Kenya Re Report

Research Report 2008
Cyclical & volatile business
Kenya Re is on target to make approximately Kshs 807 million, excluding one-

(Members of the NSE since 1954) off gains, after tax in 2007. A further growth of 14% is expected in the net
10th Floor, Loita House, Loita Street profits in 2008. We expect the group to earn net profits of Kshs 922 million in
P.O. Box 45396-00100 Nairobi, Kenya 2008.
Tel: +254-20-3240000 Fax: +254-20-218633 The group’s net profits went up by 12% in the 1st half of 2007 to Kshs 435
Website: www.dyerandblair.com
million from Kshs 388 million in the same period in 2006.
KPMG has been testing the company’s system and processes. Kenya Re will
March 2008 update its systems after KPMG’s advice by which the company should become
more efficient. Increased efficiency will result in increased earnings.
Current Price: Kshs 15.10 Though locally incorporated, the company operates in almost all the African
countries except South Africa. It also serves the Middle East and Asia. It is
Trailing PE: 16.41x continuously expanding and extending its service in the international market.
However, the principal market of the Corporation is the Kenyan insurance
Price range: market. It controls approximately 21% of the local market.
Kshs 13.85 - Kshs 18.25 Net underwriting profits have been volatile over the years. However, the
average underwriting profits from 2002-2006 was approximately Kshs 400
million per year. Underwriting profits grew by 54.42% in the 1st half of 2007.
Profit after Tax Kenya Re has an extensive asset base of over Kshs 12.81 billion and is looking
to expand the base.
Investment income grew from approximately Kshs 491 million in 2005 to
around Kshs 753 million in 2006.
The new management is increasing its focus on matching the premiums with
the risk and in turn improve its risk management.
Reinsurance business is very volatile. The risk “tails” are getting fatter and
catastrophes have been more frequent than historical records would predict.
However, Kenya Re holds sufficient reserves to meet any plausible loss
scenarios.
Loss ratio decreased to 34.07% Kenya Re will earn an extra income of Kshs 17 million in 2008 as it sold 2
properties above its estimated values.
in the 1st half of 2007 compared We project an EPS of Kshs 1.34 for 2007 and Kshs 1.56 for 2008.
to 40.28% in the same period in
2006.
Projections
1st Half
In the same period, Kshs (Million) 2005 2006 2007 2007F 2008F
management expenses Gross Premiums 2,613 3,035 1,619 3,189 3,546
decreased to 9.50% from Claims 924 1,523 551 1,237 1,454
10.66% Underwriting surplus 488 462 524 791 840
Investment income 491 753 252 536 595
Profits after tax 748 3901 435 807 936
Research: Earnings Per share 0.72 1.34 1.56
We recommend Kenya Re as a buy as we feel that the group has sustainable
Leah Nyambura growth prospects for the next 5 years. With improved risk management,
increased marketing, control on management expenses, increased efficiency
Hetal S. Shah through new systems, we estimate the net profits to increase to Kshs 807
million in 2007 and to Kshs 936 million in 2008, a growth of 16% from 2007
+254 20 3240000 earnings. We believe that the company will have good growth in
research@dyerandblair.com underwriting income as well as investment income with lower loss ratios and
continued growth in the economy once the political crisis is solved in Kenya.
We estimate a price target of Kshs 23 for Kenya Re and thus recommend a
strong buy.
Recommendation: BUY
1
Includes provision of Kshs 150 million.
Dyer & Blair may do business with companies covered in its research reports. Although the views expressed in this document are solely those of the Research Department and are subject 1
to change without notice, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a
single factor in making their investment decision. We do not guarantee the accuracy or completeness, nor will the company be held liable whatsoever for the information contained herein.
Dyer & Blair may deal as principal in or own or act as market maker for securities/instruments mentioned or may advise the issuers. Members of the firm may have pecuniary interest in the
listed companies. The document is exclusively for our clients and duplication is not allowed.
Kenya Re was established in December 1970 under the State
Reinsurance Corporation Act of the Laws of Kenya Chapter 485. Kenya
Re listed on the NSE on 27th August 2007, floating 240 million shares.
The IPO was overwhelmingly oversubscribed, by about 405%,
representing strong confidence in the company. The year 2007 therefore
emerged as an important year in the company’s history.
Insurance is a cyclical and volatile business. The management has to

