics. The board recognises that employees form an integral part of the internal control system of the corporate structure. Each year every employee It strives to act above and beyond the minimum requirements and commits to adhere to the code of business conduct by studying and benchmark performance against best international practices. keeping abreast of the Company’s expectations regarding their duties and integrity as spelt out in the Code of Business Conduct. All employees In accordance with the principles of good corporate governance, each execute a code of business conduct compliance statement in which the Director undertakes to always act in the best interest of the Company and employee commits to pin-point any violations of the code. exercise his/her power in the execution of duties in good faith and acts with care and prudence. Each Director is fully aware that the Board is responsible for determining the Company’s vision, mission and values, deciding its
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Committees of the Board Risk and Compliance Committee
The Board is responsible for the management of the Company. It has The Committee meets at least three times a year or at such other times delegated the detailed discussions to the following committees: Audit as the Chairman of the Committee shall require. Its primary purpose is to Committee, Investments and Strategy Committee, Risk and Compliance develop and implement risk management framework, policies, procedures Committee, Compensation and Human Resources Committee, ICT and standards. It also monitors the Company’s compliance with the relevant Steering Committee and Nominations and Governance Committee which laws and regulations and reviews management’s implementation and have specific and detailed terms of reference as summarized below: maintenance of appropriate systems, procedures and Codes of Conduct in accordance with the Company’s policy guidelines regarding identification, Audit Committee analysis, mitigation and control of risks. The Audit Committee meets at least thrice a year, with authority to convene additional meetings, as circumstances require. Its primary responsibilities Compensation and Human are to assist the Board in ensuring integrity of the Company’s financial Resource Committee statements, review the Company’s internal control systems, monitor and review the effectiveness of the internal audit function, make The Committee meets at least three times a year or at such other times as recommendations to the board in relation to the appointment of the external the Chairman of the Committee shall require. Its primary role is to support auditor and ensuring the Company’s compliance with legal and regulatory the Company’s strategic plan of ensuring that there is an empowered, requirements. motivated and productive workforce in a ‘one company one culture’ environment. Further, it will recommend the remuneration for non-executive The Audit Committee has authority to conduct or authorize investigations into directors, appraise the performance of senior management and determine any matters within its scope of responsibility. The Committee may delegate their remuneration as well as establish the overall staff remuneration authority to subcommittees, including the authority to pre-approve all auditing budget including performance bonus pools for approval by the Board. and permitted non-audit services, providing that such decisions are presented The committee will also ensure implementation and compliance with the to the full committee at its next scheduled meeting. Human Resources Policies and Procedures and recommend to the Board relevant reviews. The Audit Committee regularly reports to the Board about committee activities and issues that arise with respect to the quality or integrity of the Company’s financial Nomination and Governance Committee statements, compliance with legal requirements, performance and independence of the Company’s independent auditors, and the performance of the internal The Committee meets at least three times a year or at such other times as audit function. The Company Internal Audit Manager acts as the secretary the Chairman of the Committee shall require. Its main role is to review and of the committee and senior management regularly attend the committee meetings. consider proposals for the appointment of new directors and is chaired by the Chairman of the Board. The Committee shall also ensure that the Investments and Strategy Committee Company adheres to the Corporate Governance Guidelines. The Investments and Strategy Committee meets at least three times a year Remuneration of the Directors or at such other times as the Chairman of the Committee shall require. Its primary purpose is to determine the Company’s investment strategy In determining the remuneration of the Directors, the demands and and policy and to consider the proposed strategic investments and make requirements made of the Directors in relation to the Company’s business recommendation to the Board. It also maintains an interactive strategic and the availability of the Directors to consult on ad hoc basis are considered. planning, implementation and monitoring process with management. Sitting allowances to the Directors are only paid subject to attendance at the Board/Committee meetings. The emolument and fees paid to Directors ICT Steering Committee are disclosed in note 42(iv). The ICT Steering Committee meets at least three times a year or such other Professional advice times as the chairman of the committee shall require. Its primary purpose is to oversee the implementation of the ICT strategy. In order to carry out its responsibilities in an independent and objective manner, the Board seeks professional counsel from among others;
32 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF CORPORATE GOVERNANCE (Continued)
Actuaries: Mr. P.C. Falconer of Aon Hewitt Actuarial acts as the insurance approved authority being delegated. Performance against the objectives is company’s statutory actuary responsible for independently examining the reviewed and discussed monthly and quarterly by the management teams financial soundness of the company. The actuary reports independently in the Company. and directly to the Board. Compliance with Laws Mr. Lance Moroney also of Aon Hewitt is the Consulting Actuary, Non-Life business as required by the prudential guidelines issued by the Insurance The Board is satisfied that the Company has, to the best of its knowledge, Regulatory Authority. Mr. R. Leiser-Banks of Triangle Actuarial Services complied with all applicable laws and conducted its business affairs in provides actuarial services in regard to the Britam Company employee accordance with the law. pension scheme. To the knowledge of the Board, no director, employee or agent of the Tax advisors: Deloitte & Touche are the Company’s independent tax Company acted or committed any indictable offence under the Anti- advisors. They liaise with management to ensure that the Company Corruption laws in conducting the business of the Company nor been optimizes its tax position and complies with all tax laws and regulations. involved or been used as conduit for money laundering or any other activity incompatible with the relevant laws. The Company Secretary is responsible Risk management: In 2010- 2011 the Company developed an for ensuring that all the Board procedures, corporate governance policies, Enterprise Risk Management Framework with the assistance of Deloitte rules and regulations are followed. Consulting Limited. Implementation of that framework has been on-going since. However, in light of the changing regulatory environment, particularly in the area of risk management and compliance, we will continue Company Secretary to involve professionals to ensure that our risk management programs are All directors have access to the services of the company secretary who is in line, not only with the regulatory requirements but also in line with best responsible for ensuring that meeting procedures are followed and plays practice. an active role in the facilitation of the induction of new directors and the improvement and monitoring of corporate governance processes. Internal Controls Internal control is broadly defined as a process, effected by an entity’s Governance of IT board of directors, management and other personnel, designed to provide Information security governance is the responsibility of the board of reasonable assurance regarding the achievement of objectives in the directors and senior executives. It is an integral and transparent part of effectiveness and efficiency of operations, integrity and reliability of financial enterprise governance and is aligned with the IT governance framework. reporting and compliance with applicable laws and regulations. Whilst senior executives have the responsibility to consider and respond to the concerns and sensitivities raised by information security, the boards of Management has continued to ensure that the Group’s internal control directors have made information security an intrinsic part of governance; environment is robust through continuous assurance from the Internal Audit integrated with processes they already have in place to govern other critical Department. The Department’s independence is safe guarded by the fact organizational resources. that it functionally reports to the Audit Committee of the Board of Directors. To exercise effective enterprise and information security governance, the To enhance efficiency, the Internal Audit function has implemented an board and senior executives have a clear understanding of what to expect Enterprise Risk Management (ERM) Framework, utilizing an internal audit from the enterprise’s information security programme. They know how to software in collaboration with the Risk Management function. This will direct the implementation of an information security programme, how to ensure that Internal Audit reviews are risk based, in line with best practice. evaluate their own status with regard to the existing security programme and how to decide the strategy and objectives of an effective security Conduct of Business and Performance programme. Reporting Share Capital The Company’s business is conducted in accordance with a carefully The authorized and issued share capital of British-American Insurance formulated strategy, annual business plans and budgets which set out very Company (Kenya) Limited consists of only ordinary shares as disclosed on clear objectives. Roles and responsibilities have been clearly defined with
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Note 12 to the financial statements. The holders of the ordinary shares are shareholders are entitled to receive the annual report and financial statements entitled to attend the Annual General Meeting in person or through proxies. and such distributions from the Company as may lawfully be declared. All shareholders are entitled to attend, speak and vote at the AGM including the Shareholders Rights appointment of proxies. On a poll shareholders are entitled to one vote for each share held. There are no shares carrying special rights. The rights and restrictions attaching to the shares are set out in the articles which can only be amended at the Annual General Meeting (AGM). All
SCHEDULE OF ATTENDANCE OF BOARD & COMMITTEE MEETINGS FOR THE YEAR ENDED 2014
Meetings and Peter K. Francis K. Benson I. James N. Tarun Stephen O. Agnes N. Attendance During Tenure Munga Muthaura Wairegi Mwangi Nduva Muli Ghulati Wandera Odhiambo Meetings Held 4 4 4 4 4 2 4 4 Main Board Meetings Attended 4 3 4 4 0 2 4 3 % Attendance 100% 100% 100% 100% 0% 100% 100% 75% Meetings Held 4 N/A N/A N/A 4 N/A N/A 4 Audit Committee Meetings Attended 3 0 N/A 4 % Attendance 75% 0% N/A 100%
Risk & Meetings Held N/A N/A N/A N/A 3 2 N/A N/A Compliance Meetings Attended 3 0 Committee % Attendance 100% 0%
Investments Meetings Held 3 N/A 3 3 N/A N/A N/A N/A & Strategy Meetings Attended 3 3 0 Committee % Attendance 100% 100% 0% Meetings Held 1 1 N/A N/A 1 N/A N/A N/A Compensation & Meetings Attended 1 1 0 HR Committee % Attendance 100% 100% 0% Meetings Held N/A N/A 6 6 6 N/A N/A N/A ICT Steering Committee Meetings Attended 6 1 6 % Attendance 100% 16% 100%
* Tarun Ghulati resigned on 18 March 2015
34 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 RISK MANAGEMENT REPORT The practice of risk management in Britam has been on a continuous improvement trajectory over the last 2 years and it is expected to pick Key Risk Management Practices up momentum going forward in light of anticipated regulatory changes. The principal elements of the risk management process are described below. The latest draft of the Insurance Bill 2015 proposes 16 key changes, most of which will enhance risk based supervision and provide the Risk Identification& Assessment framework for the adoption of a risk based capital adequacy model. Strategic objectives, reflecting management’s choice as to how the The Britam risk management team will continue to develop and company will seek to create value for its stakeholders, are translated strengthen oversight of the business even as the Britam Group into Business Unit objectives. Risks that would prevent the achievement continues its expansion across Africa. As Britam, we recognize that of both the strategic and business objectives are then identified. risk management is an integral component of our business operations Mechanisms for identification and prioritization of risks include but are and an important contributor to the sustainability of our business and not limited to environmental scanning, focused discussions, risk surveys the protection of shareholder value. We have therefore structured the and questionnaires. Internal Audit findings also provide pointers for risk governance over risk in the following manner: identification. Risk identification and assessment is an integral part of our annual business planning process as well as an ongoing activity. Risk Governance Risk Measurement, Mitigation & Monitoring The insurance company’s risk governance framework is based on the Once risks have been identified, the factors causing or contributing to three lines of defense model. This model distinguishes between: the risks are identified and classified. From an operational perspective 1st Line of Defense: Functions owning and managing risk causal factors are classified into people, process, system and external 2nd Line of Defense: Functions overseeing the management of risk; and events. Management, in cooperation with the risk functions, then formulates action plans to mitigate the risks to acceptable levels of risk 3rd Line of Defense: Functions providing independent assurance. exposure. The management of operational risk is based on a system of internal control. This system includes a documented organizational Risk Management structure with policies, procedures and reasonable segregation of duties As part of the first line of defense, the Principal Officer, supported by the that are communicated throughout the company. respective Business heads has overall responsibility for the management The careful selection, training and development of staff contribute to a of risk. Management and staff within each business are responsible for risk monitoring and control culture. The classification of risks and causal the identification, assessment, management, monitoring and reporting factors enable the creation of risk scorecards that provide management of risks arising within their respective areas. with information on risks, the level of exposure to identified risks as well as the factors causing or contributing to risks. Linked to these Risk Oversight scorecards are detailed action plans that can be tracked through a The second line of defense comprises the Risk & Compliance function. Its web-based risk management system. This system enables dynamic mandate is to support the Business in understanding the exposure and risk management and monitoring of risk on an enterprise-wide basis. management of risks impacting the business. Other members providing The corporate governance framework for operational risk management risk oversight include the Actuarial Function in liaison with the Finance, includes monitoring committees such as: the Board Audit Committee; Investment and Strategy executives. The Board through the Board Risk and the Board Risk Management and Compliance Committee. & Compliance Committee provides the ultimate risk oversight. Risk Reporting Independent Assurance The Top Operational Risks report outlining the risk level, trend line, The third line of defense is designed to provide independent assurance exposure, potential impact and status of mitigation actions is discussed on the effectiveness of the systems of governance, risk management at the Operational Risk management committees and the Risk & and internal controls in relation to the most significant risks which Compliance Committee on a regular basis. Business unit risks are threaten the achievement of the company’s business objectives. The discussed at the appropriate levels within the organization. Internal Audit Function plays a key part in the third line of defense and provide assurance to the Board through the Board Audit Committee.
35 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY SUSTAINABILITY AND CORPORATE SOCIAL RESPONSIBILITY
First Lady Margaret Kenyatta receives a Kshs 10 million donation from Britam Group Chairman Amb. Dr. Francis K. Muthaura to support the “Beyond Zero Campaign” at State House Nairobi.
36 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued)
Our Goal Britam Foundation Britam views Corporate Social Responsibility (CSR) as a fundamental As a responsible and caring corporate citizen, Britam has been able to aspect of its business. In 2014, the Group continued to support various integrate the social, environmental, and economic concerns of its various initiatives in the areas of education, environment and ethics. We continue stakeholders in a bid to improve the society. By giving back to the community to work with our community partners to identify other emerging needs. through Corporate Social Responsibility (CSR) activities, Britam has been We have been making positive choices in our work process and have able to cultivate goodwill across all its business with the various stakeholders taken significantly huge investments in our people’s health, education, our to promote a sustainable society. community and the whole region in order to provide a safe, sustainable working and living environment. The Group’s long term strategy is to engage in strategic CSR which will not only benefit our stakeholders, but also reinforce the Company’s corporate The essence of sustainability is to continuously attend to the needs and strategy and leverage on key focus areas. Britam looks at CSR not just wants of the present generation, while mitigating future risks that might as a goodwill gesture but a prerequisite for good corporate leadership, break this cycle of commitment and attainability. Our drive is achievement governance and sustained operation and profitability. of sustainable development and the realization of growth and progress for all our stakeholders. We are founded on the principle of sustainable Background responsibility to those we serve as we continue to keep our promise to deliver peace of mind and financial freedom through our exceptionally The Britam Foundation is a non-profit charity of Britam. It was incorporated motivated team. as a Limited Liability Company as the vehicle through which Britam and its subsidiary companies will carry out corporate social responsibility (CSR) Our Ethics activities. We continue to build on honest and open working environments with those The Britam Foundation will spearhead efforts by the Group to engage we deal with both internally and externally. We have done this by maintaining with its diverse publics and stakeholders through CSR in a strategic and our positive integrity that enables us to assess the impact of our strategy sustainable manner. The mandate of the Britam Foundation is to come up and decisions that goes beyond increasing the shareholder value. with programmes and activities meant to enrich the lives and livelihoods of the less fortunate and marginalized people in the countries that Britam Our core has been sustaining the trust with our stakeholders and striving operates in order to provide a sustainable solution to their recurring to respond to our diverse stakeholder expectations while complying problems. with emerging national and international legislation. The management spearheads the initiatives that always are a reflection of professionalism, The Foundation will be instrumental in identifying core and strategic excellence and positive attitude. This flows down to all our employees. CSR activities for funding, help in the implementation of respective CSR programs and activities, and also determine the sustainability priorities of We have developed clear policies that offer optimum solutions to guide the organization. implementation of new technology, corporate governance and ethical standards in line with how we interact with our clients and business partners. When fully operational, the main focus areas of the Foundation will be Our key priority is the relationship with our customers, our employees, our on education, environmental conservation, water, health, disaster relief, partners and our suppliers. economic empowerment, arts, culture, and sports. The Foundation has come up with clear guidelines and policies on how to drive each of these important pillars. Key Objective While waiting for the foundation to be fully operational, Britam will continue to pursue CSR activities aimed at supporting the Group’s strategic objectives, grow the brand visibility as a credible and reliable business partner, and support overall sustainability objectives of the organization.
Ultimately, our aim is to cultivate loyal partners, a grateful clientele and a Britam Group Managing Director Dr. Benson I. Wairegi (centre) with the Mathare United Football Club during sustainable relationship with our various stakeholders through strategic the official launch of Britam’s sponsorship of the Kenya Premier League team. CSR activities.
37 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued)
The key objective of the Britam Foundation is to enrich the lives and livelihoods of the less fortunate and marginalized people throughout Eastern Areas of focus Africa in a sustainable manner and to provide a sustainable solution to Skills and Economic Empowerment; The foundation will help provide more their recurring problems. training, market access and career opportunities to mostly women and Our Environment men, many on farms and in factories, ultimately allowing them access to the economic opportunity they deserve. Environmental degradation can be defined as the reduction of the capacity of the environment to meet social and ecological objectives, and needs. Water; The foundation is keen to create large scale water projects in areas Our visionary focus is to protect and support the future generations to meet that have very dry seasons resulting to water shortages. This forces residents own needs through best business practices. especially women and children to walk for very long hours in search of water. The foundation will aim at making the water more accessible to residents. Britam has gone out of its way to mitigate the damage the community is facing currently from environmental degradation. The following are projects Disaster; The Britam Foundation will aim at giving grants at moments of engaged in 2014: disaster that may hit the country including clashes, and floods amongst others. This will facilitate better response and management of disasters • Project Jawabu initiative which is the creation and implementation of and saving more lives which is a responsibility of each loyal citizen. systems that will enhance efficiency in working. This will eliminate use of paper up to almost 50%. We understand and appreciate that work Environmental Conservation; Britam, through its foundation will keep processes have a direct impact on the environment in the long run. As upgrading and preserving its environment in support of the going green part of our rigorous efforts in providing due care for our eco-system, initiative. we are continuously researching and have developed, implemented efficient working processes characterized by a fully functioning Health; The Britam Foundation will continue to make investments in various paperless system. ways to improve the health and wellbeing of Kenyans, women and children • At Britam, we have in place environmental strategies and platforms that; in particular. Key is the continued support of mobile medical camps around • Minimize waste and promote less use of paper in the office. the country in marginalized areas to people in each location seeking • Educate and motivate our workforce. specialized medical attention that they cannot access due to financial, • Encourage recycling of waste paper in the office by selling to recycling quality or geographical constraints. companies. Working with the Cartoon Network, the Britam Foundation sponsored the In 2014, Britam Asset Managers visited Nyumba Ya Wazee, a home “Animation Generation” art competition for Shs 12 million. The competition which cares for the elderly. The company donated 10 wheelchairs, and for children aged between 9 and 14 years was meant to raise awareness assorted foodstuffs to the home. Britam also, donated Shs 100,000 towards on the importance of wildlife conservation and protecting the environment. establishing a fund to pay for the education of people with disabilities. It involved over 100 schools in Nairobi and its environs. Britam also bought T-shirts worth Shs 50,000 for staff to participate in the Dettol Mater Heart Run 2014.
Sports; Britam sees sports as a key means of getting to interact with the community and enhancing relations. The society further understands the values of the company including transparency and excellence. It is also an influential channel in reaching and engaging people from across the entire social, economic and demographic spectrum.
For the Dandora Youth soccer Championships, Britam got involved and donated Shs 24,000. Britam also gave Shs 400,000 sponsorship towards the Murang’a County Jamuhuri Day football match and Gatundu South
Britam Senior Investor Relations Manager Carol Karugu, presents a cheque of Kshs 50,000, to the Principal football tournament. of Exodus Junior School in Kariobangi North. Britam spent Shs 12 million to sponsor the art competition, together with Cartoon Network. The competition was aimed at engaging children in environmental and Art and Culture; The foundation approach will ensure that all community wildlife conservation. members should benefit from community revitalization activity and from the integration of arts and culture into such efforts. We are committed to
38 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued) creating opportunity for low-income and less privileged people. Britam Uganda donated Shs 100,000 to the Duke of Edinburgh’s International Award. The money will be used to pay for the education of 25 young girls in rural Uganda. The International Award provides youths between the ages of 14-24 years with practical life skills to fulfil their potential.
Students of Kigumo Girls School cheer after they received a donation of furniture from Britam’s Director Marketing and Corporate Affairs Muthoga Ngera and Administration Manager Regina Kamba. Education At Britam, we believe in empowering the children with a thirst for knowledge but who lack the needed resources to facilitate learning. A further step is Britam Group Managing Director, Dr. Benson I. Wairegi and Nairobi Governor Evans Kidero, during a ground taken to provide equipment needed by schools to provide a conducive and breaking ceremony at the Olympic Primary School in Kibra, Nairobi. The Britam Foundation will build eight effective learning environment. classrooms which will accommodate an additional 300 students in the school.
For this reason, we have developed a comprehensive education support Health and Wellness to empower the next generation of leaders and parents who can then have the vision of growth in standards of living for our society. Education Health and wellness forms an integral part of Britam and therefore, we has also directly contributed to innovation and entrepreneurship which is have always endeavoured to promote this, not just with staff members, greatly needed for the economic growth of our continent. but also amongst the entire community.
It has been a great step ahead for Kenya as the government provides free In 2014, Britam donated Shs 10 million to support the “Beyond Zero primary education. Higher institutions of learning, however, still require Campaign”. The campaign which is spearheaded by the First Lady Margaret individuals to cater for their costs. The gap is then bridged by the other Kenyatta aims to reduce prenatal and maternal deaths in all the 47 counties groups including Britam. We consider education as a valuable investment in the country. opportunity. Our support has extended to offering scholarships to university students. In addition, Britam donated Shs 600,000 to the Anglican Church of Kenya to support a half marathon by the Diocesan Synod of Nairobi. The funds In 2014, Britam spent Shs 20 million to build additional classrooms for raised by the marathon will go towards the construction of a home for the Olympic Primary School in Kibra constituency. Once complete, the additional elderly in Ruai. eight classrooms will accommodate over 300 students. The school gets most of its students from the neighbouring Kibra slum and the classrooms For the annual Health Conference and General meeting, the Group donated will ease pressure on the schools facilities and provide a better learning Shs 660,000 to the Kenya Conference of Catholic Bishops’ (KCCB) Catholic atmosphere. The Group also presented assorted furniture to Kigumo Health Commission of Kenya. Girls School plus presented a new printer worth Shs 150,000 to Students of Karega High School in Murang’a. In 2014, Britam sponsored a golf tournament to raise funds for the construction a new chapel for Kahuhia Girls School in Murang’a. The company donated Shs 100,000 towards the cause.
39 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued)
populace and expectant mothers who are able to plan and save towards the delivery and baby care expenses in advance. OUR PEOPLE Our Culture At Britam, the success of the group is highly dependent on the quality of the human resource we have. Our people are a powerful and important resource. We identify, recruit, retain and invest in the best talent in the market. Our culture of high performance, innovation and creativity is enhanced by our organizational structure that promotes free flow of ideas and communication that cuts across the levels. We embrace being a family and each individual has a key role to play all towards our Group mission and vision.
