Kenya Insurance Sector. Initiation of Coverage (30 January 2013)

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1 Kenya Insurance Sector Initiation of Coverage (30 January 2013)

2 A New Horizon GDP Per Capita (KES Market prices)-lhs GDP per capita growth(%)-rhs Inflation (%)-RHS Mobile money amount transacted(kes M) -LHS Mobile money Subscribers(000) -RHS Private household credit(kes M)-LHS as a % of GDP at market prices -RHS 100,000 80,000 60,000 40,000 20, % 15% 10% 5% 0% 1,400,000 1,200,000 1,000, , , , , ,000 20,000 15,000 10,000 5, , , , , ,000 80,000 60,000 40,000 20, % 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Kenya Population (millions)-lhs % of middle income class-rhs 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% ,000 40,000 30,000 20,000 10,000 - Genral insurance net earned premium(kes M)-LHS General insurance loss ratio (%)-RHS General insurance underwriting profit margins (%)-RHS % 60.0% 40.0% 20.0% 0.0%

3 Summary We initiate coverage on Kenya s Insurance Sector with a BUY recommendation. Based on our 3 years-out earnings forecasts, at current market capitalization there is 35% upside. 2012, Insurance stocks performed well, climbing 21% on average (FY12 s sector performance has primarily been driven by improvement in returns from equity and bond investments and continued growth in premiums 24% avg. 1H12 y/y growth). Against FY12 forecasts, the sector currently trades at PE & PB of 6.02x and 1.02x against FY11 s average of 5.81x and 1.29x). In our universe of 5 listed insurance players, only CIC insurance carries a SELL rating (Hold, 18% downside, FY11 PB of 2.08x 51% premium to sector). Industry structure. The Insurance industry in Kenya has 45 players in total, 22 in general/short-term insurance, 9 in life insurance and 14 composite companies. The short-term insurance space is fragmented with the top 5 companies controlling 40% of the market (single largest market share of 10.98% held by Jubilee Insurance; FY11 listed firms accounted for 27.8% of industry premiums). However, the life market is concentrated as the top 5 companies account for 70% of premiums (FY11: listed firms accounted for 69.4% of industry premium). Industry performance. The industry has witnessed rapid growth over the last decade with CAGR in total written premiums at 15.1%. Though the impressive growth in written premiums has mirrored increased incomes and change in perception towards need for insurance, penetration has remained low (currently at 3.03% vs. 11.6% in South Africa). Key challenge for the industry has been negative market sentiment following closure of at least 5 insurance providers over the past 5 years due to insolvency arising from high claims (avg. 61%). Underwriting profits (sector avg. 3% over the past 4 years) have however remained low due to weak pricing and increased fraudulent claims. The largest business class under shortterm is motor commercial accounting for 25.7% of total premiums, followed by motor private at 19.1%. Within life insurance, deposit administration and pension accounts for 34.6% of premiums followed by ordinary life accounting for 34% of premiums. Motor commercial class also ranks first with respect to underwriting profits (58% of industry short-term underwriting profits in 2011). In the past 3 years ( ) motor private class has registered the highest CAGR of 16.6% in gross written premiums. So why are we excited about the insurance industry. For starters, number of listed insurance firms have increased from 3 in 2010 to the current 6 accounting for 4% of total market capitalization (however, avg. sector free-float remains low; sector represented 2% of total NSE turnover in FY12). Secondly, we expect premium growth to remain strong driven by increased product & distribution innovations within the sector (we believe the insurance sector is next in line to benefit from increased financial services penetration, ignited by aggressive low-income/micro-enterprises banking initiatives and explosion of mobile money transfer as we highlight later in this report, limited distribution network has been a key

4 hindrance to increased insurance penetration). Thirdly, the industry has witnessed improved regulation, setting minimum premiums chargeable for certain classes of business thereby reducing undercutting and unfair competition. In addition, the regulator (Insurance Regulatory Authority) has increased minimum capital requirements thereby improving capitalization and strengthening solvency. Lastly and most important of all, managerial capacity and use of risk based models in pricing premiums has been greatly enhanced over the past decade (positive legislation in this regard has been the capping of single individual ownership of insurance underwriters at 25%).

5 Industry Snapshot Industry Premiums F 2013F 2014F 2015F GDP at market prices (KES bn) 2,111 2,365 2,551 3,025 3,327 3,660 4,026 4,429 Growth % 15% 12% 8% 19% 10% 10% 10% 10% Penetration rate short term % 1.75% 1.82% 2.05% 2.01% 2.21% 2.41% 2.61% 2.81% Penetration rate long term % 0.87% 0.90% 1.05% 1.02% 1.07% 1.12% 1.17% 1.22% Industry short term premium Growth % 12% 17% 21% 16% 21% 20% 19% 18% Industry life insurance premium Growth % 21% 17% 25% 16% 15% 15% 15% 15% Source: AKI Insurance report, SIB estimates Gross earned Premium Growth Market Share* (KES M) FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F Britam 4,333 5,608 6,916 15% 29% 23% 5.5% 6.1% 6.3% CIC 3,908 6,116 7,640 42% 57% 25% 4.9% 6.7% 7.0% CFCI 4,819 6,389 7, % 33% 13% 6.1% 7.0% 6.6% Pan Africa 3,831 3,648 5,280 27% -5% 45% 14.3% 11.8% 14.8% Kenya Re¹ 4,554 6,101 7,506 23% 34% 23% 22% 22% 22% Market share Market share life(%) General(%) Listed firms Non-Listed firms *Market share based on gross earned premiums ¹Kenya-Re s market share based on company GWP versus industry re-insurance premium

6 Industry Snapshot-1H12 Life Business June-12 June-11 % change Net Premiums(KES m) 17,314 13, % Benefits Paid(KES m) 7,885 7, % Commissions(KES m) 1,392 1, % Management Expenses(KES m) 2,923 2, % Total Investments(KES m) 130, , % Retention ratio(%) Commission ratio(%) Mgt exp ratio(%) Source; IRA 1H12 Report General Business June-12 June-11 % change Net Premiums(KES m) 24,443 20, % Claims incurred(kes m) 14,361 12, % Commissions(KES m) 2,208 1, % Management Expenses(KES m) 6,238 5, % Total Investments(KES m) 60,397 54, % Retention ratio(%) claims ratio(%) Commission ratio(%) Mgt exp ratio(%) Combined Ratio(%)

7 Industry Snapshot- Key operating statistics Underwriting Exp. Acquisition Exp. Combined ratio Underwriting Margin FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F Britam 31% 32% 30% 26% 24% 23% 114% 91% 98% -14% 9% 2% CIC 29% 28% 30% 9% 10% 9% 91% 90% 97% 9% 10% 3% CFCI 45% 50% 48% 18% 19% 20% 114% 117% 119% -14% -17% -19% Pan Africa 17% 22% 16% 32% 19% 27% 72% 74% 76% 28% 26% 24% Kenya Re 36% 25% 18% 30% 30% 30% 111% 104% 97% -11% -4% 3% Average 32% 31% 29% 23% 21% 22% 100% 95% 97% 0% 5% 3% Ratio s include both long term and short term business; slight error in underwriting margin caused by; lack of separation in, claims payable & other policy benefits payable, under life business and inclusion of administrative expenses attributable to non-insurance subsidiaries Growth Gross earned premium Claims OPEX Total Assets FY10 FY11 FY12F FY13F FY10 FY11 FY12F FY13F FY10 FY11 FY12F FY13F FY10 FY11 FY12F FY13F Britam 15% 29% 23% 21% 93% -42% 98% 14% 5% 30% 19% 15% 55% 1% 20% 13% CIC 42% 57% 25% 21% 35% 57% 30% 16% 39% 55% 29% 19% 83% 48% 24% 19% CFCI 156% 33% 13% 31% 84% -9% 16% 34% 79% 33% 8% 12% 93% 2% 11% 12% Pan Africa 27% -5% 45% 16% 33% -37% 96% -9% 44% -5% 18% 15% 41% 8% 24% 18% Kenya Re 23% 34% 23% 20% 18% 44% 29% 23% 62% 12% 8% 13% 15% 11% 19% 15% Average 52% 30% 26% 22% 53% 3% 54% 16% 46% 25% 16% 15% 57% 14% 20% 15%

8 Industry snapshot- solvency guidelines The paid-up capital of an insurer shall at all times, be not less than 10% of the total gross premium written by an insurer in respect of short-term insurance business during the financial year in question: Provided that if at any time the insurer does not meet the minimum ratio of paid-up capital to the total gross premium, the insurer shall, within six months after the end of the financial year to which it relates, increase the paid-up capital to restore the prescribed minimum ratio. An insurer carrying on in Kenya long-term insurance business but not short-term insurance business shall keep at all times admitted assets of not less than the aggregate value of his admitted liabilities and KES 10.0m (up to 2007 it was KES 1m), or 5% of total admitted liabilities, whichever is the greater. An insurer carrying on in Kenya short-term insurance business but not long-term insurance business shall keep at all times admitted assets of not less than the aggregate value of his admitted liabilities and KES 10.0m, or 15% of his net premium income during his last preceding financial year, whichever is the greater. An insurer carrying on both long-term and short-term insurance business shall at all times maintain separate margins of solvency for the respective units. The table acts as a guide to industry solvency Shareholders equity/net earned premium FY09 FY10 FY11 FY12F FY13F FY14F Britam 153% 274% 165% 183% 171% 168% CIC 40% 74% 80% 71% 69% 65% CFCI 37% 124% 91% 121% 112% 114% Pan Africa 47% 52% 64% 58% 66% 75% Kenya Re 263% 247% 201% 200% 194% 208% Industry Average 79% 95% 80%

