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.


mmnjug said...

I think that Kenya Re is a good investment. Not only is their Loss ratio admirable, but i think that with their effort to try and reduce their dependence on property is a good thought.

Its predicted that the share will rise by at least 5% which i think isnt bad and may go beyond that.

click to

ka-investor said...

@pesa tu: nice analysis, though the table is abit distorted. Kenya Re is a good buy, but i still hold its a short term buy unless efficient managemnt is put in place and the government stops meddling in its affairs. they have alot of room to improve on their profitability {note the idle property they have in Upper Hill} and instead of down-sizing on staff why can't they second them to Tanzania Re as Zep re did? Also, what is their strategy when the complusory ceding expires in 2011 - which is not far- or when its fully privatised?

Anonymous said...

Dond dilude yourself, Kenya Re is just another fraud. Check this out:
1. The forensic audit was never availed even to the advisors(Kimunya actually lied when he said that the advisors had access to it).
2. There is no discount here, Kenya Re's P/E is 15, the insurance average P/E for listed companies is 13.( Of course they will quote a lower offer price so that idiotic wananchi would think its 'cheap')
3. Why didnt the audit go back at least 5 years, since the NSE listing requires at least 5 years of profitability(Maybe they did not do that because they are hiding losses that would have disqualified it from listing this year).
4. The employees have managed to blackmail the management into retaining them even though retrenchment is overdue.(They must have something on them to warant such drastic change of tact)
5. Just look at the prospectus. Everyone involved is trying to cover their asses in case Kenya Re pulls a ka Uchumi. D&B does advisiong and then comes out with a scathing anaylsis. Ditto Pricewaterhouse.

And I cannot believe that you guys are falling for this fraud.

pesa tu said...

@mnjug: Agreed
@Kainvestor: East Africa-Re is succedding without compulsory cesssions So will Kenya-Re.After all local insurers(Read customers) own a big chunk of it
@Anon: Kenya-Re make an underwriting profit meaning that the insurance biz that it does is profitable.About half of our local insurers DONT make an underwriting profit.The declared profits are investment incomes.If the mkt. goes down such co.s suffer.
Thats why i say its well run.The core biz makes money.