perform at its best and continuously improve risk management strategies
The new management is by matching the premiums to the risk. In the short run, the company can
focusing on matching its show higher profits with high turnover due to premiums. However, in the
premiums with the risk.
long run, poor risk management can lead to higher payment on claims
and the company possibly can experience a loss in earnings. The new
management is focusing on matching premiums with the risk.
The group’s underwriting profit has been volatile over the years. There
are unpredictable patterns of boom and bust. Heavy losses during bust
periods force up premiums, which leads to relaxed attitudes toward risks,
which in turn help bring about new cycles of losses. The cyclical nature is
The group’s underwriting profit
why industry players have to maintain huge reserves.
has been volatile over the years.
The table below summarises the geographical presence of Kenya Re in
the global business.
Number of Number of
Region
Countries companies
Kenya 1 46
Africa (excluding Kenya) 22 80
Overseas 18 40
TOTAL 41 166
Source: Kenya Re (Dec 2006)
Industry Growth
The insurance industry has been grown alongside the Kenyan economy.
The Kenyan economy is doing well with GDP growth of 6.1% recorded in
2006 and 7.1% in 2007. Unskilled labour is languishing as wages have
stagnated, while food, housing and transport costs have spiralled.
However, the middle class has been doing well so far.
So far, 2008 looks like a difficult year. However, most of the assets
destroyed by political violence were never insured.
Kenya Re’s insurance classes can be divided into fire, accident, marine,
aviation, motor (commercial and private), and life insurance. It earns
most of its premiums from fire and accidents, followed by 14.68% from
Life insurance, 9.36% from motor insurance, 7.93% from marine
insurance, and 0.35% from insurance on aviation.
% of Gross Prem ium s earned to Total Gross Prem ium earned, Sept 2007
Life 14.68%
Aviation 0.35%
Kenya Re earns most of its Marine 7.93% Fire 37.23%
premiums from fire and accident
insurance.
Motor 9.36%
Accident 30.45%
In the 1st 3 quarters of 2007, the group earned about Kshs 889 million
from fire insurance and Kshs 727 million from insurance on accidents out
of the total of Kshs 2,387 million earned on gross premiums.
The increase in manufacturing Kshs (Million) 2005 2006 Sep-07

activities has affected the
insurance industry. Fire 1,021 1,166 889
Accident 725 908 727
Motor 165 183 224
Marine 300 265 189
Aviation 15 17 8
Life 388 497 350
Total 2,613 3,035 2,387
Insurance clients can be divided into corporate and retail categories.

The number of newly registered Generally, most businesses take out some form of insurance. The
cars and fuel consumption has
been growing at double digit
increase in manufacturing activities has affected the insurance industry.
rates. When a company is buying new equipment, it will probably seek a trade
insurance cover. Transporting the equipment will also call for more
insurance. Prior to installation, the company will also look for a
comprehensive cover to insure its new equipment.
The number of newly registered cars and fuel consumption has been
growing at double digit rates in spite of the high costs of fuel and vehicle
maintenance. Rental prices have also been growing at double digits in
Rental prices have also been the middle class enclaves of Lang’ata, South B and South C. Insurance is
growing at double digits in the a middle and high income earner product. Increasing incomes for these
middle class enclaves two categories is good news for the industry. The revitalization of the life
insurance sector is directly tied to the reversal of fortunes for the middle
class of Kenya. Life insurance has also been growing at double digit rates
in the past 3 years.
Kenya Re is not affected heavily by the recent uncertainty in the country.
As per the management, the company is not liable to pay any heavy
claims for the damages that happened during the unrest. Kenya Re will
still be able to meet its premiums target for 2008. We believe that the
claims will probably increase in 2008, thus the loss ratio will increase
Not heavily affected by the marginally. Its investment income will be volatile over the year. The
current crisis in the country. stock market has been reacting to the ongoing political talks and has
been volatile. Once the situation is resolved, we believe that the NSE will
gain stability and Kenya Re in turn will earn good returns from the
market.
We anticipate that the company will have a growth of about 5% in gross

premiums in 2007 from the previous year and an 11% growth in 2008.
Thus, we expect that Kshs 3,189 million in 2007 and Kshs 3,546 million
in 2008 will be earned by the group as gross premiums.
Kenya Re benefits from 18%
compulsory ceding of all treaty
insurance business from all Local, Regional and International Business
insurance companies in Kenya.
Kenya Re benefits from 18% compulsory ceding of all treaty insurance
business from all insurance companies in Kenya. Most of the companies
give them about 80% of their business, not just 18%. The group has a
market share of about 21% of premiums collected locally.
A lot of companies give them
about 80% of their business, In 20072, from the total gross premiums that Kenya Re earned, about
not just 18%. 67.71% of its gross premiums were earned from the Kenyan market,
18.24% from the African region and the rest, 14.05% from the
international market, i.e. Middle East and Asia.
% of gross prem ium s earned of total gross prem ium s, Dec 2007
International
Kenya Re earned about 67.85% (Middle East &
of its total gross premiums Asia)
earned from the Kenyan market. 14.05%
Africa (except
Kenya)
18.24%
Kenya
67.71%
Kenya Re attracts business from almost all the African countries except
South Africa. Africa as a continent is currently experiencing real GDP
growth at an average of over 5% a year due to factors such as;
continued progress in cementing macroeconomic stability, the beneficial
impact of debt relief, increased capital inflows, and rising oil production.
2
Data until 13th December 2007
Kenya Re has increased its focus on French-speaking countries, including
Rwanda Burundi, Congo, Madagascar, etc. Rwanda’s premium income
has more than doubled from Kshs 6.4 million in 2005 to Kshs 17.70
million in 2006.
Kenya Re has increased its focus
on French-speaking countries. Rwanda is a country that is on a path of recovery following the genocide,
and has since shown good GDP growth rates of over 6% annually3.
There is a need for services in the country, one of them being good
insurance and reinsurance. Senegal is another country which produced
impressive growth in premium income of 429% in 2006 from 2005,
coming in at Kshs 16.48 million in 2006, compared to Kshs 3.11 million
in 2005.
However, Kenya Re has not lost focus on its business in English-speaking