We embrace strive for excellence and for business; we are guided by our Britam, Director Marketing and Corporate Affairs, Muthoga Ngera, (2nd left) presents a cheque of values: Kshs 600,000 to the Rt. Rev. Joel Waweru, the Bishop of the Anglican Church of Kenya’s Nairobi Diocese. Funds raised will go to fund a medical centre for the elderly. • Respect • Integrity Our Products • Continuous, innovation and improvement We have a responsibility to our customers to not only give them products • Passion to meet the bare minimum needs but to also uniquely design them to be At commencement of our financial year our number of employees was at safe for consumption. Our unique products include; 497, this number has since grown to 825 as at 31 December 2014. The range in age of our employees is from 20 years to 60 years. This ensures Linda Jamii Micro-Health Insurance that our resource has an almost perfect blend of innovators and experts. 58% of our staff are male and 42% are female. Britam is an equal opportunity It is estimated that only about 4% of Kenyans have access to medical employer. Through its recruitment procedures, the Group aims to: insurance cover. Britam is one of the medical providers partnering with • Attract good candidates Safaricom and Changamka to provide an innovative inpatient and outpatient • Ensure a fair and auditable recruitment process micro-health insurance and saving product for the excluded segments. The • Identify and appoint the best applicants product leverages on existing Safaricom services such as M-PESA (collect • Maintain an effective and streamlined recruiting process which makes subscription data, premiums and send claim payouts), Cloud Services the best use of time and money (which hosts the platform and data on which the solution runs), USSD and SMS messaging services (to register and interact with subscribers) as Our employees’ growth and performance well as our Call Centre Business Process Outsourcing (BPO) services to manage and respond to client queries. Considering that a huge segment of The Group firmly believes that the growth of the business is directly linked the excluded include the informal sector who do not have steady sources to the growth of its employees. The performance based culture is guided by of income, but are sole bread-winners for their families, the Linda Jamii performance management systems and corporate values which focus on product has 2 key features to buffer the family and make it convenient for both qualitative and quantitative performance of the team. Our performance subscribers to contribute to their premiums: assessment tool is the Balance Score Card (BSC). • The product allows a subscriber to save and contribute slowly The BSC incorporates alignment of the individual’s and the corporate depending on their cash flow and financial situations. They can save objectives. This facilitates a win-win situation for the team and all the from as low as Shs 10 daily until they reach the premium threshold. stakeholders. Whereas attainment of quantitative goals can be measured by • To cater for situations where the bread-winner is admitted in hospital increase in shareholder value, attainment of qualitative goals is measured for more than 2 days, the product pays a daily cash benefit to the by personal growth of the individuals in the various units of the group. family so they do not languish in poverty when the principle member or spouse is in hospital. The main objective of the programme is to reduce the burden of disease We strive to support team members achieve their aspirations through currently borne by the poorest in the society and make quality healthcare training, personal development plans and initiatives. Training is specific services accessible to Kenyans. The product targets the self-employed to an individual’s needs to enhance their work performance in their niche. There is also continuous information technology (IT) training for application
40 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued) and processes competences for all employees to ensure the business The team building initiatives organized by the Group create a sense of processes are always done efficiently. oneness with the team members making the working environment favourable for each person. The team spirit created from such initiatives ensures free flow of information both vertically and horizontally.
President Uhuru Kenyatta shakes hands with Britam Group Managing Director Dr. Benson Wairegi, after The Head of State presented trophies to the winners of the inaugural Britam Kenya Guineas Cup. The event was held at the Ngong Racecourse.
employees done in phases to due to our large number of employees. Training and Development • All customer facing employees were taken through Customer Service In 2014, training focused on customer service, technical competencies Empowerment program as this is considered to be one of the Group’s and people management skills across all staff levels. core competencies that differentiate us from the competitors. • The senior management team was taken through executive coaching • The Britam academy is a framework that will ensure training for all as coaching facilitates productive change in persons, teams, and the staff in well centralized and need based across the group. The systems by enabling leaders to uncover potential that might otherwise training framework will include E- leaning platform whereby staff can go untapped. be assigned various trainings by their supervisor and as well as for competencies required as people move to new positions. Product In 2014, departmental training champions were introduced to improve the training will be managed through the e-Learning profile. Group training needs analysis at a departmental level and allow better • A corporate training was scheduled for “personal effectiveness” for all focus on training at Group level.
41 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY CORPORATE SOCIAL RESPONSIBILITY STATEMENT (Continued)
The Human Resource department has also introduced a flexi-time schedule Britam women Leadership forum- in view to equip leadership skills to the for our employees. This is beneficial in ensuring a work-life balance. The women managers in the organization to position themselves for assuming employee is at liberty to choose the time period best suited for them during more leadership positions, this forum is facilitated every month. the day. This has been a great success and has kept the employees motivated. Mentorship & coaching program is run in the organization to ensure that there is continuous knowledge transfer from the experienced staff and to Health and Safety at Work the other staff. We are responsible to ensure our people are safe and secure while performing their duties. The measures taken to enhance comfort and safety include: • Fire extinguishers placed strategically on each floor and wing of the offices. • Emergency exit staircase and fire alarm that is well spaced so as to avoid stampedes in case of a fire break out. • Provision of parking space to the employees either within the office premise or at a place close to the offices. • Proper lighting of the offices and its environs making it safe regardless of the time. • Provision of taxis for employees who work late. • UPS are installed in case of power black outs. • Protective gear for all our service providers in their line of duty. • Signage is used around the office for the slippery floors. • Proper ventilation in our offices with air conditioners and sufficient number of windows. Acting Director General Sports Kenya Gabriel Komora (l), Britam Director Marketing and Corporate Affairs • A canteen within the work premise where employees can enjoy Muthoga Ngera and the CS Sports, Culture and the Arts, Dr. Hassan Wario after announcing that Britam had won a two year contact to brand the Nyayo National Stadium. qualities meals throughout the day. • Regular garbage disposal that is centralized. Motivation of our people Leadership development At Britam, we appreciate employees who have had outstanding achievements within the work place. Our people receive appreciation through; We believe that readily available talent helps maintain our agility, a critical characteristic in a dynamic and competitive environment. Creating and • Monetary compensation through commissions for our financial maintaining a sustainable leadership pipeline is therefore a critical business advisors and bonus in accordance with BSC performance for each imperative for Britam. individual. • Our training culture to all employees to empower them for career At Britam we acknowledge that the current business constraint is an growth. adequate and sustainable pool of leaders to drive the enterprises we create • There are several surveys done and questionnaires sent for employees across the continent. One key initiative is the graduate program (GP) which to fill so at test their understanding of new processes, the winners of we had during the financial year. The GP is an annual initiative through such surveys are awarded with gifts. which we identify qualified fresh graduates with a winning attitude and high • Recognition of best employees of the month which is displayed in the leadership potential from renowned universities across country. We look office board. to absolve a number of candidates each year and have partnered with our investee companies to place other top performing candidates. Our 2013 graduates recruits have fared on well and substantive growth recognized. The graduates from the universities possess a breath of educational and professional qualifications including commerce, actuarial science, ICT and economics critical for serving different business lines. They will be exposed to a series of leadership development interventions and various corporate operations after which they will take up positions within the asset management team.
42 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 PERSONAL ACCISHIELD POLICY ACCIDENT
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43 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY REPORT OF THE CONSULTING ACTUARY LIFE NON-LIFE I, Peter Craig Falconer, of QED Actuaries & Consultants (Pty) Limited, I, Lance Moroney, of QED Actuaries & Consultants (Pty) Limited, 70 Sandhurst, Sandton, Gauteng, South Africa, being an Actuary duly Grayston Drive, Sandhurst, Sandton, Gauteng, South Africa, being qualified in terms of Section 2 of the Insurance Act 1984 and having an Actuary duly qualified in terms of Section 2 of the Insurance Act conducted an investigation in terms of Sections 57 and 58 of that 1984 and having conducted an investigation in terms of Sections 57 Act, do hereby certify as under:- and 58 of that Act, do hereby certify as under:- a) That in my opinion the value placed upon the aggregate liabilities a) That in my opinion the value placed upon the aggregate liabilities relating to the Life Fund in respect of policies on the basis of valuation relating to the General Insurance Fund in respect of policies on the adopted by me is not less than what it would have been if the aggregate basis of valuation adopted by me is not less than what it would have value had been calculated on the minimum basis prescribed; been if the aggregate value had been calculated on the minimum basis prescribed; and b) That necessary steps as required under Section 58(5)(a) were taken i.e. to ensure that any sum representing expenses of organisation or b) That necessary steps as required under Section 58(5)(a) were taken extension, or the purchase of business or goodwill or other intangible i.e. to ensure that any sum representing expenses of organisation or assets, are equitably allocated between the different statutory funds extension, or the purchase of business or goodwill or other intangible and are appropriately deducted from the surplus disclosed in each assets, are equitably allocated between the different statutory funds fund or appropriately added to the deficiency disclosed in each fund, and are appropriately deducted from the surplus disclosed in each as the case may be; and fund or appropriately added to the deficiency disclosed in each fund, as the case may be; c) That I am satisfied that the values of assets adopted by me are on the basis of the auditor’s certificates appended to the balance sheet. c) That I am satisfied that the values of assets adopted by me are on the basis of the auditor’s certificates appended to the balance sheet.
P C Falconer Lance Moroney Actuary of the Insurer Consulting Actuary
Fellow of the Actuarial Society of South Africa Fellow of the Actuarial Society of South Africa
14 Apil 2015 14 Apil 2015
44 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 EMBEDDED VALUE
This report gives a summary of the Embedded Value and the Value force at the valuation date, discounted at the risk discount rate. The of New Business of British America Insurance Company (Kenya) shareholder cash flows represent the value of the release of margins in Limited (the Company). the liabilities under the current reporting (NPV) basis.
The Embedded Value is a measure of the economic worth of an insurance The Cost of Required Capital is the opportunity cost of having to hold the company excluding the value attributable to future new business. It is required capital rather than investing it in future business development not a statutory or reporting requirement but has been incorporated in (working capital) or paying it out as dividends. the financial statements to give investors and potential investors more information on the value of the Company and the value added over the The Cost of the Restriction on Surplus Distribution (CoSR) reflects year. the frictional cost of the portion of the surplus which is restricted from being distributed to Shareholders as per the Kenyan Insurance Act and Definition of Embedded Value Regulations. The Embedded Value (EV) has been calculated for the covered business The 31 December 2013 position was restated. Details of the restatements of the Company as at 31 December 2014. Covered business is defined are given in the notes to the Financial Statements. as all in-force insurance business and incorporates all expected cash flows generated within the Company on that business. Covered business The value of new business was calculated at point of sale using the includes Individual Life, Group Life and Group Savings products. closing Embedded Value assumptions and investment yields as at year end. New business includes all policies written over the year and which The Embedded Value consists of the following components: are still in-force at the end of the year.
• Adjusted Net Worth; The Embedded Value of the Company has been calculated, where • plus: the present value at the valuation date of future shareholder possible, in accordance with the Actuarial Society of South Africa’s cash flows from the covered business; Advisory Practice Note 107: Embedded Value Reporting. Any areas • less: the Cost of Required Capital; and, of non-compliance are due to calculation constraints and/or to ensure • less: the Cost of the Restriction on Surplus Distribution greater consistency with the current practice or environment in Kenya. The Adjusted Net worth (ANW) is the excess of all assets at fair value attributed to the covered business over the corresponding liabilities on the current reporting basis (Net Premium Valuation). Adjustments may be made for either over or under statement of assets or liabilities to ensure consistency with the other EV items. The Adjusted Net Worth comprises: • the free surplus; • plus the required capital to support the in-force business. The required capital is the risk capital required to be held in addition to the covered business liabilities as per the Kenyan Insurance Act. The required capital is not available for distribution to shareholders and part of the free surplus is also restricted (see below).
The present value of future shareholder cash flows from the in-force covered business (the Value of In-Force) is calculated as the value of projected future after-tax shareholder cash flows of the business in
45 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY Embedded Value Results
Embedded value 2014 2013 2013 Reported Restated Reported Shs’000 Shs’000 Shs’000 Proposed Dividend 700,000 700,000 700,000 Free surplus 3,871,792 3,334,899 3,949,969 Required capital 1,673,095 1,250,483 1,255,003 Adjusted net worth (1) 6,244,887 5,285,382 5,904,972 Value of in-force business 4,785,885 3,772,916 3,542,781 Cost of Required Capital (375,020) (286,360) (285,280) Cost of Restriction on Surplus distribution (564,687) (486,383) (1,865,566) Embedded Value of covered business 10,091,065 8,285,555 7,296,907 Increase in Embedded Value on covered business 30% 41% 47%
1. Adjusted net worth is based on the net asset value. It includes shareholder assets plus any surplus attributable to Shareholders in the Life Fund. No additional adjustments are made on 2014 and 2013 restated as in 2013 as the additional provisions in respect of investment guarantees are already allowed for in the Free Surplus.
2. Return on Embedded Value is defined as Embedded Value earnings (see table below) divided by the Embedded Value at the start of the financial period.
The Embedded Value earnings are defined as the change in Embedded Value over the period plus any dividends paid/payable during the period. This is summarised in the table below:
Embedded 2014 Plus 2013 Value Reported Transfer Adjusted Earnings Shs’ 000 Shs’ 000 Shs’ 000 Shs’ 000 Adjusted Net worth: 6,244,887 700,000 5,285,382 1,659,505 Present Value of in-force : 4,785,885 - 3,772,916 1,012,969 Cost of Required Capital : (375,020) - (286,360) (88,660) Cost of Restriction on Surplus distribution : (564,687) - (486,383) (78,304) Embedded Value : 10,091,065 700,000 8,285,555 2,505,510
46 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 Embedded Value Results (Continued)
The Embedded Value earnings defined in the previous table are analysed by source in the table below:
Statement of embedded value earnings 2014 2013 2013 Total Restated Reported Shs’000 Shs’000 Shs’000 Expected Return on ANW (2): 896,582 672,651 578,927 Expected Return on VIF (1) : 607,155 449,086 278,180 Operating Experience Variances (3): (230,701) (141,684) (97,701) Operating Assumption Changes : (173,957) (81,577) 118,523 Value of New Business at Point of Sale (5) : 536,713 518,132 510,997 Operating Experience Variances (New Business) : 257,490 258,210 219,658 Economic Experience Variances (3) : 612,228 812,966 951,069 Economic Assumption Changes (4): - - - Embedded Value Earnings 2,505,510 2,487,784 2,559,653 Prior year “Proposed Dividend” Payment : (700,000) (210,000) (210,000) Increase in Embedded Value 1,805,510 2,277,784 2,349,653
(1) This represents the unwinding of the risk discount rate (last year’s basis) on Life renewal business.
(2) This represents the expected return on the Adjusted Net Worth net of the Cost of Surplus Restriction.
(3) This represents the variation in operating and economic experience relative to that expected on last year’s Embedded Value basis.
(4) This represents the effect of changes in assumptions and methodology from the previous year.
(5) This represents the value of new business written by the company at the point of sale.
Value of New Business The following table shows the Value of New Business and the New Business profit margin:
Vaue of New Value of Future Profit Margin Business Premium Shs’000 Shs’000 (%) Individual Life : 174,230 5,200,559 3% Group & Credit Life : 220,615 1,236,139 18% Deposit Administration : 141,868 2,982,172 5% Total 536,713 9,418,870 6%
47 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY EMBEDDED VALUE (Continued)
Assumptions The assumptions used in the calculation of the Embedded Value are based on the Company’s best estimate experience, taking into account prior year assumptions and the outlook for future experience.
The following table summarises the economic assumptions used in the Embedded Value calculations:
2014 2013 %p.a %p.a Risk Discount Rate 18.00% 18.00% Investment return 12.25% 12.25% Expense inflation Rate 10.30% 10.30%
Mortality, morbidity, lapse and surrender assumptions were derived from internal experience investigations, taking into account prior year assumptions and the outlook for future experience
Maintenance expense assumptions were based on the results of the latest expense experience and budget information
Allowance was made for the current taxation basis applicable to the Company Embedded Value Sensitivities This section shows the impact of changes in different assumptions on the Embedded Value.
For all the sensitivities the other assumptions and the reserving basis were left unchanged. Cost of Cost of restriction % Adjusted Value of required on surplus Embedded Change net worth in-force capital distribution Value from base Shs’000 Shs’000 Shs’000 Shs’000 Shs’000
Embedded value on standard assumption as at 31 December 2014 6,244,887 4,785,884 (375,020) (564,688) 10,091,064
Economic Assumptions Risk discount rate increased by 1%, with no changes to any other 6,244,887 (645,172) 9,779,466 (3%) economic assumptions 4,599,584 (419,833) Investment Return decreased by 1% and with expense inflation and 6,244,887 3,887,483 (399,531) (567,852) 9,164,988 (9%) risk discount rate changing commensurately Equity/property assets fall by 10% without a corresponding change in dividend/rental yield 5,001,916 4,785,884 (375,020) (382,248) 9,030,533 (10%) - Assume portfolio asset mix is rebalanced after fall in market values 1% increase in equity / property returns 6,244,887 5,053,161 (367,493) (564,688) 10,365,867 3%
48 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 EMBEDDED VALUE (Continued) Cost of Cost of restriction % Adjusted Value of required on surplus Embedded Change net worth in-force capital distribution Value from base Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Non-economic Assumptions Non commission maintenance expenses (excluding investment 6,244,887 (564,688) 10,627,469 5% expenses) decrease by 10% 5,322,872 (375,603)
Discontinuance rates decrease by 10% 6,244,887 (564,688) 10,141,427 1% 4,859,138 (397,910)
Base mortality and morbidity rates decreased by 5% 6,244,887 (564,688) 10,115,386 0% 4,818,619 (383,433) Value of Individual New Business Sensitivities
For all the sensitivities the other assumptions and the reserving basis was left unchanged.
Cost of required Value of New Value of in-force capital Business % Change from base Shs’000 Shs’000 Shs’000 Value of new business values as at 31 December 2014 202,347 (28,115) 174,231 on standard assumptions (net of Tax) Economic Assumptions Risk discount rate increased by 1%, with no changes to any other 167,496 (31,133) 136,363 (22%) economic assumptions Investment Return decreased by 1% and with expense inflation and 138,601 (29,976) 108,625 (38%) risk discount rate changing commensurately Equity/property assets fall by 10% without a corresponding change in dividend/rental yield - Assume portfolio asset mix is rebalanced after 202,347 (28,115) 174,231 0% fall in market values 1% increase in equity / property returns 227,349 (26,870) 200,479 15% Non-economic Assumptions Non commission maintenance expenses (excluding investment 242,103 (28,111) 213,992 23% expenses) decrease by 10% Non commission acquisition expenses decrease by 10% 258,589 (28,121) 230,468 32% Discontinuance rates decrease by 10% 205,806 (30,136) 175,670 1% Base mortalitly and morbidity rates decreased by 5% 203,949 (28,153) 175,797 1%
PC Falconer Statutory Actuary
Fellow of the Actuarial Society of South Africa
49 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED
Report on the Financial Statements also includes evaluating the appropriateness of accounting policies used We have audited the accompanying financial statements of British- and the reasonableness of accounting estimates made by the directors, as American Insurance Company (Kenya) Limited, set out on pages 48 to well as evaluating the overall presentation of the financial statements. 124 which comprise the statement of financial position as at 31 December 2014, and the statement of profit or loss, statement of comprehensive We believe that the audit evidence we have obtained is sufficient and income, statement of changes in equity and the statement of cash flows for appropriate to provide a basis for our audit opinion. the year then ended, and a summary of significant accounting policies and other explanatory information. Opinion Directors’ Responsibility for the Financial In our opinion, the accompanying financial statements give a true and fair view of the state of financial affairs of the company as at 31 December Statements 2014 and of its profit and cash flows for the year then ended in accordance The directors are responsible for the preparation of financial statements with International Financial Reporting Standards and the requirements of that give a true and fair view in accordance with International Financial the Kenyan Companies Act. Reporting Standards and the requirements of the Kenyan Companies Act, and for such internal controls as directors determine are necessary to Report on Other Legal Requirements enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. As required by the Kenyan Companies Act we report to you, based on our audit, that: Auditors’ Responsibility (i) we have obtained all the information and explanations which to the best Our responsibility is to express an opinion on these financial statements of our knowledge and belief were necessary for the purposes of our audit; based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with (ii) in our opinion, proper books of account have been kept by the company, ethical requirements and plan and perform the audit to obtain reasonable so far as appears from our examination of those books; and assurance about whether or not the financial statements are free from (iii) the company’s statement of financial position (balance sheet) statement material misstatement. of profit or loss (profit and loss account) and statement of comprehensive income are in agreement with the books of account. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures The engagement partner responsible for the audit resulting in this selected depend on our judgement, including the assessment of the risks independent auditor’s report is FCPA J W Wangai - P/No 1118. of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we considered the internal controls relevant to the company’s preparation of financial statements that give a true and fair view in order to design audit procedures that were appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal controls. An audit Certified Public Accountants (Kenya) Nairobi, Kenya 24 April 2015
50 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2014
Restated Restated Total Long term Short term Total Long term Short term Restated Notes Business Business 2014 Busines Business 2013 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Gross earned premiums 5(i) 6,459,883 4,482,615 10,942,498 5,011,637 3,541,574 8,553,211 Less: reinsurance premiums ceded 5(ii) (269,961) (720,495) (990,456) (358,692) (639,182) (997,874) Net earned premiums 6,189,922 3,762,120 9,952,042 4,652,945 2,902,392 7,555,337 Investment income 6(i) 4,983,120 357,107 5,340,227 4.987,497 323,457 5,310,954 Commissions earned 6(ii) 126,659 202,277 328,936 141,254 216,033 357,287 Other income 6(iii) 33,105 27,564 60,669 22,825 20,281 43,106 Net income 11,332,806 4,349,068 15,681,874 9,804,521 3,462,163 13,266,684 Gross claims and policyholder benefits payable 7(i) 4,903,590 916,326 5,819,916 3,401,331 1,706,968 5,108,299 Less: Reinsurance share of claims and loss adjustment expenses 7(i) (55,231) 1,347,160 1,291,929 (97,314) (159,632) (256,946) Interest payments & change in market linked insurance liabilities 7(ii) 2,035,986 - 2,035,986 2,204,586 - 2,204,586 Net benefits and claims payable 6,884,345 2,263,486 9,147,831 5,508,603 1,547,336 7,055,939 Operating and other expenses 8 1,727,034 1,133,785 2,860,819 1,330,344 772,439 2,102,783 Commissions payable 9 1,520,650 612,184 2,132,834 1,243,282 505,145 1,748,427 Total expenses and commissions 3,247,684 1,745,969 4,993,653 2,573,626 1,277,584 3,851,210
Financing costs 125 - 125 125 - 125 Results of operating activities 1,200,652 339,613 1,540,265 1,722,167 637,243 2,359,410 Share of associate’s profit 19 259,007 - 259,007 154,508 19,097 173,605 Profit before tax 1,459,659 339,613 1,799,272 1,876,675 656,340 2,533,015 Income tax expense 11 (437,898) (78,039) (515,937) (563,003) (157,109) (720,112) Profit for the year 1,021,761 261,574 1,283,335 1,313,672 499,231 1,812,903 Profit attributable to owners of the parent 1,021,761 261,574 1,283,335 1,313,672 499,231 1,812,903
Basic and dilluted Earning Per Share 15 1.46 2.06
The notes on pages 60 to 114 are an integral part of these financial statements
51 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2014 Total Notes Long term Short term Total Long term Short term Restated Business Business 2014 Business Business 2013 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000
Profit for the year 1,021,761 261,574 1,283,335 1,313,672 499,231 1,812,903 Other comprehensive income, net of tax Items that will not be reclassified subsequently to profit or loss Surplus on revaluation of Buildings 16 11,807 - 11,807 11,448 - 11,448 Re-measurement of the net defined benefit asset 43 8,091 - 8,091 9,986 - 9,986 Change in fair value of financial assets at fair value through other comprehensive income 20(i) 302,886 - 302,886 482,068 100,493 582,561 Realised gains on disposal of financial assets at fair value through other comprehensive income 288,480 194,041 482,521 - - - Total items that will not be reclassified subsequently to profit or loss 611,264 194,041 805,305 503,502 100,493 603,995 Items that may be reclassified subsequently to profit or loss Associate share of fair value of financial assets at fair value through other comprehensive income 19 26,568 - 26,568 - - - Total items that may be reclassified subsequently to profit or loss 26,568 - 26,568 - - - Total other comprehensive income for the year 637,832 194,041 831,873 503,502 100,493 603,995 Total Comprehensive income for the year 1,659,593 455,615 2,115,208 1,817,174 599,724 2,416,898 Total Comprehensive income for the year attributable to owners of the parent 1,659,593 455,615 2,115,208 1,817,174 599,724 2,416,898
Items in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in Note 11 a (ii). Items in the statement above are disclosed net of tax. The income tax relating to each component of other comprehensive income is disclosed in Note 11 a (ii).
