Featured

Nairobist Research Report: Pan Africa Insurance Holdings Limited

Pan Africa Insurance Company through its subsidiary Pan Africa Life Assurance Limited provides the underwriting of all classes of long-term insurance business with the exception of industrial life insurance. The Group has interests in a wholly owned investment company PA Securities Limited, and an associate general insurance company, APA Insurance Limited. The company was incorporated in 1946 and is domiciled in Kenya. Pan Africa is headquartered in Nairobi, Kenya.

RELATED FINANCIAL STATEMENTS
HY2008 FINANCIAL RESULTS | 2004-2007 BALANCE SHEETS | 2004-2007 INCOME STATEMENTS
2004-2007 KEY FINANCIAL STATISTICS | 2004-2007 GROUP CASH FLOW STATEMENTS

REPORT CONTENTS:
Business Overview | Subsidiaries and Associate companies | Ownership | Products & ServicesCompany Background | Insurance Industry overview | How Life Insurance Business Operates

Financial Analysis | Share Activity | Embedded Value | Competitive Analysis | Strategy & Future Outlook

BUSINESS OVERVIEW
Pan Africa Insurance Company through its subsidiary Pan Africa Life Assurance Limited provides the underwriting of all classes of long-term insurance business with the exception of industrial life insurance. The Group has interests in a wholly owned investment company PA Securities Limited, and an associate general insurance company, APA Insurance Limited. The company was incorporated in 1946 and is domiciled in Kenya. Pan Africa is headquartered in Nairobi, Kenya.SUBSIDIARIES & ASSOCIATE COMPANIES
Pan Africa General Insurance limited merged with Apollo Insurance Company Limited merged in 2003 to form APA Insurance Company Limited. Pan Africa Insurance Holdings Limited was restructured in 2004 after the merger to form two wholly owned subsidiaries. These subsidiaries are Pan Africa Life Assurance Limited dealing with life business and PA Securities.APA Insurance
APA Insurance Ltd was incorporated in 2003, and commenced operations on 1st January 2004. The company was born from the merger of the general businesses of Apollo Insurance Company Ltd and Pan Africa Insurance Company Ltd. The company underwrites Health, Marine, Aviation and other General Insurance risks. APA has offices in Nairobi, Mombasa, Nakuru, Kisumu, Nyeri and Eldoret and employs 120 well trained professionals to service its clients.Pan African Securities Limited
Pan Africa Securities owns a 40% stake in APA Insurance, a 100% stake in Mae Properties and a 25% stake in Runda WaterMae Properties Limited
A wholly owned subsidiary of Pan Africa Securities, Mae is primarily engaged in the business of developing, selling and dealing in immovable property, particularly, its extensive holdings in Runda Estate Nairobi. In addition, Mae has an interest in each of Runda Water Limited and Chem Chemi Limited.Runda Water Limited
Runda Water is primarily engaged in the business of supplying and selling water to the residents of Runda Estate. Mae has recently sold a proportion of its shareholding in the company and has retained 24.9% shareholding to reflect its immovable property holdings in Runda estate.

OWNERSHIP
Pan Africa is primarily owned by local institutions. 72% of the company is owned by local institutions, 24% by local individual investors and the rest by foreign investors. The company has a total of 2890 shareholders and the ten largest shareholders own approximately 81% of the outstanding stock. Hubris Holdings Limited is the largest single shareholder and owns 50% of the company followed by Baloobhai Patel with 18% equity stake in Pan Africa Insurance. The Chairman of the Board is John P.N. Simba (Owns 10,000 of outstanding stock) and the CEO is Tom Gitogo.

MARKET & PRODUCTS
Pan Africa’s product and services are broken down into two segments; corporate and individual.

• Corporate Products include; FlexiPension, Group Last Expense, Group Life Assurance, Group mortgages, FlexiAnnuity and Group Credit Assurance.
• Individual Products Include: Family Finance Plan, Kinga Halisi, FlexiSaver and FlexiEducator

COMPANY BACKGROUNDER
Pan Africa Insurance Company Limited was incorporated in 1946 in Mombasa as Indo - Africa Insurance Co Ltd. The name was changed in 1963, a year before listing on the Nairobi Stock Exchange (NSE), to Pan Africa Insurance Company Limited to reflect the broadened ownership. It was the first insurance company to be listed on the Nairobi Stock Exchange in 1964 and moved its head office in 1982 to Pan Africa House on Kenyatta Avenue in Nairobi. The Company which had earlier closed its operation in Tanzania and Uganda due to political reasons, re -entered the region through acquiring an equity in Reliance Insurance Company (T) Limited in Dar-es-salaam in 1998 and later on entered into Uganda.

