Monday, July 23, 2007

Kenya-RE Offer For Sale

The offer is open from 18th July 2007 to 31st July 2007.The share price is Ksh 9.50.Minimum application is 2000 shares.
The other salient features of the offer can be found at Coldtusker,Ka-investor,Ribacapital and Bankelele.I'll concentrate on the technical issues any other stuff can be found at the blogs above.

The Reinsurance Business

Kenya-Re reinsures insurance companies and other Reinsurers(retrocessions-where a reinsurer insures with another reinsurance company).It doesnt deal with primary insurance-thats why the man who went to court to stop the IPO lost.i.e. his contract was with United Insurance and NOT Kenya Reinsurance.

How does Kenya-Re make money?

In two ways:
1) Reinsurance business-when they make a profit its called an underwriting profit and conversely a loss in this business is called an underwriting loss

2) Investment income-they have an investment portfolio of approx. Ksh 8.9Billion as at December 2006.The returns from this portfolio form the investment income.38% of the portfolio is in Real Estate,Management is trying to reduce this to 25%. Over 50% of investment income is from real estate.

What are compulsory cessions?

Kenya-Re has compulsory cessions of 18% by law.This means that Kenyan insurance companies are obligated to give it 18% of their Reinsurance Portfolio NOT 18% of their total business
i.e. if an Insurance company writes KSH 1 Billion of Fire policies and reinsures Ksh 200 million of the policies then Kenya-Re will get 18% of the Ksh 200 million reinsurances.
The Cessions will end in 2011 or whenever Kenya-Re is fully privatised whichever comes first.

How Good are they at the Reinsurance business?
There is something called Loss ratio in the business.It is calculates as {Claims paid/Net Premiums}.Some use Gross Premiums as the denominator.Look at Page 13 of the Dyer and Blair research report and you will see the comparison of the loss ratios of Kenya-Re,Africa-Re,ZEP-Re and Gen-Re(south Africa).
I have extracted 2005 figures only.

The ratios indicate that Kenya-Re paid out 36.22% of its Net premiums in 2005 as claims while Africa-Re paid out 70.32% of its Net premiums in 2005 as claims,Zep-Re paid out 53.54% of its Net premiums in 2005 as claims.Gen-Re paid out 71.98% of its Net premiums in 2005 as claims.

On this ratio Kenya-Re appears to run a more profitable business since it pays out a lower portion of its Net Premiums as claims.
Insurance is a tricky business you can take on more claims thus growing your Gross Premiums and revenues significantly BUT you eventually pay for the increased business thru' higher claims payouts.Since, by taking more volume of business you take on riskier business.

Who are the Auditors?
Kenya-Re is a State Corporation so the Controller & Auditor-General is the Auditor.However, the Controller appointed Ernst & Young to do the audit for years 2002,2003 and 2004.KPMG were appointed the Auditors for 2005 and 2006.
For the purpose of the Offer for Sale Pricewaterhousecoopers(they will cringe coz i havent capitalised P,W and C) are the reporting Accountants.

Other Information

If you dont want to read the PROSPECTUS, you can read the SUNTRA research report its a summary of the prospectus.The Dyer and Blair research report focuses more on the OFS pricing methodolgy and industry comparison.

What about Todays article in Business Daily?
The article is a cut and paste of the salacious portions of the OFS , the ksh 150 million has been chopped from 2006 profits to cover bad debts from other reinsurers..The other debts to Directors are fully covered charges to various Assets.

Why do the Accounts figures fluctuate from the prospectus, published accounts and previous years statements?
The Accounts had the following treatments:

-The Accounts were stated from 200
4 backwards to conform with IFRS(International Financial Reporting standards).

-After the forensic audit and due dilligence for the OFS some items in the Accounts were changed.

-The reporting Accountants(PWC) had some adjustments made to the Accounts mainly to factor in Ksh 150 million which they didnt think was collectible and recognise the interest in ZEP-Re under IFRS.(Look at their report in the prospectus), this increased the Net profit in all the years 2002-2005 but reduced profits by Ksh 150 million in 2006

What do i think?
Good,strategic company.Reinsurance is a risky business you can have low claims for 10 years then one day a Tsunami,Earthquake or floods affects your claims upwards.
Most african countries dont have reinsurance companies and are hoping to set up some.For instance, Tanzania-Re was set up in the past two years.But its so devoid of technical skills that ZEP-Re has seconded staff to it.

I think the price is great and will stay above the Offer price post listing.

Saturday, July 07, 2007

Stanbic,CFC and the Budget

The past month has been very interesting in the financial world
CFC Stanbic Merger
The mechanics of this merger are in two parts:

1.CFC Holdings will take over Standard Bank of South Africa's stake(Stanbank-SA stake in Stanbic-Kenya is held through Stanbic-Africa Holdings ltd) in Stanbic Bank Kenya in Exchange for CFC Holdings shares.Simply put CFC will give Standard Bank-SA shares in the entire CFC group(CFC holdings) and get the former's shares in Stanbic Bank Kenya

2.Gambit holdings(45% stake in CFC holdings) will sell their shares in CFC Holdings to Standard Bank-SA through Stanbic Africa Holdings Ltd.

The net effect of the two transactions are that Standard Bank-SA will end up with 60% of CFC Stanbic Holdings ltd shareholding

Who has bought whom?
This deal has confused many.The facts are:
-CFC Holdings has acquired Stanbic Bank Kenya ltd.
-CFC Holdings has been acquired by Standard Bank Group of South Africa

Why does CFC Holdings want a CMA exemption?
CFC Holdings wants a Capital Markets Authority exemption because the deal seems to disadvantage the minority shareholders i.e. while Gambit holdings gets to sell its stake in CFC Holdings to Standard Bank Group.
The minority shareholders dont get this option.They can only remain with their shares in the CFC Holdings group or sell them through the market and NOT to Standard Bank if they do not like the deal.

The other merger option
The deal could also be structured in the manner TPS used to consolidate its East african operations under one group.In this case a new company would be formed and it would take over the entire assets of CFC Holdings+Stanbic Bank of Kenya.Then Shareholders of CFC Holdings would exchange their share in CFC holdings for shares in the new group.Likewise to holders of Stanbic Bank of Kenya.

The Budget
Did anyone notice the proposed amendment in the retirement laws that exempted a deceased persons retirement benefits from his/her estate?
This amendment means that if name your girlfriend as your retirement benefits beneficiary and not your wife and children.In the event of your untimely demise, the scheme trustees can pay your pension benefits to your girlfriend and your Wife/children cannot dispute it in a court of law.

Am sure in a few months this law will bring some interesting situations to light.Unless retirement scheme trustees amend the laws on nominating nominees and state who u can or cant nominate as a nominee.
My Blog: From this point on

Am sure most of you have noticed ave been AWOL from Blog world for a while.I took a break from my usual schedule and decided to find out what i can do with rest of my life.After a little thought(it seemed like a lot at the time), i changed jobs,relationships and have now refined my priorities.For my personal life it will be to look for someone who can fill a gap in my life but am in no no hurry.
For my professional life , i now do something i like and is intellectually very stimulating.

For the Blog, i will do less posts .
Once a week usually on a Friday or Saturday.There will probably be one weekly post but much longer.
On money
I have realised i have what it takes to be a multi-millionaire, so this will be my current/long term recurring goal.