Stock market decline eats into insurers’ returns

Capital markets

Stock market decline eats into insurers’ returns

Nairobi Stock Exchange trading room. FILE PHOTO | NMG

Insurance companies suffered lower investment income in the first half of the year as lower share prices in the Kenyan stock market weighed on their profitability.

Sanlam Kenya, Old Mutual Holdings, Jubilee Holdings and CIC Insurance Group all saw falling revenue and gains from their shares, at a time when the Nairobi Stock Exchange (NSE) lost 654 billion shillings, a quarter of its market capitalization.

Old Mutual said in its financial statements released yesterday that its investment income fell 35% to 1.88 billion shillings in the period, while CIC, which made its statements earlier this month, said reported a 22% drop to 2.05 billion shillings.

Sanlam’s investment and other income fell 34% to 1.02 billion shillings, while Liberty’s fell 79% to 13.9 million shillings.

Jubilee Holdings, Kenya’s largest listed insurer by market capitalization, said its other income, which includes investment income, fell 30% to 4.67 billion shillings over the past six months. month ending in June.

Insurance companies normally look to stocks and bonds to diversify their income, especially given the slow growth of new insurance business acquisitions.

That leaves them at the mercy of a volatile stock market, however, which has oscillated in recent years between steep losses and big gains in some stocks such as Safaricom.

“Net investment income was down 34% due to falling stock markets and rising yields in the Kenyan market, which impacted stock and bond valuations within our business,” said Old Mutual.

“Bond yields have risen as interest rates have risen, leading to fair value losses on our bond portfolios.”

NSE stocks have been hit by both external and local shocks this year, with the main factor behind the decline being the sell-off by foreign investors following the Russian-Ukrainian war, which began in February.

During the six-month period, foreign investors withdrew a net amount of 12.6 billion shillings from the exchange, a fourfold increase in net sales of 2.98 billion shillings seen in the first half of the year. last year.

Capital flowed to the safety of Western markets due to global economic uncertainty resulting from the war.

Inflation in the West has also risen sharply due to soaring fuel and food prices due to the conflict, forcing central banks to raise rates to temper the high cost of living. These higher rates have in turn diverted capital from riskier emerging markets like Kenya.

Exposure to treasury bills has also increased, with insurers now holding 310 billion shillings of government securities, up from 259 billion shillings a year ago.

Over the past year, the yield curve for government securities has risen significantly, indicating a growing perception of risk on government loans, which has led to the downward movement in the price of these securities in the market.

This means a downward revision in the value of the portfolio for holders of bonds such as insurance companies and banks, even if the interest generated by these papers is not affected, and any real loss cannot be realized. only if they choose to sell their holdings.

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