The notes on pages 60 to 114 are an integral part of these financial statements
52 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014 Notes Long term Short term Total Business Business 2014 CAPITAL EMPLOYED Shs’000 Shs’000 Shs’000 Share capital 12 180,000 700,000 880,000 Retained earnings - 1,144,257 1,144,257 Proposed dividends 14 700,000 - 700,000 Other reserves 13 5,364,888 194,041 5,558,929 Shareholders’ funds 6,244,888 2,038,298 8,283,186 REPRESENTED BY Assets Property and equipment 16 714,250 134,867 849,117 Intangible assets 17 899,221 151,484 1,050,705 Investment property 18(a) 4,842,314 - 4,842,314 Investment in property funds 18(b) 213,488 - 213,488 Investment in associate 19 4,563,723 - 4,563,723 Equity Investments at fair value through other comprehensive income 20(i) 1,394,235 1,394,235 Investments at fair value through profit or loss: - equity investments 20(ii) 6,193,167 219,972 6,413,139 - unit trusts 22 6,922,320 25,886 6,948,206 - government securities 23(i) 2,194,075 301,140 2,495,215 Government securities at amortised cost 23(ii) 6,724,717 1,728,735 8,453,452 Corporate bonds at amortised cost 24 876,121 486,592 1,362,713 Mortgage loans receivable 25 864,753 - 864,753 Loans to policyholders 26 488,084 - 488,084 Receivables arising out of reinsurance arrangements 29(ii)) 89,041 135,761 224,802 Receivables arising out of direct insurance arrangements 29(iii) 478,159 772,800 1,250,959 Reinsurers’ share of insurance liabilities 27 42,630 600,651 643,281 Loans and receivables from related parties 42(i) 811,451 118,059 929,510 Deferred income tax 36 - 3,218 3,218 Deferred acquisition costs 28 - 194,414 194,414 Current income tax recoverable 11 8,246 95,106 103,352 Other receivables 29(i) 447,657 32,548 480,205 Deposits with financial institutions 40 707,892 735,513 1,443,405 Cash and bank balances 40 158,474 147,416 305,890 Retirement benefit asset 43 72,767 - 72,767 Total assets 39,706,785 5,884,162 45,590,947 Liabilities Insurance contract liabilities 31 12,713,434 1,491,453 14,204,887 Payable under deposit administration contracts 32 11,201,557 - 11,201,557 Liabilities under investment contracts 33 6,603,982 - 6,603,982 Unearned premiums reserve 35 - 2,091,801 2,091,801 Payables to related parties 42(i) - 87,338 87,338 Other payables 37 654,737 175,272 830,009 Deferred income tax 36 2,288,187 - 2,288,187 Total liabilities 33,461,897 3,845,864 37,307,761 Net assets 6,244,888 2,038,298 8,283,186 The Financial statements on pages 60 to 114 were approved for issue by the board of directors on 24 April 2015 and signed on its behalf by:
Chairman Director Managing Director
53 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 Notes Long term Short term 2013 Business Business Restated CAPITAL EMPLOYED Shs’000 Shs’000 Shs’000 Share capital 12 180,000 700,000 880,000 Retained earnings - 825,170 825,170 Proposed dividends 14 700,000 - 700,000 Other reserves 13 4,405,380 57,428 4,462,808 Shareholders’ funds 5,285,380 1,582,598 6,867,978 REPRESENTED BY: Assets Property and equipment 16 670,742 92,666 763,408 Intangible assets 17 93,277 32,010 125,287 Investment property 18(a) 3,394,771 - 3,394,771 Investment in associate 19 1,395,238 175,751 1,570,989 Equity Investments at fair value through other comprehensive income 20(i) 3,024,609 441,459 3,466,068 Investments at fair value through profit or loss: - equity investments 20(ii) 4,362,009 188,335 4,550,344 - unit trusts 22 7,786,004 22,773 7,808,777 - government securities 23(i) 417,642 113,342 530,984 Government securities at amortised cost 23(ii) 6,458,676 1,606,950 8,065,626 Corporate bonds at amortised cost 24 455,846 136,074 591,920 Mortgage loans 25 793,815 - 793,815 Loans to policyholders 26 376,778 - 376,778 Receivables arising out of reinsurance arrangements 29(ii)) 54,248 26,980 81,228 Receivables arising out of direct insurance arrangements 29(iii) 312,152 537,645 849,797 Reinsurers’ share of insurance liabilities 27 60,197 2,170,068 2,230,265 Loans and receivables from related parties 42 1,162,985 - 1,162,985 Deferred acquisition costs 28 - 138,515 138,515 Tax recoverable recoverable 11 - 80,151 80,151 Other receivables 29(i) 328,732 124,862 453,594 Deposits with financial institutions 40 726,147 349,760 1,075,907 Cash and bank balances 40 324,465 134,456 458,921 Retirement benefit asset 43 186 - 186 Total assets 32,198,519 6,371,797 38,570,316 Liabilities Insurance contract liabilities 31 9,634,243 2,722,666 12,356,909 Payable under deposit administration contracts 32 8,109,075 - 8,109,075 Liabilities under investment contracts 33 6,414,370 - 6,414,370 Unearned premiums reserve 35 - 1,573,349 1,573,349 Payables to related parties 42 - 362,064 362,064 Other payables 37 559,850 92,487 652,337 Bank overdraft 40 78,056 38,633 116,689 Current income tax payable 11 214,070 - 214,070 Deferred income tax 36 1,903,475 - 1,903,475 Total liabilities 26,913,139 4,789,199 31,702,338 Net assets 5,285,380 1,582,598 6,867,978 The financial statements on pages 51 to 114 were approved for issue by the board of directors on 24 April 2015 and signed on its behalf by:
54 I AM Chairman Director Managing Director READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2012
Notes Long term Short term 2012 Business Business Restated CAPITAL EMPLOYED Shs’000 Shs’000 Shs’000 Share capital 180,000 300,000 480,000 Retained earnings - 735,105 735,105 Proposed dividends 210,000 340,000 550,000 Other reserves 3,324,266 (43,069) 3,281,197 Shareholders’ funds 3,714,266 1,332,036 5,046,302 REPRESENTED BY: Assets Property and equipment 598,059 32,994 631,053 Intangible assets 87,879 17,190 105,069 Investment property 1,917,900 - 1,917,900 Investment in associate 1,301,716 158,110 1,459,826 Investments at fair value through other comprehensive income 3,582,603 340,966 3,923,569 Investments at fair value through profit or loss: - equity investments 2,624,069 129,565 2,753,634 - unquoted ordinary share 50,490 - 50,490 - unit trusts 5,480,040 355,181 5,835,221 - government securities 153,327 23,235 176,562 Government securities held at amortised cost 5,073,983 1,573,107 6,647,090 Corporate bonds at amortised cost 366,886 141,471 508,357 Mortgage loans 812,022 - 812,022 Loans to policyholders 309,455 - 309,455 Receivables arising out of reinsurance arrangements 48,912 - 48,912 Receivables arising out of direct insurance arrangements 192,611 314,497 507,108 Reinsurers’ share of insurance liabilities 137,829 2,258,433 2,396,262 Loans and receivables from related parties 617,457 124,055 741,512 Deferred acquisition costs - 127,535 127,535 Tax recoverable - 7,779 7,779 Other Receivables 219,210 9,152 228,362 Deposits with financial institutions 463,038 33,409 496,447 Cash and bank balances 209,429 64,844 274,273 Total assets 24,246,915 5,711,523 29,958,438 Liabilities Insurance contract liabilities 7,897,703 2,753,048 10,650,751 Payable under deposit administration contracts 5,787,072 - 5,787,072 Liabilities under investment contracts 4,845,526 - 4,845,526 Unearned premiums reserve - 1,248,640 1,248,640 Creditors arising from reinsurance arrangements - 176,602 176,602 Retirement benefit liability 14,080 - 14,080 Payables to related parties - 113,564 113,564 Other payables 442,160 87,591 529,751 Overdraft 46,768 42 46,810 Current income tax payable 74,654 - 74,654 Deferred income tax 1,424,686 - 1,424,686 Total liabilities 20,532,649 4,379,487 24,912,136 Net assets 3,714,266 1,332,036 5,046,302
The Financial statements on pages 51 to 114 were approved for issue by the board of directors on 24 April 2015 and signed on its behalf by:
Chairman Director Managing Director 55 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY STATEMENT OF CHANGES IN EQUITY Share Other Retained Proposed Total capital reserves earnings dividends equity
Notes Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2012 (as previously reported) 480,000 3,030,607 518,002 300,000 4,328,609 Prior year adjustment: (i) Deferred tax on life fund surplus 44 - (1,424,685) - - (1,424,685) (ii) Cost of Guarantee reserve 44 - (203,730) - - (203,730)
At 1 January 2012 (restated) 480,000 1,402,192 518,002 300,000 2,700,194 Profit for the year - - 1,314,041 - 1,314,041 Other comprehensive income - 1,332,067 - - 1,332,067 Total comprehensive income for the year - 1,332,067 1,314,041 - 2,646,108 Transfer from retained earnings - 546,938 (546,938) - - Transactions with owners, recorded directly in equity - - - - - Dividends: -Interim dividend paid – 2011 - - - (300,000) (300,000) - Proposed final for 2012 - - (550,000) 550,000 - Total contributions by and distributions to owners - 546,938 (1,096,938) 250,000 (300,000) At 31 December 2012 (restated) 480,000 3,281,197 735,105 550,000 5,046,302
The notes on pages 60 to 114 are an integral part of these financial statements
56 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF CHANGES IN EQUITY
Share capital Other reserves Retained earnings Proposed dividends Total equity Notes Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2013 (as previously reported) 480,000 4,909,612 735,105 550,000 6,674,717 Prior year adjustment: (i) Deferred tax on life fund surplus 44 - (1,424,685) - - (1,424,685) (ii) Cost of Guarantee reserve 44 - (203,730) - - (203,730) Restated 1 January 2013 480,000 3,281,197 735,105 550,000 5,046,302 Transfer of reserves on adoption of IFRS 9 - (387,321) 342,099 - (45,222) Profit for the year - - 1,812,903 - 1,812,903 Other comprehensive income - 819,781 - - 819,781 Total Comprehensive income (as previosuly stated) - 432,460 2,155,002 - 2,587,462 Prior year adjustment:
Deferred tax on other comprehensive income 44 - (215,786) - - (215,786) Total Comprehensive income (restated) - 216,674 2,155,002 - 2,371,676 Transfer from retained earnings - 964,937 (964,937) - - Transactions with owners, recorded directly in equity 400,000 - (400,000) - - Dividends: - Final for 2012 - - - (550,000) (550,000) - Proposed final for 2013 14 - - (700,000) 700,000 - Total contributions by and distributions to owners 400,000 964,937 (2,064,937) 150,000 (550,000) At 31 December 2013 (Restated) 880,000 4,462,808 825,170 700,000 6,867,978
The notes on pages 60 to 114 are an integral part of these financial statements
57 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY STATEMENT OF CHANGES IN EQUITY
Share Other Retained Proposed Total capital reserves earnings dividends equity Notes Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2014 (as previously reported) 880,000 6,645,262 825,170 700,000 9,050,432 Prior year adjustment: (i) Deferred tax on life fund surplus 44 - (1,424,685) - - (1,424,685) (ii) Deferred tax expense through profit or loss 44 - (263,003) - - (263,003) (iii) Deferred tax expense through other comprehensive income 44 - (215,786) - - (215,786) (iv) Cost of Guarantee reserve 44 - (278,980) - - (278,980) At January 2014 (Restated) 880,000 4,462,808 825,170 700,000 6,867,978 Profit for the year - - 1,283,335 - 1,283,335 Other comprehensive income: Fair value gains on revaluation of Buildings 16 - 16,867 - - 16,867 Remeasurement of the net defined benefit asset/(liability) 43 - 11,558 - - 11,558 Fair value gain on financial assets at fair value through other comprehensive income 20(i) - 432,696 - - 432,696 Associate Share of Fair value gains on financial assets at fair value through other comprehensive income 19 - 37,954 - - 37,954 Realised gain on sale of financial assets at fair value through other comprehensive income - 606,155 - - 606,155 Deferred tax 36 (273,357) - - (273,357) Total comprehensive income for the year - 831,873 1,283,335 - 2,115,208 Transfer from retained earnings - 1,021,761 (1,021,761) - - Transfer of other reserves to retained earnings (57,513) 57,513 - - Transactions with owners, recorded directly in equity Dividends: - Final paid for 2013 - - - (700,000) (700,000) - Proposed final for 2014 14 - (700,000) - 700,000 - Total contributions by and distributions to owners - 264,248 (964,248) - (700,000) At end of year 880,000 5,558,929 1,144,257 700,000 8,283,186
The notes on pages 60 to 114 are an integral part of these financial statements
58 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2014
2014 2013 Notes Shs’000 Shs’000 CASH FLOW FROM OPERATING ACTIVITIES Cash generated from operations 41 2,961,187 2,283,289 Income tax paid 11(c) (645,071) (390,065) Net cash generated from operating activities 2,316,116 1,893,224 CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment 16 (191,217) (211,302) Proceeds on disposal of property and equipment 6(iii) &16 4,722 - Purchase of intangible assets 17 (953,622) (42,871) Purchase of investment property 18(a) (738,185) (678,388) Investment in property funds 18(b) (213,488) - Investment in associate 19 (2,780,320) - Investments in government securities at fair value through profit or loss 23 (i) (1,947,428) (347,366) Investments in government securities at amortised cost 23(ii) (387,826) (1,418,536) Investments in corporate bonds at armotised costs 24 (770,793) (83,563) Purchase of quoted shares - at fair value through profit or loss 20(ii) (837,316) (1,484,513) Proceeds from disposal of quoted shares- at fair value through profit or loss 20(ii) 720,149 853,441 Investments in unit trusts 22 1,597,690 (387,409) Mortgage loans advanced 25 (159,923) (168,012) Mortgage loans repayments 25 157,680 258,532 Proceeds from disposal of quoted shares at fair value through other comprehensive income 20 (i) 2,829,344 1,246,663 Purchase of quoted shares at fair value through other comprehensive income 20 (i) (324,815) - Investments in loans to policyholders 26 45,794 17,293 Dividend received 350,540 381,887 Rent and interest received 2,314,179 1,415,776 Net cash used in investing activities (1,284,835) (648,368) CASH FLOW FROM FINANCING ACTIVITIES Dividends paid 14 (700,000) (550,000) Interest paid (125) (627) Net cash used in financing activities (700,125) (550,627)
Increase in cash and cash equivalents 331,156 694,229 Movement in cash and cash equivalents At 1 January 40 1,418,139 723,910 Increase during the year 331,156 694,229 At end of year 40 1,749,295 1,418,139
The notes on pages 60 to 114 are an integral part of these financial statements
59 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014
a) Amendments to IAS 32 : Offsetting Financial Assets and Financial 1. REPORTING ENTITY liabilities British-American Insurance Company (Kenya) Limited is incorporated in The amendments to IAS 32 clarify the requirements relating to the offset Kenya under the Companies Act as a private limited liability company, of financial assets and financial liabilities. Specifically, the amendments and is domiciled in Kenya. The address of its registered office is: clarify the meaning of ‘currently has a legally enforceable right of set- Britam Centre, Upper Hill off’ and ‘simultaneous realisation and settlement’. The amendments Junction of Mara and Ragati Roads require retrospective application. The application of the new standard P.O.Box 30375-00100 has not had any impact on the disclosures or the amounts recognised in these financial statements as the company does not have any offsetting Nairobi arrangements.
The company is organised into two main divisions, short term (or general) b) Amendments to IAS 36: Recoverable Amount Disclosures for Non- insurance business and long term assurance business, comprising life Financial Assets assurance and investment management. Long term assurance business relates to the underwriting of risks relating to death of an insured person, The amendments to IAS 36 remove the requirement to disclose the and includes contracts subject to the payment of premiums for a term recoverable amount of a cash-generating unit (CGU) to which goodwill dependent on the termination or continuance of the life of an insured or other intangible assets with indefinite useful lives had been allocated person. General insurance business relates to all other categories of when there has been no impairment or reversal of impairment of the related insurance business written by the company, analysed into several CGU. Furthermore, the amendments introduce additional disclosure sub-classes of business based on the nature of the assumed risks. requirements applicable to when the recoverable amount of an asset or a The statement of profit or loss on pages 47 and 48 has been analysed CGU is measured at fair value less costs of disposal. These new disclosures between these two classes of business. In addition the long term and include the fair value hierarchy, key assumptions and valuation techniques short term business income statement has further been analysed used which are in line with the disclosure required by IFRS 13 Fair Value between the various sub classes in Notes 5, 6 and 7. Measurements. The amendments require retrospective application.
2. SUMMARY OF SIGNIFICANT The application of the new standard has an impact on the disclosures and the amounts recognized in these financial statements in respect of ACCOUNTING POLICIES the investment in associate, Housing Finance.
Statement of compliance Please refer to note 19 of these financial statements.
The financial statements have been prepared in accordance with c) Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities International Financial Reporting Standards (IFRS). The amendments to IFRS 10 define an investment entity and introduce For the Kenyan Companies Act reporting purposes, in these financial an exception from the requirement to consolidate subsidiaries for an statements, the balance sheet is represented by/equivalent to the investment entity. In terms of the exception, an investment entity is required statement of financial position and the profit and loss account is to measure its interests in subsidiaries at fair value through profit or loss. presented in the statement of profit or loss and other comprehensive The exception does not apply to subsidiaries of investment entities that income. provide services that relate to the investment entity’s investment activities.
Adoption of new and revised International Financial Reporting To qualify as an investment entity, certain criteria have to be met. Standards (IFRS) Specifically, an entity is an investment entity when it: i) New standards and amendments to published standards effective • obtains funds from one or more investors for the purpose of providing for the year ended 31 December 2014 them with investment management services; • commits to its investor(s) that its business purpose is to invest funds solely The following new and revised IFRSs were effective in the current year and for returns from capital appreciation, investment income, or both; and had no material impact on the amounts reported in these financial statements. • measures and evaluates performance of substantially all of its investments on a fair value basis.