9 Industry snapshot-risk Net Maximum Insured Loss (KES m) FY08 FY09 FY10 FY11 Britam 112, , , ,545 CFCI 66, , , ,996 Pan Africa 114, , , ,437 CIC Insurance and Kenya Re do not disclose maximum insured loss

10 Valuation & recommendation Bloomberg code Mkt.cap (USD m) Share price (KES) Fair value (KES) Upside Recommendation Britam BRIT KN % Buy CIC CIC KN % Sell CFCI CFCI KN % Buy Pan Africa PAIL KN % Buy Kenya Re KNRE KN % Buy

11 Valuation methodology Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY12, FY13, FY14 & FY15 then we use a subjective 3 year forward PB, to derive the terminal values. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x) In our view, given positive medium-term outlook on sector premium & earnings growth, scalable gearing levels (33% avg. equity/assets) and improving ROaE (4 year avg. 9%; forecast avg. 20%), we assume a sustainable 3 year exit PB of 1.3x for Kenya s Insurance sector. Using 1.3x PB as the base case, we apply a discount or premium for individual insurance firms guided by our performance expectations. 3 year exit P/B Premium/ (Discount) Britam % CIC % CFCI % Pan Africa % Kenya Re % Why PB and not Embedded value: Apart from Pan Africa, all other companies in our coverage are composite operations with sizeable short-term underwriting business. Embedded value test: Using Pan Africa s reported annual embedded value and stock price (over a 5 year period) we set out to test the relationship between the two (to what extent does embedded value guide stock pricing). We computed the correlation coefficient between the annual embedded value per share versus the average annual share price. From the exercise we arrived at a correlation coefficient of 0.13 low relationship between the two measures we therefore observe the market considers other factors apart from embedded value when pricing stocks. Out of the 5 companies under coverage only Pan Africa publishes its embedded value.

12 Valuation multiples PE (x) PB (x) Div. yield % ROaA % ROaE % FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F Britam % 2.4% 3.3% 13.0% -7.7% 8.4% 34.4% -20.5% 23.4% CIC % 2.2% 1.6% 8.4% 6.3% 5.2% 27% 17% 14% CFCI % 0% 2% 1.4% 4.0% 2.2% 10.4% 23.0% 12.2% Pan Africa % 7.4% 7.5% 3.4% 4.8% 9.6% 37.3% 22.4% 38.9% Kenya Re % 3% 4% 9% 10% 10% 15% 17% 15% Average % 3% 4% 7% 3% 7% 25% 12% 21%

13 Valuation Forecast EPS DPS NAV FY10 FY11 FY12F FY10 FY11 FY12F FY10 FY11 FY12F Britam 1.43 (1.09) CIC CFCI Pan Africa Kenya Re

14 KEY THEMES

15 Key Changes in legislation Increase in Capital requirements: In order to strengthen sector solvency, the insurance regulatory Authority increased the minimum required paid up capital to KES 300m (from KES 100m) for short term insurance underwriters, KES 150m (from KES 50m) for long term underwriters and KES 450m for composite insurance companies. (The capital requirements were introduced in 2007 effective June 2010) Changes in ownership requirements: The Finance Act, 2009 amended Section 23 of the Insurance Act to restrict the ownership and management of an insurer to 25% and 20% respectively (an individual owning more than 20% is barred from participating as an executive). The persons exempt from this provision include the Government of Kenya, listed companies, both Corporate and Foreign Corporate entities licensed by an insurance, banking, pensions or securities regulator in Kenya as well as State Corporations. Cash and carry: The Insurance Regulatory Authority requires brokers to remit premiums that they receive from policy holders the same day cash is received (previously there was not set timeline). In addition to positive impact on cash flows for underwriters, the rule allows for accurate estimation of risk and therefore more objective loss provisioning. Minimum chargeable premiums for motor vehicle insurance: Necessitated by persistent underperformance from the second largest insurance segment (19.1% of total gross written premiums in FY11), effective January 2010, IRA issued new guidelines for the motor private segment. Under the new rules, premium rates under motor private segment were revised upwards from the previous blanket-flat rate of 4% of the value of the car to 7.5%, discounting by 10% for each year of no claim to a minimum of 4.5%. The rate increase was instrumental to the 21% y/y increase in gross written premiums under general insurance class in Third party liability capped at KES 3m: The Finance Act 2009 required insurers to pay amounts over and above the statutory limit of KES 3.0m for judgments in respect of third party liability claims and recover such amounts from the policy holders. In 2009 an amendment was passed capping the amounts payable for third party claims at KES 3.0m (the new rule has had a significant impact of cushioning underwriters from fraudulent claims especially within the public sector vehicles category).

16 Key Changes in legislation Margin of solvency Investments of life assurance business or a general insurance business in a company or a group of companies which is a bank or a financial institution shall not exceed 10%. Taxation of actuarial surplus for life business. The income tax Act was amended to tax the actuarial surplus for life insurance business, recommended to be transferred for the benefit of shareholders. Settlement of claims A penalty of 5% of the outstanding amount shall be chargeable to the underwriter for any amount that remains unpaid 90 days after the reporting of a claim.

17 Other key developments Review limitation on transfer of surplus for long-term business The insurance Act restricts annual transfer of surplus from the long term fund to 30% and subjects such transfers to tax. The Association of Kenya Insurers (AKI) is lobbying for the limit to be increased so as to enhance attractiveness of Life assurance business as an investment. Introduction of integrated motor insurance data system AKI is in the process of implementing a system to centralise motor data to facilitate the detection of fraudulent claims and assist in the management of underwriting process. The system will capture and share information on reported/discovered claims and the various settlement status, as well as capture information on any declined business - declined risk or cancelled policies. In supporting industry growth, the system will have a database of uninsured motor vehicles.

18 Key challenges in the Industry Over capacity and price wars: The insurance industry is fragmented with 47 players in the market offering similar products with minimal switching costs (for short-term business, out of the 37 underwriters the top 5 players account for only 37% of GWP; this has led to cut-throat price wars with smaller players offering very low rates in order to stay in business). Negative public perception, low awareness of insurance benefits & pricing: In the past two decades over 8 insurance companies have collapsed or have been put under statutory management. In addition, insurance products are deemed complex and relatively expensive by the low-income households who form the larger portion of the population. To tackle the twin problems, the Insurance Regulatory Authority (IRA) was established in 2008 with the mandate to regulate and promote the industry. With respect to pricing, mainly leveraging on new distribution channels, insurance companies have began offering micro-insurance products targeting SME s and low income earners (aggressive push by banks to roll-out insurance premium financing services has been critical at supporting absorption of SME/micro insurance products). Fraudulent claims: The insurance industry has been plagued by huge amounts of fraudulent claims particularly for medical and motor insurance. This has led to the collapse of several insurance companies especially those dealing with public service vehicles leading to most companies electing not to underwrite such business. Limited offering from Reinsurers Reinsurance companies facilitate uptake of risk. Lack of reinsurance support in certain areas continues to hamper growth (e.g. micro insurance a leading growth market, lacks reinsurance support). Political risk also lacked reinsurance until recently when the African Trade Insurance Agency began providing reinsurance support for underwriting it. In addition to restricting product innovation, concentration in re-insurance market puts insurers at a pricing disadvantage (the situation is made more dire since insurers derive their premiums from a highly competitive market). Limitation of surplus distribution The insurance act restricts the annual transfer of surplus from the long term fund to 30% and subjects such transfers to taxation. This limitation reduces the attractiveness of the industry as an investment destination due to the related limited dividend payout (Association of Kenya Insurers, AKI, is currently lobbying the regulator to increase the maximum distributable limit).

19 Insurance industry Penetration Insurance penetration in Sub Sahara Africa has remained low as the bulk of the population operates in the informal sector where income levels are low as well as irregular. South Africa has the highest penetration rate in the region at 11.6% driven by high life insurance product uptake. Namibia comes in second with overall penetration at 7.3% followed by Kenya with penetration at 3.03%. Over 50% of the population in Kenya is poor and unable to save for the future. Majority of the population sees no need to seek wealth protection because their accumulated wealth is minimal. We see opportunity within the sector with the introduction of new products such as Micro insurance, bancassurance and Islamic Insurance (Takaful) as well as with the emergence of a middle class population whose need for wealth protection and savings is increasing (recently, an index based weather insurance (IBWI) cover for farmers was launched). To align new products to cash flow cycles of low-income earners, underwriters have introduced products allowing for regular premium remittance via mobile phones. Insurance perfomance in Africa 2011 Country Non Life Penetration Life Premium Penetration Total Total Premium USD m % USD m % Premium USD m penetration % Kenya , Algeria 1, , Egypt , , Morrocco 1, , Nigeria 1, , Tunisia S. Africa 10, , , Industry Penetration - outlook Penetration rate short term % Penetration rate long term % 3.00% 2.50% 2.00% Due to economic slowdown in 2011, high inflation & interest rates, penetration pulled back mainly in short term business (- 5.85bp y/y) to 1.99% while long-term insurance was largely unchanged at 1.04%. We expect penetration to improve by 25bp in We forecast overall penetration to reach 4.03% by 2015 mainly driven by increased short-term insurance uptake. 1.50% 1.00% 0.50% 0.00% E 2013F 2014F 2015F

