How insurance will create Kenya’s next crop of billionaires

By Emmanuel Were

Kenya: In November last year, the Society for International Development released a report on the state of East Africa.

The report, whose focus subject was The future of inequality in East Africa, had a subtle message:  Kenyans are holding less non-financial assets - like land - compared to their peers in Uganda, Rwanda, Tanzania and Burundi. Instead, Kenyans are putting more of their money into financial assets like shares at the Nairobi Securities Exchange.

The report nonetheless proved what was evident all along: Kenyans are modernising faster than the rest of the region.

But it is in appreciating what opportunities this modernisation creates for the Kenyan economy that one is able to understand where the next billionaires in the economy will come from.

The biggest beneficiaries in Kenyans’ shift in mindset from resources like land to financial assets this year are set to be owners of insurance companies — both private and public.

Diversification

As Kenyans diversify their acquisition of assets, they will require some form of security for these assets. This means more people will be willing to take up insurance cover not only for their health and the compulsory insurance for their cars but also for their businesses, laptops, smartphones and household goods.

Insurance companies have already devised ways of pushing their products through the ubiquitous mobile phones, significantly cutting their costs.

All this is set to herald a significant shift in the market for insurance products, with owners of insurance companies set to rake in billion of shillings as they cash in on acquisitions, or use the increase in premiums to expand their business empire.

It is in this context that activities in the insurance sector over the next three months should be looked at.

Nairobi Securities Exchange-listed insurer Britam should complete its acquisition of Real insurance by end of March.

Real’s owners are set to make millions of shillings from the sale, while top Britam shareholders have made millions, if not billions, of shillings in just a couple of months as the share traded at an all-time high of Sh18.

Resolution Insurance is looking to raise Sh1.7 billion by April to fund its entry into the Nigerian market and other African markets. The insurance firm, which focuses mostly on medical insurance, is also scheduled to start operations in Burundi by the end of March. 

Resolution Insurance CEO and founder Peter Nduati is expanding his other business interests — in the cosmetics industry, music, CCTV installations and alarms — using the money he has made through insurance. 

Dilesh Somchand Bid, of BTB Insurance Brokers, is among those hoping to take over Africa’s biggest sisal producer Rea Vipingo, through his investment firm WWW.Bid Investment, in a deal valued at Sh3.3 billion.  

The Islamic insurer Takaful Insurance will be preparing its entry into the Somalia market by end of this year.

Britam’s recent acquisition of Real insurance sets the scene for consolidation among Kenya’s insurance companies, according to analysts.

Deeply fragmented

The country’s insurance industry is deeply fragmented, with 43 insurance companies that mostly undercut each other in pricing insurance for cars and buildings.

Yet, the penetration of insurance in general still remains low, with about only four out of a hundred people having an insurance cover.

The spate of acquisitions should result in bigger and more capitalised players who can aggressively expand their products within the region.

Britam was drawn to Real because the latter has a presence in some frontier markets like Mozambique and Malawi.

It said it will acquire 99 per cent of Real at Sh1.4 billion.  The deal will be both cash and stock — Britam will pay out Sh825 million and issue shares worth Sh550 million to Real’s owners, who are being offered the stock at Sh11.13 per share.

Britam’s shares closed last week at Sh18, and though many stockbrokers termed them overvalued, there is still a lot of pent-up demand.

With the price increase, it means owners of Real Insurance will have instantly made millions of shillings once the deal is concluded by the end of March.

Some of the owners of Real include former KenGen MD Eddy Njoroge, the company’s chairman Sam Kamau, who is estimated to own about 20 per cent of the firm, Joe Muchekehu and Ian Mukuria.

The top Britam shareholders have also made billions from the strong bull run the shares have enjoyed. The firm’s shares have rallied from a low of Sh6. 

However, AIB Capital thinks that Sh18 per share is too high.

“Britam ... generates an attractive return on equity, but the high price to book ratio cannot be justified by the 18 per cent return on equity. We therefore estimate that the company is overvalued by 33 per cent,” said the analysts in a research report released last week.

They value Britam stock at Sh13.03 per share.

Britam’s price to book ratio is at 2.59. This means that the shareholders are paying Sh2.59 for every shilling of net assets (the value of assets which remain after the deducting the debts and removing the value of patents) Britam has. 

In contrast, other insurance firms are trading at a price to book ratio of less than 2.59, which makes them attractive as investment opportunities. 

For instance, Kenya Re-insurance is trading at a price to book ratio of 0.93.

“We conclude that the insurance sector is fairly priced, with attractive opportunities,” said AIB Capital.

Kenyan insurance firms are also looking to aggressively expand outside East Africa into markets that even the vibrant banking sector has not ventured. 

The strategy is to expand to markets with a large population or those emerging from conflict. This bold strategy could earn owners billions of shillings in the coming years.

Outside the region

Resolution Insurance has its sights trained on Nigeria, the most populous country on the continent.

“The population of Nigeria presents a very good opportunity,” said Mr Nduati. “If you want to expand, you need to grow the market,”

Resolution plans to be in 17 countries by 2018. It is currently in about eight.

Despite the fighting in South Sudan — between the government forces of Salva Kiir and the breakaway Riek Machar forces — that led to Resolution evacuating its staff, Nduati said the firm would still return to Africa’s newest country.

