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Andrew Kuhn

Jubilee Holdings Ltd: East Africa’s Largest and Most Profitable Insurer is Hidden Behind a Thinly Traded Stock

by   JOHN M. KAMARA

by JOHN M. KAMARA

JUBI(Ticker Symbol - “JUBI” in Nairobi) is an insurance holding company listed on the Nairobi Stock Exchange since 1985 that owns and operates an 82 year old insurance operation across the East African region. As of June 28, 2019 the company has a market cap of US$290million (Ksh29 billion). In my view, the stock offers a decent investment opportunity for a buy-and-hold type investor because of the businesses quality combined with the discounted price the shares seem to trade at. I believe this price is available because of an “illiquidity discount”.     

Incorporated in 1937, Jubilee Insurance was the first local Insurance Co set up as one of the initiatives by the then Imam of the Nizari Ismaili to revive the East African economies following the world recession of 1932. Sir Sultan Mohamed Shah Aga Khan III was the 48th heteridtary Imam of the Nizari Ismaili which is a branch of the Islam faith commonly referred to as the Nizari’s. The “Nizari’s’’ are a global, multi-ethnic community whose members are citizens from many parts of the globe.

This ‘group’ is involved in development, social and economic work through the Aga Khan Development Network (AKDN) that in turn carries out its activities through a multiplicity of its agencies. Its agencies are involved in sectors ranging from education to health, finance and even investment.   

The AKDN is currently under the leadership of His Highness Aga Khan IV, the 49th Imam of the Ismaili Muslims who is the grandson of the Sultan.   

The insurance company was one of the many business interests the AKDN would establish or invest in as part of their wider goal to improve the “quality of lives of the people/community” through its agency, the Aga Khan Fund for Economic Development (AKFED). This agency has been investing in for-profit businesses over the decades with potential to improve the lives of the members of the communities the businesses operate in. This type of investing has been more recently been termed Social Impact Investing (SII).

So in 1937, the Aga Khan called together a few prominent Ismailis from all over East Africa to join him start a local insurance company. The Company began with a small office in downtown Mombasa and today is now the largest composite insurer in East and Central Africa with annual premiums of $US 260million and $US670 million in float as of year 2018. 

The listed company is an insurance holding company, Jubilee Holdings Limited (“JUBI” in Nairobi) which underwrites general, life and pension business through majority owned subsidiaries in Kenya, Uganda, Tanzania, Burundi and Mauritius. Its subsidiaries, whose businesses are split into General (what is more commonly referred to as Property & Casualty in many parts of the developed world) and Life Insurance companies, all rank in the top 3 or 4 in market share in their respective jurisdictions. In addition, JUBI began operations in the Democratic Republic of Congo (DRC) in 2015 through a partnership with state-owned insurance company, Sonas to offer medical and life cover products. However I don’t think the business results of this partnership have been material given the lack of mention in the any of the annual reports or earnings releases since 2015. In aggregate, the holding company underwrites more business than any other insurer in the region.

The Industry

The insurance industry in the region has about 60 players but less than 10% control over 60% of the market. Most of these players are small companies underwriting one or two risks (usually motor and fire). The biggest composite insurers in the region are Jubilee Insurance, Britam Holdings Ltd, ICEA Lion Limited, UAP Old Mutual Holdings Ltd and APA Insurance Limited.  The Industry has had mixed results with underwriting losses in some years and underwriting profits in others. Insurance penetration is very low (1 - 4% of GDP) but the industry has been growing. In 2018, Kenya, the region’s biggest economy and Jubilee biggest market recorded annual premiums of $US2billion while Uganda, Jubilee second biggest market booked         $US192 million in annual premiums.

Insurance products and services are not so popular in East Africa because the products are fairly complicated and the majority of the population is illiterate or semi-liberate. Like most developing nations, many don’t understand the need of insurance. However, the industry has been growing fast as the growth in the economies brings the increased need for insurance products and services.  

The biggest insurers in the region have been in the industry for longtime, have massive sales forces, network of partnerships and the financial capacity to underwrite lines of business the smaller players can’t. As you probably know, insurance is a commodity business and therefore establishing competitive advantage is very difficult. However, if an insurance operation is run in a conservative way, understands insurance risk and can sacrifice short term growth for profitability then the shareholders of that business may own something worthwhile.

Past Performance, Economics, the Good and the Bad

To properly analyze the insurance operations of JUBI, you need break it up into three business units that are distinct albeit connected. The units are general insurance (P/C), life insurance and investments. When you look at the income statement of the holding company, it aggregates all the items from the three units of the consolidated subsidiaries. In fact, the regulations in most countries it operates in have already instructed insurers to have their general and life business done in separate limited companies. General insurance comprises of lines of insurance like fire, motor, marine, workmen’s compensation and the largest, medical insurance while life consists of individual/group life polices and pension administration. ‘Investments’ refers to the investment operations of the float generated by the two units described above.

