D YER & BLAIR INVESTMENT BANK COMPANY UPDATE Founder Member of the Nairobi Securities Exchange December 2019 BRITAM : COMPANY UPDATE BRITAM: 52 WEEK PRICE PERFORMANCE We issue a BUY recommendation on Britam Insurance Group based on a 1 year target price of 9.91 per share representing a 20.9% upside from its current price of KES 8.20. We project a 4 year CAGR of 71.9% in earnings to KES 4.6 BN in FY21F. This is mainly attributable to an estimated 9.4%, 3 year CAGR in gross premiums to KES 31.8 BN in FY21F and a 1,379 bps y-o-y improvement in the group’s combined ratios to 104.7 in FY21F. In addition, we expect the group to record reduced fair value losses in the me- dium term courtesy of the group’s investment shift from equities to property and gov- ernment securities. We forecast EPS at KES 1.83 while ROA and ROE stand at 2.9% and 14.6% respectively in FY21F. Upsides Premium growth: We project gross earned premiums to grow by a 3 year CAGR of 9.4% to (Source: Company Filings and DBIB Research) KES 31.8 BN in FY21F driven by a 3 year CAGR of 10.1% and 8.7% in life assurance and gen- eral insurance to KES 15.8 BN and KES 16.0 BN respectively. This will be driven by the ordi- KEY METRICS RECOMMENDATION BUY nary life business, the medical, motor and marine insurance businesses. 12-m Target Price (KES) 9.91 Current Price (KES) 8.20 Improved combined ratio: We expect the group’s combined ratio to decline to 104.7% in Capital Upside (%) 20.86 FY21F representing a 1,379 bps y-o-y improvement on account of improved risk pricing, 52 week Range (KES) 6.80-10.55 product rationalization and increased adaptation of digital channels and bancassurance. YTD Return (%) (18.00) Avg Trading Vol. (Mn) 3.26 Strategic investors backing: We believe that the investment by Swiss Re, AfricInvest and Avg Trading Val. (USD Mn) 0.02 IFC strengthens Britam’s board & technical expertise and improves the alignment of share- Issued Shares (Mn) 1,550.76 holders and managements’ interests Free float (%) 58.30 Foreign Inv. Holding (%) 44.30 Downside Market Cap (USD Mn) 12,716.23 Heightened Competition: The insurance industry in Kenya recorded a penetration rate of Trailing EPS (KES) (0.89) 2.4% in 2018 with 26 and 37 participants in the life assurance and general insurance seg- Forward EPS (KES) 0.31 ments respectively. Britam Holdings controls a market share of 24.7% in the life assurance Forward P/E (x) 32.37 Forward P/B (x) 1.08 segment and a 6.4% in the general insurance segment in Kenya Other CONTENT Total investment income volatility: The group’s performance is substantially correlated Upsides……………….…...………………………..….02 with fair value adjustments through profit and loss which results from the market and thus Downsides……………………………………………..03 volatile. Valuation…....………………………………………...07 Britam Overview..……………......……..….…….11 Capital Adequacy: The group capital adequacy ratios stood at 150.0% as at FY18 which is below the prescribed adequacy ratio of 200.0% to be met by June 2020. Research Analyst Faith Muthoni [email protected] 1 +254 709930130 UPSIDES BRITAM LIFE ASSUARACE PREMIUMS SPLIT IN MN Premium growth: We project gross earned premiums to grow by a 3 year CAGR of 9.4% to KES 31.8 BN in FY21F driven by a 3 year CAGR of 10.1% and 8.7% in life assurance and general insurance to KES 15.8 BN and KES 16.0 BN respectively. Life Insurance: We expect the 10.1% average growth from the life assurance business to be main- ly driven by a 17.2% y-o-y average growth in ordinary life business to KES 11.8 BN in FY21F, primari- ly on account of the group’s focus on the life assurance segment through innovation and the group’s in house expertise being the largest life assurance company in Kenya. In Kenya, the Insur- ance Regulation Authority (IRA) recorded an average growth of 10.6% in the life assurance segment in the last 3 years to KES 87.4 BN in FY18 primarily on account of a 3 year CAGR of 15.5% and 13.2% in the pension and ordinary life assurance segments to KES 33.9 BN and KES 24.3 BN respectively in (Source: Company Filings and DBIB Research) FY18. According to IRA 2Q19 statistics, Britam life controls a market share of 24.7% which repre- sents a 479 bps, growth in the last 4 years. Management plans to launch life assurance in Uganda BRITAM LIFE-GENERAL PREMIUM CONTRIBUTION its second largest market by premiums. General Insurance: Historically, Britam’s reliance on the general insurance segment has been slightly higher than the life segment, in FY18, Britam’s reliance on general