20 Total industry underwriting profit Despite penetration rates remaining low, the insurance industry has witnessed impressive growth (CAGR 15.1%) in gross written premiums over the past decade. Underwriting profit (avg. 3% in the past 4 years) has however remained low due to rising claims and OPEX (however, following the introduction of new rules on minimum premium chargeable for motor insurance in 2010, industry underwriting profit has improved; 225% in 2010 & 92% in 2011). As a possible sign of reduced industry risk appetite, our sector retention ratio (net earned premium/ gross earned premium) has declined from 91.2% in 2008 to the current 85.2% (of the company s under coverage, CFC Insurance has the lowest retention ratio at 66.3%, while Kenya Re has the highest ratio at 94%.) In addition to annual re-pricing of chargeable premiums for repeat claimants, we expect underwriting profits to improve further in the motor vehicle class following the introduction of stringent traffic rules - effective date 1 DEC 2012 (motor vehicle class represents 45% of industry GWP). Industry Summary P&L (KES bn) Gross Written Premium-LHS Net Earned Premium-LHS Net claims Incurred-LHS Total expenses-lhs Underwriting Profit (%)-RHS

21 Underwriting expense breakdown In 2011 our sector average loss ratio slipped to 43% compared with 46% in 2010 mainly driven by provision write backs. We forecast average loss ratio to edge up to 47% in 2012 before gradually decreasing to a low of 45% in Key factors behind forecast claims ratio include; Decline in claims within motor vehicle insurance class due to new traffic rules New micro insurance products which are yet to be fully tested Expected increase in medical insurance premiums Provision write backs in 2012 especially for Britam and CFC Life Despite heightened inflationary pressure in FY11, our sector average underwriting expense ratio declined to 31% (FY10: 32%). Over the past 3 years growth in staff costs (avg. 31%) has been the key driver of underwriting expenses (35% of total). In order to compete effectively and boost operational efficiency, majority of the insurance companies are investing in new IT platforms and introducing shared service centers. We forecast underwriting expense ratio to decline to 29% in FY12 (23% in FY15) driven by both a decline in costs (greatest scope being in staff expense) and a rise in top line. Sector Expense & Loss Ratio s 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Avg. Underwriting exp ratio (%) Avg. Acquisition exp ratio (%) Avg. Loss ratio (%) FY09 FY10 FY11 FY12F FY13F FY14F FY15F

22 Short-term class segments Since motor vehicle insurance is mandatory, motor insurance is the dominant insurance class accounting for 45% of industry short-term GWP (5 year avg. 44%). In addition to revision of premiums payable in early 2010, the segment is a key beneficiary of strong demand for cars by middle income households with increasing discretionary income ( avg. new car registrations 123,648 per annum). CIC Insurance is the market leader in writing motor insurance accounting for 9.8% of the class total gross written premiums. We expect motor insurance to remain the leading class under short-term insurance. As can be seen from the table, Medical insurance ranks in a distant second at 15% of industry GWP. Despite posting impressive growth in GWP (14.8% 3 year CAGR) this class remains the least profitable as insurance companies are unable to correctly price in risk due to intense competition (the profitability of this class has also been worsened by the continued rise in the cost of health care and medicine). To mitigate this, insurance companies have introduced a co-pay system in which the underwriters shares some costs such as hospital administration costs with policy holders (geared towards reducing medical loss ratios, we expect insurance firms to continue raising premiums while maintaining insurance limits). With the continued rise in health care as well as increase in lifestyle diseases we expect medical insurance to continue to register the highest growth rates with the general insurance sector. Jubilee is the market leader in writing medical insurance accounting for 31% of the class total GWP. In line with increased activity within the real estate sector we expect to see improved uptake of both fire domestic and fire industrial insurance (specifically, we think the rise in domestic fire cover will be tied to increased use of mortgage financing). Insurance class contribution 2011 GWP(KES M) % of GWP Underwriting profits (KES M) % of Underwriting profits Motor Commercial 15,561 26% 1,432 58% Motor private 11,596 19% % Medical 8,903 15% (650) -26% Personal accident 2,674 4% % Fire domestic 997 2% 168 7% Fire industrial 5,988 10% 127 5% Other 14,949 25% % Total 60,668 2,487 Motor class market share Total Motor GWP 2011 Market share AMACO 1,577,774, % APA 1,736,644, % CIC 2,668,851, % Direct line 1,802,180, % Jubilee 1,748,348, % UAP 1,815,399, % Others 15,807,931,638 58% Total 27,157,127,900

23 Life Insurance On life insurance, we expect growth to be in tandem with economic growth as disposable incomes improve thus enhancing savings. As at end of 2011, total life insurance premium 5yr CAGR stood at 16% mainly driven by increased uptake of group life insurance (5 year CAGR: ordinary/individual 11.6%, group life 19.5% and deposit administration 14.3%). As highlighted earlier, the Life insurance industry is more concentrated than general insurance with the top 5 underwriters accounting for 70% of industry premiums. In the medium-term we don t expect major change in market structure there is minimal product differentiation and dominance of group schemes means higher percentage of new business is allocated to the top 5 underwriters. Top 5 life underwriters(2011) Total Life premiums written (KES m) Market share Pan Africa Life 3, % Britam 3, % CIC 2, % Jubilee 1, % ICEA Lion 1, % Others 5, % Total 17,813 Overall, we expect Life insurance penetration to remain sluggish in the medium term reaching 1.22% by 2015 compared to 1.02% currently. Credit Life insurance is another class within life insurance which has increased life insurance uptake in recent years due to the increase in household credit. According to Britam management credit life insurance has been the driving force behind its group life insurance growth (credit life is included in group life insurance class) which was up 51% FY11 (5 yr avg. growth 42%)

24 Distribution Channels Insurance companies distribute their products mainly through agents and brokers. As at 2011 the number of agents and brokers stood at 4,803 and 169 respectively compared with 2,665 and 201 in Long-term underwriters mainly sell their products through individual agents while short-term insurance is mainly distributed through brokers. Acquisition cost accounts for 40% of total operating expenses making efficient product distribution key. Recent developments in enhancing distribution channels include bancassurance and premium payment via mobile money transfer platforms. In our view, the insurance sector has barely scratched the surface when it comes to utilizing these two channels (since introduction of agency banking in June 2010, banks have signed up over 12,000 agents who could also be used as sales points for insurance products, and mobile providers boast of a combined agency network of over 45,000). Within CIC Insurance 50% of its Short term business is generated from agents, 25% from brokers, 14% is directly booked while 11% is from bancassurance. 50% of short term business in Britam is booked through its bancassuarnce distribution channel while the rest is through brokers and agents. This allocation indicates that a small percentage of insurance business is directly booked thereby reiterating the need for efficient distribution. On commissions payable, the industry regulator has set maximums based on class of insurance booked. For short-term insurance the maximum payable to a broker or agent ranges between 10% and 25% of premiums across different classes. For long-term insurance the range is between 1% and 50% of premiums depending on the year of the premium. Agents & Brokers Agents Brokers , , , , , Acquisition ratios Acquisition Exp. FY09 FY10 FY11 FY12F FY13F FY14F Britam 29% 26% 24% 23% 23% 22% CIC 9% 9% 10% 9% 10% 10% CFCI 17% 18% 19% 20% 20% 20% Pan Africa 27% 32% 19% 27% 20% 19% Kenya Re 31% 30% 30% 30% 30% 30% Average 22% 23% 21% 22% 21% 20% Though we forecast increased insurance penetration rates, in light of continued partnerships with banks and mobile phone operators, we expect the acquisition ratio to decline to 20% over the next three years.

25 Investments and Yields Over the past four years, of total revenue, investment income has contributed an average of 15%, with yields on total investment assets averaging 11%. Held to Maturity government securities account for 40% of the investment portfolio, fair value through profit and loss investments (including quoted equity and government securities) account for 20%, Investment property accounts for 20%, Available for sale investments account for 13% and secured loans account for 8%. Heavy weighting in quoted equity has led to volatility in earnings within the industry. In order to reduce the volatility in earnings underwriters have reduced their allocation in equities (from 26% in 2008 to 20% in 2011) and increased allocation in investment property (from 15% in 2008 to 20% in 2011). We expect increased weighting in investment property going forward, more so with the expected introduction of REITS from REITS will provide an alternative source of fee income. Earnings Mix Investment Asset Mix Premium and Fee income Investment Income FY10 FY11 FY12F FY10 FY11 FY12F Britam 41% 146% 54% 52% -62% 40% CIC 90% 89% 87% 8% 9% 10% CFCI 66% 66% 66% 29% 26% 24% Pan Africa 73% 86% 73% 23% -5% 22% Kenya Re 66% 72% 74% 32% 27% 21% Investment Asset mix AFS FVTPL HTM Investment Property Secured Loans FY11 FY12F FY11 FY12F FY11 FY12F FY11 FY12F FY11 FY12F Britam 18% 17% 46% 50% 23% 21% 7% 7% 6% 5% CIC 0% 0% 6% 6% 55% 59% 29% 27% 9% 7% CFCI 28% 33% 0% 0% 59% 54% 4% 5% 9% 8% Pan Africa 0% 0% 46% 49% 33% 30% 10% 11% 11% 10% Kenya Re 19% 23% 0% 0% 30% 29% 48% 46% 3% 3% Average 13% 15% 20% 21% 40% 39% 20% 19% 8% 7%

26 Investments and Yields IFRS 9 implications for insurance firms. None of the insurance firms within our coverage have early adopted IFRS 9 (initially, IASB had set the mandatory adoption of IFRS 9 for January 2013, but this has been pushed to January 2015). IFRS 9 set out new rules for financial instrument classification. Unlike IAS 39 that allows for 3 measurement categories (available for sale, held for trading and held to maturity), IFRS 9 only allows for 2 categories held for trading and held for maturity and drops the available for sale class (class that leaves considerable room for earnings smoothening). This means that any equity investments that were previously held as AFS will have to be reclassified as held for trading where gains and losses will be booked directly in the income statement as opposed to passing through the fair value reserve in equity. At first instance, this will lead to an unwinding of gains and losses within reserves, then going forward gains and losses will pass through income statement (this will cause increased volatility in earnings especially among firms that classify most of their equity investments as AFS). In the long run we expect earnings volatility to decline inline with reduced investment in listed equities and improvement in underwriting business. Fair Value Reserve FY11 Fair value reserve as % of Shareholder equity Britam 3,440 40% CIC 14 0% CFCI 93 2% Pan Africa - 0% Kenya Re 818 7% Average Investment return Company Average Investment Return FY09 FY10 FY11 FY12F FY13F FY14F Britam 1% 25% -10% 20% 11% 11% CIC 13% 15% 15% 15% 14% 13% CFCI 4% 13% 11% 9% 8% 8% Pan Africa 8% 18% -3% 18% 10% 10% Kenya Re 15% 20% 20% 16% 16% 15% Average 8% 18% 6% 16% 12% 12%

