Feature of the week:
Kenya Re Posts a 25.8% Decline in After Tax Profits for FY2020
- Kenya Re reported a 25.8% y/y decline in after tax profits(PAT) for FY2020 to KES 2.9 billion (FY2019: KES 4.0 billion).
- The decline in profitability was primarily due to an increase in net claims, a rise in cedant acquisition costs and higher taxation.
- Net earned premiums edged up by 34.3% y/y to KES 20.9 billion comprising of KES 19.1 billion in short term business and KES 1.8 billion in long-term business. The growth in net earned premiums was primarily supported by a positive inflow from the change in unearned premiums to KES 3.0 billion from an outflow of KES 913.3 million in FY2019; Gross premiums written rose by 5.8% y/y to KES 18.5 billion.
- Investment income grew by 2.1% y/y to KES 3.8 billion.
- Commissions recovered fell by 6.3% y/y to KES 51.3 million.
- Fair value loss on revaluation of investment properties stood at KES 36.4 million from a gain of KES 2.2 bn realized in FY2019.
- Other income rose marginally by 0.7% y/y to KES 53.4 million
- Share of associate profits dropped by 50.1% y/y to KES 292.8 million.
- Total income grew by 13.0% y/y to KES 25.0 billion
- Net claims and benefits rose by 22.2% y/y to KES 13.5 billion comprising of KES 12.2 billion in short term business and KES 1.3 billion in long-term business. The growth was mainly driven by a 21.7% y/y increase in gross claims incurred and policy holder benefits to KES 13.9 billion. The loss ratio improved to 64.8% from 71.2% in FY2019 owing to the faster growth in net premiums (+34.3% y/y to KES 20.9 billion) than the net claims and benefits.
- Cedant acquisition costs edged up by 29.8% y/y to KES 5.3 billion
- Operating and other expenses eased by 3.8% y/y to KES 2.0 billion. Consequently, the expense ratio fell to 9.4% (FY2019: 13.2%).
- Provision for doubtful debts eased by 69.4% y/y to KES 227.8 million even as reinsurance receivables edged up by 26.9% y/y to KES 3.3 billion.
- Total claims, benefits and other expenses grew by 17.2% y/y to KES 21.0 billion. The combined ratio fell to 100.8% from 115.5% in FY2019.
- Tax expense increased by a massive 396.0% to KES 1.0 billion. This was the biggest driver of the decline in PAT.
- The company recommended the payment of a KES 0.20 dividend (FY2019: KES 0.10).
- The growth in gross written premiums and improvement in underwriting ratios is commendable given the harsh operating environment. It’s not clear to us whether the improvement in underwriting ratios was due to the environment in the previous year or deliberate actions by management or a combination of the two.
- We opine that the big drop in profit after tax was a blip since it was driven by a higher tax expense. We could see better performance in the coming years.
- The recommendation is under review.
Equities Market Summary:
Nairobi Securities Exchange Performance
The All Share Index (NASI) eased by 1.6% w/w while the NSE 20 Share Index rose by 2.5% w/w to close the week at 169.87 and 1,908.82 respectively. The market was characterized by a decrease in both market turnover (53.6% to KES 2.3 billion) and volume of shares traded (42.4% to 77.1 million shares).
We attribute the decline in the all share index partly to Safaricom which eased by 3.2% w/w to KES 40.50. Majority of the constitute counters in the NSE 20 share index recorded price gains which may explain the rise in the index (note that the NSE 20 share index is price weighted by the NASI is market cap weighted).
Kenya Re registered an 8.2% w/w price gain to KES 2.50 even as the company reported a 25.8% y/y dip in profitability to KES 2.9 billion.
There were price increases on majority of the banking counters with notable price gains on Absa (2.7% w/w to KES 9.78), NCBA (2.6% w/w to KES 26.10) and I&M (2.1% w/w to KES 22.00).
NMG edged up by 31.0% w/w to KES 22.60 following the announcement that the company is willing to buy back shares (about 20.7 million shares) at a maximum price of KES 25.0 per share. We expect more gains in the counter in the coming week. Overall, we expect price stability.
EABL – Long-term buy