MARKET RISK AVOIDING PITFALLS IN THE MARKET

1. MARKET RISKAVOIDING PITFALLS IN THE MARKET “Unleash the trade Potential”

2. Who is Britam? Britamis a leading diversified financial services group, listed on the Nairobi Securities Exchange. The group has interests across the East African region and offers a wide range of financial products and services in Insurance, Asset Management, Banking and Property.

3. Our Structure

4. What is Risk? Uncertainty surrounding future events and outcomes

5. What is Market Risks (A basket of risks)

6. UNDERSTANDING THE RISKS • In the developed markets growth has stalled • Emerging markets are offering potentially higher rewards, but there are heightened risks. • In the next few slides we will review 5 common risk you may face as you seek to take advantage of the opportunities within Kenya (in counties) or regionally.

7. 1. CURRENCY RISKS A form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk.

8. Transaction Currency Risk This form of currency exposure, which impacts the cash flow of the company, is commonly referred to as transaction exposure For Exporters currency risk is the likelihood that a change in exchange rates will result in the company receiving a lower amount of Kenyan shillings than originally anticipated. For Importers Currency risk is the likelihood that a change in exchange rates will mean the company has to pay more than planned.

9. Accounting Exposure Risk • Accounting exposure applies when asserts and liabilities denominated in foreign currency need to be converted to Kenya shilling for accounting purposes. • The conversion normally results in exchange gains or losses. Most companies focus on managing transaction exposures.

10. 2. INTEREST RATE RISKS A form of risk that arises from fluctuations in interest rates which impact on the organization’s profitability. An adverse movement in the interest rate may increase borrowing costs, reduce returns and reduce profitability.

11. Understanding Interest Rate Risk • Interest rate risk may arise from a number of sources: • Where interest costs fluctuate during the life of a loan • Resetting of interest rates on short-term investments such as bank deposits, commercial paper, bank bills • Impact of interest rate changes on the value of long-term financial assets and liabilities. E.g. the value of a bond will fall as interest rates increase

12. Are you exposed to Interest rate risk? • Its important to understand your exposure to interest rate risk: • Is your business carrying a high debt load at a variable interest rate? • If your interest costs increased significantly would you have trouble meeting your current debt obligations?

13. 3. EQUITY RISKS • A form of risk that arises from fluctuations in market value of equities and other assets

14. Understanding Equity Risk Equities (commonly known as stocks or shares) are historically the riskiest and best rewarded of our main asset classes. However, severe losses can occur at any time and frequently do.

15. Recent examples of Equities Risk Equities are a volatile asset class (High Risk: High Reward) For example: In 2011, Britam posted a loss of Sh1.7 billion largely contributed to by poor performance of the stock market. In 2012, Britam posted an after tax profit of Sh2.5 billion; a complete turnaround from the previous year's loss. Attributed to among other things a bullish run at the NSE

16. 3. POLITICAL RISKS “the risk of a strategic, financial, or personnel loss for a firm because of such non market factors as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labor, and developmental), or events related to political instability (terrorism, riots, coups, civil war, and insurrection)

17. Understanding Political Risk Despite many gains in this area, political election cycles and political transitions in the Africa still have the potential to triggers violence, affect market stability and impact negatively on businesses and investments.

18. Types of Political risk currency transfer and conversion risks; cancellation of licenses and restrictions on import and exports; terrorism, expropriation, confiscation, nationalization, deprivation of physical or financial assets Wars and coups

19. Recent examples of Political Risk South Sudan – With over 2 million US Dollars stuck in South Sudan’s banks, Jetlink eventually ran out of cash and had to halt operations. Kenya – Political violence as experienced in Kenya in 2007/8 caused interruptions and affected business in the entire region. Goods did not move from Mombasa to Kampala or Juba for about one month Nigeria – Terrorism has direct and indirect impact: destruction of property, business disruption and redundancies. Industries affected include tourism, wholesale and retail trade and services

20. 4. CATASTROPHE RISKS Large scale catastrophic events that are caused by weather including food insecurity and energy supply volatility are a rising concern in the African region. Also includes fire, flood, major terrorist attacks etc.

21. Understanding Catastrophe Risk • Catastrophic events, such as fire, flood and terrorist attacks are rare but it only takes one event to close down a business permanently. • Types of Catastrophes: • volcanic eruptions • pandemic infections, • nuclear accidents • climatic changes • economic collapse.

22. Recent examples of Catastrophe Risk Iceland Volcanic Eruption The eruption of the Eyjafjallajökull volcano on 14 April 2010 affected the economic, political and cultural activities across the world.

