Kenya RE announced their FY15 results recording a 12.0% y-o-y growth in Profit after Tax (PAT) to KES 3.5 BN with an EPS of KES 5.02 (+12.0% y-o-y). Its ROE improved marginally by 33 bps y-o-y to 16.0%. Its ROIA recorded a 114 bps y-o-y growth to 11.2%. The directors recommend a final DPS of KES 0.75, an increase of 7.1% y-o-y. (Div Yield of 3.8%).
Gross earned premiums grew 15.4% y-o-y to KES 12.5 BN while net earned premiums increased 16.5% y-o-y to KES 12.0 BN, following a 14.9% y-o-y increase in gross written premiums (GWP) to KES 17.1 BN and a 6.4% decline in reinsurance premium ceded to KES 495 MN. The decline in reinsurance ceded and growth in GWP drove its cessation rates down by 66 bps y-o-y to 2.9% as its net retention rate climbed by a similar margin y-o-y to 97.1%.
Total income increased by 16.5% y-o-y to KES 16.0 BN as income across all segments improved as follows: other income +45.2% y-o-y to KES 248 MN, investment income +17.3% to KES 3.0 BN and the net earned premium +16.5% y-o-y to KES 12.0 BN. With the increase in investment income, its investment income reliance ratio (as a percentage of total income) climbed marginally by 13 bps y-o-y to 19.0%.
This was attributed to a 18.5% y-o-y increase in net insurance benefits and claims to KES 7.1 BN, a 130.6% y-o-y increase in provisions for doubtful debts to KES 114 MN and a 20.7% y-o-y rise in other expenses to KES 1.3 BN. The growth in claims saw its claims ratio rise by a 100 bps y-o-y to 58.8% while the growth in other operating expenses saw its expense ratio rise by 32 bps y-o-y to 28.3%, driving the combined ratio up by 132 bps y-o-y to 87.1%.
This was mainly due to a 71.1% y-o-y increase in investment in associates to KES 3.4 BN, which translated to a 21.7% y-o-y increase in Profit from Associates to KES 336 MN (7.5% contribution to PBT in FY15). Kenya RE’s investment portfolio increased y-o-y as follows; investment property +11.5% to KES 8.0 BN, government securities +19.1% to KES 9.2 BN, unquoted equity +21.0% to KES 202 MN, corporate bonds +17.9% to KES 494 MN, cash +41.8% to KES 319 MN.
It however reduced its investment in quoted equity by 21.6% y-o-y to KES 2.6BN, driving down its mix of equity to total investments by 446 bps y-o-y to 12.6%. Its total investment assets represented 60.8% of total assets, a 155 bps y-o-y decline. We believe the reduction in its exposure to the equity market was driven by the decline in 2015 equities market performance, whereas the increased exposure to the fixed income and money markets followed rising yields in 3Q15.
This was mainly attributed to a 64.2% y-o-y increase in deferred tax liability to KES 904 MN, a 13.7% y-o-y rise in unearned premium to KES 4.6 BN. With the increase in total assets and liabilities, the company recorded a growth of 9.1% y-o-y in net assets to KES 21.9 BN during the period. Its unearned premium reserve climbed 13.7% y-o-y to KES 4.6 BN averaging an unearned premium reserve to earned premium ratio of 35.7%. Its insurance contract liabilities climbed by 11.0% y-o-y to KES 7.3 BN.
This was driven by 14.3% y-o-y growth in long term contracts to KES 5.2 BN, as short term contracts noted a 3.9% y-o-y growth to KES 2.2 BN. Its focus on long term contracts provides a long horizon financing base that propels its investment activities as the investment income ratio improved 18 bps y-o-y to 25.3%.
Kenya RE is seeking to increase its premium income through its subsidiary in Lusaka Zambia that will cater for southern Africa markets of Botswana, Lesotho, Namibia, South Africa and Swaziland. We expect its increasing exposure to investment properties and short term government securities to continue driving its investment income as it shifts its focus from the fairly volatile equities market. We also expect its improved liquidity position (liquidity ratio +2,275 bps to 102.4% y-o-y) and its zero debt balance sheet to form a strong asset base. We note that Kenya RE is currently trading at a P/E multiple of 3.9x below the industry median of 11.8x and at a P/B multiple of 0.6x below the sector median P/B of 1.5x and therefore issue an Overweight recommendation.