27 COMPANY ANALYSIS

28 British America Investments ltd (Britam) Recommendation: BUY Fair Value: KES 8.32 Previous fair value: KES Upside/(downside): 35% Listing date: 8 th Sept 2011 Listing price: KES 9 P/B at listing: 1.2x Trading Data Current price KES change (%) 8% Market Cap KES (m) 11,443 USD (m) 135 Daily Value traded KES (m) YTD USD (m) Anchor shareholder British American Holdings 23.92% Free float (%) 54.7 Operating Performance FY11A FY12F FY13F EPS (1.09) % growth -176% -215% -34% DPS Payout -14% 16% 25% NAV (KES) PE (x) (5.65) PB (x) We retain our buy recommendation on Britam. At KES 6.05, Britam is currently trading 35% below our fair value of KES Britam trades at (FY12E) PB of 1.00x, 9% discount to the sector. On improved returns from investment portfolio (20% avg. yield FY12E, vs. -10% FY11) we forecast EPS growth of 215% in FY12 to KES Against our FY12 NAV forecast (KES 6.17), our fair value puts Britam at a PB of 1.35x. Premium growth strong; underwriting margins remain low. At an average growth rate of 22.8% (versus sector s 17%) over the past 5 years Britam has been able to maintain strong growth in premium income. Over this period Britam s short-term business (led by motor class, 5yr CAGR 51%) has outperformed (27% versus 13.3% for life business). Strong growth in short-term business has seen Britam s market share grow 130bp (FY08-FY11) to 3.5% (ranked 9 th overall ). As at end of FY11 short-term business accounted for 38% of total gross earned premiums up from 26% in FY07 (we forecast 44.1%:55.9% short term, long term split by FY15, with the Motor class outperforming). Backed by roll out of micro insurance products (to be distributed through Equity bank) our outlook for premium growth remains positive (4 year avg. 20% for Britam versus 20% for sector). Currently, management estimates 50% of short-term premiums are captured under their bancassuarance offering. On the negative, underwriting profit (underwriting margin 4 year average 2.5%) has remained low due to high underwriting and acquisition costs. Britams 4 yr historical avg. underwriting expense ratio stood at 31% higher than its peers, with Pan African and CIC at 19.4% and 29% respectively. Acquisition costs were at 27% vs. sector average of 22%. In order to cut costs management plans to install a new I.T platform as well as introduce shared service centers which will help rationalize staff costs which account for 21% of total Opex. We forecast underwriting expense ratio to average 29% over the next four years leading to improved underwriting profit margin (6% average over the next four years).

29 Investment income volatility remains a major issue. Britam has the most volatile earnings in our universe due to heavy weighting of its investment portfolio to quoted equities. Britam has a 10.64% stake in Equity bank which it marks to market. In addition, 46% of Britam s investment portfolio constitutes of securities categorized as fair value through profit and loss (versus 20% for the sector) while 18% constitutes AFS quoted investments (as the bulk of the securities under this class are equities, if the same positions are in place when IFRS 9 comes into force in 2015, it will lead to increase in securities categorized as FVTPL). Earnings volatility could however be shifted away from quoted instruments as the underwriter deploys the bulk of the KES 3.5bn raised in its 2011 IPO towards property development. (management intends to reduce equity investments to below 30% and increase property to >30% of total investment portfolio by 2016). With respect to returns, we view the shift in asset mix as a positive development, since over the past four years yields on AFS quoted equity has averaged 11.3% vs. 22% on investment property. Expanding footprint One of Britam s main strategy is to expand its operations across East Africa. Currently, the company operates two wholly owned insurance subsidiaries in Uganda and South Sudan. The Uganda unit commenced operations in November 2010 and currently accounts for >1% of group premiums. The Ugandan insurance industry has witnessed good growth (5 yr CAGR 18%) though penetration still remains low at 0.65%. As would be the case for a new green-field operation, Britam is among the smallest players in Uganda commanding 0.31% market share in non-life and 1.3% in life business. The South Sudan subsidiary (formed in 2011) is yet to commence underwriting. Management lists Tanzania and Rwanda as markets of interest.

30 Forecast Model Gross Premiums (KES m) FY10 FY11 FY12F FY13F GDP at market prices 2,551 3,025 3,327 3,660 Growth % 7.9% 18.6% 10.0% 10.0% Penetration rate short term % 2.1% 2.0% 2.2% 2.4% Penetration rate long term % 1.0% 1.0% 1.1% 1.1% Industry short term premium Growth % 21.4% 15.9% 21.0% 20.0% BA market share % 3.2% 3.5% 3.8% 4.0% Industry life insurance premium Growth % 25.0% 15.8% 15.4% 15.1% BA market share % 10.0% 11.2% 11.5% 11.8% Gross Short-term (KES m) FY10 FY11 FY12F FY13F Motor ,134 1,503 Fire Personal accident/medical ,094 Marine Other Total 1,659 2,128 2,795 3,529 Growth % 30% 28% 31% 26% Gross Life Business (KES m) FY10 FY11 FY12F FY13F Ordinary life 2,066 2, Group life Total life 2,674 3,479 4,122 4,868 Growth % 7% 30% 18% 18% Short-term Claims KES m FY10 FY11 FY12F FY13F Motor ,007 Fire Personal accident/medical Marine Other Gross Total ,514 1,853 Long-term claims KES m FY10 FY11 FY12F FY13F Death, maturity and surrender benefits 1, ,392 1,645 Bonuses and interest on DA 875 (318) Increase in policy holder benefits ,305 1,372 Reinsurance share (100) (47) (64) (77) Net long-term claims 3,018 1,424 3,037 3,344 Investment income FY10 FY11 FY12F FY13F Interest from Govt. securities Average yield % 11.0% 8.2% 9.9% 9.7% Interest on bank deposits Average yield % 4.0% 11.8% 7.4% 7.8% Other interest receivable Average yield % 10.4% 8.8% 8.8% 8.8% Rental income Average yield % 4.8% 3.0% 4.6% 4.1% Dividends receivable Sum of fair value gains and losses 3,967 (3,167) 3,218 1,617 Total 4,684 (2,093) 4,556 3,073

31 Key Ratios Insurance operational ratios FY10 FY11 FY12F FY13F FY14F FY15F Underwriting expense ratio 31% 32% 30% 28% 26% 25% Acquisition expense ratio 26% 24% 23% 23% 22% 22% Combined ratio 114% 91% 98% 95% 92% 91% Underwriting margin -14% 9% 2% 5% 8% 9% Loss ratio % FY10 FY11 FY12F FY13F FY14F FY15F Motor 80% 50% 71% 67% 66% 65% Fire 60% 46% 45% 50% 47% 47% Personal accident/medical 53% 47% 46% 49% 47% 47% Marine 18% 10% 25% 18% 18% 20% Other 30% 24% 41% 32% 32% 35% Average 58% 43% 54% 53% 51% 51% Financial Ratios FY10 FY11 FY12F FY13F FY14F FY15F Earnings per share 1.43 (1.09) Dividend per share Price earnings ratio 4.29 (5.65) Price / Bookvalue multiple Price / Free Cash Flow (8.98) (6.38) Return on average total assets 13% -8% 8% 5% 6% 7% Return on average equity ROE 34% -20% 23% 13% 14% 17% Dividend yield 1.7% 2% 3% 3% 4% 6% Net asset value/share total equity/ total assets 42% 33% 38% 38% 39% 41%

32 Forecast performance INCOME STATEMENT Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Gross earned premiums 4,333 5,608 6,916 8,397 9,950 11,574 Reinsurance premium ceded ,005-1,190-1,385 Net earned Premium income 3,659 4,937 6,089 7,393 8,760 10,189 Fund management fees Total net premium & fee income 3,855 5,175 6,392 7,784 9,239 10,750 Investment income 4,684-2,093 4,556 3,073 3,502 4,154 Comission earned Other income Net total income 8,969 3,383 11,319 11,307 13,275 15,525 Net Total Claims -3,818-2,233-4,433-5,053-5,745-6,191 Operating and other exp -3,238-4,145-4,920-5,700-6,516-7,373 Commissions payable 961 1,192 1,415 1,678 1,939 2,196 Profit before tax 2,874-1,804 3,380 2,233 2,953 4,157 Taxation , ,247 Attributable income 2,714-2,037 2,366 1,563 2,067 2,910 BALANCE SHEET Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Fixed Assets - Net Book value Intangible assets Investment property 1,174 1,405 1,795 2,223 2,646 3,212 Available for sale quoted investments 5,980 3,409 4,499 4,976 5,437 5,980 Financial assets (fair value P&L) 12,213 8,927 12,929 14,736 16,842 19,440 Govt securities held to maturity 2,109 4,374 5,337 5,865 6,654 7,557 Deposits with financial institutions 500 2, ,044 1,258 Cash and bank balances Other assets 2,297 3,865 4,556 4,913 5,525 5,891 Total assets 25,362 25,639 30,785 34,666 39,325 44,508 Total shareholders funds 10,570 8,557 11,678 13,315 15,485 18,422 Insurance contract liabilities 6,346 7,370 8,974 10,775 12,757 14,543 Unearned premiums ,281 1,630 2,069 2,566 Bank loan Other Liabilities 6,981 7,944 8,067 8,162 8,230 8,192 Source of capital 25,362 25,639 30,785 34,666 39,325 44,508

