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Low returns and high claims exposure hurt CIC shares outlook

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Guests at the investors briefing at the company’s offices in Nairobi. PHOTO | ANTHONY OMUYA | NMG

CIC Insurance #ticker:CIC stock is unappealing to investors due to high exposure to claims and a low return on equity despite having just reported a 154-per cent jump in 2017 full-year profit, researchers at Genghis Capital say.

The company has recommended the payment of a dividend and its net premiums as well as investment income rose, but analysts expect its price to come down by almost half.

In the five days to last Thursday, just after the release of its results, the price has fallen 2.7 per cent to stand at Sh5.45.

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“We reiterate a sell recommendation on CIC Insurance Group Holdings based on a target price (TP) of Sh3.13, a 44.1 per cent downside potential,” said Genghis in a research note.

“We highlight the high claims exposure in spite of cessation rates averaging at 15.26 per cent against an industry average of 30.1 per cent as a key concern,” the analysts said. Such a rate means that in the event of a payable policy claim, the company bears a heavier responsibility than the re-insurer or other insurer. According to Genghis, CIC is forced to bear a larger portion of claims incurred despite the leeway to spread risk further.

“High growth in claims due to high reliance on and exposure in loss-making classes remains a key concern. Receivable growth also poses a risk under the new risk-based capital requirements due to the risk charge attached to receivables,” they said.

Uncollected premiums (receivables) must be provided for in full (100 per cent) under the new rules, thereby eating into an underwriter’s capital.

CIC weathered a tough economic climate to record higher premium and commission income on the way to making a 154-per cent jump in net profit to Sh478.5 million for the year ended December 2017.

The listed insurer’s gross written premiums grew by Sh2.6 billion or 20.9 per cent to Sh14.95 billion last year. This line of income had only expanded by eight per cent in 2016, due to underperforming regional subsidiaries.

Most of the premiums income was from Kenya, with Uganda contributing three per cent to the gross written premiums, South Sudan and Malawi bringing in just one per cent each.

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