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Fitch says insurers ripe for foreign investment

An investor on the NSE trading floor. The local insurance market’s low penetration rate is seen as offering an expansion opportunity for companies. PHOTO | FILE
An investor on the NSE trading floor. The local insurance market’s low penetration rate is seen as offering an expansion opportunity for companies. PHOTO | FILE 

Kenyan insurance companies are ripe for foreign investment, according to global credit ratings agency Fitch’s new report.

Fitch Ratings says the insurance sector has matured compared to other African economies and that the reporting standards for local companies are comparatively high.

The report says Kenyan insurance companies can also give foreign investors crucial access to regional markets.

“Kenyan insurers’ attractiveness as a destination for foreign investors has been supported by the market sophistication (despite low penetration rates) and transparency of financial disclosure in Kenya relative to its peers in sub-Saharan Africa,” said Fitch.

“Some insurers such as Britam, UAP and Jubilee have footprints across the greater East African region which enhances their attraction to investors.”

Better regulation and profitability of some segments such as non-life insurance are the other factors expected to continue drawing foreign investors to the Kenyan market in search of deals, either through mergers or acquisition.

The local market’s low penetration rate is seen as offering an expansion opportunity for companies, with data showing that insurance penetration in Kenya stands at 2.8 per cent, which is below that of countries such as South Africa with a 14.1 per cent penetration rate.

Fitch’s sentiments tally with those of UK-based Prudential Plc which returned to the Kenya market in late 2014 on buying Shield Assurance after exiting 30 years earlier.

Prudential said Kenya’s insurance industry is similar to that of South East Asia in the 80s that was characterised by strong economic growth, a young population, rising middle class and limited social welfare—factors that justify investment in the sector.

“Prudential has already invested over a billion shillings in Kenya and we expect to invest significantly in Kenya over the next five years,” said Prudential (Africa) chief executive Matt Lilley in a recent update on the company.

Old Mutual, another foreign firm, has equally increased its footprint by raising its shareholding in UAP to 60.66 per cent from 23.3 per cent.

This is after the South African firm bought a combined 37.3 per cent from private equity (PE) firms Aureos, Africinvest and Swedfund for about Sh14 billion.

In other deals, South African firm MMI Holdings bought Canon Assurance, Swiss Re bought 26.9 per stake in Apollo Investment while private equity firm LeapFrog bought a majority stake in Resolution Health.

Fitch however says that most activity will be concentrated on small companies since the larger and more stable insurance firms are expensive at current market prices.

“The valuations of leading Kenyan insurance companies, however, suggest that further scope for large acquisitions is limited. Despite share price weakness during the past six months, most leading insurers are valued at significant multiples of both tangible net asset value (TNAV) and earnings, thereby pricing-in significant future profit growth. As a result, Fitch expects further M&A activity to focus on consolidating smaller licences.”

The report notes that UAP/Old Mutual’s implied valuation of Sh38 billion is higher than Jubilee Insurance’s Sh33 billion despite having a lower dividend yield and market share.

UAP/Old Mutual had a market share of 5.9 per cent as at the end of 2014— lower than Jubilee’s 12.9 per cent. Dividend yield was also lower at 0.9 per cent against Jubilee’s 1.5 per cent.

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