countries and it continues to grow in these markets. Earlier in the year,
Kenya Re had put into place aggressive marketing strategies to capture
African markets outside of Kenya, as well as retain its existing market
within Kenya.
In the coming years, Kenya Re has a target to develop their market

share and penetrate into Angola, Mozambique, Namibia, Sudan, Ghana,
Cameroon, Senegal, The Gambia, Zambia and Botswana. In the
Francophone Africa, they expect to grow in Tunisia, Algeria, Senegal,
Togo and Gabon among others.
Kenya Re has realized a considerable growth in its gross premiums

locally and internationally. It experienced a growth of 19% from local
business and 11% from international business. Kenya Re’s international
Kenya Re experienced a growth business is obtained largely through brokerage. For instance, the J. B.
of 19% from local business and Boda Group, the largest and oldest reinsurance brokers in India, is the
11% from international
business.
Indian broker for Kenya Re, providing the Corporation with quality
business. The corporation has established service level standards to
match international standards in order to bolster its foreign business.
Gross prem ium s earned through local and international business
4,000
3,500
3,000
Kshs (Million)
2,500
2,000
1,500
1,000
500
-
2005 2006 2007F 2008F
Local International Total
3
Figures from World Economic Outook by International Monetary Fund, April 2007
Underwriting Profits, Investment Income and Profits after tax
The group’s profits have been volatile over the years as can be seen
below. This is due to the earnings pattern from underwriting and
investment income experienced by the company. Kenya Re earned
higher income from investment in 2002, 2004 and 2006. We expect that
in the next two years, it will earn more of its income from the
underwriting business. We anticipate the net profits to increase to Kshs
Gross premiums earned have
been increasing more or less 807 million in 2007 and Kshs 936 million in 2008, a growth of 16% from
steadily over the past five years. 2007 earnings.
Gross premiums earned have been increasing more or less steadily over
the past five years. Investment income is also up over this time period,
though this portion of their profits has been more volatile in its growth
pattern. Profits after taxes were lower in 2006 than in 2005; however,
this was due to the extraordinary gain that was booked in 2005 and the
provisions of Kshs 150 million in 2006. Taking this into account, profits
after tax did increase slightly in 2006, compared to 2005.
Underwriting profits
As mentioned earlier, insurance business is a cyclical and a volatile
business. It usually goes through a boom-bust cycle. The group’s
underwriting profits have been volatile since 2002. It experienced a
positive growth in 2003 and 2005 and a negative growth in 2002 and
2004. The main reason for this is high claims that it had to pay in 2002
and 2004 as shown in the table below.
Kshs (Million)
2002 2003 2004 2005 2006 2007F 2008F
Gross Premiums 1,339 1,680 1,823 2,613 3,035 3,189 3,546
Claims 770 458 766 924 1,523 1,237 1,454
Loss ratio %
Claims/GP 57.51 27.26 42.03 35.35 50.17 38.80 41.00
We expect an improvement in
the loss ratio in the current year The volatility in the underwriting profits is reflected in the highs and lows
to 38.80% and an increase of it of the loss ratio over the years. For instance, in 2005, the loss ratio
in 2008 to 41%.
increased decreased to 35.35% from 42.03% in 2004 due to low
payment in claims and higher growth in premiums. However, the
opposite happened in 2006 and the loss ratio worsened to 50.17%. We
believe that the insurance companies will continue growing in this
manner. Therefore, we expect an improvement in the current year to
We anticipate underwriting
38.80%. It may deteriorate in 2008 to 41% due to the claims Kenya Re
profits to grow by 71% in 2007 might have to pay as a result of the post election unrest.
and 6% in 2008.
Nevertheless, we feel that the profits from underwriting will not have a
negative growth rate but will grow marginally. In 2008, we estimate
underwriting profits to increase to Kshs 840 million, a marginal growth of
6% from 2007 earnings. However, we anticipate it to grow by 71% in
2007 to Kshs 791 million from Kshs 462 million in 2006.
Investment Income
Kenya Re has a large investment portfolio of over Kshs 9.76 billion, as of
September 2007. Investment is an integral part of Kenya Re’s business,
as the reinsurance premium income has to be reinvested to build up
Kenya Re has a large investment reserves and pay claims as they occur. Kenya Re is in the process of
portfolio of over Kshs 9.76 reducing its property portfolio, which currently makes up the largest
billion. portion of its investment portfolio, approximately 33.52% of their overall
investment portfolio at the end of the 3rd quarter this year.
Investment income has been volatile in the past five years. It went up in
2002, 2004 and 2006 and declined in 2003 and 2005. The income
stream should grow over time as the company restructures its portfolio
away from being concentrated so heavily in real estate. However, it is
expected that the income stream will continue to be volatile as Kenya Re
invests in real estate and listed and unlisted securities, which all have
fluctuating prices. We expect the investment income to decrease by
about 29% to Kshs 536 million in 2007 from Kshs 753 million in 2006.
However, we expect it to grow by 11% in 2008 to Kshs 595 million
compared to the income in 2007.
Investment Portfolio
30th November 2007 AMOUNT ( KSHS) % of the total
Short term deposits 745,384,817 7.64%
Government securities 2,527,050,000 25.90%
Investment property 3,270,000,000 33.52%
Commercial mortgages 430,350,350 4.41%
Equity (Unquoted cos.) 161,440,586 1.65%
Equity (Quoted cos.) 2,621,907,777 26.87%
TOTAL 9,756,133,530 100%
Kenya Re has a number of properties, some held for rent, and a few for
sale. It has diversified in this respect with investments in undeveloped
land, developments for sale, office blocks and residential properties. The
Corporation is planning to divest from investments in properties and has
put a number of properties for sale. Kenya Re will earn an estimated
Kshs 621 million from the sale of this land and buildings. In February
2008, the company sold a building in Mombasa equivalent to a value of
Kshs 190 million and a plot in Upper Hill equivalent to Kshs 82 million.
The estimated cost of these buildings was about Kshs 255 million, thus
Kenya Re will have an added income of Kshs 17 million in 2008. The
management may increase in its investments in government securities,
Mortgages form 4.41% of the
quoted equity and in short term deposits with the income received from
total investments.
the sale of properties.
Kenya Re also gives mortgages to people who are interested in