60 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consequential amendments to IFRS 12 and IAS 27 have been made IFRS 9 Financial Instruments to introduce new disclosure requirements for investment entities. The application of the new standard has not had any impact on the IFRS 9, issued in November 2009, introduced new requirements for disclosures or the amounts recognized in these financial statements as the classification and measurement of financial assets. IFRS 9was the company is not an investment entity amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. d) IFRIC 21 Levies Key requirements of IFRS 9: IFRIC 21 addresses the issue of when to recognise a liability to pay a levy. • All recognised financial assets that are within the scope of IAS39 The Interpretation defines a levy, and specifies that the obligating event Financial Instruments: Recognition and Measurement are required to that gives rise to the liability is the activity that triggers the payment of the be subsequently measured at amortised cost or fair value. Specifically, levy, as identified by legislation. The Interpretation provides guidance on debt investments that are held within a business model whose objective how different levy arrangements should be accounted for, in particular, it is to collect the contractual cash flows, and that have contractual cash clarifies that neither economic compulsion nor the going concern basis flows that are solely payments of principal and interest on the principal of financial statements preparation implies that an entity has a present outstanding are generally measured at amortised cost at the end of obligation to pay a levy that will be triggered by operating in a future subsequent accounting periods. All other debt investments and equity period. IFRIC 21 requires retrospective application. The application of investments are measured at their fair value at the end of subsequent the new standard has not had any impact on the disclosures or the accounting periods. In addition, under IFRS 9, entities may make an amounts recognized in these financial statements as the company’s irrevocable election to present subsequent changes in the fair value of levies paid by the company are based on the current period’s results. an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. (ii) Relevant new and amended standards and interpretations in issue • With regard to the measurement of financial liabilities designated as at but not yet effective in the year ended 31 December 2014 fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes New and Amendments to Effective for annual periods in the credit risk of that liability is presented in other comprehensive standards beginning on or after income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an IFRS 9 Financial Instruments (as 1-Jan-18 accounting mismatch in profit or loss. Changes in fair value attributable revised in 2014) to a financial liability’s credit risk are not subsequently reclassified to IFRS 15 Revenue from Contracts 1-Jan-17 profit or loss. Under IAS 39, the entire amount of the change in the fair with Customers value of the financial liability designated as fair value through profit or Amendments to IAS 19 Defined 1-Jul-14 loss is presented in profit or loss. Benefit Plans: Employee The company early adopted IFRS 9 during the year ended 31 December 2013 Contributions Amendments to IAS 16 and IAS 1-Jan-16 IFRS 15, Revenue from Contracts with Customers 38 Clarification of Acceptable In May 2014, IFRS 15 was issued which establishes a single comprehensive Methods of Depreciation and model for entities to use in accounting for revenue arising from contracts Amortization with customers. IFRS 15 will supersede the current revenue recognition Amendments to IFRS 11 1-Jan-16 guidance including IAS 18 Revenue, IAS 11 Construction Contracts and Annual Improvements 2010-2012 1-Jul-14 the related Interpretations when it becomes effective. The core principle Cycle of IFRS 15 is that an entity should recognise revenue to depict the transfer Annual Improvements 2011-2013 1-Jul-14 of promised goods or services to customers in an amount that reflects the Cycle consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step iii) Impact of new and amended standards and interpretations on the approach to revenue recognition: financial statements for the year ended 31 December 2014 and future Step 1: Identify the contract(s) with a customer annual periods Step 2: Identify the performance obligations in the contract
61 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Step 3: Determine the transaction price (ii) add definitions for ‘performance condition’ and ‘service condition’ Step 4: Allocate the transaction price to the performance obligations in which were previously included within the definition of ‘vesting the contract condition’. The amendments to IFRS 2 are effective for share-based payment transactions for which the grant date is on or after 1 July Step 5: Recognise revenue when (or as) the entity satisfies a performance 2014. obligation IFRS 8: Operating Segments Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services (a) Aggregation of operating segments underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 The amendments require an entity to disclose the judgements made by to deal with specific scenarios. Furthermore, extensive disclosures are management in applying the aggregation criteria to operating segments, required by IFRS 15. The directors of the company anticipate that the including a description of the operating segments aggregated and the application of IFRS 15 in the future will not have a significant impact on economic indicators assessed in determining whether the operating amounts reported in respect of the company’s financial statements. segments have similar economic characteristics; and
Clarification of Acceptable Methods of Depreciation and (b) Reconciliation of the total of the reportable segments’ Amortization (Amendments to IAS 16 and IAS 38) assets to the entity’s assets The amendments to IAS 16 prohibit entities from using a revenue- The amendments clarify that a reconciliation of the total of the reportable based depreciation method for items of property, plant and equipment. segments’ assets to the entity’s assets should only be provided if the The amendments to IAS 38 introduce a rebuttable presumption that segment assets are regularly provided to the chief operating decision- revenue is not an appropriate basis for amortization of an intangible maker. asset. This presumption can only be rebutted in the following two limited circumstances: IFRS 13: Fair Value Measurement • When the intangible asset is expressed as a measure of revenue. Short-term receivables and payables Provided that the contract specifies a fixed total amount of revenue to be generated on which amortization is to be determined, the The amendments to the basis for conclusions of IFRS 13 clarify that the revenue that is to be generated might be an appropriate basis for issue of IFRS 13 and consequential amendments to IAS 39 and IFRS amortizing the intangible asset; or 9 did not remove the ability to measure short- term receivables and • When it can be demonstrated that revenue and the consumption of payables with no stated interest rate at their invoice amounts without the economic benefits of the intangible asset are highly correlated. discounting, if the effect of discounting is immaterial The directors of the company do not anticipate that the application of IAS 16: Property, Plant & Equipment; and IAS 38: Intangible Assets the standard will have a significant impact on the company’s financial statements. Revaluation method—proportionate restatement of accumulated depreciation (amortisation) Annual Improvements 2010-2012 Cycle The amendments to IAS 16 and IAS 38 remove perceived inconsistencies The Annual Improvements include amendments to a number of IFRSs, in the accounting for accumulated depreciation/amortisation when which have been summarised below. an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount IFRS 2: Share-based Payment is adjusted in a manner consistent with the revaluation of the carrying Definition of vesting condition amount of the asset and that accumulated depreciation/amortisation is the difference between the gross carrying amount and the carrying The amendments amount after taking into account accumulated impairment losses. (i) change the definitions of ‘vesting condition’ and ‘market condition’; and
62 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) IAS 24 Related Party Disclosures (iv) Early adoption of standards Key management personnel The company did not early-adopt any new or amended standards in 2014. The amendments clarify that a management entity providing key management personnel services to the reporting entity or to the (A) BASIS OF PREPARATION parent of the reporting entity is a related party of the reporting entity. Consequently, the reporting entity should disclose as related party The financial statements have been prepared in accordance with transactions the amounts incurred for the service paid or payable to International Financial Reporting Standards (“IFRS”). The measurement the management entity for the provision of key management personnel basis applied is the historical cost basis, except for investment services. However, disclosure of the components of compensation to properties, buildings, financial assets at fair value through profit or key management personnel that is paid through another entity is not loss and fair value through other comprehensive income which have required. been measured at fair value. The financial statements are presented in Kenyan Shillings (Shs), rounded to the nearest thousand. These IFRS improvements are effective for accounting periods beginning on or after 1 July 2014. The directors of the company do not The preparation of financial statements in conformity with IFRS requires anticipate that the application of these improvements to IFRSs will have the use of certain critical accounting estimates. It also requires a significant impact on the company’s financial statements. management to exercise its judgement in the process of applying the Annual Improvements to IFRSs 2011 - 2013 Cycle Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are The Annual Improvements include amendments to a number of IFRSs, significant to the financial statements, are disclosed in Note 3. which have been summarised below. (B) INSURANCE CONTRACTS IFRS 3: Business Combinations: Classification Scope exceptions for joint ventures The Company issues contracts that transfer insurance risk or financial The amendments clarify that IFRS 3 does not apply to the accounting for risk or both. Insurance contracts are those contracts that transfer the formation of all types of joint arrangement in the financial statements significant insurance risk. Such contracts may also transfer financial risk. of the joint arrangement itself. As a general guideline, the Company defines as significant insurance IFRS 13: Fair Value Measurement: risk, the possibility of having to pay benefits on the occurrence of an insured event that are at least 10% more than the benefits payable if the Scope of paragraph 52 (portfolio exception) insured event did not occur. The amendments clarify that the scope of the portfolio exception for measuring the fair value of a group of financial assets and financial Investment contracts are those contracts that transfer financial risk liabilities on a net basis includes all contracts that are within the scope with no significant insurance risk. Insurance contracts and investment of, and accounted for in accordance with, IAS 39 or IFRS 9, even if those contracts are classified into two main categories, depending on the contracts do not meet the definitions of financial assets or financial duration of risk and as per the provisions of the Insurance Act. liabilities within IAS 32. (i) Long term insurance business IAS 40: Investment Property Includes insurance business of all or any of the following classes, namely, Clarifying the interrelationship between IFRS 3 and IAS 40 when life assurance business (ordinary life and group life), superannuation classifying property as investment property or owner-occupied property business, industrial life assurance business and bond investment The amendments clarify that IAS 40 and IFRS 3 are not mutually exclusive business and business incidental to any such class of business. and application of both standards may be required. Consequently, an entity Life assurance business means the business of, or in relation to, the acquiring investment property must determine whether: issuing of, or the undertaking of liability to pay money on death (not being (a) the property meets the definition of investment property in terms of IAS death by accident or in specified sickness only) or on the happening of 40; and any contingency dependent on the termination or continuance of human life (either with or without provision for a benefit under a continuous (b) the transaction meets the definition of a business combination under disability insurance contract), and include a contract which is subject IFRS 3. to the payment of premiums for term dependent on the termination or
63 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) continuance of human life and any contract securing the grant of an assumption of risks, and includes estimates of premiums due but not annuity for a term dependent upon human life. yet received, less an allowance for cancellations, and less unearned premium. Unearned premiums represent the proportion of the premiums Superannuation business means life assurance business, being business written in periods up to the accounting date that relates to the unexpired of, or in relation to, the issuing of or the undertaking of liability under terms of policies in force at the financial reporting date, and is computed superannuation, group life and permanent health insurance policy. using the 365ths method. Premiums are shown before deduction of commission and are gross of any taxes or duties levied on premiums. (ii) Short term insurance business (ii) Claims and policyholders benefits payable It is insurance business of any class or classes not being long term insurance business. Classes of General Insurance Include Aviation For long term insurance business, benefits are recorded as an expense insurance, Engineering insurance, Fire insurance - domestic risks, when they are incurred. Claims arising on maturing policies are Fire insurance - industrial and commercial risks, Liability insurance, recognised when the claim becomes due for payment. Death claims Marine insurance, Motor insurance - private vehicles , Motor insurance are accounted for on notification. Surrenders are accounted for on - commercial vehicles, Personal accident insurance, Theft insurance, payment. Workmen’s Compensation and Employer’s Liability insurance and Miscellaneous insurance (i.e. class of business not included under those A liability for contractual benefits that are expected to be incurred in listed above). the future is recorded when the premiums are recognised. The liability is determined as the sum of the expected discounted value of the Motor insurance business means the business of affecting and carrying benefit payments and the future administration expenses that are out contracts of insurance against loss of, or damage to, or arising out directly related to the contract, less the expected discounted value of of or in connection with the use of, motor vehicles, inclusive of third the theoretical premiums that would be required to meet the benefits party risks but exclusive of transit risks. and administration expenses based on the valuation assumptions used (the valuation premiums). The liability is based on assumptions as to Personal Accident insurance business means the business of affecting mortality, persistency, maintenance expenses and investment income and carrying out contracts of insurance against risks of the persons that are established at the time the contract is issued. A margin for insured sustaining injury as the result of an accident or of an accident of adverse deviations is included in the assumptions. a specified class or dying as the result of an accident or of an accident of a specified class or becoming incapacitated in consequence of disease Where insurance contracts have a single premium or a limited number or of disease of a specified class. It also includes business of effecting of premium payments due over a significantly shorter period than the and carrying out contracts of insurance against risk of persons insured period during which benefits are provided, the excess of the premiums incurring medical expenses. payable over the valuation premiums is deferred and recognised as income in line with the decrease of unexpired insurance risk of the Fire insurance business means the business of affecting and carrying contracts in-force or, for annuities in force, in line with the decrease of out contracts of insurance, otherwise than incidental to some other class the amount of future benefits expected to be paid. of insurance business against loss or damage to property due to fire, explosion, storm and other occurrences customarily included among (iii) Commissions payable and deferred acquisition costs (“DAC”) the risks insured against in the fire insurance business, damage to property due to fire, explosion, storm and other occurrences customarily Commissions payable are based on the premium written and are included among the risks insured against in the fire insurance business. recorded as an expense in the period in which they are incurred.
Recognition and measurement A proportion of commission’s payable is deferred and amortised over the period in which the related premium is earned. Deferred acquisition (i) Premium income costs represent a proportion of acquisition costs that relate to policies that are in force at the period end. For long term insurance business, premiums are recognised as revenue when they become payable by the contract holder. Premiums are shown (iv) Liability adequacy test before deduction of commission. At each financial reporting date, liability adequacy tests are performed For general insurance business, Premium income is recognised on to ensure the adequacy of the insurance contract liabilities net of
64 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) related DAC. In performing these tests, current best estimates of The Company gathers the objective evidence that an insurance future contractual cash flows and claims handling and administration receivable is impaired using the same process adopted for loans and expenses, as well as investment income from the assets backing such receivables. The impairment loss is also calculated under the same liabilities, are used. Any deficiency is immediately charged to profit or method used for these financial assets. loss. (vii) Salvage and subrogation reimbursements (v) Reinsurance contracts held Some insurance contracts permit the Company to sell (usually damaged) These are contracts entered into by the Company with reinsurers under property acquired in settling a claim (for example, salvage). The Company which the Company is compensated for losses on one or more contracts may also have the right to pursue third parties for payment of some or issued by the Company and that meet the classification requirements all costs (for example, subrogation). Estimates of salvage recoveries are for insurance contracts are classified as reinsurance contracts held. included as an allowance in the measurement of the insurance liability for Contracts that do not meet these classification requirements are claims. The allowance is the amount that can reasonably be recovered classified as financial assets. Insurance contracts entered into by the from the disposal of the property. company under which the contract holder is another insurer (inwards reinsurance) are included with insurance contracts. Subrogation reimbursements are also considered as an allowance in the measurement of the insurance liability for claims and are recognised in The benefits to which the Company is entitled under its reinsurance other assets when the liability is settled. The allowance is the assessment contracts held are recognised as reinsurance assets. These assets of the amount that can be recovered from the action against the liable consist of short-term balances due from reinsurers, as well as longer third party. term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Amounts (C) REVENUE RECOGNITION recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in (i) Insurance premium revenue accordance with the terms of each reinsurance contract. Reinsurance The revenue recognition policy relating to insurance contracts is set out liabilities are primarily premiums payable for reinsurance contracts and under note 2(b) above. are recognised as an expense when due. (ii) Commissions The Company assesses its reinsurance assets for impairment on a quarterly basis. If there is objective evidence that the reinsurance asset is Commissions receivable are recognised as income in the period in impaired, the Company reduces the carrying amount of the reinsurance which they are earned. asset to its recoverable amount and recognises that impairment loss in the income statement. The Company gathers the objective evidence (iii) Fee income that a reinsurance asset is impaired using the same process adopted Fee income consists primarily of administration fees arising from for financial assets held at amortised cost. The impairment loss is also services rendered in relation to the issue and management of deposit calculated following the same method used for these financial assets. administration and investment contracts. Fees are recognised in the (vi) Receivables and payables related to insurance contracts accounting period in which the services are rendered and are presented in the income statement within ‘other income’ and investment contracts Receivables and payables are recognised when due. These include (iv) Interest income amounts due to and from agents, brokers and insurance contract Interest income for all interest-bearing financial instruments, including holders. financial instruments measured at fair value through profit or loss, is recognized within ‘investment income’ (Note 6) in the income statement If there is objective evidence that the insurance receivable is impaired, using the effective interest rate method. When a receivable is impaired, the Company reduces the carrying amount of the insurance receivable the Company reduces the carrying amount to its recoverable amount, accordingly and recognises that impairment loss in the income being the estimated future cash flow discounted at the original effective statement. interest rate of the instrument, and continues unwinding the discount as interest income.
65 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(v) Dividend income investment contracts without fixed terms is determined using the current unit values in which the contractual benefits are denominated. Dividends are recognised as income in the period in which the right to These unit values reflect the fair values of the financial assets contained receive payment is established. within the company’s unitised investment funds linked to the financial liability. The fair value of the financial liabilities is obtained by multiplying (vi) Rental income the number of units attributed to each contract holder at the financial Rental income is recognized as income in the period in which it is earned. reporting date by the unit value for the same date. All investment income is stated net of investment expenses. When the investment contract has an embedded put or surrender (vii) Realised/Unrealised gains and losses option, the fair value of the financial liability is never less than the amount payable on surrender, discounted for the required notice period, where Realised/unrealised gains and losses recorded in the income statement applicable. For investment contracts with fixed and guaranteed terms, on investments include gains and losses on financial assets and the amortised cost basis is used. In this case, the liability is initially investment properties. Gains and losses on the sale on investments measured at its fair value less transaction costs that are incremental are calculated as the difference between net sales proceeds and the and directly attributable to the acquisition or issue of the contract. original or amortised cost and are recorded on occurrence of the sale transaction. Subsequent measurement of investment contracts at amortised cost uses the effective interest method. This method requires the (D) INVESTMENT CONTRACTS determination of an interest rate (the effective interest rate) that exactly discounts to the net carrying amount of the financial liability, the The company issues investment contracts without fixed terms (unit- estimated future cash payments or receipts through the expected life linked) and investment contracts with fixed and guaranteed terms (fixed of the financial instrument or, when appropriate, a shorter period if the interest rate).The investment contracts include funds administered for a holder has the option to redeem the instrument earlier than maturity. number of retirement benefit schemes. The company re-estimates at each reporting date the expected future Investment contracts without fixed terms are financial liabilities whose cash flows and recalculates the carrying amount of the financial liability fair value is dependent on the fair value of underlying financial assets by computing the present value of estimated future cash flows using (these contracts are also known as unit-linked investment contracts) and the financial liability’s original effective interest rate. Any adjustment is are designated at inception as at fair value through profit or loss. The immediately recognised as income or expense in the income statement. company designates these investment contracts to be measured at fair value through profit or loss because it eliminates or significantly reduces (E) PROPERTY AND EQUIPMENT a measurement or recognition inconsistency (sometimes referred to as ‘an accounting mismatch’) that would otherwise arise from measuring All categories of property and equipment are stated at historical cost assets or liabilities or recognising the gains and losses on them on less depreciation except buildings. Historical cost includes expenditure different bases. that is directly attributable to the acquisition of the asset. Buildings are stated in the statement of financial position at their revalued amounts, The best evidence of the fair value of these financial liabilities at initial being the fair value at the date of revaluation, less any subsequent recognition is the transaction price (i.e. the fair value received) unless accumulated depreciation. the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument or based on Buildings are revalued on an annual basis by external independent a valuation technique whose variables include only data from observable valuers. Any increase arising on the revaluation is recognized in other markets. When such evidence exists, the company recognises profit on comprehensive income and accumulated in the revaluation surplus on day 1. The company has not recognised any profit on initial measurement property. Decreases that offset previous increases of the same asset of these investment contracts because the difference is attributed to the are recognized in other comprehensive income and charged against the prepayment liability recognised for the future investment management revaluation surplus on property. services that the company will render to each contract holder.
The company’s main valuation techniques incorporate all factors that market participants would consider and make maximum use of observable market data. The fair value of financial liabilities for
66 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation on other assets is calculated using the straight-line method to (G) INTANGIBLE ASSETS write down their residual values over their estimated useful lives, as follows: The Company’s intangible assets relate to computer software and goodwill. Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific Buildings 40 years software. These costs are amortised over their estimated useful lives of seven years. Development Costs that are directly associated with Leasehold improvements 10 years identifiable and unique software products that will generate economic benefits beyond one year, are recognised as intangible assets if:- Motor vehicles 5 years • It is technically feasible to complete the software product so that it will be available for use; Computer equipment 5 years • Management intends to complete the software product and use or sell it; Furniture, fixtures, and fittings 5 years • There is an ability to use or sell the software product; • It can be demonstrated how the software product will generate Subsequent costs are included in the asset’s carrying amount or probable future economic benefits; recognised as a separate asset as appropriate, only when it is probable • Adequate technical, financial and other resources to complete the that future economic benefits associated with the item will flow to the development and use or sell it are available; and company and the cost of the item can be measured reliably. All other • The expenditure attributable to the software product during its repairs and maintenance are charged to profit or loss during the financial development can be reliably measured. period in which they are incurred. Direct costs include the software development, employee costs and The assets’ residual values and useful lives are reviewed, and adjusted if an appropriate portion of relevant overheads. Other development appropriate, at each financial reporting date. An asset’s carrying amount expenditure that do not meet these criteria are recognised as an is written down immediately to its estimated recoverable amount if expense as incurred. Development costs that have been expensed are the asset’s carrying amount is greater than its estimated recoverable not recognised as an asset in a subsequent period. amount. Computer software development costs recognised as assets are The gains and losses on disposal of property and equipment are amortised over their estimated useful lives (not exceeding seven years). determined by comparing the sales proceeds with the carrying amount Costs associated with maintaining computer software programmes are of the asset and are included in the profit or loss for the year. recognised as an expense as incurred.
On disposal of revalued assets, amounts in the revaluation surplus (H) INVESTMENT IN ASSOCIATE relating to that asset are transferred to retained earnings. Associates are all entities over which the Company has significant (F) INVESTMENT PROPERTY influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates Buildings, or part of a building, (freehold or held under a finance lease) are accounted for using the equity method of accounting. Under the and land (freehold or held under an operating lease) held for long term equity method, the investment is initially recognised at cost, and the rental yields and/or capital appreciation and are not occupied by the carrying amount is increased or decreased to recognise the investor’s Company are classified as investment property under non-current share of profit or loss of the investee after the date of acquisition. The assets. Investment property is carried at fair value, representing open Company’s investment in associates includes goodwill identified on market value determined annually by external valuers. Properties under acquisition. construction and development sites with projected use as Investment properties are valued at projected fair values taking into account current If the ownership interest in an associate is reduced but significant market conditions, outstanding investment costs and a risk loading influence is retained, only a proportionate share of the amounts according to the progress of the project. Changes in fair values are previously recognised in other comprehensive income is reclassified to included in investment income in the income statement. profit or loss where appropriate.
67 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company’s share of post-acquisition profit or loss is recognised (i) Classification of financial assets in profit or loss, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income a) Classification of financial assets at amortised cost with a corresponding adjustment to the carrying amount of the investment. When the Company’s share of losses in an associate equals The Company measures a financial asset at amortised cost if both of the or exceeds its interest in the associate, including any other unsecured following conditions are met; receivables, the Company does not recognise further losses, unless • The financial asset is held within the Company with an objective to it has incurred legal or constructive obligations or made payments on collect contractual cash flows behalf of the associate. • The contractual terms of the financial asset gives rise on specified dates to cash flows that are solely payments of principal and interest The Company determines at each reporting date whether there is any on the principal amount outstanding. objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as The Company holds the following assets at amortised costs; part of its the difference between the recoverable amount of the associate andits government securities portfolio, part of its corporate bonds portfolio, carrying amount. other receivables, deposits with financial institutions and cash and bank balances. Profits and losses resulting from upstream and downstream transactions between the Company and the associates are recognised in the (b) Classification of financial assets at fair value through other Company’s financial statements only to the extent of unrelated investor’s comprehensive income interests in the associates. Unrealised losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Company measures financial assets at fair value through other Accounting policies of associates have been changed where necessary comprehensive income if both of the following conditions are met; to ensure consistency with the policies adopted by the Company. • The financial asset is held within the Company with an objective to Dilution gains and losses arising in investments in associates are both collect contractual cash flows and sell the financial asset recognised in profit or loss. • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (I) IMPAIRMENT OF NON-FINANCIAL ASSETS on the principal amount outstanding. Intangible assets that have an indefinite useful life or intangible assets The Company holds part of its quoted ordinary shares portfolio in this not ready to use are not subject to amortisation and are tested annually category. for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate (c) Classification of financial assets at fair value through other profit or loss that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds The Company measures financial assets at fair value through profit or its recoverable amount. The recoverable amount is the higher of an asset’s loss unless it is measured at amortised cost or at fair value through fair value less costs of disposal and value in use. For the purposes of other comprehensive income. However the Company may make an assessing impairment, assets are grouped at the lowest levels for which irrevocable election at initial recognition for particular investments there are largely independent cash inflows (cash-generating units). Prior in equity instruments that would otherwise be measured at fair value impairments of non-financial assets (other than goodwill) are reviewed for through profit or loss to present subsequent changes in fair value in possible reversal at each reporting date. other comprehensive income. The Company may at initial recognition, irrevocably designate a financial asset as measured at fair value (J) FINANCIAL ASSETS through profit or loss if doing so eliminates or significantly reduces a measurement or recognition inconsistency (accounting mismatch) that As at 1 January 2013 the Company’s management adopted IFRS 9. The would arise from measuring assets or liabilities or recognising the gains Company’s financial assets are now classified and measured as follows; and losses on them on different bases. at amortised cost, at fair value through other comprehensive income or at fair value through profit or loss. The classification of the assets to the The Company holds the following assets in this category; part of its three categories is based on; the Company’s business model for managing government securities portfolio, part of its quoted ordinary shares the financial assets and the contractual cash flow characteristics ofthe portfolio and the unit trusts. financial asset.
68 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(ii) Classification of financial liabilities and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be The Company classifies financial liabilities in two categories; at amortised reliably estimated. cost and at fair value through profit or loss. Objective evidence that a financial asset or group of assets is impaired a) Classification of financial liabilities at amortised cost includes observable data that comes to the attention of the Group about the following loss events: The Company classifies all financial liabilities as subsequently measured at amortised cost, except for: • Significant financial difficulty of the borrower; • A breach of contract, such as default or delinquency in interest or • Financial liabilities at fair value through profit or loss. principal repayments; • Financial liabilities that arise when a transfer of a financial asset does • The company granting to the borrower, for economic or legal reasons not qualify for derecognition or when the continuing involvement relating to the borrower’s financial difficulty, a concession that the approach applies. company would not otherwise consider; • Financial guarantee contracts. • It becoming probable that the borrower will enter bankruptcy or other • Contingent consideration recognised by an acquirer in a business financial reorganisation; combination to which IFRS 3 applies. • The disappearance of an active market for that financial asset The Company holds the following liabilities in this category; creditors because of financial difficulties; or arising from reinsurance arrangements, other payables and bank • Observable data indicating that there is a measurable decrease in overdraft. the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot b) Classification of financial liabilities at fair value through profit or loss yet be identified with the individual financial assets in the Company including: The Company, at initial recognition irrevocably designates a financial (a) Adverse changes in the payment status of borrowers in the Company; liability as measured at fair value through profit or loss when doing so or results in more relevant information, because either: • It eliminates or significantly reduces a measurement or recognition (b) National or local economic conditions that correlate with defaults on inconsistency that would otherwise arise from measuring assets or the assets in the company liabilities or recognising the gains and losses on them on different bases. The estimated period between a loss occurring and its identification • A group of financial liabilities or financial assets is managed and is determined by management for each identified portfolio. The its performance ie evaluated on a fair value basis, in accordance company first assesses whether objective evidence of impairment with documented risk management or investment strategy, and exists individually for financial assets that are individually significant, and information about the Company is provided internally on that basis individually or collectively for financial assets that are not individually to the entity’s key management personnel. significant. If the company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether The Company holds the following liabilities in this category; payable significant or not, it includes the asset in a group of financial assets under deposit administration contracts and liabilities under investment with similar credit risk characteristics and collectively assesses them for contracts. impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not (K) IMPAIRMENT OF FINANCIAL ASSETS included in a collective assessment of impairment. Assets carried at amortised cost: If there is objective evidence that an impairment loss on financial assets The company assesses at each financial reporting date whether there carried at amortised cost has been incurred, the amount of the loss is objective evidence that a financial asset or a group of financial assets is measured as the difference between the asset’s carrying amount measured at amortised cost is impaired. A financial asset or a group and the present value of estimated future cash flows (excluding future of financial assets is impaired and impairment losses are incurred only credit losses that have not been incurred) discounted at the financial if there is objective evidence of impairment as a result of one or more instrument’s original effective interest rate. events that occurred after initial recognition of the asset (a ‘loss event’)
69 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The carrying amount of the asset is reduced through the use of (L) CASH AND CASH EQUIVALENTS an allowance account and the amount of the loss is recognised in the income statement. If a loan has a variable interest rate, the discount Cash and cash equivalents are carried in the statement of financial rate for measuring any impairment loss is the current effective interest position at amortised cost. For the purposes of the cash flow statement, rate determined under the contract. As a practical expedient, the Group cash and cash equivalents comprise cash on hand, deposits held at may measure impairment on the basis of an instrument’s fair value using call with banks, other short-term highly liquid investments with original an observable market price. maturities of three months or less, and bank overdrafts.
