Non-Life Insurance Set to Grow Faster than Life Insurance as Growth Averages 8.7 Percent

Growth in the insurance sector is expected to stand at an average of 8.7 percent in the 2018 financial sector with the non-life business set to grow faster than life insurance, Genghis Capital states.

The growth will be driven by an accelerating improvement of 8.8 percent y/y in the non-life insurance business sector compared to a growth of 7.8 percent in the life business sector.

According to Genghis Capital, Ordinary Life insurance will outpace Group Life in the 2018 financial year and non-life insurance will maintain its contribution of high premiums.

Meanwhile, the buy recommendation on the insurance sector is retained with a 22.2 percent upside potential. Target prices have, however, been revised downward with an average of 1.65 percent should there be growth in premiums from general business, investment income growth in government securities and improved but consistent combined ratio above the industry average.

Genghis maintains that earnings will recover by an average increase of 46 percent y/y with an EPS FY18E 14.6 shillings from 12.28 shillings in the 2017 financial year.

Currently, top picks in the insurance sector are Kenya Re, Jubilee, Liberty Holdings and Britam Holdings.  CIC has been upgraded to a Hold TP 3.76 shillings (previously SELL) and Britam to a BUY TP 13.1 shillings (previously HOLD).

CIC depicts potential for growth due to improving underwriting profits as the company focuses on claims management. Britam, on the other hand, will benefit from its wide regional expansion, cost containment and sturdy premium from the life business.
 
Notably, high combined ratios remain a key concern in the sector primarily due to the high claims exposure in the non-life segment, resulting in high loss ratios. The industry loss ratio under the non-life business currently stands at 64.6 percent as at 1Q18 slightly down against 1Q17 numbers.

Considering higher exposure to medical and motor private classes, higher claims from the two classes are expected. The projected combined ratio for the capital’s listed universe will average 121 percent in FY18E against an industry average of 105.31 percent as at 1Q18. 

Another area of great concern is the cost rationalization. Cost containment measures will be seen and actualized through technology. The disruption has not yet occurred but Genghis believes it will be a game changer for the insurance sector.

Adoption of technology will prop up the distribution of micro-insurance products as well as improve overall underwriting abilities. Increased mobile usage from the young and middle age population will spur innovations. The average expense ratio from the listed universe is expected to average 40.1 percent in FY18E and improve to 39 percent in FY19F. Jubilee

Holdings and Britam are expected to have the lowest expense ratio of 22.13 percent and 34.4 percent in FY18E, respectively.

What remains as a primary contributor to the total income is the investment income, which contributed 22 percent in FY17A.  The composition is skewed to government securities, investment property, and equities.

Be that as it may, the interest rate capping continues to pose a threat to investment income. Data as at 1Q18 portend that asset classes with the highest investment proportion were; government securities at 55.5 percent, investment property with 15.4 percent, 12.3 percent in equities, and 8.1 percent in term deposits.