purchasing housing units developed by the company. The average rate
charged on the mortgage is 14% per annum. The Corporation also
provides loans to its employees to build or purchase houses. Mortgages
form 4.41% of the total investments. Commercial mortgages given out
Equities form about 28.53% of
have been increasing rapidly compared to the employee mortgages,
total investments.
which have been decreasing.
Equities form about 28.53% of total investments, as of September 2007

and also bring in approximately 80% of investment income in the form of
dividends.
Kenya Re’s investment portfolio The unquoted equity could unlock additional value should some of these
in quoted equity has had a
companies go public, or if the shares are sold to other investors
growth of about 16.83% of its
value compared to the 8.84% privately. It is possible that the values of these investments are
drop in the NSE index between understated, given that they are valued at cost.
the end of 2006 and end of
September 2007.
Kenya Re’s investment portfolio in quoted equity has had a growth of
about 16.83% of its value compared to the 8.84% drop in the Nairobi
Stock Exchange (NSE) index between the end of 2006 and end of
September 2007. However, it should be pointed out that approximately
59% of its portfolio is concentrated in one stock, East African Breweries,
which exposes it to significant security specific risk.
The corporation also invests in short-term deposits and government

securities which formed about 7.64% and 25.90% of total investment
income as of September 2007. Some of the government securities have
realised gains due to recent tightening of interest rates. In 2007, Kenya
Re has earned an average return of 6% on its short-term deposits and
about 7.5% on its investment in government securities.
Exceptional performance for the 1st Half year ended 30th June 2007
Kshs June 2006 June 2007 Growth
Gross Premiums Earned 1,532 1,619 5.62%
Net Premiums Earned 1,378 1,500 8.80%
Underwriting surplus 339 524 54.42%
Investment Income 315 252 -20.08%
Profit after Tax 388 435 12.12%
Loss Ratio 40.28% 34.07% -6.21%