The calculation of the present value of the estimated future cash flows (M) EMPLOYEE BENEFITS of a collateralised financial asset reflects the cash flows that may result (i) Retirement benefit obligations from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. The Company operates two (2) retirement benefit schemes for its employees and qualifying agents. For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. Defined benefit scheme is a pension plan that defines an amount of on the basis of the company’s grading process that considers asset pension benefit that an employee will receive on retirement, usually type, industry, geographical location, collateral type, past-due status dependent on one or more factors such as age, years of service and and other relevant factors). Those characteristics are relevant to the compensation. The liability recognised in the statement of financial estimation of future cash flows for groups of such assets by being position in respect of defined benefit pension plan is the present value indicative of the debtors’ ability to pay all amounts due according to the of the defined benefit obligation at the end of the reporting period less contractual terms of the assets being evaluated. the fair value of plan assets. The defined benefit obligation is calculated annually by independent Future cash flows in a group of financial assets that are collectively actuaries using the projected unit credit method. The present value of evaluated for impairment are estimated on the basis of the contractual the defined benefit obligation is determined by discounting the estimated cash flows of the assets in the company and historical loss experience future cash outflows using interest rates of government bonds that are for assets with credit risk characteristics similar to those in the company. denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension Historical loss experience is adjusted on the basis of current observable obligation. data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove Actuarial gains and losses arising from experience adjustments and the effects of conditions in the historical period that do not exist currently. changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past When a loan is uncollectible, it is written off against the related provision -service costs are recognised immediately in income for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been Defined contribution scheme is a pension plan under which the company determined. pays fixed contributions into a separate entity. The company hasno Subsequent recoveries of amounts previously written off decrease the legal or constructive obligations to pay further contributions if the fund amount of the provision for loan impairment in the income statement. does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Company’s If, in a subsequent period, the amount of the impairment loss decreases contributions to the defined contribution schemes are charged to the and the decrease can be related objectively to an event occurring after income statement in the year to which they relate. the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by The company and all its employees also contribute to the National Social adjusting the allowance account. The amount of the reversal is recognised Security Fund which is also a defined contribution scheme. in the income statement. Loans that are either subject to collective impairment assessment or individually significant and whose terms (ii) Incentive Bonus have been renegotiated are no longer considered to be past due but are Staff are entitled to a bonus which is based on preset performance treated as new loans. In subsequent years, the renegotiated terms apply parameters on an annual basis. The full cost of the bonus is expensed in determining whether the asset is considered to be past due. in the year in which it is earned.
70 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (iii) Other entitlements (ii) Deferred income tax Employee entitlements to long service awards are recognised when Deferred income tax is recognised, using the liability method, on they accrue to employees. A provision is made for the estimated liability temporary differences arising between the tax bases of assets and for such entitlements as a result of services rendered by employees up liabilities and their carrying amounts in the financial statements. to the financial reporting date. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business The estimated monetary liability for employees’ accrued annual leave combination that at the time of the transaction affects either accounting entitlement at the financial reporting date is recognised as an expense nor taxable profit or loss. accrual. Deferred income tax is determined using tax rates (and laws) that have (N) DIVIDENDS been enacted or substantively enacted at the statement of financial position date and are expected to apply when the related deferred Dividends are recognised as a liability in the year in which they income tax asset is realised or the deferred income tax liability is settled. are declared. Proposed dividends are accounted for as a separate component of equity until they have been declared at an annual general Deferred income tax assets are recognised only to the extent that it is meeting. Dividends for the year that are approved after the reporting probable that future taxable profits will be available against which the date are dealt with as a non-adjusting event after the reporting date. temporary differences can be utilised. Deferred income tax assets and (O) SHARE CAPITAL liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred Ordinary shares are classified as ‘share capital’ in equity. Any premium income taxes assets and liabilities relate to income taxes levied by the received over and above the par value of the shares is classified as same taxation authority on either the same taxable entity or different ‘share premium’ in equity. Incremental costs directly attributable to the taxable entities where there is an intention to settle the balances on a issue of new ordinary shares are shown in equity as deduction from the net basis. proceeds. 3. CRITICAL ACCOUNTING ESTIMATES (P) COMPARATIVES AND JUDGEMENTS IN APPLYING Where necessary comparative figures have been adjusted to conform to changes of presentation in the current year. Where changes are ACCOUNTING POLICIES made and affect the statement of financial position, a third statement of financial position at the beginning of the earliest period presented is Certain reported amounts of assets and liabilities are subject to presented together with the corresponding notes. estimates and assumptions. Estimates and judgements by management are continually evaluated and are based on historical experience and (Q) INCOME TAX other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the process of applying (i) Current income tax the company’s accounting policies in the year, management made The tax expense for the period comprises current and deferred income judgements in determining the following:- tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. (i) Claims Reserving and Determination of IBNR: In this case, the tax is also recognised in other comprehensive income The estimation of future contractual cash flows in relation to reported or directly in equity respectively. claims and claims incurred but not reported is a key accounting estimate. There are several sources of uncertainty that need to be considered in Current income tax is the amount of income tax payable on the taxable the estimate of the liability that the Company will ultimately pay for such profit for the year determined in accordance with the relevant tax claims. legislation. The current income tax charge is calculated on the basis of the tax enacted or substantively enacted at the statement of financial position date. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
71 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES (Continued) Case estimates are determined on the basis of the best information (iv) Defined Benefit Liabilities available at the time the records for the year are closed. Claims incurred but not reported (IBNR) are determined on the basis of prevailing claims The company uses certain assumptions relating to the calculation of the defined reporting and settlement patterns. Further details on the process used benefit liabilities. These assumptions comprise the expected return on plan to estimate IBNR are set out in note 33 of the financial statements. assets as well as future salary increases and future pension increases which have been derived from estimates based on past experience. The expected (ii) Actuarial Value of future benefits payment from long-term return on the plan assets takes into consideration the investment policy relating to the assets and their projected returns. contracts The estimation of the future benefit payments from long-term contracts is The assumptions are set out in note 43. another key accounting estimate. This estimation is mainly based on the mortality assumption which is derived from the standard mortality tables. (v) Provisions The company is exposed to the risk of a worse mortality experience than The recognition of provisions involves assumptions about the probability, those assumed in the estimation of future benefits. The future benefit amount and timing of an outflow of resources embodying economic payment is determined by the expected number of deaths which then benefits. A provision is recognised to the extent that an outflow of informs the valuation premiums charged. The company is also exposed to resources embodying economic benefits is probable and a reliable longevity risk on some of its products that pay on survival to maturity. This estimate can be made. is the risk that mortality experience is less than that assumed in determining future benefit payments. There is also investment risk which arises from (vi) Recoverable amount of receivables poor investment returns than expected. This risk will exacerbate the longevity risk if investment return is lower than the long-term future return Critical estimates are made by the management in determining the assumed. The long-term return is 12.25% (2013: 12.25%). Details of the recoverable amount of impaired receivables. actuarial value of future benefits are set out in note 34 (b). (vii) Accounting for investment in Housing Finance (iii) Fair value of financial assets Critical judgement was made in respect of determining the control/ Fair values of certain financial assets recognized in the financial significant influence of the company on Housing Finance Company of statements are determined using valuation techniques based on Kenya Limited. Considerations made include the assessment of the assumptions that are not supported by prices from current market company’s power over the associate, consideration of whether the transactions or observable market data. The fair values of financial company is exposed or has rights to variable returns from its involvement instruments that are not quoted in active markets are determined by with the investee and the ability of the company to use its power over using valuation techniques. the investee to affect the amount of the company’s returns.
(iii) Fair value of financial assets Having taken all the above in to consideration, the directors are of the Where valuation techniques (for example models) are used to determine opinion that the investment is correctly accounted for as an associate fair values, they are validated and periodically independently reviewed by through the equity method. the Treasury and Investment Manager. All models are certified before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practical, models use observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates.
72 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 4.RISK MANAGEMENT OBJECTIVES AND POLICIES
The company’s activities expose it to a variety of financial risks, including Factors that aggravate insurance risk include lack of risk diversification underwriting risk, credit risk and the effects of changes in debt and equity in terms of type and amount of risk, geographical location and type of market prices, and interest rates. The company’s overall risk management industry covered. programme focuses on the identification and management of risks and the unpredictability of financial markets and seeks to minimise potential The following tables disclose the concentration of insurance risk by adverse effects on its financial performance. the class of business in which the contract holder operates and by the maximum insured loss limit included in the terms of the policy. The The company’s risk management policies include the use of underwriting amounts are the maximum insured loss limit of the insurance liabilities guidelines and capacity limits, reinsurance planning, credit policy (gross and net of reinsurance) arising from insurance contracts. governing the acceptance of clients and defined criteria for the approval of intermediaries and reinsurers. Investment policies are in place which help manage liquidity and seek to maximise return within an acceptable level of interest rate risk. Further, the internal audit function helps to monitor that these policies are followed.
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim.
By the very nature of an insurance contract, this risk is random and therefore unpredictable.
(i) Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the very nature of an insurance contract, this risk is random and therefore unpredictable.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments exceed the carrying amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the level established using statistical techniques.
Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected by a change in any subset of the portfolio. The company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability ofthe expected outcome.
73 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Year ended 31 December 2014 Maximum insured loss Class of business (Amounts presented in Shs’000) General Insurance business Shs. 0-15m Shs.15-250m Shs. >250m Total Motor Gross 18,734,662 5,817,371 - 24,552,033 Net 18,665,590 5,754,578 - 24,420,168 Fire Gross 12,295,285 37,627,922 78,836,398 128,759,605 Net 10,921,613 25,914,732 - 36,836,345 Personal Accident Gross 949,966 1,130,365 3,195,033 5,275,364 Net 1,141,947 1,485,392 - 2,627,339 Other Gross 21,391,213 23,656,121 61,311,286 106,358,620 Net 20,803,176 17,907,369 5,320,068 44,030,613 Long term business Ordinary Life Gross 152,125,307 3,415,202 - 155,540,509 Net 135,513,512 - - 135,513,512 Group life Gross 235,796,590 29,484,033 283,672 265,564,295 Net 216,494,097 - - 216,494,097 Total Gross 441,293,023 101,131,014 143,626,389 686,050,426 Net 403,539,935 51,062,071 5,320,068 459,922,074
Year ended 31 December 2013 Maximum insured loss Class of business (Amounts presented in Shs’000) General Insurance business Shs. 0-15 Shs. 15-250 Shs. >250 Total Motor Gross 21,807,422 1,378,867 - 23,186,289 Net 21,532,483 1,078,329 - 22,610,812 Fire Gross 11,692,146 32,084,932 80,169,708 123,946,786 Net 11,505,396 22,855,274 - 34,360,670 Personal Accident Gross 15,100,288 2,308,570 428,270 17,837,128 Net 11,860,638 1,262,318 - 13,122,956 Other Gross 7,309,599 22,690,789 52,309,343 82,309,731 Net 7,339,874 15,176,069 1,734,005 24,249,948 Long term business Ordinary Life Gross 120,083,720 1,644,261 - 121,727,981 Net 111,872,845 - - 111,872,845 Group life Gross 181,177,183 45,581,765 - 226,758,948 Net 105,768,915 - - 105,768,915 Total Gross 357,170,358 105,689,184 132,907,321 595,766,863 Net 269,880,151 40,371,990 1,734,005 311,986,146 The concentration by sector or maximum insured loss at the end of the year is broadly consistent with the prior years.
74 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) (ii) Credit risk Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital The Company takes on exposure to credit risk, which is the risk that repayment obligations and by changing lending limits where appropriate. a counter party will cause a financial loss to the company by failing Exposure to credit risk is also managed in part by obtaining collateral to pay amounts in full when due. Credit risk is an important risk for and corporate and personal guarantees. the Company’s business: management therefore carefully manages the exposure to credit risk. Credit exposures arise from: The credit quality of financial assets that are neither past due nor impaired can be assessed by reference to external credit ratings if available or • Investment balances; historical information about counterparty default rates. None of the • Reinsures’ share of insurance liabilities; Company’s credit risk counter parties are rated except the Government • Amounts due from reinsurers in respect of claims already paid; of Kenya, the issuer of the Company’s government securities which has • Amounts due from insurance contract holders; and B+ rating. The Company classifies counterparties without an external • Amounts due from insurance intermediaries. credit rating as below: The Company structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower or Group 1 - new customers/related parties. groups of borrowers. Such risks are monitored on a revolving basis and Group 2 - existing customers/related parties with no defaults in the past. subject to annual or more frequent review. Group 3 - existing customers/related parties with some defaults in the The exposure to any one borrower is further restricted by sub-limits. past. All defaults were fully recovered. Actual exposures against limits are monitored daily.
Maximum exposure to credit risk before collateral held External credit rating 2014 2013 Shs ‘000 Shs ‘000 Government securities at fair value through profit or loss B+ 2,495,215 530,984 Government securities at amortized cost B+ 8,453,451 8,065,626 Corporate bonds Group 2 1,362,713 591,920 Unit trusts Group 2 6,948,206 7,808,777 Investments in property funds Group 2 213,488 - Mortgage loans receivable Group 2 864,753 793,815 Loans to policy holders Group 2 488,084 376,778 Receivable arising out of reinsurance arrangements Group 2 224,802 81,228 Receivables out of direct insurance arrangements Group 2 1,250,959 849,797 Reinsurers’ share of insurance contract liabilities Group 2 643,281 2,230,265 Receivables from related parties Group 2 958,668 1,201,741 Other receivables Group 2 429,562 447,779 Deposits with financial institutions Group 2 1,443,405 1,075,907 Bank balances Group 2 305,369 458,401 Total 26,081,956 24,513,018 No collateral is held for any of the above assets other than for staff mortgage loans, Loans to policy holders and car loans included under other receivables. Properties in relation to staff mortgage loans and motor vehicles in relation to staff car loans are charged to the Company as collateral.
75 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
The fair value of this collateral was Shs 2,233,881,720 (2013: Shs • 96% (2013: 97%) of the mortgages portfolio are neither past due nor 2,016,337,350) Policy loans are secured by the surrender value of impaired. the policies. The fair values of collateral held for surrender values of • 100 % (2013: 100%) of the mortgages portfolio are backed by the policies with loans amounted to Shs 2,022,539,976: (2013: Shs collateral. 2,013,207,400). • 81 % (2013: 81%) of the investments in debt securities are In case of default, the collateral would be realised thereby reducing the government securities. company credit risk. All receivables that are neither past due nor impaired are within No collateral had been repossessed at as the end of the year. All their approved credit limits, and no receivables have had their terms receivables that are neither past due or impaired are within their approved renegotiated. credit limits, and no receivables have had their terms renegotiated. None of the above assets are either past due or impaired except for the All receivables are classified in group 2. following:- Management is confident in its ability to continue to control and sustain (a) Mortgage loans past due but not impaired minimal exposure of credit risk to the Company resulting from mortgage loans and debt securities based on the following: Mortgage loans less than 180 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross • the Company exercises stringent controls over the granting of new amounts of mortgage loans that were past due but not impaired were loans. as follows: 2014 2013 Shs ‘000 Shs ‘000 Past due up to 30 days Group 2 4,236 4,190 Past due 31 – 60 days Group 2 4,158 4,184 Past due 61 – 180 days Group 2 35,958 14,282 Total past due but not impaired 44,352 22,656 (b) Mortgage loans individually impaired Mortgages are considered impaired if they fall in arrears for more than No collateral had been repossessed as at the end of the year and no six months or other information becomes available which indicates that receivables have had their terms renegotiated. the borrower will not be able to meet their obligation. Impaired mortgage loans of Shs 51,293,348.00 (2013: Shs 41,335,060) were secured by collateral of Shs. 642,197,612 (2013: Shs 77,852,500). (c) Receivables out of reinsurance arrangements 2014 2013 Shs ‘000 Shs ‘000 Past due but not impaired 1,250,959 849,797 Impaired Group 2 6,768 6,768 Total past due but not impaired 1,257,727 856,565 Less: Provision for impairment (6,768) (6,768) Net carrying amount 1,250,959 849,797 No collateral is held in respect of the receivables that are past due but not impaired.
76 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Movements on the provision or impairment of receivables arising on direct insurance arrangements are as follows:
2014 2013 Shs ‘000 Shs ‘000 At 1 January 6,768 6,768 Provision in the year - - At 31 December 6,768 6,768 All Receivables from direct insurance arrangements past due by more than 365 days are considered to be impaired and are carried at their estimated recoverable value. (d) Receivables from direct insurance arrangements that are past due but not impaired Receivables from direct insurance arrangements less than 180 days past due are not considered impaired, unless other information is available to indicate the contrary. The amounts for receivables from direct insurance arrangements that were past due but not impaired were as follows:
2014 2,013 Shs ‘000 Shs ‘000 Past due 1 – 60 days Group 2 901,530 497,137 Past due 61 – 90 days Group 2 146,191 146,533 Over 90 days Group 2 203,238 206,127 Total past due but not impaired 1,250,959 849,797 The Receivables from direct insurance arrangements are unsecured.
(e) Receivables from direct insurance arrangements individually impaired Receivables from direct insurance arrangements are considered impaired if they fall in arrears for more than 180 days or other information becomes available that indicates that the debt may not be collected. They are carried at their estimated recoverable value.
Long term Short term Total Long term Short term Total business business 2014 business business 2013 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Brokers 72,343 194,240 266,583 47,018 134,411 181,429 Agents 209,266 549,240 758,506 136,484 381,727 518,211 Direct clients 196,550 29,320 225,870 128,650 21,507 150,157 At end of year 478,159 772,800 1,250,959 312,152 537,645 849,797 The total gross amount of impaired receivables is owed by brokers. Other than the above, there are no other financial assets that are either past due or impaired.
(iii) Liquidity risk
Liquidity risk is the risk that the Company is unable to meet its payment The table below presents the cash flows payable by the Company under obligations associated with its financial liabilities as they fall due. The liabilities by the remaining contractual maturities (other than insurance and Company is exposed to daily calls on its available cash resources from investment contract liabilities which are based on expected maturities) at maturing policies, claims and calls on cash settled contingencies. The the reporting date. Finance and Investments department monitors liquidity on a daily basis. 77 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
At 31 December 2014 0 - 4 5-12 1-5 Over 5 Total months months Years Years 2014 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Liabilities Payables to related parties 87,338 - - - 87,338 Insurance Contract Liabilities: 916,732 501,957 (1,322,130) 31,425,869 31,522,428 Payable Under DA contracts: 681,301 1,362,601 6,247,080 10,565,016 18,855,998 Liabilities under Investment contracts: 297,888 708,968 5,050,881 2,366,279 8,424,016 Other Payables: 776,729 776,729 - - 1,553,458 Total Financial Liabilities 2,759,988 3,350,255 9,975,831 44,357,164 60,443,238
At 31 December 2013 0 - 4 5-12 1-5 Over 5 Total months months years years 2013 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Liabilities Payables to related parties 362,064 - - - 362,064 Insurance Contract Liabilities: 336,262 661,312 5,446,108 26,838,133 33,281,815 Payable Under DA contracts: 410,549 1,211,266 4,803,357 7,923,143 14,348,315 Liabilities under Investment contracts: 106,946 336,524 4,622,220 3,625,113 8,690,803 Other payables: 633,611 633,614 - - 1,267,225 Bank overdrafts: 140,092 - - - 140,092 Total Financial Liabilities 1,989,524 2,842,716 14,871,685 38,386,389 58,090,314 Investment contracts and deposit administration contracts can be surrendered before maturity for a cash surrender value specified in the contractual terms and conditions. Prudent liquidity risk management includes maintaining sufficient cash balances to cover anticipated surrenders before the contractual maturity dates. In addition, the Company invests only a limited proportion of its assets in investments that are not actively traded.
(iv) Market risk
(a.) Foreign exchange risk: The Company has no material exposure To manage its price risk arising from investments in equity and debt to foreign exchange risk. securities, the Company diversifies its portfolio. Diversification of the portfolio is done in accordance with limits set by the Company. (b.) Price risk. At 31 December 2014, if the NSE Index had increased/decreased by 15% The Company is exposed to equity securities price risk because of (2013 15%) with all other variables held constant and all the Company’s investments in quoted and unquoted shares classified at fair value through equity instruments moved according to the historical correlation to the other comprehensive income or at fair value through profit or loss. index, post tax profit for the year would have been Shs. 961,970,894 higher/lower (2013 : Shs 682,551,555).
78 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
Similarly, a 15% (2013:15%) change in the price of Equity Bank Limited (v) Capital management shares would affect the other reserves and the shareholders’ funds by Shs. 209,135,000 (2013: Shs 519,910,000). The Company’s objectives when managing capital, which is a broader concept than the ‘equity’ on the statement of financial position, are: The concentration on equities in general and on specific counters • To safeguard the Company’s ability to continue as a going concern, is closely monitored. The investment in Equity Bank Limited at 31 so that it can continue to provide returns for shareholders and December 2014 was 15% (2013 : 15%) of total assets. benefits for other stakeholders. • To maintain a strong capital base to support the development of its (c.) Cash flow and fair value interest rate risk business. • To provide an adequate return to shareholders by pricing insurance The Company’s interest bearing assets are quoted corporate bonds, and investment contracts commensurately with the level of risk; and mortgages, staff loans, intercompany loans and policy loans all of which are at fixed rate. The Company also has borrowings at fixed rates. No • To comply with the capital requirements set out in the Insurance Act. limits are placed on the ratio of variable rate borrowing to fixed rate The Company’s paid up capital comprises share capital as disclosed on borrowing. note 12. Capital adequacy and solvency margin are monitored regularly by the Board of Directors. Capital adequacy and the required information At 31 December 2014, if interest rates on government securities are filed with the Insurance Regulatory Authority. The Company met the classified as financial assets at fair value through profit and losshad required technical solvency margin at 31 December 2014 and 2013. been 1% higher/lower (2013:1%) with all other variables held constant, post tax profit for the year would have been Shs. 7,412,023 (2013: Shs. The table below summarises the regulatory capital requirements and the 38,250) higher/lower mainly as a result of increase or decrease in the fair capital maintained by the company at December 2014 and 2013: value of the government securities.
