A third of insurance companies plunged to a combined pre-tax loss of Sh8.5 billion, hurt by high costs and a bearish Nairobi Securities Exchange (NSE) #ticker:NSE market and other factors which conspired to sink the sector in a 68 percent dip in profitability last year.
Disclosures show that 16 firms posted straight pre-tax losses while 10 recorded drops in before tax profits — pulling down the sector’s overall profits from Sh15.8billion in 2017 to Sh5.1billion last year. That represents a drop of more than Sh10 billion.
Financial reports for the fiscal year ended December 2018 show that while written premiums increased, investment income dipped and operating expenses grew, piling pressure on the bottom line of most insurers.
Significant underwriting losses for many players were witnessed last year, leaving a number of insurers with ratios below the legal minimum requirements set by the Insurance Regulatory Authority (IRA).
“I think this is the worst year ever in Kenya’s history. We need to ask for how long. Another one similar year and half of these companies will go bust. Maybe consolidation is an answer,” Jubilee Holdings chairman Nizar Juma told the Business Daily.
Most of the profits for the entire sector are concentrated in the hands of Jubilee as the industry writhes in losses.
Half of the Sh13.2 billion pre-tax profit for the 24 insurers that closed the year in profits belong to just two insurers -- Jubilee (Sh5.41 billion) and GA Insurance Limited (Sh1.1 billion).
Other firms that recorded a profit were APA (Sh947 million), Liberty (Sh925 million), CIC (Sh852 million), AIG Kenya (Sh557 million), Mayfair (Sh508 million), Occidental (Sh384 million), Geminia (Sh341 million) and Sh332 million for Kenindia.
Many other insurers, such as Monarch, Saham, Takaful, AAR and Resolution, have breached the capital adequacy ratios set by the industry regulator.
Last year’s Sh419 billion decline in the value of shares at Nairobi Securities Exchange (NSE) as well as lower yields on government bonds resulted in subdued growth in investment income for insurers, dealing a body blow to firms that had high exposures.
As a result, the profits of the seven NSE-listed insurers shrunk three-and-a-half times to Sh2.98 billion from the previous year’s Sh10.14 billion, mainly brought down by Britam, Sanlam and UAP losses.
Of the listed insurers, only CIC insurance booked a growth in profit. Although Jubilee made a profit, it was marginally lower than what the company earned in 2017.
On the other hand, Britam posted a Sh2.2 billion net loss, following a Sh3.2 billion hit on its equity investment in mortgage lender Housing Finance (HF) Group where it has a 48.2 percent stake. HF was the worst performing banking stock at the NSE last year.
Sanlam Kenya plunged into Sh1.97 billion loss on account of reduced income and increased expenses because it had to write off some its key investments.
“Several institutions in which the group’s long-term insurer had invested came under financial distress which led to impairment of approximately Sh1.14 billion, primarily debt notes and equity in Kaluworks, Real People and Athi River Mining,” said the company on its performance.
Britam suffered a Sh3.1 billion unrealised loss on investment from a Sh14 billion gain in the previous year while for Jubilee, it was Sh48.89 million gain, down from Sh2.88 billion in 2017. The unrealised gain of Kenya Re dipped 69 per cent to Sh397 million while that of UAP moved from a Sh5.85 billion gain to a Sh780 million loss in investment.
UAP took a Sh400 million hit from bond investment in ARM Cement and deposits in Tanzania’s Bank M.
This pulled it to Sh518 million net loss, the first in about a decade.
However, Group CEO Peter Mwangi said the firm has now tightened investment criteria.
“We want to deal with people whose creditworthiness is above a certain threshold. We have made the write-offs but will keep up efforts of recovery,” he said last month during the release of results.
Mr Juma said that while last year was generally a difficult year for the industry, the absence of a clear price structure for many of the insurance products compounded by unfair competition risk driving many insurers out of the market.
In 2017, the industry regulator was barred from setting minimum premium prices, leaving market forces to determine costs.
The High Court ruled that the regulator had no role in fixing insurance premium prices.
This has meant that insurers compete for clients without any guidelines, unlike before when for instance, IRA had set 7.5 per cent of a car’s value as minimum premium charged. This was to be discounted by 10 per cent for each year that went without a claim.
Insurers also compete on payment of intermediaries like brokers and this has also meant higher costs in terms of remuneration.
Commissions paid increased by 16.9 per cent from Sh785.5 million in 2018, according to data from Kenya National Bureau of Statistics.
While gross written premiums have gone up for over half of the insurers, underwriting costs have also risen, eating into the topline, according to Jubilee insurance CEO Julius Kipngetich.
According to him, poor underwriting processes have made it worse for many firms.
“Intermediaries’ margins have increased tremendously in the last two years.
There were rules around that but now some firms are paying as high as 12 per cent. They end up with a topline without bottom line,” he said.
Top line refers to a company's revenues or gross sales while bottom line refers to net income, usually arrived at by subtracting all expenses used in generating those sales.