Kenyan insurers are facing weaker returns from their government paper and fixed deposit holdings as interest rates decline, marking a contrast to the previous year when higher investment income lifted their earnings.
Many underwriters, especially those offering long-term insurance, have been increasing their investments in Treasury bills and Treasury bonds over time— with the asset class now accounting for over 70 percent of their investment portfolios.
This shift has come at the expense of other investments such as equities.
The strategy has paid off in recent years, boosting both investment income and profitability.
For instance, investment income, which is money received from investments such as government securities, fixed deposits and property, rose by 79.2 percent to Sh124.87 billion last year from Sh69.67 billion in the prior year.
Long term insurers’ saw their investment income rise by 93.1 percent to Sh105.59 billion from Sh54.68 billion while that of short-term underwriters rose by 28.7 percent to Sh19.28 billion from Sh14.99 billion.
However, insurers are now under pressure to sustain this momentum this year in an environment of falling returns on government paper, coupled with decline in returns on fixed deposits.
For instance, returns from 91-day, 182-day and 364-day Treasury bills averaged 8.45 percent, 8.61 percent and 10.02 percent respectively in the latest auction. The same short-term papers fetched 16.02 percent, 16.9 percent and 16.85 percent respectively in July last year.
Returns on bank deposits are also on a decline, coming from the 22-year high of 11.48 percent in June last year to 8.87 percent at the end of April this year in an environment of falling Central Bank Rate.
Jubilee Holdings Chairman Zul Abdul said insurers will have to diversify their portfolio within Kenya and the region to avoid a sharp drop in investment income, which has been a key driver for bottom-line even in cases of underwriting losses.
“We see headwinds coming in in terms of interest rates on deposits and Treasury bills and Treasury bonds, which is essentially where financial institutions invest. The challenge now is to find alternative investments to get maximum yields,” said Mr Abdul.
“As Jubilee, we are not blind to that. We are looking at more opportunities. We need to go beyond Kenya. There are spots within the region and beyond.”
The industry’s investment portfolio rose by 16.5 percent to Sh1.093 trillion at the end of December last year from Sh938.44 billion at a similar time in 2023, with Sh777.4 billion or 71.1 percent being in government securities. This was followed by Sh125.82 billion or 11.5 percent in term deposits and Sh92.13 billion in properties.
Jubilee Holdings deputy CEO Juan Cazcarra said the insurer is counting on its diversified investments to avert sharp drops in income.
“What makes the difference for us is that we have some strategic investments outside government paper such as Bujagali Power, IPS Cable System and Farmers Choice and this gives us a balanced mix of investment to ensure this income stream is sustainable,” said Cazcarra.
Many insurers have been going for investment classes with higher and relatively stable returns, even as they cut exposure at Nairobi Securities Exchange (NSE) to below three percent of their investment portfolio.
Increasing investment in equity assets is one obvious option for insurers to enhance their returns but they will have to boost their presence in the stock market.
Insurers held 2.2 percent of their investment portfolio at the NSE at the end of last year compared with the peak of 20 percent in 2014 when government securities were accounting for 45 percent.
The NSE market capitalisation has grown by 8.84 percent or Sh171.47 billion to Sh2.111 trillion since the start of the year, positioning itself as one of the attractive investment classes this year.
Insurance companies around the world invest the majority of their funds in bonds, especially government bonds, because they are required to be risk-averse and invest prudently in securities that provide stable, predictable returns and a steady stream of income to meet current and future obligations to policyholders.
