• Friday, March 29, 2024
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BusinessDay

Kenyan insurers diversify into real estate to boost earnings as Nigeria lags

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Whenever interest rates are high and stock markets weak, some Kenyan insurers diversify into real estate especially when there is sharp rise in the price of homes and rental income.

On the other hand, Nigerian insurance companies have not been investing in housing and real estate as they rely on interest from government securities, dividend income, and corporate bonds to add impetus to investment income.

But yields and interest rates are subject to the vagaries of macroeconomic shocks.

For instance, bond yields were high while prices fell high between 2015 and 2017 when a precipitous drop in the price of crude oil tipped the country in its first recession. In short, there was an inversion of the yield curve those periods.

Financial institutions in Africa’s largest economy made money from treasury bills in 2017 when yields hovered between 18 percent and 22 percent. However, T-bill yields began to fall in the first six months of 2018, albeit it started to rise and it is now between 14 percent and 17 percent.

Insurance firms usually channel premiums from their clients to government securities, shares and real estate from which they look to earn interest.

Of course more worrisome is that the Nigeria’s economy has been growing sluggishly as it GDP expanded by 1.80 percent in the third quarter of 2018, below 2.10 percent figure as at the last quarter of 2017.

The stock market has been beaten down throughout 2018 and the selloff has spilled into 2019 as investors fret over the outcome of the forthcoming election while the continuous rate hike by the United States Federal Reserve forced investors to dump emerging and developing market assets for the save heaven of dollar assets.

Despite susceptibility of yields and bonds to the above systematic risk, insurers do not see the housing and real estate market attractive enough for them to invest in and earn higher returns.

This is because there has not been a significant rise in the price of homes and rental income as a tough and macroeconomic environment is taking a toll on consumers and companies.  Nigerians are getting poorer and cannot afford decent homes while office occupancy rates are just picking up as many firms are not renting office apartment as they did during the pre-recession period.

“Many tenants are not paying rent as at when due and it difficult ejecting the recalcitrant ones,” said  Fola Lawal, Chief Financial Controller at Old Mutual.

“A house of N100 million in Lekki will fetch a rent of N5m, that’s just 5 percent. Treasury bills will fetch 16 percent tax, without stress. Insurers were not investing in real estate when other sectors offered more attractive return on investment,” said Lawal.

Despite insurers allure for fixed income investment, they earn less in investment income.

For instance, investment income of 15 largest quoted insurers that have released third quarter 2018  results stood at N20.15 billion, this compares with N118.8 billion incomes from treasury bills raked in by First Bank Holdings Plc.

Little wonder combined average net margins of all listed 23 firms fell to 12.15 percent in September 2018 from 20.12 percent as at September 2017.

Also, combined net income dipped by 3.54 percent to N20.54 billion in the period under review as against N21.29 billion as at September 2017.

Jide Orimolade , former CEO and managing director of Law union and Rock Plc said that retail life business is growing very well in Kenya like individual life policies, burial expenses compared to Nigeria that the only product assisiting the life business is Group life.

“You need long term funds to be able to play in the housing market,” said Orimolade.

Kenya, with a population of 51.68 million and GDP of $98.26 billion, has an insurance penetration of 2.80 percent, thanks to expanding middle class and young population.

On the other hand, Nigeria, with a population of 180 million people and GDP of $414 million, has insurance penetration of less than 1 percent, as the sector continues to struggle with a myriad of challenges like apathy for insurance, poor corporate governance, poor regulations, and tough and unpredictable macroeconomic environment.

Lack of capital that has hindered Nigerian firms from taking on more risk prompted policy makers to be more aggressive on recapitalization as investment returns of insurers are ebbing.