2014 2013 Long term Short term Long term Short term business business business business Shs’000 Shs’000 Shs’000 Shs’000 Regulatory capital requirements 150,000 300,000 150,000 300,000 Amount of paid up capital maintained by the company 180,000 700,000 180,000 700,000 Required solvency margin 1,673,095 473,827 1,255,003 372,436 Solvency margin by Company 2,979,738 809,989 3,579,211 1,311,463 Surplus/(deficit) over required margin 1,306,644 336,162 2,324,208 939,027
(vi) Fair value estimation
Fair value is the price that would be received to sell an asset or paid to IFRS 7 requires disclosure of fair value measurements by the following transfer a liability in an orderly transaction between market participants levels of hierarchy for financial instruments that are measured in the at the measurement date, regardless of whether that price is directly statement of financial position at fair value into Level 1, 2 or 3 based observable or estimated using another valuation technique. In estimating on the degree to which the inputs to the fair value measurements the fair value of an asset or a liability, the Company takes into account are observable and the significance of the inputs to the fair value the characteristics of the asset or liability if market participants would measurement in its entirety, which are described as follows: take those characteristics into account when pricing the asset or liability • Level 1 inputs are Quoted prices (unadjusted) in active markets for at the measurement date. identical assets or liabilities. • Level 2 inputs are Inputs other than quoted prices included within
79 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
level 1 that are observable for the asset or liability, either directly (that regarded as active if quoted prices are readily and regularly available is, as prices) or indirectly (that is, derived from prices). from an exchange, dealer, broker, industry group, pricing service, or • Level 3 inputs are Inputs for the asset or liability that is not based on regulatory agency, and those prices represent actual and regularly observable market data (that is, unobservable inputs) (level 3). occurring market transactions on an arm’s length basis. The fair value of financial instruments traded in active markets is based The following table presents the Company’s assets that are measured at on quoted market prices at the financial reporting date. A market is fair value the end of the year.
Fair value Valuation technique (s) Significant Financial assets Fair value at Fair value at hierarchy and key inputs unobservable inputs 31/12/2014 31/12/2013 Shs’000 Shs’000
Financial assets at fair value through profit or loss
Quoted bid prices in an – Equity securities 6,413,139 4,550,344 Level 1 N/A active market Quoted bid prices in an – Government securities 2,495,215 530,984 Level 1 N/A active market Quoted bid prices in an – Unit trusts 6,948,206 7,808,777 Level 1 N/A active market Financial assets at fair value through other comprehensive income Quoted bid prices in an – Equity securities 1,394,235 3,466,068 Level 1 N/A active market Quoted bid prices in non- – Property and equipment building 849,117 763,408 Level 2 N/A active market Quoted bid prices in non- – Investment in property funds 213,488 - Level 2 N/A active market Quoted bid prices in non- – Investment property 4,842,314 3,394,771 Level 2 N/A active market Total assets 23,155,714 20,514,352 Financial liabilities Quoted bid prices in non- – Liabilities under investment contracts 6,603,982 6,414,370 Level 2 N/A active market Quoted bid prices in non- – Liabilities under deposit administration contracts 11,201,557 12,356,909 Level 2 N/A active market Total liabilities 17,805,539 18,771,279 The quoted market price used for financial assets held by the group is the current bid price. These instruments are included in level 1. Instruments included in level 1 comprise primarily NSE equity investments classified as trading securities or at fair value through other comprehensive income.
80 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 4.RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued)
The fair value of financial instruments that are not traded in an active There was no movement between level 1 and 2 during the year. market (for example, government bonds and unit trusts) is determined by using valuation techniques. These valuation techniques maximise the The company had level 3 financial instruments (unquoted stock) use of observable market data where it is available and rely as little as amounting to Shs Nil as at 31 December 2014 (2013: Shs. 50,490,000). possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in The following table presents the changes in Level 3 instruments for the level 2. year ended 31 December 2014.
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.
2014 2013 Shs ‘000 Shs ‘000 At start of year - 50,490 Reclassification to quoted equity investments - (50,490) At end of year - -
Specific valuation techniques used to value financial instruments include: Fair values of financial assets and liabilities • Quoted market prices or dealer quotes for similar instruments The fair value of financial instruments that are not traded in an active • The fair value of government securities is based on a yield curve market is determined by using valuation techniques. The Company uses based on trends at the Nairobi stock exchange its judgment to select a variety of methods and make assumptions that • The fair value of unit trusts is based on the computed net shares are mainly based on market conditions existing at the financial reporting in each fund which is based on applying the market rates on the date. underlying investor’s units held. The fair value of held-to-maturity government securities at 31 December Other techniques, such as discounted cash flow analysis, are used to 2014 is estimated at 8,490,546,513 Shs (2013: Shs. 7,769,575,390) determine fair value for the remaining financial instruments. compared to their carrying value of Shs. 8,453,452,000 (2013: Shs 8,599,736,240), while that of mortgage loans and policy loans are Shs Note that all of the resulting fair value estimates are included in level 2. 864,753,000 (2013: Shs 793,815,100) and Shs. 488,084,000 (2013: Shs There was transfer out of level 3 during the year 2014 as summarised in Note 21 376,777,766) respectively.
81 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 5 (i) GROSS EARNED PREMIUMS Gross earned premiums are the total premiums receivable by the company after adjusting for the unearned proportion of the premiums. The premium income of the company can be analysed between the main classes of business as shown below:
2014 2013 Shs’000 Shs’000 Long term insurance business: - Ordinary life new business 1,338,019 975,706 - Ordinary life renewal recurring 3,398,663 2,653,986 - Group life 1,723,201 1,381,945 Total Long term business 6,459,883 5,011,637 Short term insurance business: - Engineering 148,350 126,560 - Fire 299,219 231,034 - Marine 135,349 182,552 - Motor 1,617,868 1,186,820 - Personal accident and medical 1,597,439 1,331,614 - Micro insurance 307,087 182,125 - Theft 139,254 126,691 - Liability 26,935 23,893 - Workmen’s Compensation 188,815 121,610 - Miscellaneous 22,299 28,675 Total Short term business 4,482,615 3,541,574 Total 10,942,498 8,553,211
(ii) PREMIUMS CEDED TO REINSURERS Reinsurance ceded allows the company to reduce its risk exposure in an insurance policy by passing that risk onto another company (reinsurer) in exchange for a predefined premium. The Insurance Act requires all registered underwriters to have in place appropriate reinsurance arrangements which are approved by the Commissioner of Insurance in respect of insurance business underwritten in course of the year. The company has complied with this regulation.
82 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 5 (ii) PREMIUMS CEDED TO REINSURERS (Continued)
2014 2013 Shs’000 Shs’000 Long term insurance business: - Ordinary life 67,019 49,295 - Group life 202,942 309,397 Total Long term business 269,961 358,692 Short term insurance business: - Engineering 115,350 102,448 - Fire 195,497 156,192 - Marine 90,171 133,424 - Motor 74,609 33,886 - Personal accident and medical 175,723 183,910 - Micro insurance 31,873 - - Theft 2,901 362 - Liability 17,683 15,677 - Workmen’s Compensation 3,964 - - Miscellaneous 12,724 13,283 Total Short term business 720,495 639,182 Total 990,456 997,874 6 (i) INVESTMENT INCOME Long term Short term Total Long Term Short Term Total Business Business 2014 Business Business 2013 Shs’ 000 Shs’000 Shs’000 Shs’ 000 Shs’000 Shs’000 Interest from government securities 911,181 173,875 1,085,056 624,154 175,539 799,693 Bank deposit interest 95,950 56,585 152,535 46,005 7,939 53,944 Loan interest receivable 234,822 2,995 237,817 198,531 11,411 209,942 Rental income from investment properties 78,037 - 78,037 63,431 - 63,431 Fair value gains on investment properties (Note 18) 709,358 - 709,358 798,483 - 798,483 Dividends on financial assets at fair value through other comprehensive income 147,542 21,535 169,077 174,219 3,659 177,878 Dividends on financial assets at fair value through profit or loss 177,317 4,146 181,463 123,623 17,947 141,570 Treasury bonds realised(loss)/gain - 19 19 (1,096) (86) (1,182) Gain on equities classified as fair value through profit or loss 11,082 72,729 83,811 263,515 4,699 268,214 Realised gains on unit trusts 143,323 - 143,323 763 39,377 40,140 T- bonds unrealised premium 15,787 1,196 16,983 5,470 1,586 7,056 Stocks unrealised gains 1,724,384 21,245 1,745,629 1,108,190 57,448 1,165,638 Unit trust unrealised gains 734,337 2,782 737,119 1,582,209 3,938 1,586,147 Total 4,983,120 357,107 5,340,227 4,987,497 323,457 5,310,954 Operating expenses generating rental income is Shs 8,271,000 (2013: Shs. 4,494,000)
83 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 6 (ii) COMMISSIONS EARNED Long term Short term Total Long Term Short Term Total Business Business 2014 Business Business 2013 Shs’ 000 Shs’000 Shs’000 Shs’ 000 Shs’000 Shs’000 Reinsurance commissions 126,659 202,277 328,936 141,254 216,033 357,287 (iii) OTHER INCOME Long term Short term Total Long Term Short Term Total Business Business 2014 Business Business 2013 Service fee on policy loans 4,894 - 4,894 126 20,281 126 Administration fees 24,352 27,564 51,916 22,699 42,980 Gain on asset disposal 3,859 - 3,859 - - - Total 33,105 27,564 60,669 22,825 20,281 43,106 Administration fees relates to services rendered for managing deposit administration and out-patient medical fund. 7 (i) NET CLAIMS AND POLICYHOLDER BENEFITS PAYABLE 2014 2013 Total Total Shs’000 Shs’000 (a) Long term business - death, maturity and surrender benefits 1,176,104 881,068 - bonuses 677,859 661,982 - change in actuarial value of policyholder benefits 3,049,627 1,858,281 Total long term 4,903,590 3,401,331 -Reinsurers’ share of claims (55,231) (97,314) (b) Short term business - Claims payable by principal class of business: - Engineering 34,908 33,369 - Fire 235,851 10,984 - Marine (1,688,818) 51,185 - Motor 1,129,660 678,296 - Personal accident and medical 780,885 695,931 - Micro insurance 323,467 158,188 - Theft 77,903 56,849 - Liability (18,753) (21,524) - Workmen’s Compensation 41,029 43,601 - Miscellaneous 194 89 Total short term 916,326 1,706,968 Less: reinsurers’ share of claims 1,347,160 (159,632) Total Long term & Short term 5,819,916 5,108,299 Total Reinsurers’ share of claims 1,291,929 (256,946)
84 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 7 (ii) INTEREST PAYMENTS/INCREASE IN UNIT VALUE 2014 2013 Long term business Shs’000 Shs’000
Interest on deposit administration contracts (Note 32) 1,427,773 1,029,209 Fair Value gains on investment contracts (Note 33) 608,213 1,175,377 Total interest payments 2,035,986 2,204,586 8. OPERATING AND OTHER EXPENSES
Long term Short term 2014 Long term Short term 2013 Shs’ 000 Shs’000 Shs’000 Shs’ 000 Shs’000 Shs’000 Staff costs (Note 10) 573,881 391,927 965,808 460,072 273,368 733,440 Depreciation on property and equipment (Note 16) 103,244 18,268 121,512 59,780 35,521 95,301 Amortisation of intangible assets (Note 17) 20,420 7,784 28,204 16,537 6,116 22,653 Advertising & marketing expenses 128,618 78,991 207,609 62,025 54,604 116,629 Business development costs 180,447 122,541 302,988 122,133 77,602 199,735 Office accommodation costs 71,134 30,320 101,454 45,636 26,802 72,438 Software maintenance & renewals 155,892 71,134 227,026 67,500 39,643 107,143 Transport & representation 41,100 88,230 129,330 58,600 34,416 93,016 Premium levies & duties 60,094 60,577 120,671 73,007 42,877 115,884 Underwriting costs 13,243 60,095 73,338 22,936 13,471 36,407 Legal fees 2,000 646 2,646 25,131 14,760 39,891 Professional fee 119,240 49,843 169,083 49,647 48,966 98,613 Repairs & maintenance expenditure 1,867 942 2,809 1,444 858 2,302 Auditor’s renumeration 8,847 2,400 11,247 6,743 4,578 11,321 Director’s fees expenses 67,657 21,365 89,022 75,174 18,357 93,531 Communication costs 19,396 25,212 44,608 28,869 12,930 41,799 Actuarial fees 14,335 10,019 24,354 12,185 8,516 20,701 Staff training and career development cost 29,874 18,112 47,986 27,951 18,873 46,824 Group medical and life costs 55,324 42,083 97,407 67,161 20,439 87,600 Stationery and printer leasing expenses 28,673 27,368 56,041 24,372 14,764 39,136 Bank Charges 31,748 5,928 37,676 23,441 4,978 28,419 Total 1,727,034 1,133,785 2,860,819 1,330,344 772,439 2,102,783
85 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 9. COMMISSIONS PAYABLE 2014 2013 Shs’000 Shs’000 Long term insurance business: - Ordinary life 1,332,257 1,117,512 - Group life 143,087 113,993 Deposit administration 45,306 11,777 Total Life 1,520,650 1,243,282 Short term insurance business: - Engineering 33,837 25,313 - Fire 64,749 62,829 - Marine 23,736 26,567 - Motor 162,391 116,776 - Personal accident and medical 213,680 207,516 - Micro insurance 56,716 22,461 - Theft 13,752 11,859 - Liability 4,551 3,764 - Workmen’s Compensation 36,844 25,747 - Miscellaneous 1,928 2,313 Total Short term business 612,184 505,145 Total 2,132,834 1,748,427 10. STAFF COSTS Long Term Short Term 2014 Long Term Short Term 2013 Staff costs include the following: Shs’ 000 Shs’000 Shs’000 Shs’ 000 Shs’000 Shs’000 Salaries and wages 445,846 332,726 778,572 379,165 225,294 604,459 Retirement benefits costs: - Defined contribution scheme 124,005 57,929 181,934 76,015 45,167 121,182 - Defined benefit scheme (Note 43) 3,293 1,040 4,333 4,344 2,581 6,925 - National Social Security Fund 737 232 969 548 326 874 Total 573,881 391,927 965,808 460,072 273,368 733,440 The number of persons employed by the company at the end of 2014 was 431 (2013: 340). 11. INCOME TAX (a) (i) Income tax expense Long-term Short-term 2014 2013 business business Total Total Shs‘000’ Shs‘000’ Shs‘000’ Shs‘000’ Current taxation 326,543 73,563 400,106 457,109 Prior year under provision – current tax - 7,694 7,694 - Deferred taxation: Charge/(credit) for the year (note 36) 111,355 (3,218) 108,137 263,003 Income tax expense through profit or loss 437,898 78,039 515,937 720,112 Charge on items of other comprehensive income 273,357 - 273,357 215,786 Total income tax expense 711,255 78,039 789,294 935,898
86 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 11. INCOME TAX (Continued)
A reconciliation of the tax charge is shown below. The income not subject to tax is mainly unrealised gains
(a) (ii) Income tax expense - other comprehensive income
The tax charge relating to components of other comprehensive income is as follows:
2014 2013 Tax Before tax Before Tax charge After tax After tax tax charge Shs‘000’ Shs‘000’ Shs’000 Shs’000 Shs’000 Shs’000 − Re-measurement of the net defined benefit asset 11,558 (3,467) 8,091 14,266 (4,280) 9,986 − Share of other comprehensive income from associates accounted for 37,954 (11,386) 26,568 - - - using the equity method Fair value gains - Building 16,867 (5,060) 11,807 16,354 (4,906) 11,448 - Financial assets at fair value through other comprehensive income 1,038,851 (253,444) 785,407 789,161 (206,600) 582,561 Other comprehensive income 1,105,230 (273,357) 831,873 819,782 (215,786) 603,995 A reconciliation of the tax charge is shown below. The income not subject to tax is mainly unrealised gains
(b) Reconciliation of taxation expense to expected tax based on the accounting profit before taxation
Long term Short term 2,014 2,013 business business Total Total Shs‘000’ Shs‘000’ Shs‘000’ Shs‘000’ Profit before taxation 1,459,659 339,613 1,799,272 2,533,015 Tax calculated at a tax rate of 30% (2013:30%) 437,898 101,884 539,782 782,480 Tax effect of income not subject to tax - (69,004) (69,004) (351,979) Tax effect of expenses not deductible for tax purposes - 37,465 37,465 26,608 Prior year under provision – current tax - 7,694 7,694 - Total 437,898 78,039 515,937 457,109 Income tax 326,543 73,563 400,106 457,109 Prior year under provision – current tax - 7,694 7,694 - 326,543 81,257 407,800 457,109 Deferred tax 111,355 (3,218) 108,137 263,003 Tax charge 437,898 78,039 515,937 720,112
87 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 11 INCOME TAX (Continued)
c) Corporation tax recoverable/(payable) Long-term Short-term 2014 2013 business business Total Total Shs‘000’ Shs‘000’ Shs‘000’ Shs‘000’ At 1 January (214,070) 80,151 (133,919) (66,875) Taxation charge for the year (326,543) (81,257) (407,800) (457,109) Paid for the year 548,859 96,212 645,071 390,065 At 31 December 8,246 95,106 103,352 (133,919) The company’s current tax charge is computed in accordance with income tax rules applicable to composite Kenyan insurance companies. Deferred tax on the life surplus not recommended for distribution to shareholders has been provided for.
12. SHARE CAPITAL AND RETAINED EARNINGS The total authorised number of ordinary shares is 880,000,000 (2013: 880,000,000) with a par value of Shs. 1 per share.
Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary shares shares shares shares shares shares Authorised, issued and fully paid: Long Term Short Term 2014 Long Term Short Term 2013 (Par value Shs 1) Shs’ 000 Shs’000 Shs’ 000 Shs’ 000 Shs’000 Shs’000 Balance at 1 January 2014 180,000 700,000 880,000 180,000 700,000 880,000 Balance at 31 December 2014 180,000 700,000 880,000 180,000 700,000 880,000
RETAINED EARNINGS Retained earnings represent the balance of net income after distribution of dividends to the shareholders of the company.
13. OTHER RESERVES Other reserves include fair value reserves arising from revaluation of assets carried at fair value through other comprehensive income, revaluation reserves on buildings and general reserves which are undistributed retained earnings of the long term business. The definition of accumulated surpluses from the life fund is subject to the restrictions imposed by the Kenyan Insurance Act. The Insurance Act limits the amounts of surpluses of the life business available for distribution to shareholders to 30% of the accumulated surplus of the life business.
88 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 13. OTHER RESERVES (Continued)
Fair value Revaluation General Reserves Reserves Reserves Total Shs’000 Shs’000 Shs’000 Shs’000 At 1 January 2013 (as previously reported) 3,371,870 164,450 1,373,393 4,909,713 Prior year adjustment: (i) Deferred tax on life fund surplus (note 36) (1,424,686) - - (1,424,686) (ii) Cost of Guarantee reserve (note 44) (203,730) - - (203,730) At 1 January 2013 (restated) 1,743,354 164,450 1,373,393 3,281,197 Prior year adjustment: (i) Deferred tax on life fund surplus (note 36) (215,786) - - (215,786) Revaluation gain on buildings - 16,354 - 16,354 Revaluation gain on quoted investments at fair value through other comprehensive income 789,161 - - 789,161 Transfer of reserves on adoption of IFRS 9 (387,321) - - (387,321) Re-measurement of the net defined benefits - 14,266 - 14,266 Transfer from retained earnings - - 964,937 964,937 At 31 December 2013 (restated) 1,929,408 195,070 2,338,330 4,462,808 Revaluation gain on buildings - 16,867 - 16,867 Revaluation gain on quoted investments at fair value through other comprehensive income 432,696 - - 432,696 Re-measurement of the net defined benefits - 11,558 - 11,558 Share of associate profit through other comprehensive income 37,954 - - 37,954 Gain on disposal of financial assets at fair value through other comprehensive income 606,155 - - 606,155 Transfer from retained earnings - - 264,248 264,248 Deferred income tax (273,357) - - (273,357) At 31 December 2014 2,732,856 223,495 2,602,578 5,558,929 14. DIVIDENDS Proposed dividends are accounted for as a separate component of equity until they have been ratified at an annual general meeting. At the annual general meeting to be held on March 18, 2015, a final dividend in respect of the year ended 31 December 2014 of Shs 0.80 (2013: Shs 0.80) per share amounting to a total of Shs. 700,00,000 (2013: Shs. 700,000,000), will be proposed.
Payment of dividends is subject to withholding tax at the rate of either 5% or 10%, depending on the residence of the individual shareholders.
89 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 15. EARNINGS PER SHARE (EPS) Basic earnings per share has been calculated by dividing the net profit for the year by the number of Ordinary shares.
2014 2013
Profit attributed to equity holders (Shs thousands) 1,283,335 1,812,903 Weighted number of ordinary shares in issue (millions) 880 880 Basic and diluted earnings per share (Shs) 1.46 2.06 There were no potential dilutive shares at 31 December 2014 (2013: Nil). 16. PROPERTY AND EQUIPMENT
Year ended 31 December 2014 Leasehold Furniture, Motor improve- fittings & Computer Buildings Total vehicles ments equipment equipment Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Cost At 1 January 2014 351,226 15,461 217,835 494,064 146,403 1,224,989 Additions - 1,870 28,613 137,237 23,497 191,217 Disposal - (8,436) - - - (8,436) Revaluation surplus 16,867 - - - - 16,867 At 31 December 2014 368,093 8,895 246,448 631,301 169,900 1,424,637 Depreciation At 1 January 2014 - 11,106 143,737 212,833 93,905 461,581 Accumulated depreciation on disposal - (7,573) - - - (7,573) Charge for the year - 1,448 9,942 91,063 19,059 121,512 At 31 December 2014 - 4,981 153,679 303,896 112,964 575,520 Net book value At 31 December 2014 368,093 3,914 92,769 327,405 56,936 849,117
90 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 16. PROPERTY AND EQUIPMENT (Continued)
Year ended 31 December 2013
Leasehold Furniture, Motor improve- fittings & Computer Buildings Total vehicles ments equipment equipment Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Cost At 1 January 2013 334,872 14,599 183,095 349,814 114,953 997,333 Additions - 862 34,740 144,250 31,450 211,302 Revaluation surplus 16,354 - - - - 16,354 At 31 December 2013 351,226 15,461 217,835 494,064 146,403 1,224,989 Depreciation At 1 January 2013 - 9,752 135,827 144,982 75,719 366,280 Charge for the year - 1,354 7,910 67,851 18,186 95,301 At 31 December 2013 11,106 143,737 212,833 93,905 461,581 Net book value At 31 December 2013 351,226 4,355 74,098 281,231 52,498 763,408
Property and equipment are classified as non-current assets The carrying amount of buildings would be as shown below had it been carried under the cost model.
