New IRA rule risks forcing Britam to cut Equity stake

Insurance firm Britam will have to sell part of its stake in Equity Bank if new regulations proposed by market regulator IRA become law.

The Insurance Regulatory Authority (IRA) has published a raft of proposed rules, which among other things seek to cap an insurance company’s investment in a commercial bank at 10 per cent of the insurer’s assets.

“An insurer transacting long term business shall not invest more than five per cent of the total assets in any company, commodity or group of related companies. Where the company or group of related companies is a bank or financial institution, the maximum limit for the investment shall be 10 per cent,” the IRA’s proposed regulations say.

Britam owns 10.1 per cent of Equity Bank, valued at Sh16 billion and which is equivalent to 20 per cent of the insurance company’s asset base of Sh76 billion.

It also owns 46 per cent of Housing Finance, which at an estimated value of Sh3.4 billion is below the cap at 4.4 per cent of its assets. The IRA has not put a date when the regulations would take effect if passed.

Britam and Equity Bank’s close link has come into focus based on recommendations made by different regulators seeking to control interrelationship in the financial sector.

The capital markets regulator CMA recently published a set of proposals seeking to restrict an executive or managing director of a listed company to one other directorship of another listed company – a rule that would upset the web of Britam’s directorships with related companies.

READ: CMA closes revolving door for directors of public firms

Britam’s Benson Wairegi was at the time of the recommendations sitting at Housing Finance and Equity Bank boards besides that of Britam.

He resigned from Equity Bank’s board early this year as Equity Bank’s chief executive James Mwangi exited the board of Britam.

The regulations have, however, not been passed.

The list of insurers who are heavily invested in the banking sector includes Jubilee Insurance and Old Mutual. Jubilee owns 10.4 per cent of Diamond Trust Bank, a stake worth Sh4.4 billion which is six per cent of its total assets.

Old Mutual acquired 67 per cent of Faulu Kenya last year at Sh3.6 billion. The insurer is privately owned and does not publish its financials, making it difficult to determine whether the stake is above the proposed threshold.

The IRA issued the investment guidelines in compliance with the recently introduced risk based supervision framework widening the options available to insurance companies.

If passed, the new rules will offer insurers the option of investing up to 30 per cent of their assets at the Nairobi Securities Exchange, 10 per cent in real estate investment trusts and five per cent outside the country.

Insurers will also be free to invest in bonds issued by county governments.

General insurers’ investments in other companies are capped at 10 per cent of assets irrespective of the corporation type.

The current regime has specified the amount of money that can be invested in an asset class.

The insurers are allowed to invest at least 20 per cent in government securities, 65 per cent in prescribed investments leaving them leeway of choosing where to put only 15 per cent of their investments.

Life insurers must ensure that at least 10 per cent of their assets are held in government securities with tenure of more than two years.

Under the risk based supervision model, insurers will not be required to hold a minimum capital as is the case currently.

Presently life insurers are required to have a minimum of Sh300 million capital while general insurers hold at least Sh150 million in owners capital.

Insurers capital requirement will be determined by the business they are conducting under the risk based supervision model.