Kenya Re has performed well so far in the current year, meeting its
targets. During the first half year result, income from net premiums
increased by 8.80% from Kshs 1,378 million to Kshs 1,500 million.
Profits after tax had a growth of
12.12% to in the 1st half of 2007
However, net investment income decreased by 20.08% to Kshs 252
compared to the 1st half of 2006. million in 2007, compared to 315 million in 2006. Nevertheless, profits
after tax had a growth of 12.12% to Kshs 435 million from Kshs 388
million. This is due to the fact that the total claims decreased by 10.67%
in the first half year of 2007 compared to the same period last year. This
brought the loss ratio down by 6.21% from 40.28% to 34.07%.
The loss ratio dropped by
6.21% from 40.28% to 34.07% Peer Comparison
in the same period.
Kenya Re has two peers; the PTA Reinsurance Corporation (ZEP Re) and
African Reinsurance Corporation (Africa Re).
In terms of size, Africa Re had the largest balance sheet with assets
totalling Kshs 38.10 billion as at the end of 2006, followed by Kenya Re
with total assets of Kshs 12.81 billion. ZEP Re is relatively small with
assets amounting to Kshs 3.05 billion.
Balance Sheet as at Dec 2006

Kshs (billion) Kenya Re Africa Re Zep Re
Total Liabilities 6.65 24.65 1.83
Shareholders Funds 6.16 13.45 1.22
Total Assets 12.81 38.10 3.05
Source: Audited Company accounts
How do the Kenya Re ratios compare to those of industry peers?
Kenya Re Africa Re Zep Re

2004 2005 2006 2004 2005 2006 2004 2005 2006
Insurance Ratios
Loss Ratio = Claims/N.P.(%) 44.60 43.74 54.54 63.84 70.32 64.12 52.8 53.54 57.87
Management Expense/N.P.(%) 11.26 13.75 16.23 4.71 3.99 5.30 9.46 9.58 9.70
Provision for impairment/N.P. (%) 11.74 9.55 6.59 1.43 1.51 2.11 N/A 2.67 3.70
Profitability Ratios
ROA (%) 5.46 7.21 4.80 2.07 3.76 4.53 6.91 4.89 5.63
ROE (%) 10.98 13.48 8.78 7.51 11.17 12.83 16.81 12.21 14.03
Liquidity Ratios
Current ratio 3.39 4.4 4.07 2.1 1.56 2.15 5.73 6.45 5.59
Quick ratio 2.29 2.96 3.23 2.1 1.56 1.78 5.73 6.45 5.54
Leverage Ratios
Debt to assets 5.66 5.43 5.10 14.98 13.55 11.12 6.76 11.10 13.96
Debt to equity 11.39 10.15 9.33 54.41 40.27 31.48 15.95 27.67 34.80
Loss ratio
The loss ratio of Kenya Re was lower than all its peers for the years in
comparison. In 2006, Kenya Re’s ratio was at 54.54%. ZEP Re’s ratio
was 57.87% and Africa Re’s 64.12% for the same year. Kenya Re’s loss
The loss ratio of Kenya Re was ratio worsened from 44.60% in 2004 and 43.74% in 2005 to 54.54% in
lower than all its peers for the 3 2006. However, in 2007 we expect the ratio to improve to 43.11% and
years analysed. slightly increase in 2008 to 45.20%. In 2006, Kenya Re earned Kshs
2.79 billion from net premiums, a growth of 32% from year 2005, but
the claims increased by 65% from year 2005 to Kshs 1,523 million. The
increase in 2006 can be attributable to large claims from the marine
sector, and the fire insurance sector.
Management Expenses
However, Kenya Re’s management expenses are much higher than that
of its peers. The management expense ratio was 16.23% (taking out
Kshs 150 million provisions) for Kenya Re in 2006 compared to 5.30%
Kenya Re’s management for Africa Re and 9.70% for Zep Re. Looking at these figures, it would
expenses are much higher to seem that Kenya Re needs to work at bringing down its management
that of its peers. costs to bring it more in line with the rest of the industry. The company
has already started to work on this. In the 1st half of 2007, the ratio has
reduced to 10.25%. We expect this to come back down to its historical
average and possibly trend downwards further as improved efficiencies
are achieved. We anticipate the ratio to drop to 9.92% in 2008.
The management has introduced a voluntory early retirement scheme for

staff members. There are about 30 staff members who currently fall into
the early retirement category. The management expects the scheme to
begin in 2008. The staff numbers will reduce if this strategy of the
management is successful and we should see reduced costs and
increased earnings in 2008.
KPMG is currently looking at the group’s systems, processes and

numbers. It will advice the company on improvements needed in the
system for increased efficiency. Increased efficiency will in turn reduce
the costs and increase the earnings which will trickle down to the share
holders.
Provision for impairment

