The real impact of the massive oversubscription of the Kenya Reinsurance Corporation’s Initial Public Offering has emerged with insurance firms poised to be the major beneficiaries of ongoing share allocation.
The underwriters, who are currently bound by law to pay compulsory cessions to Kenya Re, were on course to getting 60 per cent of what they applied for compared to retail investors’ 15 per cent and qualified institutional investors (QII) 20 per cent, according to a formula agreed on last week.
This level of allocation is a win of sorts for the reinsurance company, which had cut the sharing criteria to position insurers as key stakeholders in the company as a way of guaranteeing a steady inflow of revenue when the rule on compulsory cessions it has been getting from the underwriters expires in four years.
Under this method of allocation, retail investors will get a total of Sh1.1 billion worth of shares, the QIIs Sh800 million while insurers will get Sh360 million.
The Kenya Re IPO returns show that retail investors applied for shares worth over Sh6 billion against the Sh1.07 billion that had been reserved for the category, while qualified institution investors applied for shares worth Sh5 billion against a reservation of Sh684 million.
Insurers for who shares worth Sh456 million had been reserved oversubscribed the offer to the tune of Sh600 million, bringing the total value of applications to more than Sh11.6 billion.
Analysts were however quick to point out that some affirmative action appears to have been brought to bear in the allocations in favour of the qualified institutional investors.
This, they reckon, is because going by the level of oversubscriptions in the respective categories, insurance companies would have walked away with 76 per cent of what they applied for, retail investors 17.8 per cent and QIIs 13.6 per cent.
If effected, this change in allocations to investors in the various categories may turn out to be Kenya Re IPO’s greatest puzzle since a notice on the amendment of the allocation criteria that the company published at the end of last week did not include a reduction in the number of shares reserved for allotment to each category.
The allocation however affords Kenya Re some ammunition to take on private insurer East African Re where some of its new shareholders already have a stake.
With insurance companies having a major stake in the firm, Kenya Re is expected to find the battle for premiums a lot easier.
“The company should be able to protect its turf so long as the board and management maintains the growth momentum and the quality of leadership in the organization,” said an analyst who did not want to be named because of his involvement in the matter.
“It will be upon the Kenya Re management to show leadership now that the insurers will be on their side as key stakeholders in the firm. If the management doesn’t perform then it will be to blame,” said the source.
Last week, the massive oversubscription has prompted a slight amendment of the allocation criteria set out in the prospectus. Initially, applicants were to be allocated 100 offer shares in the first instance and thereafter in multiples of 100 on a pro rata basis, rounded down to the nearest 100 shares.
An amendment approved by the Capital Markets Authority said the initial criteria had become impractical due to the massive oversubscription.
Any allocations after the initial 100 will now be rounded off to the nearest whole number until all shares in the category are fully allocated. QIIs may be a bit disappointed that they cannot get a higher allocation but this is related to the fact that the oversubscription for shares in their category was by the largest margin.
Like KenGen, ScanGroup and Eveready floated in 2006, Kenya Re received applications worth five times the value of shares on sale. KenGen had wanted to raise only Sh7.8 billion but ended up receiving Sh26 billion, forcing it to return Sh18 billion to investors.
For Kenya Re, Treasury is surrendering its 40 per cent stake or 240 million shares to the public in the offer that kicked off in mid July.
The flotation had been preceded by a period of waiting as the IPO faced a litany of hurdles. It had earlier been fixed for April but did not kick off until July as the transaction managers dealt with an alleged corruption scandal involving the company’s executives.
The insurers were seen as critical to the success not so much of the offer but of its subsequent operations in the fight for the limited reinsurance premiums market.
Treasury decided to sweeten the offer for insurers, a decision that triggered more interest from the underwriters.
Reinsurance underwriting market in Kenya was worth just about $360 million (Sh24 billion) in terms of net premiums as at the end of 2005, having grown from $324 million (Sh22 billion) in 2004.
Africa Re controlled the highest net premiums of about $296 million as at the end of 2005, followed by Kenya Re with $31 million, PTA Re with $19 million and East Africa Re at $14 million.
Kenya Re however experienced the highest growth of 30.6 per cent compared to East Africa Re which grew by a margin of 17.3 per cent.
This level of growth makes East African Re Kenya Re’s biggest challenge in terms of market share growth. This is particularly so because East Africa Re has recorded this level of growth although it does not enjoy compulsory reinsurance premiums from local underwriters and is therefore somehow disadvantaged when it comes to competing in the marketplace.
Kenya Re’s premiums will however end in four years or when the company is fully privatized and therefore the state is keen to ensure that it protects Kenya Re future market. Significantly, mistakes by the management or board (or even perception of the same) can cost the reinsurer a lot.
The situation is revealed to be tenuous if you consider that though Kenya Re has 18 per cent compulsory reinsurance, it managed only 21 per cent total premiums in the industry. Thus it had only three percentage points above the compulsory cessions.
The question is whether the company would survive in a situation where the compulsory cessions are not in place. It has to keep insurers close for it to be assured of a portion of the market when it is no longer protected by the law.
The prospectus for the shares said: “This [end of compulsory cessions] may expose Kenya Re to a reduction of the premium it collects since insurance firms will no longer be obligated to reinsure with Kenya Re.”
However it adds that this may not necessarily be the case if it was to maintain the 21 per cent market share that it has including the 18 per cent compulsory cessions.
Other firms could arise to operate locally. Munich Re, one of the world’s largest reinsurance firms, has a liaison office in Nairobi but it is not known whether it might choose to operate as a full subsidiary in future and compete with existing reinsurance firms.
A key strength of Kenya Re, however, after the sale of the shares to the public is that it will be seen to be more transparently managed and shareholders expect greater accountability and disclosure. This alone may positively affect its ability to net premiums from the local market and abroad.
Written by Geoffery Irungu, Business Daily.