Pan Africa Insurance underwrote all general insurances and made a steady growth over the years to attain a gross premium income in 2007 of Ksh.2.07 billion. By way of a rights issue in year 2000 African Life Assurance (currently Sanlam) of South Africa became a strategic partner. Pan Africa General Insurance limited and Apollo Insurance Company Limited merged in 2003 to form APA Insurance Company Limited.

Pan Africa Insurance Holdings Limited was restructured in 2004 after the merger to form two wholly owned subsidiaries, Pan Africa Life Assurance Ltd dealing with life business and Pan Africa General Insurance Limited dealing with general insurance business. Just before the merger with Apollo, Pan Africa General Insurance Company was a separate entity alongside Pan Africa Life Co Ltd under Pan Africa Insurance Holdings Ltd.

To date there are only three quoted insurance companies; Kenya Re (for reinsurance), Pan Africa and Jubilee insurance

INSURANCE INDUSTRY OVERVIEW
The insurance industry in Kenya has 43 licensed insurance companies in Kenya. 21 of these exclusively write general insurance business, 7 write long term insurance business only, while 15 write composite insurance business.In 2006, most insurance companies reported increased premium income and profitability. The industry recorded gross premium income of KShs.41.68 billion compared to KShs.36.40 billion in year 2005, representing a growth rate of 14.5%.Association of Kenya Insurers (AKI) attributed the good performance to the overall economic growth of 6.1% in the country. Over the same period, the total assets held by the industry increased by 20.6% to KShs. 110.065 billion while the total liabilities incurred increased by 12.2% to KShs. 82.668 billion. The net assets increased by 43.8% to KShs. 27.397 billion. The claims and total expenses increased by 22.7% and 33.98% to KShs. 21.20 billion and KShs. 14.77 billion.Life insurance companies are required to raise their core capital from Sh50 million to Sh150 million, general insurance from Sh100 million to Sh300 million, and composite insurance companies from Sh150 million to Sh450 million by 2010.Life insurance underwriting equals 0.18% of Kenya’s gross domestic product (GDP) compared to 15.7% for South Africa. Overall, insurance penetration in Kenya is at 3.09%.