The provision for impairment on balances due to cedants and reinsurers
The provision for impairment on
is the highest for Kenya Re over the years compared. However, they
balances due to cedants and
reinsurers is the highest for have been on a decreasing trend over the last 3 years analysed. This
Kenya Re over the years implies that Kenya Re does not have to provide as much as it used to a
compared. few years back. This is due to a reduced number of impairments. Africa
Re’s and Zep Re’s bad debt provision have been increasing but they are
still lower than Kenya Re. In 2006, Kenya Re’s ratio was 6.59% whereas
Africa Re’s was 2.11% and Zep Re’s was 3.70%.
Profitability
In terms of relative profitability, Kenya Re is higher than Africa Re but
lower than Zep Re in 2006. Kenya Re’s Return on assets was 4.80%
compared to Africa Re’s 4.53% and Zep Re’s 5.63%. The return on
assets and return on equity have been volatile just like the trend of the
net profits.
In terms of relative profitability,
Kenya Re is higher than Africa
Kenya Re’s returns are positive and although they were lower for 2006,
Re but lower than Zep Re in
2006. the company has been earning solid profits on average. In 2006, Kenya
Re earned a profit of approximately Kshs 540 million, excluding
provisions, after tax. However, we would like to see the company
improve its efficiency in producing returns from its equity and asset base
and would like to see both ratios improve from their 2006 levels.
Total assets of Kenya Re have been on an increasing trend. Over the last
year, assets increased by 9% to Kshs 11.26 billion in December 2006
from Kshs 10.38 billion in December 2005. Shareholders funds have also
been on the rise. They grew from Kshs 5.55 billion in 2005 to Kshs 6.15
billion in December 2006, an increase of 11%. Increases in these
categories helps bring down the return on assets and return on equity
ratios, unless net income is increased by a greater percentage.
Liquidity
Liquidity levels look good for Kenya Re, Africa Re and Zep Re. Kenya Re
Liquidity levels look good for and Zep Re in particular seem to be very well capitalized in terms of
Kenya Re, Africa Re and Zep Re. handling current cash needs due to their high current and quick ratios.
Kenya Re’s liquidity has been increasing over the last 3 years. Their
current ratio has been over 4 for the past couple of years, and the quick
Kenya Re’s liquidity has been ratio has been right around 3 or above for 2005 and 2006, suggesting
increasing over the last 3 years. they can meet their short term obligations very easily and are not at a
high risk of suffering insolvency.
Leverage
Kenya Re’s leverage ratios have been decreasing; illustrating that the
Kenya Re’s leverage ratios have
company is lowly geared and has a solid capital base from which to
been decreasing.
operate. Africa Re and Zep Re have higher debt ratios than Kenya Re.
New Capital Requirements

Africa Re and Zep Re have
higher debt ratios than Kenya
Re. Before the budget was released in 2007, the minimum capital required
for setting up a life insurance company was Kshs 50 million. The capital
required for setting up a general insurance company was Kshs 100
million. Hence, Kshs 150 million was required to start an insurance
company that does both life and general insurance. This capital
requirement was inadequate, leading to the collapse of several firms.
This has weakened the industry overall and helped contribute to a
negative image of the industry as a whole.
The 2007 Finance Bill raised the capital requirements to Kshs 150 million
and Kshs 300 million for life and general insurance respectively. Thus,
insurance companies will have to raise their capital to Kshs 450 million
within the next 2 years in order to cover both lines of business. This will
effectively lock out “briefcase outfits.” These small companies are prone
to undercutting premiums and taking imprudent risks. They are
With the new capital detrimental to the health of the industry.
requirements in place, Kenya Re
will be able to reinsure stronger
companies, leading to
The increased capital requirements should help improve the insurance
decreasing claims payments. industry, which should also create benefits for reinsurers.
The increased capital requirements will have direct impact on Kenya Re.
They should lead to stronger companies, more adequately capitalized,
and thus more able to survive. This should improve the insurance
industry overall, leaving Kenya Re to be able to reinsure stronger
companies, leading to decreasing claims payments.
Prospects
♦ The company’s main strategy is to reduce management expenses

and increase earnings. The management has introduced Voluntary
Early Retirement Scheme for staff members. There are about 30
The management has
staff members currently who fall into the early retirement category.
introduced Voluntary Early
Retirement Scheme for staff The management expects this to begin in 2008. The staff numbers
members. will reduce if this strategy is successful and we will see reduced
costs and increased earnings in 2008.
♦ KPMG is currently looking at the group’s systems, processes and

numbers. It will advice the company on improvements needed in
Kenya Re will experience the system for increased efficiency. Increased efficiency will in turn
improved efficiency and
reduce the costs and increase the earnings which will trickle down
increased earnings once it has
installed new systems. to the share holders.
♦ The compulsory ceding of 18% provides the corporation with a

guaranteed source of business until 2011 or full privatisation,
whichever takes place first.
The management team is ♦ Kenya Re is now lead by strong and competent management. We
focussing on improving the risk
expect that the management team will improve the risk
management systems and hold
down the growth in claims. management and hold down the growth in claims.
♦ Staff is constantly motivated to perform better due to performance

contracts.
♦ Kenya Re will be able to tap further into the life business due to the
growth in disposable incomes of regional residents.
♦ Kenya Re plans to aggressively continue to attract more business

from the West African Region.
♦ Powerful marketing should allow Kenya RE to increase market share

in existing markets.
♦ Kenya Re has about Kshs 700 million invested in Dollar and Sterling
Pounds. The company will gain on these investments if the Kenyan
Shilling depreciates.
Risks
♦ Investment in quoted shares has very high weighting in East

