Insurance firm Britam Holdings #ticker:BRIT is set to raise Sh13.9 billion from the sale of 253.1 million shares of Equity Group Holdings #ticker:EQTY to the International Finance Corporation (IFC).
Sources familiar with the transaction told Business Daily that IFC will acquire the shares at a price of Sh55 each based on negotiations with the insurer.
The private transaction price represents a premium of 10.88 percent on the bank’s closing price of Sh49.6 Tuesday.
Selling at the prevailing market price would have seen Britam pocket only Sh12.5 billion.
“Britam is exiting its Equity investment with this transaction,” the source said.
“The share sale will reduce Britam’s investment concentration risk while also reducing volatility in earnings that has mainly arisen from the equities investments.” The transaction closes the chapter on Britam’s most successful investment.
The insurer started buying Equity shares in 2004 and holds them directly and through its insurance subsidiaries.
Britam held an 11 percent stake in the bank worth about Sh900 million when the lender listed on the Nairobi Securities Exchange (NSE) in August 2006 via introduction.
The insurer has over the years earned billions of shillings in the form of dividend income and partial sale of the bank’s shares as it worked down its concentration risk.
For IFC, the proposed investment marks a tighter relationship with Equity to which it is the single largest creditor.
The global financier had lent the bank Sh21.8 billion as of December 2020, leading a list of development finance institutions that have backed the lender’s aggressive regional expansion.
IFC will now also become Equity’s second-largest shareholder with a 6.7 percent stake.
Arise B.V., backed by institutional investors Norfund, FMO and Rabobank, is the top shareholder with an 11.99 percent stake in the Kenyan banking multinational.
IFC will acquire 164.5 million shares of the lender directly and another 88.5 million shares through its IFC Financial Institutions Growth Fund LP.
Britam sees the deal as both a profit-taking and portfolio optimisation move, reducing its reliance on the performance of the bank’s share price as an input in the calculation of its earnings and assets.
The stake in the bank often amounted to more than 10 percent of Britam’s total assets and would drag the insurer into losses during bear markets which have been regular since 2015.
Britam has over the years been selling Equity’s shares which in 2014 represented 26 per cent of its total assets on the back of the lender’s long-term stock price rally.
The Insurance Regulatory Authority (IRA) in 2015 published investment guidelines that, for instance, capped an insurer’s investment in a bank at 10 percent of its total assets.
The requirement is meant to promote financial stability of an insurer which can be threatened if an oversize investment goes wrong.
Britam joins rival Jubilee Holdings which was among the first to cut its exposure to the volatility in the performance of the stock market.
Jubilee has invested heavily in government debt securities, real estate and energy projects which provide steady income while building capital gains.
The insurer has the most stable earnings of the listed underwriters, generating profits in all market cycles.
Insurers with big stock market investments are required to reflect the paper losses on their portfolios in their income statement.