“Insurance shuts down in civil war, but are we going back to South Sudan? Hell yes,” he said.

South Sudan is one of the key markets for Resolution Insurance, accounting for 30 per cent of the firm’s Sh3 billion in revenues. 

The insurer also has a presence in Sudan and Qatar, markets that not many Kenyan companies have ventured into.

Other companies like UAP have set up in DRC, as the country has enjoyed some relative political stability.

The insurance brokerage business is also proving a lucrative source of income, with agents earning decent commissions that they can invest.

Mr Bid, for instance, runs one of the largest insurance brokers in Kenya and Tanzania. Through his investment firm, WWW.Bid, he has made the largest offer so far of the three takeover bids for NSE-listed Rea Vipingo.

Although, Mr Bid declined to state the source of his funds, insurance brokerage might have provided him with the “free cash” to return the family business back into sisal farming. Mr Bid’s father was one of the pioneer owners of sisal and coffee farms in the 1960s in Kenya.

One of the biggest challenges that has dogged the uptake of the insurance in Kenya is the cultural perception.  

“Insurance is at the end of the consumption line. People first pay for food, school fees medicine and other expenses before they leave the rest of what they have to the insurance sector. People leave tomorrow for God to take care of,” said Hassan Bashir, the CEO of Takaful Insurance.  

“Insurance is a push product rather than a product many people are willing to walk in and buy. Few are comfortable sleeping without airtime on their phone, but how many people are comfortable sleeping without personal accident cover for their children?”

John, in his early 30s, is your typical middle class worker. He drives to work, is married and expecting his first child. For close to a year, an insurance salesperson has been pushing him to buy a cover for his household products. He gets medical insurance for his family from his employer.

Making the decision

“I have delayed my decision, but I have been considering it,” John said, asking that his full name not be used to protect his identity.

“Just the other day, someone tried to steal my smartphone and it dropped and the screen cracked. I now have to buy another phone.”

The mobile phone for many Kenyans has become more than a communication tool; it is a mobile wallet and a bank.

This is why insurers like Kenya Orient came out with a big marketing campaign last year trying to push people to insure their smartphones, which cost upwards of Sh30,000 on average.

But the mobile phone can turn out to be the saving grace for the insurance industry, with it becoming an alternative distribution channel for insurance firms.

Recently, Safaricom, Britam and Changamka launched Linda Jamii, a medical insurance cover whose premium is Sh12,000 a month and can be paid mobile money platform M-Pesa.

Using this approach, Britam will not have to deploy hundreds of sales agents to sell the product; instead the 11.6 million active M-Pesa customers are brought to it.

Banks are also looking to push their insurance products through the bankassurance model, where they provide insurance cover at their branches.

For instance, Takaful has a livestock insurance product that it sells through the mobile phone.

They target livestock owners in the dry regions of the country, such as Wajir, Marsabit, Mandera and Tana River. 

Its agents travel to these arid and semi-arid areas, count the livestock and work out the premiums payable by the livestock owners.

The risks are calculated based on an index that was built on weather systems.

When an early warning satellite system triggers an alert of drought in an area, the livestock owners are compensated through the mobile phone.

“In Kenya’s ASAL regions, 90 per cent of wealth is held in the form of livestock, so this is an important sector and a method of risk management is required,” said Mr  Bashir.

“As land cover disappears through the dry season, livestock owners are compensated without the animals necessarily dying. This enables them to use the cash to search for fodder or water for their animals.

“Since it does not make sense to try and drive down all the way to Wajir to make the payment of Sh20,000 to Sh30,000 in compensation, we use the mobile phone.”

Takaful plans to offer livestock insurance to the Somalia market this year.

“By the end of the year, we will most definitely go into Somalia. The country is 100 per cent Muslim and it is emerging from conflict, so there are opportunities,” he said. “And most likely we will go into Uganda and Tanzania in the next five years.”

One of the worries for Bashir in the Kenyan market is undercutting, especially in motor vehicle insurance.

“It is a slippery slope. We are too many in the market and the managers have high targets to meet and everybody is running to undercut the other person,” he said.

Instead of an insurance premium of 7.5 per cent on the value of a car, some insurance firms are offering cover from as low as 3 per cent. This undercutting has lead to underwriting losses and the eventual collapse of some firms. 

Property is another insurance segment with a lot of price undercutting.

The insurance regulations are changing with insurance companies now forced to hold capital based on their risks.

If the risks are high, then the insurance firms have to hold a lot more capital and vice versa. This is a more prudent way for insurance firms to spread their risk, instead of each hold a set amount of capital.

Creative policies

Still, Bashir thinks the industry needs to do a lot more to remain competitive.

“The industry can be creative on how you sell products to the customers,” he said.

For instance, Takaful has a model where policy holders who do not make a claim in a certain year are entitled to share profits from the operations.

In 2011, they gave back Sh16.5 million to their customers because they were able to make an underwriting profit of Sh26 million. Their customers who did not make claims received between Sh1,000 and Sh254,000, depending on the premiums they gave.

“It is an ethical and fair equity based sharing system for profits,” he said.

[email protected]