As you probably know, the insurance business model is a float business which boils down to a ‘collect now - pay later’ model. Insurers turn this float into a revolving fund where by $1 paid out (settled claims) is simultaneously being replaced by another $1 of new business being written (collected premium) making it seem like the money never left. This money stays with the insurer who invests it for the benefit of the shareholders. However, to turn an operating profit, this business must pay out less than it receives annually (or over time).The difference between the two figures will be the cost of its float. A negative cost means it’s making an operating profit that can be added to the revolving fund (float) and increase income from investments which further grows the float and this creates a compounding effect. A positive cost on the other hand means the business is paying ‘interest’ to have this revolving fund. The ideal insurance operation makes money from both underwriting and investments while growing the size of its float.

JUBI premium revenue is currently spilt about 67% from general insurance and 33% from life & pensions business. The general insurance unit has made underwriting profits every year in the last decade while its life insurance unit has done the exact opposite - lost money every year since 2007. Worse yet, the underwriting loss from the life business has been greater than the profit from the general insurance business every year in the last decade. This means it has had an overall underwriting loss each year over the last decade. So, one part of its insurance operation is very good, another is terrible.

The life business includes guaranteed funds, life cover and pensions. I think the life insurance business is very difficult because the risk you cover per policy can be very long term. The pricing of these policies are based on very long term and very unpredictable variables like future interests rates. This is a key variable in the pricing of an insurance policy. The East African region‘s economies are typically developing ones and have been rocked with turbulent political and economic changes in the past decades, they have had revaluation of currencies, changing monetary policies, times of hyperinflation etc. This is not the kind of environment you want to sell a life policy in because the current price may look good today or even 5 years from now but then turns into a terrible one in the subsequent 10 years of the policy and you are on the hook for it. Combine that with players undercutting prices to gain share and you’ll end up with a horrible business.

A look at other life underwriters confirms the struggling economics of underwriting life insurance. Britam Holdings plc, the biggest life underwriter in the region had $US100 million (Ksh.10.76bn) in net premiums of life insurance in 2017 and made an underwriting loss of $US 30million  (Khs.3.15bn). ICEA Lion Life Assurance booked net premium revenue of $US68 million  (Ksh.6.8bn) and made an underwriting loss of $US74 million (Ksh.7.4bn). I find it interesting that no single listed insurance company in East Africa explicitly discloses their underwriting results in their annual reports or annual filings with the exchange. The numbers have to be worked out from the financials footnotes. A few of the letters from managements in the annual report mention the underwriting results but with a lot of ambiguity. I think the regulator should probably put some emphasis on such disclosures. 

So why does Jubilee or and its competitors bother selling life insurance?

Underwriting life polices creates longer term float that can be invested in longer term investments that should potentially earn better returns. You may not be able to invest float from general business in say properties or private equity. Therefore life insurance companies are potentially able to earn better long term returns on their float than a typical general insurer underwriting say fire and marine insurance would earn.  

A glance at the segment reporting of an insurer’s annual report shows that the bulk of their investment income comes from the life insurance float. 

JUBI’s bottom line is green because the company is able to more than make up for the cost of its life insurance float via income earned from investing the float. I run that ‘’profit’’ figure considered only the actual cash received from its investment portfolio hence totally disregarding the fair value gains/losses on its portfolio in an attempt to be conservative. I figured it will suffice given they have reported fair value gains in 10 years out of the last 15 years.  

The net result (combination of general, life insurance operations and cash returns from investment portfolio) is positive for 12 out of the last 15 years. This should give the investor an indication of the company’s earning power.   

Moving over to the more pleasant part of the business, Jubilee’s General Insurance business has been making underwriting profits for the last 10 years demonstrating its ability in this line of business. A large portion of its general business (45% of net premiums in year 2018) is from medical insurance and this is what sets its underwriting operation from the pack. Jubilee’s medical business is the largest and the most profitable in the region.

Annual Insurance Industry Report (Kenya) for year 2017 showed Jubilee ranked number one in profits from medical insurance having made $US8.5 million (Khs851m) while the second best made about half that and the third best only 10% of that. The industry report for 2018 is yet to be released but an article in The Business Daily Africa on May 13, 2019 run a story about Kenyan insurance companies blaming doctors for the losses they incurred under medical insurance in 2018. The article mentioned that in 2018, Jubilee Insurance Kenya booked the biggest underwriting profit in medical of $US 7.7million (Khs771m) and followed by CIC Insurance with $US1.7million (Khs179m).  

Medical insurance has been growing nicely over the last decade in East Africa. Industry reports for Kenya (East Africa’s biggest economy) show annual net premiums for the industry under medical line of insurance grew at an 18% annual compounded rate for the 5 years ending 2017.

The reasons for this growth are fairly obvious. The region has a rapidly growing population that has limited access to quality and affordable healthcare and the governments have failed to come up with a workable public healthcare plan that reaches out to the masses. Medical insurance provides a practical solution to this problem.

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