Insurance firms typically make money by investing the difference between the premiums they receive from clients and claims paid out when risks occur. This is known as float in the business. The larger the float, the higher the investment income and the lower the expenses of running the business and commissions paid, the fatter the profits. At the end of 2006, Kenyan insurance had invested Sh25 billion, which represents seven per cent of their total assets in quoted shares.For the last five years in Kenya, insurance firms have been relying heaving on investments in both listed and unlisted equities. Underwriting income has continued to be depressed due to rising claims and pricing pressures from growing competition. The dependence on income from capital gains from share prices increases and dividend payments as ensured continued to rise in profits for insurance firms in Kenya. But all this is a very risky venture due to the uncertainty associated with stocks, especially in listed firms. The heavy leaning towards investment income and the decline in underwriting income across the industry has been largely attributed to price undercutting and an increase in claims especially in the motor insurance business.Between 2002 and 2006, the NSE 20 Index more than tripled, translating into huge investment incomes for the growing number of insurers who had turned to the stock market to invest their float, the excess cash generated from premiums after claims have been settled. The industry’s average growth stands at between 30% and 40%. At the end of 2006, the industry had invested over Ksh.25 billion on the stock exchange up from Ksh.15.8 billion in 2005.HOW LIFE INSURANCE BUSINESS OPERATES
A life insurance company attempts to manage mortality rates among its clients. The insurance company collects premiums from policy holders, invests the money (usually in low risk investments), and then reimburses this money once the person passes away or the policy matures.Profit is made if the policyholder doesn’t die, for example, and just contributes premiums over many years. Losses are possible for policies where the insured dies soon after signing the contract. Profitability is also affected by whether (and when) a policy might terminate early. Higher premium collections do not equate to higher profits. Lower numbers of claims (via low risk clients) contribute more to the bottom line.For an insurance company, there are two components of profits: premium/underwriting income and investment income. Underwriting income is just that any revenue derived from issuing insurance policies. Investments are made in low-risk bonds, equities or money market securities. Some insurers invest a substantial portion of their assets in real estate e.g. NSSFFINANCIAL ANALYSIS - 2005 - 2007
Pan Africa Insurance Holdings recorded mixed results in its Net Profits between the 2005-2007 financial years. The firm recorded an impressive 155% growth in Net Profit from Ksh.176 million to Ksh.450 million in the year 2005-2006 financial years. This was attributable to the buoyant equity market, which is the company’s earnings. In 2006-2007 financial year, Pan Africa recorded a decline of 55% in Net Profit from Ksh.450 million to Ksh.201 million due to increased costs of expanding into new business.The company’s gross Insurance Premium grew by 20% from ksh.1.1 Billion to Ksh.1.3 Billion in 2005-2006 financial years. This was higher than the industry average of 14.5%. In 2006-2007 financial year, it recorded a 48% growth in gross insurance premium from Ksh.1.3 Billion to ksh.2 Billion. The company acquired 24 corporate schemes during the year.Total income grew by 28% from Ksh.1.4 Billion to 1.8 Billion in 2005-2006 financial years while in 2006-2007 financial years total income grew by 38% from Ksh.1.8 Billion to Ksh.2.4 Billion.  Total operating expenses grew by 16% from Ksh.1.4 Billion to Ksh.1.6 Billion in 2005-2006 financial years while in 2006-2007 financial years total operating expenses grew by 33% from ksh.1.6 Billion to Ksh.2.2 Billion.Total Assets increased by 28.6% from Ksh.3.7 Billion to Ksh.4.8 Billion in 2005-2006 financial years and a 24% growth from Ksh.4.8 Billion to Ksh.5.9 Billion in 2006-2007. Total liabilities increased by 24% from Ksh.2.8 Billion to Ksh.3.4 Billion in 2005- 2006 financial years and 30% growth from Ksh.3.4 Billion to Ksh.4.5 Billion in 2006-2007. Net Assets grew by a whopping 42.5% from Ksh.0.9 Billion to Ksh.1.3 Billion in 2005-2006 financial years and a dismal 8% growth from 1.3 Billion to 1.4 Billion the following fiscal year.SHARE ACTIVITY
Due to the relatively uncertain nature of profitability in the insurance industry the performance of Performance of Pan Africa share on the NSE has been quite dormant and unpredictable. Similarly the company’s earning per share (EPS) has been very random. The EPS changed moved from Ksh.1.68 in 2006 to Ksh.9.38 in 2006 and down to Ksh.4.19 in 2007. Dividends are equally not forthcoming for Pan Africa shareholders as the firm seeks to reinvest. The share price recorded a 35% drop in value from 100 to 74 in the past one year.EMBEDDED VALUE
It is calculated by adding the adjusted net asset value and the present value of future profits of a firm. The present value of future profits considers the potential profits that shareholders will receive in the future, while adjusted net asset value considers the funds belonging to shareholders that have been accumulated in the past.EV=PVFP+ANAV
PVFP= Present Value of Future Profits
ANAV= Adjusted Net Asset Value

European Embedded Value (EEV) standardizes the calculation of embedded value. The discounting factor is the risk free rate plus an explicit allowance for operational risk and market riskEmbedded value went up 16% and now exceeds 2.9 Billion.

COMPETITIVE ANALYSIS
MAJOR COMPETITORS
Their many competitors in the Kenyan insurance industry but the major competitors to Pan Africa Insurance are Blue Shield, Jubilee Insurance, UAP Insurance, AIG and Kenindia Assurance Company.

Peer Comparison at a Glance

PAN AFRICA - STRATEGY & FUTURE OUTLOOK
With the stagnating economic growth prospects of the Kenyan economy after the 2007 violent general elections, coupled by increased inflation and oil prices in the international markets, the business environment in Kenya has been adversely affected. Pan Africa plans to continue pursuing further growth in its individual and corporate business lines. The insurance company is optimistic that their current operating performance will be sustained in the fore seeable future.  The investment performance of the other activities in the group, notably associate company APA Insurance, which in the past has been affected largely by the movement of the stock market is expected to be low in 2008 but pick up as from 2009 and beyond as the stock market recovers.

One of the key challenges facing the company is ensuring that the 24 major corporate schemes acquired in 2007 yield positive returns in the coming years. The acquisitions led to a decline, by more than a half of its net profit to Ksh.201 million in the financial year ended December 2007.

Pan Africa’s performance will continue to be affected by historical issues arising from the general insurance business it previously undertook through Pan Africa General Insurance Limited. Proper provisions have to be made for potential claims and other liabilities arising from this business to ensure the insurer is cushioned from further losses accruing.

Related Links:

• No Related Links