Insurance firms are willing to cede up to 60 per cent of their shareholding to a new investor if the buyers pay at least 1.7 times the underwriter’s book value.
Kenyan insurance firms seeking mergers to comply with new capital requirements are ready to accept even less than two times their net-worth or book value, UK and Kenyan investment banks say.
UK-owned Exotix and Equity Investment Bank say that going by the past eight acquisition deals in the sector the firms are willing to cede up to 60 per cent of their shareholding to a new investor if the buyers pay at least 1.7 times the underwriter’s book value, which refers to a firm’s total assets minus its total liabilities.
With limited capital-raising options for the family-owned firms, the insurers should be prepared to sell to private equity investors, say the investment bankers. The firms have to comply with the new risk-based capital requirements by June 30, 2018.
Exotix and EIB investment banks say that the transaction value of the deals done in the recent past is between Sh550 million and Sh14 billion, for insurers of various sizes such as UAP, Gateway Insurance, First Assurance and Real Insurance.
Going by the full-year 2015 books, more than 10 insurers out of the licensed 44 are expected to seek additional capital in order to comply with new capital requirements that will be fully operational in the next two years.
“To a large extent, insurance operations do not meet solvency standards due to the uniform application of lenient solvency and capital adequacy requirements from the regulator. The majority of these businesses are also family-run institutions with limited available capital for growth,” the report reads in part.
“Despite the technical complexities in underwriting insurance, most of these insurers operate without an in-house actuarial function, with pricing determined by an actuarial consultant or at their discretion… we believe that these insurers would benefit greatly from the entry of a strategic financial investor or operator.”
The investment banks value Kenyan insurance industry at Sh218 billion, assuming a split of 64 per cent for life insurance (Sh124 billion) and 36 per cent for non-life insurance (Sh94 billion).
According to Exotix and EIB, the insurance firms that are likely to be involved in mergers and acquisitions are those that are family-owned without an anchor institutional shareholder, or those which have had one anchor institutional shareholder for a long time.
Others include those that have not seen any acquisition move by an institutional investor or foreign-based insurer for the past five years, and those whose solvency and capital adequacy are low.
“Using this criteria, we identify 17 non-listed insurers that we believe would consider entering into an M&A transaction,” say the investment banks.
Kenya has 44 licensed insurers, out of which only six are listed on the Nairobi Securities Exchange.
Under the existing regulatory framework, which is not risk-based, general insurers require to have Sh300 million in minimum capital while life underwriters require a minimum of Sh150 million.
Under the new risk-based dispensation to come into operation in two years, at the very least general and life insurance companies must have capital of Sh600 million and Sh400 million respectively but this rises once the risks a company carries grow higher.
The insurance sector regulator — the Insurance Regulatory Authority — and the Competition Authority of Kenya have already signalled that they expect an increase in the number of mergers in the sector on the enactment of the new requirements.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
