Capital Markets

Insurance shares at the NSE are ‘underpriced’

nse

Share prices displayed at the Nairobi Securities Exchange. FILE PHOTO | NMG

Listed insurance firms retain an upside of up to 22 per cent in share price with their incomes projected to improve in the second quarter of the year backed by higher premium earnings, investment income from government securities and cost cutting.

In a sector note, investment bank Genghis Capital says the higher projected income will likely outweigh concerns over high loss ratios coming out of the non-life business.

“We maintain premium growth expectations of an average of 8.7 per cent in the 2018 financial year…driven by an accelerating growth of 8.8 per cent year on year in the non-life insurance business segment and a growth of 7.8 per cent in the life business segment,” said Genghis analyst Elizabeth Wangechi in the report.

“Cost containment measures will be seen and actualised through technology.

“Adoption of technology will prop up distribution of micro-insurance products as well as improve overall underwriting abilities.”

Investment income is expected to be backed majorly by government securities, where the insurers have gone overweight in the last three years as they sought to shield themselves from the adverse effects of the NSE bear run on their returns.

By the end of the first quarter of the year, government securities accounted for 55.5 per cent of investments, followed by property at 15.4 per cent, equities at 12.3 per cent and term deposits at 8.1 per cent.

Five of the six listed insurance companies have seen their share prices drop this year — four by double digits in percentage terms — amid a tough year for most listed firms.

Only Liberty Kenya #ticker:CFCI, with a year-to-date share price gain of 3.9 per cent is in the black, while the worst performing stock in the market segment is CIC #ticker:CIC, with a share price drop of 29.5 per cent since January.

The case for upside in the sector is also helped by the fact that three of the six listed firms are deemed cheap at current price based on their price to book (P/B) ratios, which compare current market price to book value.

Kenya Re #ticker:KNRE is the cheapest with a P/B of 0.4, compared to a sector average of 0.9. A price to book value below one indicates that a stock is undervalued.

Britam #ticker:BRIT and Sanlam #ticker:PAFR both have a P/B of 0.9. Liberty at 1.0, Jubilee Holdings at 1.2 and CIC at 1.4 also have fairly low P/B.