Stock Watch: Kenya Reinsurance Corporation Limited

Kenya Reinsurance Corporation Limited (NSE:KNRE) announced their audited financial results for the Full Year (FY) ended 31^st December 2014 on 27^th March 2015.

Recommendation; BUY; Fair Value KES 28.6 (Upside 52.13%)

Reasonable Performance with a 20% Growth in Gross Written Premiums and Net Earned Premiums amid a 14% Growth in Investment Income.

Growth of premiums largely supported by the general insurance business and increased cedent uptake across markets increased gross written premiums from KES 9.6 Billion to KES 11.57 Billion and net earned premiums from KES 8.5 Billion to KES 10.3 Billion. Investment income grew by 14% from KES 2.2 Billion to KES 2.59 Billion resulting from good performance of the firms fixed income investments and increase in rental income earned from buildings leased. Fixed deposits are expected to yield the firm 11% and treasury bills 8%; thus, there shall be a keen focus of holding surplus funds in fixed income investments.  The firm also reported increased revaluation gains on property by 55% which have a margin of 4.88% compared to 3.15% in the previous financial year with management stating a continued pattern of annual valuation of property. Unearned premiums also increased in tandem with the gross written and net earned premiums by 22% from KES 3.2 Billion to KES 4 Billion.

Increase in After Tax Profits by 12% to KES 3.1 Billion; Swell of Income Tax Expenses by 64% and Shoot Up of Claims by 26%.

Growth of premiums earned as well as change of the taxation policy by the regulator to incorporate tax of surpluses from life business caused the firm to restate tax expenses in its financial statements consequently increasing the expense by 64%. Severe claims paid out caused the claims expense to shore up to KES 5.9 Billion from KES 4.7 Billion. Despite the rise in claims and tax expenses the firm posted a higher after tax profit of KES 3.1 Billion resulting from increased earnings from investment income and premiums. Operating and other expenses rose by 8% indicating favourable operational efficiency of the firm in spite of the 20% premium growth that would have warranted a larger rise in the expenses.

Impressive Bottom line; Earnings per Share Increase by 12%, DPS of KES 0.70 Yielding 3.72%.

Shareholders’ funds increased to KES 19.91 Billion with an earnings per share of KES 4.48 compared to previous year’s earnings of KES 3.99. Return on equity remained relatively flat with a slight increase of 0.11% from 15.58% to 15.69%. The firm declared a dividend of KES 0.70 per share yielding 3.72%. Management provided 29^th June 2015 as the books closure date with dividends expected to be paid on or about 31^st July 2015.

Outlook: Management pointed out that key performance drivers for the coming year are reinsurance and investments. The company is focused to segment its market, expand to other regions through its subsidiaries as well as enlarge its reinsurance base. Attention is being driven to its current expansions in West Africa that have been running for nearly a year and to Southern Africa through the set up of a base in Zambia.

Proactive portfolio management and revaluation gains from property will be the key investment drivers. A strategic focus is on its human capital, financial performance, improved business processes and risk management through embedding of enterprise risk management and good corporate governance. Given the performance and the outlook of the company, expectations are that it shall achieve its upside as it increases its reinsurance capacity coupled with efficient management of its claims and investments.