33 Valuation Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY13, FY14 & FY15 then we use a subjective 3 year forward PB of 1.2x, to derive the terminal value. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x). We expect Britam to trade slightly (-8% discount to sector exit P/B) below sector due to below sector ROE ( 4 yr average forecast 15% vs. 18% sector average) Price to book FY12F FY13F FY14F FY15F Dividend NAV 9.74 Discount period Discount rate 16.0% 16.0% 16.0% 16.0% Discount factor PV dividend Cumulative PV of Dividends 0.83 PV of Terminal value 7.49 Per Share Value 8.32 Current price 6.15 Sustainable PB 1.20 Upside 35% Sensitivity Analysis (COE vs. PB) 14% 15% 16% 17% 18%

34 CIC Insurance Company Recommendation: Sell Fair Value: KES 3.37 Upside/(downside): -1% Listing date: 18 th July 2012 Listing price: 3.50 P/B at listing: 1.78x Trading Data Current Price KES change (%) Market Cap KES (m) 7,411 USD (m) 87 Daily Value traded KES (m) YTD USD (m) 0.05 Anchor shareholder Co-op Insurance Society 74.30% Free float (%) 25.0 Operating Performance FY11A FY12F FY13F EPS % growth 20% 10% 42% DPS Payout 34% 22% 25% NAV (KES) PE (x) PB (x) We Initiate coverage on CIC Insurance with a Sell recommendation. At KES 3.40, CIC is currently trading 18% above our fair value of KES CIC trades at (FY12E) PB of 1.88x, 72% premium to the sector. Riding on its strong ties with the co-operative movement (a positive with respect to both captive market & distribution outlets) we expect CIC to continue delivering above sector premium growth (4 year CAGR 28% vs. sector 21%; forecast 4 year CAGR 15% vs. 13% sector). Despite our positive outlook on both premium growth & underwriting profits, we think below sector solvency (shareholder equity/net earned premium ratio FY12F 71% vs. sector average 121) could limit future capacity and thus doesn t justify above sector P/B. We forecast EPS growth of 10% in FY12 to KES Against our FY12 NAV estimate (KES 2.18), our fair value puts CIC at a PB of The rise of the under dog. CIC has witnessed tremendous growth in the past five years ranking 4 th overall in the industry compared to 11 th five years ago and 32 nd ten years ago. At the same time, underwriting profit margins have grown from 6% FY08 to 10% FY11, consistently above sector average. The growth in underwriting profits has been underpinned by low acquisition costs, acquisition exp ratio at 10% FY11 vs. 21% sector average (the company uses co-operative societies to distribute its products). CIC s Short-term business has seen strong growth (5yr CAGR 31% vs. 19% in life insurance) buoyed by growth in its motor insurance class (5 yr CAGR 31.2%). We expect CIC to maintain healthy underwriting profit margin (5% average FY12-FY15) driven by continued growth in premiums (4yr CAGR forecast 15%). Although we expect market share to improve reaching 15.2% by 2015, the increase will be at a slower pace than the past four years dampened by increased competition in the market and below sector average solvency (shareholder equity/net earned premium ratio, 4 yr forecast average 68% vs. sector average 131%).

35 The Co-operative movement. CIC provides insurance to a niche co-operative movement market which comprises of approximately 10 million members across 12,000 co-operative societies. Cooperative societies own 74.3% of CIC Insurance. Majority of co-operative society members fall in the low to middle income segment which we believe will allow CIC push micro insurance products successfully. CIC is an associate company of Co-operative bank which has over 100 retail branches to offer bancassurance.

36 Forecast Model Gross Premiums (KES M) FY10 FY11 FY12F FY13F GDP at market prices 2,551 3,025 3,327 3,660 Growth % 7.9% 18.6% 10.0% 10.0% Penetration rate short term % 2.1% 2.0% 2.2% 2.4% Penetration rate long term % 1.0% 1.0% 1.1% 1.1% Industry short term premium Growth % 21.4% 15.9% 21.0% 20.0% CICmarket share % 4.4% 6.5% 6.8% 6.9% Industry life insurance premium Growth % 25.0% 15.8% 15.4% 15.1% CIC market share % 6.0% 7.0% 7.5% 7.7% Gross Short-term FY10 FY11 FY12F FY13F Motor 1,418 2,389 3,001 3,654 Fire Personal accident/medical ,017 Other Total 2,313 3,961 4,975 6,057 Growth % 50% 71% 26% 22% Gross Life assurance Business FY10 FY11 FY12F FY13F Ordinary life Group life 1,407 1, Total life 1,595 2,155 2,665 3,151 Growth % 31% 35% 24% 18% Short-term Claims KES m FY10 FY11 FY12F FY13F Motor 887 1,146 1,861 2,192 Fire Personal accident/medical Other Gross Total 1,288 2,090 2,881 3,424 Long-term claims KES m FY10 FY11 FY12F FY13F Death, maturity and surrender benefits ,264 1,450 Increase in policy holder benefits Reinsurance share (24) (87) (122) (147) Net long-term claims 840 1,252 1,443 1,589 Investment income FY10 FY11 FY12F FY13F Interest from government securities Average yield % 11.6% 11.1% 10.2% 10.9% Interest on bank deposits Average yield % 6.7% 12.2% 9.3% 9.3% Other interest receivable Average yield % 2.9% 5.9% 4.9% 4.9% Rental income Average yield % 3.6% 2.0% 4.1% 4.1% Dividends receivable Sum of fair value gains and losses 93 (13) Total

37 Key Ratios Insurance operational ratios FY10 FY11 FY12F FY13F FY14F FY15F Underwriting expense ratio 29% 28% 30% 30% 28% 28% Acquisition expense ratio 9% 10% 9% 10% 10% 10% Combined ratio 91% 90% 97% 95% 93% 92% Underwriting margin 9% 10% 3% 5% 7% 8% Loss ratio % (General Insurance) FY10 FY11 FY12F FY13F FY14F FY15F Motor 63% 48% 62% 60% 58% 56% Fire 17% 13% 18% 16% 16% 16% Personal accident/medical 36% 31% 32% 32% 32% 32% Other 65% 116% 91% 90% 99% 93% Average 56% 53% 58% 57% 57% 55% Financial Ratios FY10 FY11 FY12F FY13F FY14F FY15F Earnings per share Dividend per share Price earnings ratio Price / Bookvalue multiple Price / Free Cash Flow (19.5) (31.6) Return on average total assets 8% 6% 5% 6% 7% 8% Return on average equity 27% 17% 14% 18% 20% 23% Dividend yield 1% 2% 2% 3% 4% 4% Net asset value/share Total equity/total assets 35% 39% 34% 33% 33% 34%

38 Forecast Performance INCOME STATEMENT Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Gross earned premiums 3,908 6,116 7,640 9,208 11,408 13,380 Reinsurance premium ceded ,162-1,440-1,689 Net earned Premium income 3,550 5,344 6,676 8,045 9,968 11,691 Investment income ,126 1,333 Comission earned Net total income 3,937 6,020 7,675 9,207 11,375 13,355 Net Total Claims -2,007-3,150-4,098-4,741-5,846-6,667 Operating and other exp -1,632-2,621-3,285-3,932-4,748-5,495 Commissions payable ,120 Profit before tax ,303 1,757 2,313 Taxation Attributable income ,230 1,619 BALANCE SHEET Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Fixed Assets - Net Book value Intangible assets Investment in associate Investment property 891 1,307 1,666 1,982 2,307 2,651 AFS- Quoted investments Quoted ordinary shares Unit trusts Government securities- HTM 1,160 2,474 3,596 4,818 6,037 7,224 Deposits with financial institutions 1,091 1,991 2,573 2,834 3,229 3,832 Cash and bank balances Other assets 3,418 4,451 4,937 5,619 6,504 7,453 Total assets 7,496 11,121 13,829 16,491 19,527 22,847 Total shareholders funds 2,609 4,294 4,746 5,517 6,520 7,809 Insurance contract liabilities 1,669 2,596 3,537 4,355 5,374 6,524 Unearned premiums 1,368 2,158 2,779 3,343 3,814 4,098 Policyholder liabilities 881 1,273 1,574 1,861 2,166 2,488 Other Liabilities ,192 1,414 1,653 1,928 Source of capital 7,496 11,121 13,829 16,490 19,527 22,847

39 Valuation Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY13, FY14 & FY15 then we use a subjective 3 year forward PB of 1.3x, to derive the terminal value. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x). We forecast CIC to trade close to par with forecasted average sector ROE (4 yr average forecast 17% vs. sector average 18%), leverage (4 yr average forecast 34% vs. sector average 37%) and premium growth (4 yr average forecast 22% vs. sector average 20%) which we believes justifies our exit P/B of 1.3x. FY12F FY13F FY14F FY15F Dividend NAV 3.58 Discount period Discount rate 16.0% 16.0% 16.0% 16.0% Discount factor PV dividend Cumulative PV of Dividends 0.39 PV of Terminal value 2.98 Per Share Value 3.37 Current price 4.10 Sustainable PB 1.3 Downside -18% Sensitivity Analysis (COE vs. PB) 14% 15% 16% 17% 18%

