UAP banks on private and government securities for recovery

BY VICTOR ADAR

When a financial services provider, UAP Holdings Limited (UAPHL), reported its full year financial results for 2018 at a recent investor briefing, the mood and character of those who were in the room was mixed. The firm recorded a loss of Sh518 million, which is a dip from Sh608 million profits before tax that it recorded the previous year.

At the centre of the deterioration in financial results include unrealized losses in the equity portfolio, property valuation write-downs mainly in the South Sudan portfolio, credit loss impairments, the adoption of international accounting standard (popular as IFRS 9) as well as one-off costs for a restructuring exercise concluded in the first half of 2018.

In fact, this market turbulence was largely driven by a more challenging operating environment in Tanzania and a slower than expected pace of economic recovery in Kenya. Doing business has proved quite tough so much that players never know whether it is going to work. It requires a broader scope of approach

“In driving our strategy of controlled growth we carried out actions to selectively acquire new accounts while dropping non-performing ones,” explains group CEO, Peter Mwangi.

A time when most asset classes are failing to thrive, giving below average returns, Mr Mwangi says that financial services providers will need to place emphasis on technology and process improvements. For UAPHL, that has meant that it has to re-invent itself by going for long term investments mainly tilting focus on private and government equities, a move that he believes will increase operating efficiency thus necessitating optimization of the headcount in the business.

“We are not saying that we don’t want investment income. Underwriting will still be there, and it won’t lose value. There will be volatility but for us it’s about identifying good opportunities. That’s why we now have a preference for medium to longer term investments including private and government securities,” he says.

FACT BOX

The UAP Old Mutual Group is an Integrated Financial Services business comprising Faulu Microfinance Bank, UAP and Old Mutual entities.  The Group operates in East Africa providing investment, savings, insurance and banking services to more than 1.2 million customers.  UAP Old Mutual has its headquarters in Kenya with regional offices in Uganda, South Sudan, Tanzania and Rwanda.

In Kenya, the UAP Old Mutual Group has the fourth largest Property and Casualty (P&C) business, the third largest Health Insurance business, a substantial property investment portfolio and a fast-growing Life Insurance business.  It has established diverse distribution networks via brokers, an agency force, direct sales, bancassurance, digital channels and supermarkets.

In South Sudan, the Group has the largest P&C market share as well as substantial investment property portfolios. The Group also has top presence in Uganda and a substantial investment property portfolio.  UAP Old Mutual also has P&C businesses in Rwanda and Tanzania and is the largest Life Assurance business in Uganda.

UAP Old Mutual is part of Old Mutual Limited (OML), which operates in 13 countries in Africa.  OML was listed on the Johannesburg Stock Exchange on June 26th 2018 with a standard listing in London and secondary listings on the stock exchanges of Malawi, Namibia, and Zimbabwe.

In South Sudan for example, cost of healthcare has gone up. Outcome is, expenses are continuously soaring as well. In 2018 alone, the company spent Sh324 million to retire 89 employees, and another Sh780 million (largely relating to its holdings of corporate bonds in Athi River Mining and Bank M deposits in Tanzania) to cushion it from credit risks.

At the same time, investment income for the Group was down 20.4% due to the poor performance of the equity market in Kenya. Bearish performance on the Nairobi Securities Exchange 20 Share Index, which was down 23.5% in 2018, also negatively impacted its performance on the bourse. The unrealized losses on equities totalled Sh478 million. There was also a net impact of property valuation write-downs mainly due to the South Sudan business that was valued at Sh604 million. Amidst the huge losses, the chief executive is happy on their path to recovery.

“We are managing the risks making sure we have right pricing and also looking at new businesses as we manage costs of doing things. We’ve invested on technology to give us insights into claims,” says Mwangi, adding that the combination of the savings realized from the reorganization and other cost management initiatives led to a reduction of 11% in operating expenses to Sh5.485 billion in the year. “We expect to realize more savings in 2019 given that the impact of the reorganization exercise will be experienced for the full year,” he says.

The firm’s 2017 financial performance paints a bleak picture. Profit before tax went down to Sh1.330 billion compared to Sh1.963 billion, a clear indication that 2018 was a challenging year, and focus now is on 2019. Though the reduction is largely attributed to a downward adjustment to the fair value of investment property in the Kenya business, the firm can’t keep on making losses like this. Something has to give.

“We continue to drive execution of our strategic priorities anchored on consistent profitable growth and exceeding our customers’ expectations. Our investments in people, processes and technology will enable us to fully realise operating efficiencies and improve customer experience,” says Mwangi.   

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