Asset management business slows down BIHL 2019 H1
Business
Botswana Insurance Holdings Limited (BIHL), the country‘s largest insurance and investment conglomerate has not had it easy in the first half of 2019. According to BIHL financial statement for the half year period ended 30 June 2019 released this week, operating profit for the Group improved marginally by 1% over the 6 months when gauged against the same period in 2018.
Zooming into business operations per segment, BIHL reports that operating profit for the life business increased by 2% over the same period despite difficult economic conditions and intensified competition, while the general insurance business was positively impacted by lower claims registering 18 % growth in operating profit.
On a major highlight, posting negative movement the Group‘s asset management business under its market outfit Botswana Insurance Fund Management (BIFM Holdings) went the opposite direction ending the six months period with a decline of 42 percent in operating profit due to pressure on the fees earned as well as once off provisions that were booked during the period.
“The first half of the year has been a challenging one for BIFM Holdings; operating profit is showing a continued decrease of 20% when compared to the same period last year,” explained BIHL Executives. The Group says this low performance is mainly attributable to competitive landscape BIFM operate in locally which is depicted by pressure experienced in the investment management fees and once off costs that contributed negatively to the operating profit movement.
On a slight positive wave under asset management segment was the Zambia business upswing with a 24 percent increase in operating profit from the previous half year period. However due to its size the Zambia asset management business could not fully offset the decrease in BIFM’s performance. Total Assets under Management including Zambia’s P4.4 billion stands at P28.3 Billion , closing the 2019 half year at a slight increase of 2% on prior year.
Another negative performance was experienced by BHIL associates and joint ventures, closing the six month period at 38 percent decrease on share of profits contributed to the group. The main driver of this decline was a drop in fair value of Letshego Holdings Limited.
The other associates, Funeral Services Group, Botswana Insurance Company Limited and NICO however reported satisfactory results compared to last year. Investment income which comprises dividend income and interest income increased by 104% compared to prior year as a result of dividends from the Offshore Private Equity fund.
On a close look on BIHL in house subsidiaries the life insurance business which operates under Botswana Life experienced significant positives in the period under review , closing the half year at slight operating profit increase from P164 million in June 2018 to P166 million in June 2019. This slight growth is mainly as a result of good new business volumes from the group lines and low new business strain for Botswana Life retail products.
Net premium income for the first half of 2019 grew by 11% from P1.15 billion in 2018 to P1.28 billion, with all income lines posting good growth from prior year, while total new business written grew by 6% underpinned by strong single premium income performance. Recurring premium income grew by 12% from P634 million in June 2018 to P712 million in June 2019. “This line represents a sustainable source of profits in the long term” observed BIHL.
The value of new business, which represents the present value of future profits from new business premiums written during the year, was flat compared to prior year despite the challenging operating environment. Operating expenses increased above inflation as a result of the investment made on the 5-year strategy that was rolled out at the beginning of the year.
In the short term insurance space, Legal Guard, the group’s segment market outfit continued to experience top line pressures which saw revenue declining by 3% compared to the first 6 months of 2018. However operating profit achieved for the first 6 months of 2019 amounted to P1.6 million, a slight increase of P0.2 million higher than for the same period last year.
The business has also managed to contain operating expenses which are 1% lower than the same period last year. “As the results for the half year reflect, top line performance is and must remain the preeminent focus area. The business will continue to implement its comprehensive sales strategy in order to turn around the top line performance,” shared BIHL Executives.
On the overall, BIHL Group’s embedded value increased to P4.38 billion from the P4.37 billion reported as at 30 June 2018. The embedded value allows for P234 million in dividends paid during the first half of the year. The value of new life business is flat at P66 million compared to prior year. Value of new business was subdued for the risk and term assurance products due to lower new business volumes for the period.
BIHL Group Chief Executive Officer Catherin Letegele says prospects for the economy remain mixed reflecting both international economic uncertainty as well as domestic challenges. “Despite these challenges we are focused on delivering sustainable growth and value to our stakeholders,” she said.
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Finance Committee cautions Gov’t against imprudent raising of debt levels
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
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Gov’t Investment Account drying up fast!
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”