Strong M&A activity expected in Kenya insurance sector

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The insurance industry in Kenya is expected to see a round of consolidation this year, as operators in the fast-growing sector look to not only increase market share but meet higher capital requirements.

The sector has witnessed rapid growth over the past decade, with written premiums reaching compound annual growth rates (CAGR) of 15.1% between 2004 and 2014. Some in-house estimates put growth in the non-life segment at 20% per annum, while the health insurance component is leading the expansion with a 38% growth a year.

Yet despite the fast market growth, penetration rates remain low, at just 3.4% of GDP in 2013, according to the Insurance Regulatory Authority (IRA), the market’s governing agency, a small increase from 3.02% the previous year, but still far below South Africa’s 14.16%. Premiums have been buoyed by compulsory coverage requirements, or in some cases insurance cover provided through the workplace.

The sector is likely to benefit from the same forces that have put Kenya’s banking industry on a fast trajectory over the past few years, including a rising middle class and the influence of technology. “We see mobile products as a great catalyst for growth in the sector, amongst other innovative distribution channels that the industry is exploring,” Jared Kangwana, chairman of The Monarch Group, sister company of The Monarch Insurance Company, told OBG. “Technology will be the big driver for growth in the insurance industry”.

Currently, there are more than 40 companies offering insurance services in the Kenyan market, resulting in significant competition in what remains a relatively small industry. Total written premiums for 2013, the last full year for which figures have been released, were KS130bn ($1.45bn), with total net profit reaching KS14.5bn ($161m).

Bigger market, fewer players

Forecasts are for growth to continue in 2015 with an increase in the client base and premiums, but potentially fewer operators.

The industry regulator said in January that at least two local insurance firms are holding acquisition or merger discussions. According to IRA CEO Sammy Makove, the coming year will see a heavy dose of consolidation: “In 2015 we are anticipating to see more abrasive acquisitions and investments in the insurance industry,” Makove told local media. “Insurance is seen as the next frontier for growth because penetration is still low, so there is potential for the market to grow.”

One deal has already been completed so far this year, with insurer Old Mutual acquiring a 37.3% stake in local insurer UAP Holdings for $155.5m in cash, after investing a total of $253m during the month and taking its holding up to 60.7%. Old Mutual said UAP has the third-biggest property and casualty market share in Kenya and the second largest health insurance business. 

In late November, private equity firm LeapFrog Investments announced it was planning to buy a majority state in Kenya’s fourth largest health insurer, Resolution Insurance, with a bid valued at around KS1.6bn ($18.7m).

The pattern is set to continue, according to sector participants. “The industry expects more foreign players to enter the market as the fundamentals for substantial growth are there,” Vijay Srivastava, CEO of GA Insurance, told OBG. “And the only realistic way for them to do so is to acquire stakes in local players, as the industry is already overcrowded.”

A number of past mergers and acquisitions were driven by higher capital requirements as well as an IRA-imposed cap on individual stakes in insurance firms at no greater than 25%. The latter rule was announced in 2012 and had a final deadline of the end of December 2014. 

While those requirements sparked a wave of M&A activity in the sector, the next expected wave of transactions might be driven mainly by increasing competitiveness as well as investors seeking to take advantage of the potential for expansion.

Regulatory revamp

The industry is also shifting to improved risk-based supervision (RBS) measures. The IRA outlined its increased focus on RBS in its 2013-2018 strategic plan, saying it reflected best practice in the industry globally, increasing both consumer protection and regulatory oversight.

Additionally, the IRA has submitted guidelines to the central bank to ensure that bank customers are guaranteed freedom of choice when taking out coverage from bancassurance providers. It is expected the new guidelines will come into force after being approved by parliament later this year.

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