2014 2013 Shs’000 Shs’000 Cost Accumulated depreciation 134,635 135,899 Charge for the year. 1,264 1,264 Net Book Value 133,371 134,635
91 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 17 INTANGIBLE ASSETS 2014 2014 Total 2014 Computer software Work in progress Intangible Cost Shs’000 Shs’000 Shs’000 At 1 January 2014 302,876 - 302,876 Additions 28,787 924,835 953,622 At 31 December 2014 331,663 924,835 1,256,498 Amortisation At 1 January 2014 177,589 - 177,589 charge for the year 28,204 - 28,204 At 31 December 2014 205,793 - 205,793 Net book amount At 31 December 2014 125,870 924,835 1,050,705
2013 2013 Total 2013 Computer software Work in progress Intangible Cost Shs’000 Shs’000 Shs’000 At 1 January 2013 260,005 - 260,005 Additions 42,871 - 42,871 At 31 December 2013 302,876 - 302,876 Amortisation At 1 January 2013 154,936 - 154,936 Charge for the year 22,653 - 22,653 At 31 December 2013 177,589 - 177,589 Net book amount At 31 December 2013 125,287 - 125,287
The intangible assets relate to computer software while work in progress is on account of implementation of new business systems and enterprise resource planning (ERP) system. All intangible assets are classified as non-current assets.
18 (a). INVESTMENT PROPERTIES 2014 2013 Shs’000 Shs’000 At 1 January 3,394,771 1,917,900 Additions 738,185 678,388 Fair value gains 709,358 798,483 At 31 December 4,842,314 3,394,771
92 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 18 (a). INVESTMENT PROPERTIES (Continued) The Company’s investment properties were revalued in December 2014 and 2013 by Gimco Limited, registered professional valuers on an open market basis. The rental income arising during the year and direct operating expenses arising in respect of such properties are disclosed in note no.6 (i).
The fair values arising from the open market valuation of investment property is categorised as level 2 in the fair value hierarchy.
An investment in property is classified as a non-current asset. 18 (b). INVESTMENT IN PROPERTY FUND During the year the company invested in a real estate fund together with other investors for the purposes of investing in property. The value of the investment as at 31 December 2014 was Sh 213,488,000. An investment in property funds is classified as a non-current asset.
The fair values arising from the open market valuation of investment property funds are categorised as level 2 in the fair value hierarchy. 19. INVESTMENT IN ASSOCIATE As at 31 December 2014, the Company had a shareholding of 46.04% in Housing Finance Company of Kenya Limited. The movement in the carrying amount of the investment during the year is presented below:
2014 2013 Shs’ 000 Shs’ 000 At 1 January 2014 1,570,989 1,459,826 Share of associate’s profit for the year (based on old shareholding) 259,007 173,605 Share of associate’s other comprehensive income (based on old shareholding) 37,954 - Dividends received in the year (based on old shareholding) (84,547) (62,442) New shares acquired on 31 December 2014 2,780,320 - As at 31 December 4,563,723 1,570,989 Made up of: Fair value of existing equity interest 1,783,403 1,570,989 Fair value of new equity interest acquired 2,780,320 - At end of year 4,563,723 1,570,989
Set out below is the associate of the Company as at 31 December 2014, which, in the opinion of the directors, is material to the company. The associate as listed below has share capital consisting solely of ordinary shares, which are held directly by the company; the country of incorporation or registration is also their principal place of business. Nature of investment in associate at 31 December 2014: Place of business/country % of ownership Method of Name of entity of incorporation Interest accounting Housing Finance Company of Kenya Limited Kenya 46.04% Equity Nature of investment in associate at 31 December 2013: Housing Finance Company of Kenya Limited Kenya 21.31% Equity
93 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 19. INVESTMENT IN ASSOCIATE (Continued)
Housing Finance Limited is the leading mortgage financial institution in the additional stake (including any directly attributable costs) is added to Kenya. Housing Finance is a strategic partner for the company, providing the carrying value of the associate. access to new customers and distribution channels for the insurance business. The Company’s share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and its share of post-acquisition movements in As at 31 December 2014, the fair value of the Company’s interest in Housing other comprehensive income is recognised in other comprehensive income, Finance limited which is listed on the Nairobi Securities Exchange, was with a corresponding adjustment to the carrying amount of the investment. Shs.5,091.035,000 (2013: 1,554,479,000) and the carrying amount of the When the Company’s share of losses in an associate equals or exceeds company’s interest was Shs. 4,563,723,000 (2013: 1,570,989,000). its interest in the associate, including any other unsecured receivables, the Company does not recognise further losses, unless it has incurred legal or On 31st December 2014, British – American Insurance Co. (K) Ltd acquired constructive obligations or made payments on behalf of the associate. 24.73% of the shares and voting interests in Housing Finance Corporation of Kenya. As a result British – American Insurance Co. (K) Ltd interest in The Company determines at each reporting date whether there is any Housing Finance increased from 21.31% to 46.04%. objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as The investment is in line with Group’s strategic plan, with the Group the difference between the recoverable amount of the associate andits expected to leverage on existing and potential synergies to drive joint carrying value and recognises the amount adjacent to ‘share of profit/ (loss) business initiatives while earning returns as a portfolio investment. of an associate’ in the income statement. Management in consideration of the investment structure in housing Finance established that is does not have effective control and exercise Profits and losses resulting from upstream and downstream transactions power over Housing Finance. As such, HF is accounted as an Associate. between the Company and its associate are recognised in the Company’s In the twelve months to 31 December 2014, Housing Finance contributed financial statements only to the extent of unrelated investor’s interests in the Shs. 259, 007, 000 ( 2013: 173,605,00 ) as a share of associate profits. associates. Unrealised losses are eliminated unless the transaction provides Associates are all entities over which the Company has significant influence evidence of an impairment of the asset transferred. Accounting policies of but not control, generally accompanying a shareholding of between 20% associates have been changed where necessary to ensure consistency and 50% of the voting rights. Investments in associates are accounted with the policies adopted by the Company. Dilution gains and losses arising for using the equity method of accounting. Under the equity method, the from investments in associates are recognised in profit or loss. investments are initially recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss Consideration transferred of the investee after the date of acquisition. The Company’s investment in The following table summarises the acquisition-date fair value of each associates includes goodwill identified on acquisition. major class of consideration transferred for acquisition of 57,270,000 When the Company increases its stake in an existing associate continuing Housing Finace shares: to have significant influence but not gaining control, the cost of acquiring Shs’000 Cash Purchase of 57,270,000 shares from Equity Bank 2,731,779 Cash paid for delayed completion to Equity Bank 48,541 Total 2,780,320 Acquisition related costs The Company incurred acquisition – related costs of Shs. 13,658,895 on professional fees. These costs have been included in investment expenses. Identifiable assets acquired and liabilities assumed In Management’s consideration, a key assumption for this computation has been that the assets and liabilities in the HF financial statements are carried at fair value considering the nature of business the company does. The following items on HF’s statement of financial position have been adjusted to arrive at the fair value on acquisition; 2014 Shs’000 Net assets per final accounts 6,508,132 Adjust for fair value on: Carrying value of prepaid operating lease rental (46,038) Add: fair value of leasehold land 225,000 Fair value adjustments 178,962 Total 6,687,094
94 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 19. INVESTMENT IN ASSOCIATE (Continued)
Goodwill Management considers Housing Finance’s 31st December 2014 financial statements in establishing the fair value of acquired assets and liabilities as of the acquisition date. Goodwill has been computed based on IAS 28. The standard requires that the post-acquisition share of the associate’s profit or loss is appropriately adjusted, so that it is based on fair values at the date of acquisition. In the case of an increase in stake in an existing associate, the adjustment is based on the fair values of each tranche.
Shs.’000 Net Asset Value at fair value 6,687,094 Fair value of consideration paid 2,780,320 Fair value of acquired net assets (24.73%) (1,653,726) Goodwill on acquired tranche 1,126,594 Goodwill on initial tranche (21.31%) 376,280 Total Goodwill on HF (46.04%) 1,502,874 The goodwill arose from acquisition of an additional stake in Housing Finance in 2014 and is therefore all allocated to the Kenyan Insurance Cash Generating Units (CGUs) for the purposes of impairment assessment. Summarised financial information for associate Set out below is the summarised financial information for Housing Finance Limited which is accounted for using the equity method. Identifiable assets acquired and liabilities assumed Summarised statement of financial position 2014 2013 Shs’ 000 Shs’ 000 Current Cash and cash equivalents 11,635,870 8,597,605 Other current assets (excluding cash) 264,331 789,770 Total current assets 11,900,201 9,387,375 Financial liabilities (excluding trade payables) 36,105,929 (26,588,851) Other current liabilities (including trade payables) 887,296 (468,033) Total current liabilities (36,993,225) (27,056,884) Non-current assets Assets 48,864,129 37,367,786 Financial liabilities (17,287,724) (14,016,374) Other liabilities (46,307) - Total non-current liabilities (17,334,031) (14,016,424) Net assets 6,437,074 5,681,853
95 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 19. INVESTMENT IN ASSOCIATE (Continued)
Summarised statement of profit or loss and comprehensive income 2014 2013 Shs’ 000 Shs’ 000 Net interest income 3,033,979 2,553,377 Profit before taxation 1,400,653 1,480,356 Income tax expense (425,317) (485,160) Net profit after tax for the year 975,336 995,196 Other comprehensive income 123,477 57,018 Total comprehensive income for the year 1,098,813 1,052,214 Dividends received from associate 84,547 62,442
Summarised statement of cash flow
2014 2013 Shs’ 000 Shs’ 000 Net cash flows from operating activities 3,265,259 1,741,341 Net cash flows used in investing activities (98,194) (796,321) Net cash flows used in financing activities (400,480) (306,352) Net Increase in cash and cash equivalent 2,766,585 638,668 The information above reflects the amounts presented in the financial statements of the associate adjusted for differences in accounting policies between the company and the associate.
Identifiable assets acquired and liabilities assumed Reconciliation of summarised financial information Reconciliation of the summarised financial information presented to the carrying amount of the company’s interest in associate.
2014 2013 Shs’ 000 Shs’ 000 Opening net assets 1 January 5,808,757 5,145,818 Profit for the year 975,336 808,969 Other comprehensive income 123,447 57,018 Transactions with owners recorded directly in equity (399,408) (203,048) Closing net assets 6,508,132 5,808,757 Interest in associate (46.04%) (2013: 21.31%) 3,060,849 1,194,709 Goodwill 1,502,874 376,280 Carrying value 4,563,723 1,570,989
96 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 20. QUOTED INVESTMENTS
(i) At fair value through other comprehensive income: 2014 2013 Shs’ 000 Shs’ 000 At start of year 3,466,068 3,923,569 Acquisition 324,815 (1,246,663) Transfer from fair value through other comprehensive income (2,829,344) - Fair value gains 432,696 789,162 At end of year 1,394,235 3,466,068 (ii) At fair value through profit or loss 2014 2013 Shs’ 000 Shs’ 000 At start of year 4,550,344 2,753,634 Transfer from fair value through other comprehensive income - 1,246,663 Additions 837,316 187,360 Transfer from unquoted equity investments - 50,490 Disposals (720,149) (853,441) Fair value gains 1,745,628 1,165,638 At end of year 6,413,139 4,550,344
The following table represents the company’s assets that are measured at fair value at 31 December 2014 and 31 December 2013. There was no movement out of level one.
Valuation Relationship of Fair value Financial assets Fair value as at Fair value as at technique (s) unobservable hierarchy and key inputs inputs to fair value 2014 2013 Shs’000 Shs’000 Financial assets at fair value through profit or loss Quoted bid – Equity shares 6,413,139 4,550,344 Level 1 prices in an N/A active market Financial assets at fair value through other comprehensive income Quoted bid – Equity securities 1,394,235 3,466,068 Level 1 prices in an N/A active market Total 7,807,374 8,016,412
97 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 21. UNQUOTED INVESTMENTS
2014 2013 Shs’000 Shs’000
At start of year - 50,490 Transfer to quoted investments - (50,490) At end of year - -
22. UNIT TRUSTS
2014 2013 Shs’000 Shs’000 At start of year 7,808,777 5,835,221 Additions 584,382 576,323 Disposals (2,182,072) (188,914) Fair value gains 737,119 1,586,147 At end of year 6,948,206 7,808,777 The following table represents the company’s unit linked investment contracts that are designated as contracts at fair value through profit or loss as at 31 December 2014.
There was no movement out of level one during the year.
Relationship of Valuation Significant Fair value unobservable Financial assets Fair value as at Fair value as at technique (s) unobservable hierarchy inputs to fair and key inputs inputs value 2014 2013 KSh’000 KSh’000 Financial assets at fair value through profit or loss Quoted bid – Unit trusts 6,948,206 7,808,777 Level 2 prices in an N/A N/A active market Total 6,948,206 7,808,777
Unit-linked investment contracts belonging to the company are designated as contracts at fair value through profit or loss.
Unit linked investment contracts are classified as current liabilities
98 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 23. GOVERNMENT SECURITIES Government securities with a maturity period of up to 1 year are classified as current assets while those with a maturity period of more than 1 year are classified as non- current assets
(i) At fair value through profit or loss 2014 2013 Shs’000 Shs’000 Treasury bills and bonds maturing - Within 1 year 5,263 18,774 - In 1 – 5 years 1,233,550 452,353 - After 5 years 1,256,402 59,857 At end of year 2,495,215 530,984 2014 2013 Treasury bills and bonds movement - At start of year 530,984 176,562 Transfer due to reclassification to fair value though profit or loss - 238,297 - Additions 1,992,405 210,600 - Fair value gains 16,803 7,056 - Disposals and maturities (44,977) (101,531) At end of year 2,495,215 530,984
(ii)Government securities at amortised cost
Shs’000 Shs’000
At start of year 8,065,626 6,647,090 Transfer due to reclassification to fair value though profit or loss - (238,297) Additions 1,273,976 2,900,397 Maturities (886,150) (1,243,564) Total 8,453,452 8,065,626
Relationship of Valuation Significant Fair value unobservable Financial assets/liabilities Fair value as at Fair value as at technique (s) unobservable hierarchy inputs to fair and key inputs inputs value 2014 2013 KSh’000 KSh’000 Financial assets at fair value through profit or loss Quoted bid – Government securities 2,495,215 530,984 Level 2 prices in non- N/A N/A active market Total 2,495,215 530,984
99 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 24. CORPORATE BONDS AT AMORTISED COST 2014 2013 Shs’000 Shs’000 At start of year 591,920 508,357 Additions 1,087,923 114,254 Maturities (317,130) (30,691) At end of year 1,362,713 591,920
25. MORTGAGE LOANS 2014 2013 Shs’000 Shs’000 At start of year 835,150 837,095 Loans advanced in the year 159,923 168,012 Loan repayments in the year (157,680) (258,532) Provision for impairment losses (51,293) (41,335) Accrued interest 78,653 88,575 At end of year 864,753 793,815 Movement in provision for mortgages impairment losses:
2014 2013 Shs’000 Shs’000 At 1 January 41,335 25,073 Increase in the year 9,958 16,262 At 31 December 51,293 41,335 Lending commitments These are mortgage loans approved by the investment committee but not advanced at year end.
2014 2013 Shs’000 Shs’000 77,378 68,060
Mortgage loans maturing within 1 year are classified as current assets while those maturing after 1 year are classified as non- current assets. Mortgage loans maturity profile 2014 2013 Shs’000 Shs’000 - Within 1 year 35,595 32,675 - In 1 – 5 years 230,959 212,013 - After 5 years 598,199 549,127 At end of year 864,753 793,815
100 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 26. LOANS TO POLICYHOLDERS
2014 2013 Shs’000 Shs’000 At start of year 376,778 309,455 Loans advanced 429,130 306,912 Surrenders (66,620) (81,510) Loan repayments (316,716) (208,109) Accrued interest 65,512 50,030 At end of year 488,084 376,778
Policy loans maturing within 1 year are classified as current assets while those maturing after 1 year are classified as non- current assets 27. REINSURERS’ SHARE OF INSURANCE LIABILITIES
2014 2013 Reinsurers’ share of: Shs’000 Shs’000 - notified claims outstanding - long term 42,630 60,197 - notified claims outstanding – short term 304,879 1,934,733 -claims incurred but not reported (Note 34(a) 56,013 30,225 - unearned premium (Note 35) 239,759 205,110 Total 643,281 2,230,265
Amounts due from reinsurers in respect of claims already paid by the company on contracts that are reinsured are included in receivables arising out of reinsurance arrangements.
Movements in the above reinsurance assets are shown in Note 34.
Reinsurer’s share of insurance liabilities is classified as a current asset. 28. DEFERRED ACQUISITION COSTS
2014 2013 Shs’000 Shs’000 At start of year 138,515 127,535 Additions 193,289 135,944 Amortisation charge (137,390) (124,964) At end of year 194,414 138,515
Deferred acquisition costs are classified as current assets.
101 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 29. (i) OTHER RECEIVABLES
Long-term Short-term Total Long-term Short-term Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Staff and agents loans 103,417 641 104,058 66,267 1,003 67,270 Car loans & premium financing 243,070 - 243,070 187,251 - 187,251 Prepayments 40,497 3,189 43,686 3,980 1,935 5,915 Accrued income 6,219 762 6,981 13,708 120,664 134,372 Other 54,454 27,956 82,410 57,526 1,260 58,786 Total 447,657 32,548 480,205 328,732 124,862 453,594
Other receivables are classified as current assets
(ii) RECEIVABLES ARISING OUT OF REINSURANCE ARRANGEMENTS Long-term Short-term Total Long-term Short-term Total Shs’000 Shs’000 2014 Shs’000 Shs’000 2013 At beginning of year 54,248 26,980 81,228 48,912 - 48,912 Net increase in the period 34,793 108,781 143,574 5,336 26,980 32,316 Total 89,041 135,761 224,802 54,248 26,980 81,228 Receivables arising out of reinsurance arrangements are classified as non-current assets.
(iii) RECEIVABLES ARISING OUT OF DIRECT INSURANCE ARRANGEMENTS
Long-term Short-term Total Long-term Short-term Total
Shs’000 Shs’000 2014 Shs’000 Shs’000 2013 At beginning of year 312,152 537,645 849,797 192,611 314,497 507,108 Net increase in the period 166,007 235,155 401,162 119,541 223,148 342,689 Total 478,159 772,800 1,250,959 312,152 537,645 849,797 Receivables arising out of direct insurance arrangements are classified as non-current assets. 30. WEIGHTED AVERAGE EFFECTIVE INTEREST RATES The following table summarises the weighted average effective interest rates at the year-end on the principal interest-bearing investments:
2014 2013 % % Mortgage loans 9.64 11.39 Policy loans 14.5 14.5 Government securities 10.76 11.29 Deposits with financial institutions 11.43 7.1 Corporate bond 12.31 12.1 Deposits with financial institutions have an average maturity of 3 months (2013:3 months).
102 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 31. INSURANCE CONTRACT LIABILITIES 2014 2013 Shs’000 Shs’000 Long term insurance contracts - claims reported and claims handling expenses 404,099 374,535 - actuarial value of long term liabilities 12,309,335 9,259,708 At end of year 12,713,434 9,634,243
Short term non-life insurance contracts - claims reported and claims handling expenses 1,102,087 2,476,373 - claims incurred but not reported 389,366 246,293 At end of year 1,491,453 2,722,666 Total gross insurance liabilities 14,204,887 12,356,909 Movements in insurance liabilities and reinsurance assets are shown in Note 34. Insurance contract liabilities are classified as current liabilities (i) Short term non-life insurance contract liabilities Gross claims reported, claims handling expenses liabilities and the development factors are then applied to cumulative claims data for liability for claims incurred but not reported are net of expected each accident year that is not fully developed to produce an estimated recoveries from salvage and subrogation. The expected recoveries at ultimate claims cost for each accident year. the end of 31 December 2014 and 31 December 2013 are not material. The development of insurance liabilities provides a measure of the The company uses chain-ladder techniques to estimate the ultimate company’s ability to estimate the ultimate value of claims. cost of claims and the IBNR provision. Chain ladder techniques are used as they are an appropriate technique for mature classes of business that The table below illustrates how the company’s estimate of total claims have a relatively stable development pattern. This involves the analysis outstanding for each accident year has changed at successive year of historical claims development factors and the selection of estimated ends. development factors based on this historical pattern. The selected Accident year 2010 2011 2012 2013 2014 Total Shs’000 Shs’000 Shs’000 Shs ‘000 Shs’000 Shs’000 Estimate of ultimate claims costs: At end of accident year 603,627 550,994 2,476,661 827,144 2,129,385 6,587,811 One year later 617,332 535,225 1,521,239 851,072 - 3,524,858 Two years later 610,398 533,845 830,503 - - 1,974,746 Three years later 609,126 538,214 - - - 1,147,340 Four years later 591,315 - - - - 591,315 Current estimate of cumulative claims 591,315 538,234 830,503 815,072 2,129,385 4,904,509 Add: Incurred but not reported - 579 15,257 52,213 321,417 389,466 Add: Liability in respect of prior years 265,833 - - - - 265,833 Less: Cumulative payments to date (543,231) (478,307) (768,486) (769,067) (1,538,975) (4,098,066) Total gross claims liability included in the 313,917 60,506 77,274 98,218 911,827 1,461,742 statement of financial position
103 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 31. INSURANCE CONTRACT LIABILITIES (Continued)
(ii) Long term insurance contract liabilities The prescribed mortality assumptions are; the AKI KE 01/03 for conventional life business and a (55) for the annuity business. The The company determines its liabilities under long term insurance same assumptions were used in 2013. contracts based on the prescribed valuation basis in the Insurance Act. This basis contains prudent margins for adverse experience in mortality, b) Interest rate expenses, withdrawals and investment return. The Insurance Act prescribes a 4% interest rate as the investment The liabilities are calculated in-house by the Actuarial department and return assumption and for discounting the cash flows (benefits less reviewed for adequacy by the Appointed Actuary (QED Actuaries & premium and investment income). The same assumption was used Consultants (Pty) Ltd). As at 31 December 2014, the valuation showed a in 2013. surplus of Shs 6,064,000,000 (2013: Shs 6,662,000,000). b) Persistency, expenses, expense inflation and tax Valuation assumptions The prescribed basis does not explicitly allow for the persistency, The key assumptions are summarized below: expense, expense inflation and tax. Expense assumption is implicitly a) Mortality allowed through the difference between the gross premium and net valuation premium. Persistency is explicitly not allowed for. 32. AMOUNTS PAYABLE UNDER DEPOSIT ADMINISTRATION CONTRACTS
Deposit administration contracts are recorded at amortised cost. Movements in amounts payable under deposit administration contracts during the year were as shown below. The liabilities are shown inclusive of interest accumulated to the end of the reporting period. Interest was declared and credited to the customer accounts at a weighted average rate of 16% for the year (2013:16%)
2014 2013 Shs’000 Shs’000 At 1 January 8,109,075 5,787,072 Pension fund deposits received 2,653,873 1,850,173 Surrender and annuities paid (989,164) (557,379) Interest on deposit administration contracts 1,427,773 1,029,209 At 31 December 11,201,557 8,109,075 Amounts payable under deposit administration contracts are classified as current liabilities
33. LIABILITIES UNDER INVESTMENT CONTRACTS The benefits offered under these contracts are based on the return of a portfolio of equities and debt securities. The maturity value of the financial liabilities is determined by the fair value of the linked assets. There will be no difference between the carrying amount and the maturity amount at maturity date.
