Kenyan underwriters cut their stock market investments to record lows

Kenyan underwriters cut their stock market investments to record lows

Kenyan insurers and reinsurers have cut their investment in equities to record lows and ramped up their holding of government paper in a bid to chase sustainable earnings.

Latest data from the Insurance Regulatory Authority (IRA), which oversees insurance business in the East African country, shows that the sector cut its investment in quoted equities to KES27.47 or just three% of KES805.42bn total investments as at the end of September 2022.

“The industry exposure to capital market investment (quoted shares) continued to drop from 5.5% in Q3 2019 to 3% in Q3 2022 with long-term having the exposure of 2.2%,” said the IRA.

Long-term insurers held KES20.6bn in quoted securities by end of September 2022 compared with KES28.6bn in the preceding similar period in 2021.

General insurers had KES5.74bn in quoted securities while reinsurance firms’ exposure was KES1.14bn.

The underwriters’ continued sell-down from equities has come on the back of underperformance of shares of many companies that are listed on the Nairobi Securities Exchange (NSE) at a time returns from government securities – Treasury bonds and Treasury bills – have been improving.

Kenyan underwriters have in the process increased their investment in government securities to the high of 71.5% and taken the balance to investment property, and term deposits, which have offered more stable returns.

Government securities were in 2014 accounting for 45% percent of insurance industry’s investments while quoted equities took up 20%.

In a period of three years – from June 2019 – the value of the equities investments has fallen by more than 35%, with the underwriters redirecting their investment portfolio towards government securities, investment property, and term deposits, which have offered more stable returns.

Since mid-2019, the NSE has been hit by successive shocks including the Covid-19 pandemic and ongoing Russia-Ukraine conflict, leading to the erosion of billions of shillings of investor wealth.

The rising inflation in the West as a result of the fuel and food price jumps has forced central banks to raise interest rates to cool the high cost of living. But the higher rates have in turn attracted capital away from riskier emerging markets such as Kenya, leading to a fall in share prices.

A drop in the fair value of shares at the NSE hurts investment income, which has increasingly become critical for the sector that has been relying on such returns given the losses in major insurance classes such as medical and motor.

Jubilee Insurance, Sanlam Kenya, Old Mutual Holdings and CIC Insurance Group have all in the past been hit by reduced investment income any time the NSE share prices declined.

Many insurers, alert to the trends in the recent past, have therefore responded to the bear run at the market by cutting their exposure to equities in order to protect their profitability.

The Kenyan government’s rising appetite for both domestic and foreign debt has offered underwriters room to invest in, getting stable returns.

Central Bank of Kenya data showed insurance companies accounted for 7.38% or KES323.7bn of Kenya’s KES4.386trn domestic debt by the end of December.

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