African Breweries alone, about 59%.
There is currently strong
competition from global players
like Swiss Re and Munich Re and
♦ There is currently strong competition from global players like Swiss
competition is increasing from Re and Munich Re and competition is increasing from newer
newer regional market regional market participants. It will also face competition from
participants. Tanzanian and Ugandan markets due to new reinsurance companies
developed there affecting their market share and in turn financial
results.
♦ Implosion of the real estate market could harm the Kenya Re

balance sheet.
♦ The Corporation is exposed to foreign currency exchange risk

arising from changes to the exchange rates of various currencies.
Mismatch of Assets and
Liabilities leads to interest rate ♦ Mismatch of Assets and Liabilities leads to interest rate risk. Kenya
risk. Re’s assets are mostly short term in nature, while its liabilities are
mostly long term. The value of their assets and liabilities will be
affected by the level of interest rates. Longer term liabilities will be
affected more than short term assets, due to their longer duration.
If rates rise, the value of their existing assets will decrease and the
value of liabilities will also decrease. The magnitude of the change
of the liabilities will be larger than that of the assets. As a result,
they will gain value due to this change. If rates fall, the reverse will
happen. The mismatch in the duration of assets and liabilities
means that adverse changes in interest rates can negatively impact
the company.
Technical analysis
Weighted Moving Average

Daily QKRIN.NR 27/08/2007 - 21/03/2008 (NBO)
Line, QKRIN.NR, Last Trade(Last) Price

12/03/2008, 15.10 KES
WMA, QKRIN.NR, Last Trade(Last), 30
12/03/2008, 15.46 17.6
KRE price movement
12/03/2008, 15.46 17.2
12/03/2008, 15.46 16.8
30 day w eighted moving average 16.4
16
15.6
15.2
14.8
14.4
60 day M/average
14
.12
27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 17 24 07 14 21 28 04 11 18 25 03 10 17
Sep 07 Oct 07 Nov 07 Dec 07 Jan 08 Feb 08 Mar 08
This indicator is used to identify price trends and trend reversals. If the
Moving Average is sloping down and prices are below the Moving Average
then prices are considered to be in a downtrend. When a short term
period Moving Average crosses above a long term period Moving
Average, an investor should BUY. When a long term period Moving
Average crosses above a short term period Moving Average, an investor
should exit. In this case, there have been two crossovers. In the mid
December 2007, the short term 30 day period moving average (MA)
crossed from below the long term moving average (60 days). This was a
SELL signal. In early Feb this year the short term MA crossed above the
long term period MA emanating a BUY signal. In the last few trading
sessions, the short term MA can be seen to be crossing above the long
term MA. In early march short term MA crossed the long term MA from
below indicating the SELL signal. However, currently it seems that the
short term MA is just about to go above the long term MA from below
which would then reflect a bullish signal.

Relative Strength Index (RSI)
RSI, QKRIN.NR, Last Trade(Last), 14, Wilder Smoothing V alue

25/02/2008, 49.228 KES
80
70
60
50
40
30
20
10
.123
19 26 03 10 17 24 07 14 21 28 04 11 18 25
November 2007 December 2007 January 2008 February 2008


The RSI is a price-following oscillator that ranges between 0 and 100. If
the RSI is above 70 then the market is considered to be overbought, and
an RSI value below 30 indicates that the market is oversold. From
September to December 2007, the RSI was fluctuating between 30 and
70. Then it went above 70 on 24th December 2007 indicating an
overbought condition which was a sell signal. The moving average also
confirmed this signal when the short term MA crossed the long term MA
from below. In early February this year RSI approached 30 indicating a
buy signal which was also confirmed by momentum. From late February
to date, the RSI has been fluctuating in between 30 and 70 indicating
good counter performance.

Momentum
Mom, QKRIN.NR, Last Trade(Last), 14 Value

12/03/2008, 0.00 KES
0.5
Momentum line is not far away
from zero. 0
-0.5
-1
-1.5
-2
-2.5
-3
.12
15 22 29 05 12 19 26 03 10 17 24 07 14 21 28 04 11 18 25 03 10
Oct 07 Nov 07 Dec 07 Jan 08 Feb 08
A Momentum analysis is an oscillator that measures the rate at which

prices are changing over an observation period (as defined in the
parameters). It measures whether prices are rising or falling at an
increasing or decreasing rate. The momentum calculation subtracts the
current price from the price a set number of periods ago. This positive or
negative difference is plotted above or below a zero line.
Momentum analysis indicates overbought and oversold conditions. An

