Stock market decline eats into returns for insurersWednesday August 31 2022
Insurance firms suffered a decline in investment income in the first half of the year due to lower share prices in the Kenyan stock market denting their profitability.
Sanlam Kenya, Old Mutual Holdings, Jubilee Holdings, and CIC Insurance Group have all reported lower income and gains from their stocks, in a period when the Nairobi Securities Exchange (NSE) shed Sh654 billion or a quarter of its market capitalisation.
Old Mutual said in its financials published yesterday that its investment income fell by 35 per cent to Sh1.88 billion in the period, while CIC, which made its disclosures earlier this month, reported a decline of 22 per cent to Sh2.05 billion.
Sanlam’s investment and other income declined by 34 per cent to Sh1.02 billion, with Liberty’s retreating by 79 per cent to Sh13.9 million.
Jubilee Holdings, Kenya’s largest listed insurer by market capitalisation, said its other revenue—which includes investment income—was down by 30 per cent to Sh4.67 billion in the six months to June.
Insurance firms normally turn to stocks and bonds in order to diversify revenue, especially in light of the slow growth in new acquisitions of insurance business.
This, however, leaves them at the mercy of a volatile stock market, which in recent years has see-sawed between steep losses and sharp gains on selected stocks such as Safaricom.
“Net investment income was down 34 per cent driven by equity market falls and rising yields in the Kenyan market that impacted equity and bond valuations within our business,” said Old Mutual.
“Bond yields have been on the rise in line with increasing interest rates, which led to fair value losses on our bond portfolios.”
Shares at the NSE have been hit by both external and local shocks this year, with the biggest factor behind the decline being the foreign investor selloff that followed the Russia-Ukraine war, which began in February.
In the six-month period, foreign investors withdrew a net of Sh12.6 billion from the bourse, a fourfold rise from the Sh2.98 billion net sales seen in the first half of last year.
Capital flowed to the safety of western markets due to the global economic uncertainty that came as a result of the war.
Inflation in the West has also risen sharply as a result of the fuel and food price jumps due to the conflict, forcing central banks to raise rates to temper the high cost of living. These higher rates have in turn attracted capital away from riskier, emerging markets such as Kenya.
Exposure to Treasury bonds has also gone up, with insurers now holding Sh310 billion worth of government securities, up from Sh259 billion a year ago.
In the past year, the yield curve for government securities has risen significantly, indicative of rising risk perception on lending to the State, resulting in the downward movement in the price of these papers in the market.
This means a downward revision in portfolio value for bond holders such as insurance firms and banks, even though the interest earned from these papers remains unaffected, and any actual losses can only be realised should they opt to sell their holdings.