40 CFC Insurance Company Holdings (CFCIH) Recommendation: BUY Fair Value: KES Upside/(downside): 66% Listing date: 21 st April 2011 Listing price: 6.16 P/B at listing: 0.72x Trading Data Current Price KES 6.95 YTD change (%) 2.3 Market Cap KES (m) 3,555 USD (m) 42 Daily Value traded YTD KES (m) 0.14 USD (m) Anchor Shareholder Liberty Holdings 56.82% Free float (%) 12.9 Operating Performance FY11A FY12F FY13F EPS % growth 265% -39% 30% DPS Payout 0% 10% 10% NAV (KES) PE (x) PB (x) We initiate coverage on CFC Insurance Holdings with a BUY recommendation. At KES 6.90, CFCI is currently trading 66% below our fair value of KES CFCI trades at (FY12E) P/B of 0.64x, 29% discount to the sector. Against our FY12 NAV estimate (KES 10.85), our fair value puts CFCIH at a PB of CFCIH came to be in April 2011, following the demerger of the banking and insurance operations of CFC Stanbic Holdings (CSH). The demerger of CSH, controlled by South Africa s Standard Bank, commenced in 2010 and concluded with the listing of CFCIH by way of introduction. CFCIH s majority shareholder is Liberty holdings (56.82%) an affiliate of Standard Bank. CFCIH operates two subsidiaries, CFC life and Heritage Insurance (short-term business). What next after restructuring?? CFCIH saw a 133% rise in gross earned premiums in FY10 due to incorporating Heritage Insurance business in its financials. FY11 Gross earned premiums rose 20% y/y mainly driven by a 60%y/y jump in short term business premiums (personal accident & medical insurance class outperformed climbing 104% y/y while motor insurance registered slower growth of 21%). Despite strong top line growth, high administrative costs dampened underwriting profit growth (FY11 underwriting profit margin -17% vs. sector average 5%). Having gone through its restructuring process, we believe CFCIH will now be able to focus on growing its insurance business under the guidance of Liberty group which is one of South Africa's leading underwriters. Unlike most of its peers, with good corporate-retail clientele mix, CFCIH s short term business is skewed towards corporate business which management guides accounts for 60% of premiums. Going forward, management is targeting to aggressively grow retail premiums, by leveraging on CFC Stanbic bank to offer bancassuarnace services to the middle to high income retail market. Going forward we expect CFCIH to derive most of its growth from its short term business where we forecast market share to average 7.9% over the next 4 years vs. historical average of 4.6%. Management initiatives towards growth include venturing into micro insurance, building bancassurance partnerships with additional banks and improving product offering.

41 Above sector average costs a major concern. CFCIH Underwriting profit margin has remained below sector average (-17% FY11 compared to 5% sector average) weighed down by high underwriting costs (50% FY11 vs. 31% sector average) as well as above sector average loss ratios (47% FY11 vs. 43% sector average). Short term business accounts for 71% of gross claims with personal accident and medical witnessing the highest loss ratios (FY % vs. 55% average loss ratio). We forecast CFCIH to remain in underwriting loss territory for the next two years ( underwriting profit margin 9.4%-FY13, 2.4%-FY14) and turn profitable by 2015 (underwriting profit margin 0.8%) driven by decline in underwriting expenses (underwriting expense ratio to reach 32.8% FY15F, as management focuses on cost reduction). Staff costs account for 34% of total Opex and we expect management to rationalize their staff numbers especially now that the restructuring process is over. We forecast staff costs to account for 31% of Opex by 2015 (vs. sector average 20%). Risk Averse... CFCIH s retention ratio (66.3%) remains way below industry average of 85.2%. We see CFCIH maintaining its below sector retention ratio (FY12E 64% versus 58% for the sector). Dividend likely FY12. Management guides that the company is likely to pay a dividend in FY12. We forecast a dividend payout of 10%. (DPS 0.11 FY12F & slight improvement to KES 0.14 in FY13)

42 Forecast Model Gross Premiums (KES M) FY10 FY11 FY12F FY13F GDP at market prices 2,551 3,025 3,327 3,660 Growth % 7.9% 18.6% 10.0% 10.0% Penetration rate short term % 2.1% 2.0% 2.2% 2.4% Penetration rate long term % 1.0% 1.0% 1.1% 1.1% Industry short term premium Growth % 21.4% 15.9% 21.0% 20.0% CFCIH market share % 6.1% 8.5% 7.5% 8.0% Industry life insurance premium Growth % 25.0% 15.8% 15.4% 15.1% CFCIH market share % 6.1% 4.1% 4.9% 5.9% Gross Short-term FY10 FY11 FY12F FY13F Motor 974 1,183 1,262 1,616 Fire 638 1,300 1,386 1,775 Personal accident/medical 638 1,295 1,381 1,768 Other 950 1,350 1,440 1,843 Total 3,200 5,128 5,469 7,002 Gross Life assurance Business FY10 FY11 FY12F FY13F Ordinary life 1,619 1, Group life Total life 1,619 1,261 1,740 2,415 Growth % 57% -22% 38% 39% Short-term Claims KES m FY10 FY11 FY12F FY13F Motor Fire Personal accident/medical 452 1, ,218 Other Gross Total 2,069 2,419 2,989 3,792 Long-term claims KES m FY10 FY11 FY12F FY13F Death, maturity and surrender benefits Bonuses and interest on DA Increase in policy holder benefits Reinsurance share Gross long-term claims ,019 1,527 Investment income FY10 FY11 FY12F FY13F Interest from government securities ,022 Average yield % 5.4% 8.4% 7.9% 7.3% Interest on bank deposits Average yield % 5.1% 4.6% 7.0% 5.6% Other interest receivable Average yield % 17.4% 19.8% 15.0% 17.4% Rental income Average yield % 4.6% 5.4% 5.8% 5.3% Dividends receivable s Sum of fair value gains and losses Total 1,581 1,641 1,601 1,572

43 Key Ratios Insurance operational ratios FY10 FY11 FY12F FY13F FY14F FY15F Underwriting expense ratio 45% 50% 48% 39% 32% 29% Acquisition expense ratio 18% 19% 20% 20% 20% 19% Combined ratio 114% 117% 119% 109% 101% 96% Underwriting margin -14% -17% -19% -9% -1% 4% Loss ratio % (General Insurance) FY10 FY11 FY12F FY13F FY14F FY15F Motor 33% 52% 52% 51% 50% 49% Fire 55% 38% 47% 47% 44% 46% Personal accident/medical 71% 77% 70% 69% 68% 67% Other 100% 23% 50% 50% 50% 50% Average 65% 47% 55% 54% 53% 53% Financial Ratios FY10 FY11 FY12F FY13F FY14F FY15F Earnings per share Dividend per share Price earnings ratio Price / Bookvalue multiple Price / Free Cash Flow (24.62) (4.15) Return on average total assets 1% 4% 2% 3% 4% 5% Return on average equity ROE 10% 23% 12% 12% 18% 19% Dividend yield 0% 0% 2% 2% 4% 5% Net asset value/share Total equity/ total assets 18% 16% 21% 23% 25% 28%

44 Forecast Performance INCOME STATEMENT Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Gross earned premiums 4,819 6,389 7,210 9,417 11,458 13,458 Reinsurance premium ceded (1,287) (2,151) (2,596) (3,390) (3,896) (4,441) Net earned Premium income 3,532 4,238 4,614 6,027 7,562 9,017 Investment income 1,581 1,641 1,601 1,572 1,891 2,134 Comission earned ,059 Other income Net total income 5,375 6,433 6,881 8,468 10,457 12,298 Net Total Claims (2,714) (2,482) (2,878) (3,844) (4,598) (5,316) Operating and other expenses (2,853) (3,767) (4,113) (4,774) (5,408) (6,051) Commissions payable ,217 1,481 1,739 Profit before tax 483 1, ,067 1,932 2,670 Taxation (223) (62) (246) (320) (580) (801) Attributable income ,352 1,869 BALANCE SHEET Year to December (KES M) FY10 FY11 FY12F FY13F FY14F FY15F Fixed Assets - Net Book value 1,093 1,057 1,028 1,016 1,017 1,029 Intangible assets 1,422 1,375 1,301 1,273 1,262 1,258 Investment in associate Investment property ,214 1,563 1,937 Available for sale shares 4,439 2,528 3,371 3,823 4,092 4,554 AFS- Government Security 4,916 1,750 2,938 2,836 3,041 4,036 Government securities-htm 4,176 8,900 10,438 11,974 13,353 14,519 Deposits with financial institutions 2,181 2, ,557 2,010 Cash and bank balances Other assets 4,092 5,005 5,204 6,278 7,325 8,430 Total assets 23,827 24,294 26,890 30,089 34,071 38,779 Total shareholders funds 4,387 3,874 5,588 6,779 8,596 10,962 Non Controlling Interest Insurance contract liabilities 6,027 6,689 7,187 8,497 9,864 11,284 Unearned premiums 1,853 2,242 2,681 3,254 3,952 4,771 Bank loan Other Liabilities 10,770 10,683 11,133 11,257 11,359 11,462 Source of capital 23,827 24,294 26,890 30,089 34,071 38,779

45 Valuation Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY13, FY14 & FY15 then we use a subjective 3 year forward PB of 0.8x (38% discount to sector average exit P/B), to derive the terminal value. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x). In our view, the deep discount is representative of CFCIH s below sector returns (FY12F 10% vs. 19% sector average) and above sector leverage (equity to assets at 21% FY12F vs. 35% sector average) FY12F FY13F FY14F FY15F Dividend NAV Discount period Discount rate 16.00% 16.00% 16.00% 16.00% Discount factor PV dividend Cumulative PV of Dividends 0.66 PV of Terminal value Per Share Value Current price 6.95 Sustainable PB 0.80 Upside 66% Sensitivity Analysis (COE vs. PB) 14% 15% 16% 17% 18%