104 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 33. LIABILITIES UNDER INVESTMENT CONTRACTS (Continued)
2014 2013 Shs’000 Shs’000 At start of the year: 6,414,370 4,845,526 Investments contributions received 999,519 1,165,458 Liabilities released for payments (1,418,120) (771,991) Fair value gains on investment contracts 608,213 1,175,377 At 31 December 6,603,982 6,414,370
Investment contracts are classified as current liabilities. Other movements relate to increase in actuarial liabilities
Relationship of Valuation Significant unobservable Fair Value at Fair Value at Fair value technique (s) unobservable inputs to fair Financial assets/liabilities 2014 Shs 000’ 2013 Shs 000’ hierarchy and key inputs inputs value Liabilities under single premium investment contracts 6,603,982 6,414,370 Level 2 N/A N/A N/A Total 6,603,982 6,414,370
34. MOVEMENTS IN INSURANCE LIABILITIES AND REINSURANCE ASSETS
(a) Short term insurance business 2014 2013 Gross Reinsurance Net Gross Reinsurance Net Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Notified claims 2,476,373 1,934,733 541,640 2,549,304 2,038,498 510,806 Incurred but not reported 246,293 30,225 216,068 203,744 43,305 160,439 Total at beginning of year 2,722,666 1,964,958 757,708 2,753,048 2,081,803 671,245 Cash paid for claims settled in (2,217,864) (256,906) (1,960,958) (1,768,517) (276,477) (1,492,040) year Increase in liabilities: - arising from current year claims 958,010 (1,264,793) 2,222,803 1,658,313 138,757 1,519,556 - arising from prior year claims 28,641 7,208 21,433 79,822 20,875 58,947
Total at end of year 1,491,453 450,467 1,040,986 2,722,666 1,964,958 757,708
Notified claims 1,102,087 394,454 707,633 2,476,373 1,934,733 541,640 Incurred but not reported 389,366 56,013 333,353 246,293 30,225 216,068 Total at the end of year 1,491,453 450,467 1,040,986 2,722,666 1,964,958 757,708
105 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 34. MOVEMENTS IN INSURANCE LIABILITIES AND REINSURANCE ASSETS (Continued)
(b) Long term insurance business Ordinary Life Group Life 2014 Total Ordinary Life Group Life 2013 Total Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At beginning of year 8,147,210 1,112,497 9,259,707 6,234,327 944,748 7,179,075 Transfer to General insurance - - - - (56,629) (56,629) Release to pay policy Benefits (1,357,210) (495,252) (1,852,463) (1,076,227) (306,259) (1,382,486) Increase in the period (net) 3,325,355 (67,629) 3,257,727 2,407,998 (137,743) 2,270,255 New Business 1,014,563 908,780 1,923,343 581,112 668,380 1,249,492 Total at end of year 11,129,918 1,458,396 12,588,314 8,147,210 1,112,497 9,259,707
35. UNEARNED PREMIUMS Unearned premiums reserve represents the liability for short term business contracts where the company’s obligations are not expired at the year end. Movements in the reserve are shown below:
2014 2013 Gross Reinsurance Net Gross Reinsurance Net Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 At beginning of year 1,573,349 (1,368,239) 205,110 1,248,640 (176,630) 1,072,010 Net increase in the period 518,452 (483,803) 34,649 324,709 (28,480) 296,229 At end of year 2,091,801 (1,852,042) 239,759 1,573,349 (205,110) 1,368,239 Unearned premiums are classified as current liabilities 36. DEFERRED INCOME TAX Deferred tax is calculated, in full, on all temporary differences under the liability method using a principal tax rate of 30% (2013: 30%). The movement on the deferred income tax account is as follows:
Long-term Short-term 2014 2013 Restated business business Shs ‘000’ Shs ‘000’ Shs’000’ Shs’000’ At 1 January 1,903,475 - 1,903,475 1,424,686 Profit/(loss) credit (note 11) 111,355 (3,218) 108,137 263,003 Charged to other comprehensive income 273,357 - 273,357 215,786 At 31 December 2,288,187 (3,218) 2,284,969 1,903,475
106 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 36. DEFERRED INCOME TAX (Continued)
The deferred tax liability is attributable to the following items: Long-term Short-term 2014 2013 Restated business business Deferred tax liability: Property & Equipment - 7,421 7,421 - Life business actuarial surplus 2,288,187 - 2,288,187 1,903,475 2,288,187 7,421 2,295,608 1,903,475 Deferred tax asset: Provisions - (10,639) (10,639) - Net deferred tax liability 2,288,187 (3,218) 2,284,969 1,903,475 37 OTHER PAYABLES
Long-term Short-term 2014 Long-term Short-term 2013 business business Total business business Total
Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Accrued expenses 199,424 77,325 276,749 276,505 94,667 371,172 Premiums paid in advance 131,427 - 131,427 135,792 - 135,792 Stale cheques 90,179 18,666 108,845 68,916 68,916 Withheld taxes 30,845 5,678 36,523 44,069 44,069 Other liabilities 202,862 73,603 276,465 34,568 (2,180) 32,388 Total 654,737 175,272 830,009 559,850 92,487 652,337 There are no individually significant items under other liabilities category. Other payables are classified as current liabilities 38 CONTINGENT LIABILITIES In common with the insurance industry in general, the Company is subject to litigation arising in the normal course of insurance business. The directors are of the opinion that this litigation will not have a material effect on the financial position or profits of the Company. 39 COMMITMENTS The company has committed and contracted for two major capital expenditure projects at financial reporting date as follows:-
(a) Construction of an investment property
2014 2013 Shs’000 Shs’000 Capital expenditure 4,485,722 5,184,112
Construction of the investment property is estimated to cost approximately Shs 6 billion and is expected to take 2 years to complete.
107 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 39 COMMITMENTS (Continued)
(b) Business transformation system
2014 2013 Shs’000 Shs’000 Capital expenditure 476,935 45,550
This project is in line with the Company’s business transformation strategy. It is expected to cost approximately Shs. 1,401,770,000 and is expected to take 2 years to complete.
(c) Operating lease commitments
The future minimum lease commitments under non-cancellable operating leases are as follows:-
Receivable Payable 2014 2013 2014 2013 Total Total Total Total Shs’000 Shs’000 Shs’000 Shs’000 Not later than 1 year 43,449 21,604 10,231 1,934 Later than 1 year but not later than 5 years 88,850 159,074 116,558 124,990 More than 5 years 159,651 186,658 286,717 341,131 Total 291,950 345,732 413,506 468,056 40. CASH AND CASH EQUIVALENTS For the purposes of cash-flow statement, cash and cash equivalents comprise the following:
2014 2013 Shs’000 Shs’000 Cash and bank balances 305,890 458,921 Bank overdraft - (116,689) Deposits with financial institutions 1,443,405 1,075,907 Total 1,749,295 1,418,139
The weighted average effective interest rate on short-term bank deposits was 11.96% (2013: 11.67%).
The effective interest rate on overdraft was 2.5% (2013:2.5%).
108 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 41. NOTE TO THE STATEMENT OF CASH FLOWS Reconciliation of profit before tax to cash generated from operations:
2014 2013 Sh’000 Sh’000 Profit before tax Note 1,799,272 2,533,015 Adjustments for: Depreciation of property and equipment 16 121,512 95,301 Amortisation of intangible assets 17 28,204 22,653 Investment income 6(i) (5,340,227) (5,310,954) Investment other income 6(iii) (60,669) (43,106) Share of associate’s results 19 (259,007) (173,605) Changes in: Receivables arising out of direct insurance arrangements 29(iii) (401,162) (342,689) Receivables arising out of reinsurance arrangements 29(ii) (143,574) (32,316) Re-insurers’ share of insurance liabilities 27 1,586,984 165,998 Unearned premiums 35 518,452 324,709 Other payables 37 177,672 122,584 Retirement benefit asset 43 (72,581) (14,266) Related party balances 42 (41,251) (167,899) Deferred acquisition costs 28 (55,899) (10,980) Other receivables 29(i) (26,611) (230,308) Insurance contract liabilities 31 1,847,978 1,630,908 Payable under deposit administration 32 3,092,482 2,322,002 Actuarial liabilities under investment contracts 33 189,612 1,568,844 Creditors arising out of reinsurance arrangements - (176,602) Cash generated from operations 2,961,187 2,283,289 42. RELATED PARTIES The company is controlled by British-American Investments Company (Kenya) Limited incorporated in Kenya, which owns 100% of the company’s shares. There are other companies which are related to British-American Insurance Company (Kenya) Limited through common shareholdings or common directorships. The following transactions were carried out with related parties:- (i) Outstanding balances with related parties
(a) Amounts receivable from:- 2014 2013 Shs’000 Shs’000 British-American Investments Company (Kenya) Limited 782,424 330,622 British-American Asset Managers Limited 104,253 30,668 British-American Insurance –Short term business 42,833 801,695 Total balance receivable at year end 929,510 1,162,985 There were no provisions made or amounts written off on related party balances during the year (2013: Nil). The amounts receivable from related parties are interest bearing at 11% p.a (2013: 11% p.a )
109 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 42. RELATED PARTIES (Continued)
(b) Amounts payable to:- 2014 2013 Shs’00 Shs’00 British-American Investments Company (Kenya) Limited - 28,090 British-American Asset Managers Limited 44,505 3,352 British-American Insurance –Long term business 42,833 330,622 Total balance payable at year end 87,338 362,064
The amounts payable to related parties are interest bearing at 11% p.a (2013:11% p.a ). The amounts payable to related parties have no specific repayment date.
(ii) Mortgage Loans to directors 2014 2013 Shs’000 Shs’000 At start of year 166,628 202,619 Loans advanced during the period 10,042 21,350 Interest charge for the year 19,704 30,289 Loan repayments received (15,042) (87,630) At end of year 181,332 166,628 Mortgage loans are given to both executive and non- executive directors.
The loans are fully secured and are charged interest at 6% p.a (2013: 6% p.a) for executive directors and at 14.5% p.a (2013: 14.5% p.a) for non- executive directors (iii) Key management compensation 2014 2013 Shs.’000 Shs.’000 Salaries & other short- term employment benefits 234,531 171,975 post-employment benefits 12,804 10,767 247,335 182,742 This includes both senior management and executive directors. (iv) Directors emoluments 2014 2013 Shs’000 Shs ‘000 Fees 6,819 3,243 Other remuneration - - 6,819 3,243
This includes non-executive directors only.
110 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 42. RELATED PARTIES (Continued)
(v) Transaction with related parties 2014 2013 Shs’000 Shs’000 Gross earned premium * Equity Bank Limited 2,301,047 2,146,024 Housing Finance 95,802 26,371 British American Asset Managers 2,176 2,009 Net claims incurred Equity Bank Limited 898,629 966,310 Housing Finance 7,328 - Interest on related party balances 84,002 84,860 Fair value gains on Equity Bank shares 1,446,543 1,315,178 Acquisition of additional shares in Housing Finance 2,780,340 - share of Housing Finance profit after tax 259,007 173,605 Total 7,874,874 4,714,357 * British American Insurance Company (Kenya) Limited and Equity Bank Limited are related by common directorship.
43. RETIREMENT BENEFIT OBLIGATIONS The Company operates two types of retirement benefit schemes for its The present value of the defined benefit obligation is determined by employees and qualifying agents. discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the (a) Defined contribution scheme is a pension plan under which the benefits will be paid and that have terms to maturity approximating to company pays fixed contributions into a separate entity. The company the terms of the related pension obligation. has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the Actuarial gains and losses arising from experience adjustments and benefits relating to employee service in the current and prior periods. changes in actuarial assumptions are charged or credited to equity in The Company’s contributions to the defined contribution schemes are other comprehensive income in the period in which they arise. Past charged to the income statement in the year to which they relate. The -service costs are recognised immediately in income. The scheme is scheme is open to new entrants. not open to new entrants. The scheme is established under trust and the scheme funds are (b)Defined benefit scheme is a pension plan that defines an amount invested by the treasury & investment manager in a variety of asset of pension benefit that an employee will receive on retirement, usually classes comprising government securities (treasury bills and bonds), dependent on one or more factors such as age, years of service and stocks and shares and commercial paper. compensation. The liability recognised in the statement of financial position in respect of defined benefit pension plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method.
111 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 43. RETIREMENT BENEFIT OBLIGATIONS (Continued)
The amounts recognised in the statement of financial position are determined as follows:-
2014 2013 Shs’000 Shs’000 Present value of funded obligations 374,567 343,855 Fair value of plan assets (447,334) (344,041) Present value of unfunded obligations/(over-funding) (72,767) (186) Liability/(asset) in the statement of financial position (72,767) (186) The movement in the defined benefit obligation over the year was as follows: 2014 2013 Shs’000 Shs’000 At start of year 343,855 287,695 Current service cost 10,902 8,889 Interest cost 40,338 33,974 Impact of change in financial assumptions 19,911 3,695 Experience adjustments (14,001) 28,047 Benefits paid (26,438) (18,445) At end of year 374,567 343,855 The movement in the fair value of the plan assets is as follows: 2014 2013 Shs’000 Shs’000 At start of year 344,041 261,306 Interest income 44,494 34,175 Re-measurements: Return on plan assets 17,468 10,926 Employer contributions 65,356 54,316 Employee contributions 6,973 6,287 Expenses paid (4,560) (4,524) Benefits paid (26,438) (18,445) At end of year 447,334 344,041 The amounts recognised in the income statement for the year are as follows: 2014 2013 Shs’000 Shs’000 Current service cost 10,902 8,889 Interest income (4,156) (201) Contributions received from members (6,973) (6,287) Expenses paid 4,560 4,524 Total included in employee benefit expense (Note 10) 4,333 6,925
112 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 43. RETIREMENT BENEFIT OBLIGATIONS (Continued)
The amounts recognised in other comprehensive income statement for the year are as follows:
2014 2013 Shs’000 Shs’000 Liability/asset in the balance sheet (186) 14,080 Liability in the balance sheet 72,767 186 Amounts recognised through profit or loss 4,333 - Employer contribution (65,356) - Amounts recognised through other comprehensive income statement 11,558 14,266
The principal actuarial assumptions used were as follows: 2014 2013 - discount rate 12.20% 12.20% - future salary increases 12.00% 10.00% - future pension increases 0.00% 0.00%
The sensitivity of the present value of funded obligations to changes in the principal assumptions is: Effect of: Increase Decrease - discount rate-100 basis points (+or-1.00% per annum) (7.79%) 9% - future salary increases-100 basis points (+or-1.00% per annum) 1.26% (1%) - future pension increases-100 basis points (+or-1.00% per annum) 3.49% 0% 44. PRIOR YEAR ADJUSTMENTS Prior year adjustments were made in relation to:
(a) Cost of guarantee on the Deposit Administration product fund; (b) Deferred Income Tax (DIT) on life business surplus;
The deposit administration DA Policy Contract states that “Interest on The adjustment was in pursuance of new guideline Institute of Certified Scheme Deposits received in the first three years of commencement of Public Accountants (ICPAK) issued in December 2014 on treatment of the scheme is guaranteed at a rate of 5% per annum. At expiry of this deferred income tax on the life fund surplus for Life insurance companies period and with reference to trustees the rate of guaranteed interest shall in Kenya. Guideline: “A deferred income tax liability should be recognised be decided by the Actuary for the time being of the insurance company on the whole life fund surplus carried forward, not recommended for and the insurance company shall notify the policyholder in writing of the transfer for the benefit of shareholders.” Where deferred income tax on new rate.” The cost of guarantee is therefore a cost to the company for actuarial surplus had not been previously recognised, the company has guaranteeing a minimum return of 5% to all members of the DA fund. reflected the change as per IAS 8 and has done restatement of prior The adjustment relates to the cost of guarantee reserve that has not period statements. been set aside historically. The general reserve has been reduced with a similar amount. The effect is that life fund surplus is what is wholly attributable to the shareholders.
113 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY 44. PRIOR YEAR ADJUSTMENTS (Continued)
(a) Deferred Tax on Life Fund Surplus
Year ended 31 December 2012 Long term Long term business business At 31 December Adjustment Adjustment At 31 December For cost of 2012 Deferred tax 2012 Guarantee (As previously reported) (Restated) Shs’000 Shs’000 Shs’000 Shs’000 Life fund surplus 4,952,682 (1,424,686) (203,730) 3,324,266 Deferred tax - 1,424,686 - 1,424,685 Actuarial value of longterm insurance contracts liabilities 7,693,973 - 203,730 7,897,703
(b) Year ended 31 December 2013 The adjustment is further broken down into: Deferred tax on life fund surplus for the year 2012 1,424,686 Deferred tax other comprehensive income 2013 215,786 Deferred tax through profit and loss 263,003 1,903,475
(c) Year ended 31 December 2013 Long term business Adjustment Adjustment Long term business at 31 December at 31 December As previously reported As restated For cost of 2013 Deferred tax 2013 Guarantee Shs’000 Shs’000 Shs’000 Shs’000 Profit after tax 1,651,924 (263,003) (75,251) 1,313,670 Life fund surplus 6,587,835 (1,903,475) (278,981) 4,405,379 Deferred tax - 1,903,475 - 1,903,475
Actuarial value of longterm insurance contracts liabilities 9,355,262 - 278,980 9,634,242
114 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 SHORT TERM INSURANCE BUSINESS REVENUE ACCOUNT
Work Engine- Fire Fire Motor Motor Personal Misce- Micro Class of insurance Liability Marine Medical Theft men’s 2014 Total 2013 Total ering Domestic Industrial Private Comm Accident llaneous insurance Business Comp
Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Sh ‘000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000
Gross premium written 165,682 72,191 241,731 28,009 135,207 858,042 1,057,817 565,514 1,127,961 142,550 186,846 20,392 399,124 5,001,066 3,826,508
Less: reinsurance (115,350) (29,876) (165,621) (17,683) (90,171) (34,530) (40,079) (154,917) (20,806) (2,901) (3,963) (12,724) (31,874) (720,495) (639,182)
Net premium written 50,332 42,315 76,110 10,326 45,036 823,512 1,017,738 410,597 1,107,155 139,649 182,883 7,668 367,250 4,280,571 3,187,326
Unearned premium b/f 79,054 28,029 93,837 10,247 8,533 263,933 375,937 156,042 403,917 24,778 74,515 10,229 44,298 1,573,349 1,288,415
(96,386) (29,971) (106,598) (11,320) (8,391) (439,110) (498,750) (137,658) (518,337) (28,075) (72,545) (8,322) (136,337) (1,573,349) Unearned premium c/f (2,091,800)
Net earned premiums 33,000 40,373 63,349 9,253 45,178 648,335 894,925 428,981 992,735 136,352 184,853 9,575 275,211 3,762,120 2,902,392
Claims paid 27,457 12,693 62,231 1,808 22,980 581,044 385,742 111,170 679,986 53,599 28,910 (40) 250,285 2,217,865 1,768,518
Reinsurance recoveries (14,764) (4,771) (147,503) 17,371 1,696,568 (66,325) (88,109) (57,625) (16,858) (13,739) (1,229) (1,832) (52,842) 1,248,342 (276,477)
Claims outstanding at the (27,521) (4,289) (22,425) (71,849) (1,721,681) (240,617) (257,538) (123,091) (61,448) (31,081) (62,343) (767) (78,143) (2,702,793) 737,838 end of the year
Claims outstanding at the 34,973 5,243 182,398 51,388 11,885 417,709 339,984 98,207 76,062 55,385 74,512 1,001 151,325 1,500,072 (696,001) beginning of the year
Total claims incurred 20,145 8,876 74,701 (1,282) 9,752 691,811 380,079 28,661 677,742 64,164 39,850 (1,638) 270,625 2,263,486 1,533,878
Gross Commissions 33,837 9,373 55,526 4,551 23,736 70,616 87,237 100,347 112,706 19,963 36,844 1,929 55,519 612,184 505,145
(40,709) (727) (51,937) (3,934) (25,191) (26) (58,531) - - - (5,166) (16,056) (202,277) (216,033) Reinsurance commissions -
Expenses of management 9,411 11,514 18,067 2,639 12,884 184,900 255,226 122,342 179,252 38,887 52,718 2,731 243,214 1,133,785 772,439
Total expenses 2,539 20,160 21,656 3,256 11,429 255,516 342,437 164,158 291,958 58,850 89,562 (506) 282,677 1,543,692 1,061,551
Underwriting profit 10,316 11,337 (33,008) 7,279 23,997 298,992) 172,409 236,162 23,035 13,338 55,441 11,719 (278,091) (45,058) 306,964
115 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY LONG TERM INSURANCE BUSINESS REVENUE ACCOUNT Deposit Restated Ordinary life Group life Deposit Admin 2014 Total Ordinary life Group life Admin 2013 Total
Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000 Shs’000
Gross earned premiums 5,006,609 1,453,274 - 6,459,883 3,774,600 1,237,037 - 5,011,637
Reinsurance premium ceded (67,019) (202,942) - (269,961) (49,295) (309,397) - (358,692)
Net earned premiums 4,939,590 1,250,332 - 6,189,922 3,725,305 927,640 - 4,652,945
Investment income 1,045,137 132,946 1,176,123 2,354,206 932,665 96,307 999,474 2,028,446
Net realized gains on financial asset 530,179 3,854 32,486 566,519 124,331 40,204 98,647 263,182
Net fair value gains on financial assets at fair value through profit or loss 1,428,166 179,261 454,968 2,062,395 2,271,514 (10,724) 435,079 2,695,869
Commissions earned 27,284 99,375 - 126,659 37,294 103,960 - 141,254
Other income (including fees) 8,500 65 24,540 33,105 461 245 22,119 22,825
Total income 7,978,856 1,665,833 1,688,117 11,332,806 7,091,570 1,157,632 1,555,319 9,804,521
Life claims 500,984 495,252 - 996,236 385,521 387,656 - 773,177
Surrenders and annuity payments 179,868 - - 179,868 107,890 - - 107,890
Other Insurance claims 677,859 - - 677,859 586,733 - - 586,733
Less: amounts recoverable from reinsurers (1,500) (53,731) - (55,231) (3,918) (93,397) - (97,315)
Net insurance benefits and claims 1,357,211 441,521 - 1,798,732 1,076,226 294,259 - 1,370,485
Interest payments/increase in value 608,213 - 1,427,773 2,035,986 1,175,378 - 1,029,209 2,204,587
Change in actuarial value of policyholders benefits 2,592,313 345,897 111,417 3,049,627 1,633,903 224,378 75,250 1,933,531
Operating and other expenses 1,446,169 195,652 85,338 1,727,159 1,067,430 174,218 88,821 1,330,469
Commissions payable 1,332,257 143,087 45,306 1,520,650 1,117,512 113,993 11,777 1,243,282
Total expenses 5,978,952 684,636 1,669,834 8,333,422 4,994,223 512,589 1,205,057 6,711,869
Results of operating activities 642,693 539,676 18,283 1,200,652 1,021,121 350,784 350,262 1,722,167
Share of associates profits 137,663 15,245 106,099 259,007 106,015 13,582 34,911 154,508
Long term business profit before tax 780,356 554,921 124,382 1,459,659 1,127,136 364,366 385,173 1,876,675
Tax charge (437,898) - - (437,898) (563,003) - - (563,003) Long term business profit after tax 342,458 554,921 124,382 1,021,761 564,133 364,366 385,173 1,313,672
116 I AM READY BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 HEAD OFFICE Britam Centre Mara/Ragati Road Junction, Upper Hill P.O.Box 30375-00100, Nairobi Tel: (020) 2833000 Fax: (020) 2717626/2714927 Email: [email protected]
KENYA l UGANDA l TANZANIA l RWANDA l SOUTH SUDAN l MOZAMBIQUE l MALAWI
117 I AM BRITISH-AMERICAN INSURANCE COMPANY (KENYA) LIMITED ANNUAL REPORT & FINANCIAL STATEMENTS 2014 READY