overbought or oversold market is one where the prices have risen or
fallen too far and are therefore likely to retrace. If the Momentum line
moves to a very high value above the zero line, this is a sign of an
overbought market. If the momentum line moves to a very low value
below the zero line this is a sign of an oversold market. An overbought
condition was experienced on December 24th 2007; the volume of shares
traded on that day was 1.1M. The RSI also confirmed this signal.
Oversold was experienced on end of January this year thus a buy signal.
Currently, the momentum line is not too far away from zero, thus
indicating a hold signal.
Future outlook
1st Half
Kshs (Million) 2005 2006 2007 2007F 2008F
We estimate the net profits to Gross Premiums 2,613 3,035 1,619 3,189 3,546
increase to Kshs 807 million in
2007 and to Kshs 953 million in Claims 924 1,523 551 1,237 1,454
2008, a solid growth of 18% Underwriting surplus 488 462 524 791 840
from 2007 earnings. Investment income 491 753 252 536 595
Profits after tax 748 3904 435 807 936
Earnings Per share 0.72 1.34 1.54
The group is expected to achieve a gross premium income of Kshs 3,189

million in 2007 and Kshs 3,546 million in 2008 as compared to Kshs
3,035 for year 2006. This is a growth of 5% and 11% from premiums
earned in 2006 and 2007 respectively. The growth is expected to be
driven by increasing market share through increased acceptances in
existing markets. Increasing international market share is of particular
importance as it will help to dampen any potential negative effects of the
removal of mandatory cessions in the future.
Underwriting profits are expected to increase by 71% in 2007 and 6% in

2008 due to improved risk management. Investment income should be
able to improve as the company divests some of its real estate holdings
and invests in higher yielding assets. We would also like to see the
company diversify its equity portfolio as this could also unlock potentially
higher returns, which would improve the firm’s bottom line.
We recommend Kenya Re as a buy as we feel that the group has

sustainable growth prospects for the next 5 years. With improved risk
We feel that the group has management, increased marketing, control on management expenses,
sustainable growth prospects increased efficiency through new systems, we estimate the net profits to
for the next 5 years.
increase to Kshs 807 million in 2007 and to Kshs 936 million in 2008, a
growth of 16% from 2007 earnings. We believe that the company will
have good growth in underwriting income as well as investment income
with lower loss ratios and continued growth in the economy once the
political uncertainty in the country is resolved. We estimate a price target
of Kshs 23 for Kenya Re and thus recommend a strong buy.
Recommendation: BUY
4
Includes provision of Kshs 150 million.

Kenya Re Report

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Research Report 2008

Cyclical & volatile business

 Kenya Re is on target to make approximately Kshs 807 million, excluding one-

Insurance is a cyclical and volatile business. The management has to

The increase in manufacturing Kshs (Million) 2005 2006 Sep-07

Insurance clients can be divided into corporate and retail categories.

We anticipate that the company will have a growth of about 5% in gross

However, Kenya Re has not lost focus on its business in English-speaking

In the coming years, Kenya Re has a target to develop their market

Kenya Re has realized a considerable growth in its gross premiums

Local International Total

Kenya Re also gives mortgages to people who are interested in

Equities form about 28.53% of total investments, as of September 2007

The corporation also invests in short-term deposits and government

Loss Ratio 40.28% 34.07% -6.21%

Balance Sheet as at Dec 2006

How do the Kenya Re ratios compare to those of industry peers?

Kenya Re Africa Re Zep Re

The management has introduced a voluntory early retirement scheme for

KPMG is currently looking at the group’s systems, processes and

Provision for impairment

New Capital Requirements

♦ The company’s main strategy is to reduce management expenses

♦ KPMG is currently looking at the group’s systems, processes and

♦ The compulsory ceding of 18% provides the corporation with a

♦ Staff is constantly motivated to perform better due to performance

♦ Kenya Re plans to aggressively continue to attract more business

♦ Powerful marketing should allow Kenya RE to increase market share

♦ Investment in quoted shares has very high weighting in East

♦ Implosion of the real estate market could harm the Kenya Re

♦ The Corporation is exposed to foreign currency exchange risk

Weighted Moving Average

Line, QKRIN.NR, Last Trade(Last) Price

30 day w eighted moving average 16.4

RSI, QKRIN.NR, Last Trade(Last), 14, Wilder Smoothing V alue

Mom, QKRIN.NR, Last Trade(Last), 14 Value

A Momentum analysis is an oscillator that measures the rate at which

Momentum analysis indicates overbought and oversold conditions. An

The group is expected to achieve a gross premium income of Kshs 3,189

Underwriting profits are expected to increase by 71% in 2007 and 6% in

We recommend Kenya Re as a buy as we feel that the group has

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Kenya Re is on target to make approximately Kshs 807 million, excluding one-