46 Pan Africa Insurance Recommendation: BUY Fair Value: KES 74.7 Upside/(downside): 72% FY11 reported EV per share: KES Trading Data Current Price KES change (%) 94 Market Cap KES (m) 3,936 USD (m) 46 Daily Value traded YTD KES (m) USD (m) Anchor Shareholder Sanlam 50% Free float (%) 50.0 Operating Performance FY11A FY12F FY13F EPS % growth -25% 116% 25% DPS Payout 64% 30% 30% NAV (KES) PE (x) PB (x) We Initiate coverage on Pan Africa Insurance Insurance with a BUY recommendation. At KES 43.50,Pan Africa is currently trading 72% below our fair value of KES Pan Africa trades at (FY12E) P/B of 1.37x, 39% premium to the sector. Coming from a loss position in 2011, we forecast EPS growth of 115.8% FY12 to KES 9.97, driven by improved returns on investment portfolio (+18%% vs. -3% in FY11) and strong top line growth (by 1H12, gross earned premium was up 76% y/y). Against our FY12 NAV estimate (KES 29.12), our fair value puts Pan Africa at a PB of 2.6x Sanlam receives approval to increase stake. Through a National Gazette posting dated 21 December, the Competition Authority approved the acquisition of additional shares in Pan Africa Insurance Holdings Limited by Hubris Holdings Limited, an investment vehicle controlled by Sanlam. From the current 50%, Sanlam has expressed interest in increasing its stake up to 60% (insurance act caps ownership of insurance companies by foreigners at 66%). In the meantime, it remains unclear how the acquisition will be structured available options; outright share purchase from market, private negotiations with other leading shareholders or creation of new shares (in our view, it remains a possible avenue, a capital injection could improve solvency ratios; shareholder equity to NEP at 64% FY11 vs. sector avg. at 120%). Market leader. Following disposal of its 39.97% stake in APA insurance in FY11 (APA was formed in 2003 as joint venture with Apollo Insurance), Pan Africa is now only exposed to life insurance operations. Pan Africa is the market leader in life insurance accounting for 20.5% of the sectors premium income. Though the underwriter has lagged industry growth (4 yr. average 15.9% vs. 19.6%) we expect it to outperform over the next four years (4 yr. forecast average 22.9% vs. 15% industry average), underpinned by continued product innovation. Last year the company launched a funeral cover, a new product in the market, which offers an entire funeral benefits package to policy holders and dependants. Ordinary Life Insurance accounts for 56% of premiums while group life accounts for 44%. We forecast gross earned premiums to grow by 47.3% FY12 ahead of the sector s 26%) coming off a 6.9% decline FY11. We forecast market share to reach 15.1% FY 15 vs. 11.8% FY11.

47 Healthy operating ratios. Compared to our universe (dominated by composite insurers) Pan- Africa boasts of significantly better underwriting profit margins (26% FY11 vs. 5%) mainly underpinned by lower loss ratios (32% FY11 vs. 49%) and underwriting expenses (22% FY11 vs. 31%). In addition, Pan African has sustained attractive ROE (21% FY11 vs. 11% avg. in our universe) and above sector dividend yields (7% vs. 3%). We forecast underwriting margins to average 31% over the next four years (vs. 8% sector avg.) driven by below sector underwriting expenses (4 yr forecast avg. 16% vs. sector avg. 25%) and sustained top line growth (4 yr. forecast average 22.9% vs. 15% industry average).

48 Forecast Model Gross Premiums FY10 FY11 FY12F FY13F GDP at market prices 2,551 3,025 3,327 3,660 Growth % 7.9% 18.6% 10.0% 10.0% Penetration rate long term % 1.0% 1.0% 1.1% 1.1% Industry life insurance premium Growth % 25.0% 15.8% 15.4% 15.1% Pan Africa market share % 14.3% 11.8% 14.8% 14.9% Gross Life assurance Business FY10 FY11 FY12F FY13F Ordinary life 1,697 2, Group life 2,133 1, Total life 3,831 3,648 5,280 6,120 Growth % 27% -5% 45% 16% Investment income FY10 FY11 FY12F FY13F Interest from government securities Average yield % 4.7% 6.5% 4.9% 5.4% Interest on bank deposits Average yield % 0.8% 3.2% 2.8% 2.3% Other interest receivable Average yield % 9.7% 10.1% 6.6% 8.8% Rental income Average yield % 5.1% 2.6% 4.5% 4.0% Dividends receivable Sum of fair value gains and losses 809 (710) 1, Total 1,110 (199) 1, Long-term claims KES m FY10 FY11 FY12F FY13F Death, maturity and surrender benefits 959 1,252 1,812 1,977 Bonuses and interest on DA Increase in policy holder benefits 2, ,958 1,512 Reinsurance share (134) (191) (207) (256) Net long-term claims 2,999 1,876 3,676 3,358

49 Key Ratios Insurance operational ratios FY10 FY11 FY12F FY13F FY14F FY15F Underwriting expense ratio 17% 22% 16% 17% 17% 16% Acquisition expense ratio 32% 19% 27% 20% 19% 19% Combined ratio 72% 74% 76% 68% 66% 65% Underwriting margin 28% 26% 24% 32% 34% 35% Financial Ratios FY10 FY11 FY12F FY13F FY14F FY15F Earnings per share Dividend per share Price earnings ratio Price / Bookvalue multiple Price / Free Cash Flow Return on average total assets 3% 5% 10% 10% 11% 11% Return on average equity ROE 37% 22% 39% 37% 35% 32% Dividend yield 4% 7% 8% 9% 12% 14% Net asset value/share Total assets/total equity 17% 18% 20% 22% 24% 26%

50 Forecast performance INCOME STATEMENT Year to December (KES m) FY10 FY11 FY12F FY13F FY14F FY15F Gross earned premiums 3,831 3,648 5,280 6,120 7,079 8,173 Reinsurance premium ceded (288) (348) (419) (510) (609) (678) Net earned Premium income 3,543 3,300 4,861 5,610 6,470 7,496 Investment income 1,110 (199) 1, ,127 1,254 Comission earned Other income Net total income 4,851 3,851 6,720 7,000 8,099 9,323 Net Total Claims (2,999) (1,876) (3,676) (3,358) (3,838) (4,409) Operating and other expenses (603) (733) (784) (954) (1,093) (1,176) Commissions payable (890) (690) (893) (974) (1,056) (1,220) Profit before tax ,367 1,713 2,111 2,519 Share of associate profit/ loss Taxation (76) (109) (410) (514) (633) (756) Attributable income ,199 1,477 1,763 BALANCE SHEET Year to December (KES m) FY10 FY11 FY12F FY13F FY14F FY15F Fixed Assets - Net Book value Intangible assets Investment in associate Investment property ,254 1,522 1,826 Quoted ordinary shares 1,607 1,547 2,280 2,584 2,926 3,318 Available for sale investment Government securities fvtpl 2,293 1,902 2,193 2,267 2,342 2,412 Government securities- HTM 2,056 2,454 2,792 3,163 3,572 4,063 Deposits with financial institutions 1,256 2,808 3,473 4,664 6,108 7,726 Cash and bank balances Other assets 1,208 1,557 1,919 2,106 2,374 2,676 Total assets 10,671 11,500 14,267 16,844 19,843 23,235 Total shareholders funds 1,832 2,123 2,795 3,708 4,825 6,145 Insurance contract liabilities 3,179 3,470 4,330 5,018 5,805 6,702 Provisions for outstanding claims Other Liabilities 5,574 5,850 7,030 8,016 9,096 10,254 Source of capital 10,672 11,499 14,267 16,844 19,842 23,235

51 Valuation Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY13, FY14 & FY15 then we use a subjective 3 year forward PB of 1.5x, to derive the terminal values. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x). Going by our forecasts, we expect Pan African to maintain returns higher than COE and hence the 15% premium on exit PB. FY12F FY13F FY14F FY15F Dividend NAV Discount period Discount rate 16.00% 16.00% 16.00% 16.00% Discount factor PV dividend Cumulative PV of Dividends PV of Terminal value Per Share Value Current price Sustainable PB 1.5 Upside 72% Sensitivity Analysis (COE vs. PB) 14% 15% 16% 17% 18%

52 Kenya Reinsurance Corporation Recommendation: BUY Fair Value: KES Upside/(downside): 59% Trading Data Current Price KES change (%) 43 Market Cap KES (m) 7,735 USD (m) 91 Daily Value traded YTD KES (m) USD (m) Anchor Shareholder Government of Kenya 63.35% Free float (%) 40.0 Operating Performance FY11A FY12F FY13F EPS % growth 24% 14% 5% DPS Payout 11% 15% 17% NAV (KES) PE (x) PB (x) We Initiate coverage on Kenya Re Insurance with a BUY recommendation. At KES 11.80, Kenya-Re is currently trading 59% below our fair value of KES Kenya-Re trades at (FY12E) PB of 0.58x, 47% discount to the sector. We forecast EPS growth of 17.4% in FY12 to KES 3.21 Against our FY12 NAV estimate (KES 20.26), our fair value puts Kenya-Re at a PB of 0.91x End of an era Kenya-Re (the only locally owned reinsurer) has enjoyed 18% mandatory cessations from all underwriters in Kenya but this is set to end in 2015 after an earlier extension from In order to reduce its reliance on Kenya, Kenya-Re has successfully diversified its business, writing both life and non-life business in other African markets (key markets include; West Africa, Middle East and Asia). As at FY11 Kenya accounted for 53.6% of written premium compared to 57.9% FY10. We forecast Kenya to account for 37% of written premium by 2015 as Kenya-Re aggressively markets its products within Africa (in the coming months, the company intends to establish a branch office to serve the Southern Africa region). Though we expect continued premium growth (+23% FY12F) in the short term we expect growth to be constrained in the long-term (1.8% growth FY15F) owing to increased competition from new entrants in the local market, compounded by the negative impact of the end of mandatory cessation. Margins & Costs. Short term insurance business accounts for a majority (85%) of Kenya Re s total gross premiums. Within short term insurance, Fire insurance class accounts for 41% of total premiums. Personal accident class has seen the fastest growth (32% 4 yr CAGR) in the past four years while motor insurance has seen the slowest growth (13% 4yr CAGR). We expect Personal accident to continue to outperform. Overall gross premium growth has been driven by life insurance which has witnessed an 18% 4 yr CAGR, driven by a 26% CAGR in ordinary life class. Underwriting profit margin has underperformed sector average (-2.3% 4yr historical avg. VS. +3% sector avg.) driven by above average acquisition costs (31% 4 yr historical avg. vs. 22 sector). We forecast underwriting profit margins to improve ( 4 yr forecast avg. 4.6%) mainly driven by top line growth.

