Investment

If You Are Not On The Table, You Are On The Menu

BY Standard Investment Bank · September 27, 2023 11:09 am

In a cautionary notice issued to the exchange, NCBA Group has announced its intention to raise its stake in AIG Kenya Insurance Company Ltd (AIG) from the current 33.33% stake to 100% by buying the remaining 66.67% (which we suspect may be part of shareholder pre-emptive rights).

If the Transaction does materialize from these discussions, it will be subject to conditions that are customary to transactions of this nature including regulatory approvals from, amongst others, the Central Bank of Kenya, the Insurance Regulatory Authority, the Competition Authority of Kenya, and the Capital Markets Authority.

Echoing former United States Senator, Michael Enzi, ‘If you are not on the table, you are on the menu,’ NCBA has chosen to be on the table of general insurance, mirroring Equity Group Holdings (EGH) in May 2023 – which received approval to set up general insurance business.

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AIG is a general insurer that operates in Kenya, Uganda, Tanzania, and Rwanda. Apart from already owning a stake in the business, the brand probably resonates with the NCBA brand, along with some niche products. We view that the bank is likely looking to leverage its first-party data to boost revenues, case in point, offering general insurance services to borrowers that are financed through its asset finance segment.

Going by IRA figures, motor insurance is the second highest line of gross premium income, which accounts for 26.2% of gross premium income as of 1Q23, right behind medical at 35.5%. However, we note that loss ratios on the two averaged 81.8% and 84.1% respectively; which has been a key downside to the general insurance business.

With a 15.9% return on average equity (ROaE) as of FY22, the insurer’s business would be slightly dilutive to NCBA’s 17.2%. That said, AIG’s ROaE is quite impressive given the poor performance of the listed insurer which posted an average ROaE of 6.5% in FY22.

This may have informed the decision of the bank to increase its stake in the insurer. Notably, AIG’s outstanding claims account for only 2.1% of the total general insurance outstanding claims. The firm ranked 18 out of 34 when compared with other firms, with outstanding claims of KES 697.8m.

In terms of the claims payments ratio, the figure seemed quite low at 4.7% (ranking 28 out of 34), which may raise concerns about customer satisfaction though may also signal underwriting of good quality business.

The acquisition plan mirrors our sentiments in our 1H23 Banking summary report (published on 25 September) in which we stated that banks will be looking for other streams of income (largely non-funded) following growing constraints on the lending arm of business. If concluded successfully, we can expect to see a higher contribution by subsidiaries to group profitability before tax which rose to 14% in 1H23 from 1% in 1H22 – an increasing theme where we are starting to see subsidiaries for Kenyan banks start to deliver a more meaningful contribution to overall performance.

NCBA’s equity holding in AIG as of FY22 is stated as worth KES 1.0bn, valuing AIG at over KES 3.0bn. We calculate the implied valuation at a P/B of 1.3x – a premium to the sector, possibly due to the robust performance. Considering these figures (KES 2Bn consideration), we expect the dividend for the year to decline roughly 20% which will drag the dividend yield to about 10% – which is still acceptable in our view. Depending on the price eventually agreed on, we think the transaction could be accretive.

The general insurance space is becoming increasingly competitive with the entry of major multinationals, especially the recent play by Allianz Group which locally bought into Jubilee Insurance General business, and in Africa, created a joint venture with Sanlam. This means that things could evolve considerably over the years depending on the nature of products introduced in the market.