insurance stood at 55.1% relative to 62.3% in FY15. We forecast an 8.3%, 3 year CAGR on premiums from the general insur- ance segment to KES 16.0 BN courtesy of a 3 year CAGR of 9.4% in personal accident & medical (31.0% premium contribution) to KES 5.1 BN and a 3 year CAGR of 8.4% in motor insurance ( 34.5% premium contribution) to KES 5.5 BN courtesy of regulation (especially under motor insurance), improving living standards, and innovation. We note that Britam insurance has the highest market share in the marine insurance segment at 11.0% with the group recording a 4 year average growth (Source: Company Filings and DBIB Research) of 26.8% to KES 614.9 MN in FY18 relative to the industry’s 6.5%. We attribute this to regulations on local marine insurance and the group’s expertise in the area given its prior track record. As a result, we estimate a 3 year CAGR of 6.5% in gross premiums from marine insurance to KES 827.8 MN in FY21F. Management's one distribution strategy is expected to boost both life and general insurance premium courtesy of increased cross selling opportunities which we believe will raise uptake of non conventional general insurance. BRITAM GENERAL INSURANCE PREMIUM SPLIT 2018 Claims: We estimate the claims ratio to rise to 68.4% in FY19F and to ease to 55.5% in FY20F from a claims ratio of 67.6% in FY18 and 61.6% in FY17. This is courtesy of improvement in risk pricing following the group’s product rationalization mainly through product re-design (e.g move from out patient medical to out patient fund) and efficiency through project Jawabu. The group’s investment in ‘Project Jawabu’ saw it automate its internal processes in medical underwriting and customer service resulting in a single distribution channel. Currently the group has a 24/7 contact centre which improves consumer engagement. Project Jawabu is expected to speed up medical under- writing and claim settlement processes through efficiency and allow for direct premiums collection. The medical and motor insurance segments continue to record the highest claims ratio with IRA recording an average 4 year average claims ratio of 50.7% and 67.7% respectively while Britam rec- orded an 3 year average claims ratios of 72.2% and 73.4% to contribute 36.5% and 41.0% to total claims in the general insurance segment respectively. We expect the claims ratio from the motor segment to ease to 72.7% by FY21 from 75.4% in FY18. The focus of growing the un conventional general insurance lines is expected to improve the overall claims ratio especially in Kenya given they (Source: Company Filings and DBIB Research) are typically lower. Expense and net acquisition; We project a 3 year cumulative improvement of 365 bps improve- ment in Britam’s expense ratio to 36.5% in FY21F while net acquisition ratio increases by 282 bps to 2 14.3%. UPSIDES We believe that the expense improvement will be as a result of efficiency courtesy of the group’s project Jawabu, its adoption of additional distribution channels such as mobile(*778#), internet and banc assurance. In addition, the group in 2018 laid off 110 employees incurring a one off expense of approximately KES 600.0 MN. This is expected to result in savings on employee expenses. Overall, we expect the group’s combined ratio to decline to 104.7% in FY21F representing a 1,379 bps y-o-y improvement. Britam’s broken down Combined ratio FY13 FY14 FY15 FY16 FY17 FY18 Incurred claims ratio 63.24 68.04 64.82 28.75 61.58 67.64 Net commission ratio 19.39 17.75 15.61 16.26 13.67 11.66 Expense ratio 41.43 39.15 41.02 40.79 36.24 39.14 TOP BRITAM SHAREHOLDERS 2019 Combined ratio 124.06 124.93 121.46 85.80 111.49 118.45 Top Shareholders % Africinvest 17.6 (Source: Company Filings and DBIB Research) Equity Group* 16.1 Swiss Re 15.8 Stanchart Nominee (NR) 9.1 Strategic investors backing-Strategic investors backing-We believe that the investment by Swiss Re, IFC 8.9 AfricInvest and IFC strengthens Britam’s board & technical expertise and improves interest align- Jimnah Mbaru 7.7 ment between shareholders and management. Others 24.8 (Source: Company Filings and DBIB Research) The direct investment by IFC (10.4%) and AfricInvest (14.3%) resulted in a capital injection of KES 9.3 Investment by IFC, AfricInvest and Swiss BN in 2017. The funds raised were aimed at; consolidating gains from its acquisition of Real Insur- Re occurred at P/B levels of 1.5x, 1.4x and ance in 2014 that saw the group expand to Tanzania, Mozambique and Malawi, enhancing the 1.3x respectively.