23. Impact of the Iceland Volcanic Eruption • Kenya • destroyed 400 tonnes of flowers it was unable to airship to the UK. • economy incurred losses of $3.8m each day of the and thousands of farm workers were laid off. • Zambia'sflower and vegetable industry lost about $150,000 a day. • Uganda'sfish and flower export businesses, were also affected by the lack of air freight. • Nissansuspended production of three models in Japan and halted production of 2,000 vehicles in two plants. • Samsung and LG were unable to air-freight more than 20% of their daily electronics exports

24. AVOIDING THE PITFALLS - MITIGATIONS In the following slides we will examine the various ways that business can mitigate the market risks described.

25. 1. Currency Risk – Possible Mitigations • Hedge Currency movements through use of Forward Contracts arranged with a financial institution. • A currency forward contract is a binding agreement between 2 parties to buy or sell currency at an agreed upon future date for an agreed upon price. • This neutralizes the impact of any currency movements that may occur.

26. Currency Hedge Explained For example: • If you know you must pay your supplier USD 50,000 six months from now, you can enter into a forward contract today that ensure you have access to US50,000 in six months at today’s exchange rate. • While you may not benefit from any potential gains, you are full protected against losses.

27. Mitigating Currency Risk - CAUTION • Currency hedges are expensive • Does the cost of creating the currency hedge outweigh the currency downside risk? • What is the duration of the exposure? Over the short-term currencies tend to fluctuate relatively little, which means the cost of the hedge may not be worth the marginal benefit.

28. 2. Interest Rate Risk – Possible Mitigations • Move to Fixed Interest Rate: move from a variable rate to a fixed rate loan structure to provide greater cost certainty. • Loan Re-amortization: You may also be able to negotiate lower monthly loan payments by extending the amortization period of your loan. While this increases your interest costs over the long term, it can be an important strategy for keeping payments affordable in the short term.

29. 3. Equity Risk – Possible Mitigations Asset Diversification: Add asset categories that move independently from the stock market e.g. bonds, property / real estate

30. 4. Political Risk – Possible Mitigations Government policies e.g. expropriation: Partner with an established local company. Engaging in legitimate lobbying activities and/or building relationships with influential citizens. Labor Unrest: Establishing appropriate sustainabilityand community programs. Develop partnership and social investment programs aligned with the population’s needs

31. 4. Political Risk – Possible Mitigations Procure political risk insurance (PRI), either from private insurers or governmental agencies such as African Trade Insurance Agency ATI or Lloyd’s of London. Conventional underwriters.

32. 5. Catastrophic Risk – Possible Mitigation • Protect business operations. Business interruption insurance may replace lost earnings. • Have a contingency plan. • Are there alternative premises where your business can operate? • Are back up files easily accessible? • How will you and your staff communicate?

33. Reassess risks at regular intervals These are just a few risks that you may face as seek to maximize on the opportunities presented by the phenomenal growth in Africa A risk management plan is an excellent way to protect your business from the risk it may face. Make a regular risk assessment part of your longer-term business planning.

34. Managing risk is core to our Business TUNESIA MOROCCO Africa ALGERIA LIBYA EGYPT WESTERN SAHARA MALI ERITREA MAURITANIA SUDAN NIGER CHAD SENEGAL GAMBIA DJIBOUTI BURKINA FASO BENIN SIERA LEONE NIGERIA SOMALIA SOUTH SUDAN COTE D’IVOIRE TOGO ETHIOPIA CENTRAL AFRICAN REP. GHANA LIBERIA CAMEROON With the acquisition of Real Insurance, Britamwill soon have a Pan African footprint. Our innovative solutions will offer you the desired protection from various operational risks you may face as you expand into the region EQUATORIAL GUINEA UGANDA KENYA CONGO SAO TOME & PRINCIPE BURUNDI GABON RWANDA DEMOCR. REP. OF THE CONGO SEYCHELLES TANZANIA COMOROS ANGOLA MALAWI ZAMBIA MADAGASCAR MOZAMBIQUE NAMIBIA ZIMBABWE MAURITIUS BOSTWANA SWAZILAND LESOTHO SOUTH AFRICA

35. Britam Product Offering in the Region: • Moveable asset protection: • Motor Vehicle insurance (Personal and Commercial) • All Risk (Portable items like laptops, personal computers, videos, baggage, cameras and other fragile electronic) • Immoveable asset protection: • Industrial All Risk - (Fire & Allied Perils, Burglary, Accidental damage and Business Interruption) • Machinery Breakdown - (Factory production machinery, workshop machinery, generators, industrial lathes, drills, compressors) • Workers protection: • Personal Accident (insured for physical and visible body injury caused in an accident) • Employers Liability (cover to employers for legal liability upon death of or bodily injury to or illness of an employee) • Medical protection: flexible cover for staff and their eligible dependents for hospitalization due to illnesses and/or accidental injuries