Insurance firms sound profit alerts as stock market bear run hits hard

Corporate News

The benchmark NSE 20 Share Index has lost about 21 per cent since the beginning of the year. PHOTO | FILE 

By VICTOR JUMA

In Summary

• The earnings drop could lead to reduced dividends for investors, who have seen their paper wealth fall as the insurers’ stocks also took a hit from the expected profit drop.  

The ongoing bear market has seen insurers with heavy exposure at the stock market record significant unrealised losses which are set to hurt their performance this year.

Pan Africa Holdings,Britam and UAP Holdings have already issued profit warnings, indicating that their full-year net earnings will fall by at least a quarter as a result of the erosion of the value of their portfolios at the Nairobi Securities Exchange (NSE).

READ: Pan Africa issues profit warning pushing tally to 15

The earnings drop could lead to reduced dividends for investors, who have seen their paper wealth fall as the insurers’ stocks also took a hit from the expected profit drop.   

The benchmark NSE 20 Share Index has lost about 21 per cent since the beginning of the year while the overall market, as measured by the NSE All Share Index, has fallen 12 per cent.

The market sell-offs have seen the Nairobi bourse lose over Sh270 billion over the same period to the current value of Sh2 trillion, marking down the insurers’ marketable securities.

The bear run has also spread to companies trading on the over-the-counter (OTC) market where some insurers have also booked significant paper losses. Underwriters with large investments in publicly traded companies have seen their earnings swing in line with the market cycles, recording big profit jumps in bull runs and lower earnings in bear markets.

Insurers, however, tend to have a long-term investment horizon and rarely realise losses from trading their stocks. This has seen them receive dividends even as the long-term rally of equities add to their net worth.

More insurance firms are however seeking to invest more in alternative asset classes like real estate to mitigate the impact of market swings on their short-term performance.

Pan Africa has been one of the most affected by declines at the Nairobi bourse, with the insurer now issuing a profit warning for the second consecutive year.

“The board of directors wishes to advise Pan Africa’s shareholders and the general public that the group’s consolidated profit after tax for the year ending December 2015 is expected to be more than 25 per cent lower than the profit for the year ended December 2014,” the firm said in a statement.

Besides its exposure at the NSE, Pan Africa also recorded marked-to-market losses in its five per cent stake at an OTC-traded commercial bank.

The profit warning means Pan Africa is expecting maximum net earnings of Sh653 million this year compared to Sh871.1 million in 2014.

Britam has also alerted investors that its net profit in the same period will fall by at least 25 per cent compared to Sh2.4 billion the year before.

The insurer has recorded paper losses in its investments in Equity Group (10.1 per cent stake) and Housing Finance (46 per cent) whose share prices have dropped by double digits.