53 Robust investment yields. Kenya Re boasts above sector, stable investment yields (20% FY11 vs. 6% sector average), which has supported bottom line growth. Investment income accounts for 27% of net income. The reinsurer s portfolio is heavily weighted in Investment property which accounts for 48% of its portfolio. The company has been able to ride the real estate wave which has witnessed strong yields due to increased value as well as rental yields. We expect Kenya-Re to maintain its heavy weighting in investment property to protect against volatility given that it will have to convert into AFS equity investments (accounts for 19% of portfolio) to FVTPL once it adopts IFRS 9 in 2015.

54 Forecast Model Gross Premiums (KES m) FY10 FY11 FY12F FY13F GDP at market prices 2,551 3,025 3,327 3,660 Growth % 7.9% 18.6% 10.0% 10.0% Total Industry premium Growth % 22.6% 15.9% 19.1% 18.4% Insurance Penetration 3.1% 3.0% 3.3% 3.5% Total industry Re-insurance Ceded Growth % 19.0% 20.8% 16.7% 18.4% Reinsurance /premuims 16.7% 17.3% 17.1% 17.1% Total Kenya Re Premium (gross written) 4,981 6,614 7,938 9,480 Growth % 29.6% 32.8% 20.0% 19.4% Kenya 2,884 3,542 4,099 4,872 kenya re share of total premium ceeded 21.8% 22.2% 22.0% 22.1% as a % of total 58% 54% 52% 51% Outside Kenya 2,097 3,072 3,840 4,608 Growth % 0.0% 46.5% 25.0% 20.0% as a % of total 42.1% 46.4% 48.4% 48.6% Gross Short-term (KES m) FY10 FY11 FY12F FY13F Motor Fire 1,615 2,002 2,573 3,058 Personal accident/medical Marine Other 1,087 1,666 1,938 2,296 Total 3,682 4,880 6,005 7,181 Growth % 27% 33% 23% 20% Gross Life Business (KES m) FY10 FY11 FY12F FY13F Ordinary life Group life Total life ,052 1,229 Growth % 7% 44% 23% 17% Short-term Claims KES m FY10 FY11 FY12F FY13F Motor (277) Fire 1,016 1,212 1,579 1,884 Personal accident/medical Marine Other ,160 Gross Total 1,828 2,760 3,346 4,130 Long-term claims KES m FY10 FY11 FY12F FY13F Death, maturity,surrender benefits bonuses and interest Increase in policy holder benefits Reinsurance share (44) (73) (89) (107) Net long-term claims Investment income FY10 FY11 FY12F FY13F Interest from government securities Average yield % 9.4% 11.1% 9.9% 10.1% Interest on bank deposits Average yield % 5.6% 5.7% 5.7% 5.7% Other interest receivable Average yield % 14.4% 13.1% 13.7% 13.8% Rental income Average yield % 11.9% 11.2% 11.8% 11.6% Dividends receivable Sum of fair value gains and losses Total 2,058 2,135 2,043 2,360

55 Key Ratios Insurance operational ratios FY10 FY11 FY12F FY13F FY14F FY15F Underwriting expense ratio 36% 25% 18% 15% 15% 16% Acquisition expense ratio 30% 30% 30% 30% 30% 30% Combined ratio 111% 104% 97% 95% 94% 95% Underwriting margin -11% -4% 3% 5% 6% 5% Loss ratio % FY10 FY11 FY12F FY13F FY14F FY15F Motor -89% 39% 39% 38% 37% 36% Fire 63% 61% 61% 62% 61% 61% Personal accident/medical 88% 86% 75% 83% 81% 80% Marine 59% 53% 53% 55% 54% 54% Other 54% 49% 48% 51% 49% 49% Average 50% 57% 56% 58% 56% 56% Financial Ratios FY10 FY11 FY12F FY13F FY14F FY15F Earnings per share Dividend per share Price earnings ratio Price / Bookvalue multiple Price / Free Cash Flow Return on average total assets 9% 10% 10% 9% 10% 10% Return on average equity ROE 15% 17% 15% 14% 15% 14% Dividend yield 3% 3% 4% 5% 7% 8% Net asset value/share total equity/total assets 61% 60% 62% 63% 65% 68%

56 Forecast Performance INCOME STATEMENT Year to December (KES m) FY10 FY11 FY12F FY13F FY14F FY15F Gross earned premiums 4,554 6,101 7,506 8,977 9,828 10,154 Reinsurance premium ceded (280) (366) (450) (538) (589) (609) Net earned Premium income 4,274 5,735 7,056 8,439 9,238 9,545 Investment income 2,058 2,135 2,043 2,360 2,726 3,124 Comission earned Other income Net total income 6,429 7,972 9,535 10,949 12,129 12,840 Net Total Claims (2,047) (2,940) (3,783) (4,651) (4,876) (4,929) Operating and other expenses (1,525) (1,420) (1,272) (1,302) (1,402) (1,511) Commissions payable (1,277) (1,730) (2,132) (2,538) (2,785) (2,877) Profit before tax 1,581 1,883 2,349 2,459 3,065 3,523 Share of profit of associate Taxation (119) (122) (171) (167) (205) (244) Attributable income 1,541 1,915 2,178 2,291 2,860 3,279 BALANCE SHEET Year to December (KES m) FY10 FY11 FY12F FY13F FY14F FY15F Fixed Assets - Net Book value Intangible assets Investment In Associate 953 1,133 1,133 1,133 1,133 1,133 Investment property 4,617 5,365 6,234 7,225 8,363 9,666 AFS- quoted investments 2,568 2,009 2,963 3,859 4,741 5,977 Unquoted ordinary shares Government securities- HTM 2,777 3,358 3,955 4,519 5,497 6,659 Deposits with financial institutions 2,693 3,687 4,365 4,997 5,296 5,178 Cash and bank balances Other assets 3,213 3,186 3,761 4,062 4,244 4,316 Total assets 17,241 19,096 22,846 26,294 29,844 33,566 Total shareholders funds 10,574 11,526 14,179 16,490 19,387 22,659 Insurance contract liabilities 4,363 4,659 5,333 5,944 6,404 6,748 Unearned premiums 1,643 2,157 2,589 3,091 3,260 3,336 Other Liabilities Source of capital 17,241 19,096 22,846 26,294 29,844 33,566

57 Valuation Our fair value is derived using a price to book (PB) approach based on a 3 year holding period. Using the approach, we forecast accruing net dividends for FY12, FY13, FY14 & FY15 then we use a subjective 3 year forward PB of 0.8x, to derive the terminal values. We then discount the derived cash - flows at 16% (risk free rate of 9%, risk premium of 7% & beta of 1x). Going by our forecasts, we expect Kenya Re to maintain lower than sector average ROE ( 4yr forecast avg. 14.5% vs. sector average 18.5%) as well as premium growth ( 4 yr forecast avg. 14% y/y vs. sector avg. 20% y/y) hence the 38% discount on exit PB. FY12F FY13F FY14F FY15F Dividend NAV Discount period Discount rate 16.00% 16.00% 16.00% 16.00% Discount factor PV dividend Cumulative PV of Dividends 2.18 PV of Terminal value Per Share Value Current price Sustainable PB 0.8 Sensitivity Analysis (COE vs. PB) Upside 59% 14% 15% 16% 17% 18%

58 Recommendation Scale Recommendation scale Valuation range Fair Value > 15% of current market price Fair Value +15% to - 15% Fair Value < 15% of current market price Recommendation BUY HOLD SELL

59 Key Contacts Research Francis Mwangi, CFA Head of Trading Tony Waweru Eric Musau Brenda Kithinji Equity and Foreign Sales Eric Ruenji

60 Legal Disclaimer: The information/quips/quotes in this newsletter originates from domestic and international information public sources (including the Internet) that are deemed reliable, along with public information, and SIB s own processing and estimates at the time. The information has not been researched independently by SIB and SIB does not vouch for the precision, veracity or rightness of the information. SIB does not intend to disappoint anyone with their views in the newsletter as the newsletter is issue oriented and one can lose money based on our views. The opinions of the authors can change without notice and SIB is not obligated to update, rectify or change the report if assumptions change. The newsletter is only published for informational purposes and shall therefore not be viewed as recommendation/advice to make or not make a particular investment or an offer to buy, sell or subscribe to specific financial instruments. SIB and its employees are not responsible for transactions that may be carried out based on information put forth in the report. Readers who are interested in making transactions are urged to seek expert advice and familiarize themselves thoroughly with the investment options on offer. Investments always entail financial risk, including risk due to local investments and fluctuations in the exchange rate of currencies. Investors investment objectives and financial position vary. It should be noted that past returns do not indicate future returns. Reports and other information from SIB are only intended for private use. This report is a short compilation and should not be considered to contain all available information on the subjects it discusses.