Kenya Re IPO

Kenya Reinsurance Corporation has been insuring insurance companies for close to 30 years. It has done so profitably though as a Government corporation, State appointees who have had no insurance or reinsurance experience have at times been at the helm. In a few cases, they had little or no business experience.
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Kenya Re started as a compulsory reinsurer. Those were easy days when 25 per cent of all direct insurance and 25 per cent of all reinsurance premiums ended up at its bank. Without an office of Commissioner of Insurance, Kenya Re acted as a regulatory authority.
But compulsory share of business was reduced and Kenya Re had to look within and internationally for reinsurance agreements. In its 2006 annual accounts, Kenya Re boasts presence in 33 countries in Africa, Asia and the Middle East. It has business relations with 116 companies outside Kenya.
Kenya Re's profitability depends on the quality and performance of the insurance companies it reinsures. Recent statements of accounts show growing profitability of core business. In the 1980s and 1990s, instability due to low rates and high third-party liability awards characterised insurance business.
Public perception largely determines the success of initial public offers. Most are oversubscribed, and allocation of shares is limited. A corporate investor is, therefore, restricted in how much it can purchase initially. Corporate influence is, however, felt once shares start trading at the stock exchange, with the initial buyers cashing in on higher prices.
Speculation drives many initial buyers in the hope of making short-term gains. Buyers from the stock exchange include speculative buyers and more sophisticated corporate or long-term investors. The latter are more analytical and motivated by medium and long-term profitability.
Whereas initial buyers rely on the prospectus and opinion of the Capital Markets Authority, later buyers rely on the analysis of the company's performance. In recent months, Kenya Re has gone through rough waters, with top executives taken to court over corruption. This has resulted in negative publicity.
The new executives are good for the IPO. Longer-term price movements will depend on whether the enthusiasm flows to the boardroom and the management team. The team will be judged by its ability to tap the local, regional and international markets. As a potential Kenya Re shareholder, I would pay close attention to the words of the chairperson and managing director and wait to see whether the business figures match the words.
If Kenya Re is to grow into a major continental and global reinsurance company, it must boost business in size and profitability. Last year, business premium income grew to Sh3.1 billion from Sh2.4 billion the previous year, a commendable growth of 28 per cent.
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Similar growth will have to be realised consistently. Shareholders must accept to increase capital, forego dividends in the short-run and streamline management expenses, which rose from Sh290 million in 2005 to Sh453 million last year.
Finally, the company must focus on its core business rather than distractive investment in property. Will the new team inject the dynamism, integrity and cutting edge business practices required of a modern reinsurance corporation? The will and professional capacity are certainly there. A more vigilant and critical shareholder will be watching.
The writer is an insurance consultant