Kenya RE IPO-The Prospects

What does Kenya Re do? Insures insurance companies. Has 21% of the Kenyan market. Its main rivals in the Kenyan market are Africa Re, PTA Re and East Africa Re in that order. By law, all Kenyan insurers must re insure 33% of their business, 18% they have to do with Kenya Re. Kenya Re generates currently 63% of its net premiums from Kenya and 30% from the rest of Africa. By industry, most of its premiums are from industrial fire (46%).

How does it make its Profit/Loss? Re insurers make money from net premiums (new premiums received less new claims) ; income from their investment portfolios (rent; dividends; net proceeds from buying and selling these investments; interest; unrealised capital gains from shares and property revaluations) and then adjust for management expenses. 40% of its investment portfolio is in properties...

Strengths: Has a strong balance sheet. Got a "very good" credit rating last July (i.e. before the scandal broke). A credit rating is important in the financial sector as it internationally comparable measure of financial strength. Recognisable name in Kenya and in Africa.

Weaknesses: 

1. Corporate governance and internal controls led to scandal discovered earlier in the year where the now ex-MD and FD were engaged in amateurish pilfering (amount not fully quantified in the prospectus). Most of the BoD that was there during this period are still there. New auditor now appointed who may take a while to get to know the system. Most of BoD have loans from Kenya Re. KEY WEAKNESS.
2. Weak insurers especially in its key Kenyan market (20 out of the 42 are under-capitilised based on the recently issued criteria). 
3. Reliance on investment income (has usually seen almost as much growth from this compared to its core activities).
   
4. Non-property portfolio all Kenyan-based. It should be done to match its business exposure.
5. Despite the international ambitions, doesn't hedge its book against fx risk

Opportunities: The Kenyan economy will grow as will that of the rest of the Africa meaning increased business in volume and variety of premiums. International opportunities are still open to Kenya Re. A reduced property portfolio should surely increase its liquidity and make KRe more agile in writing new business.

Threats: 

1. Other re-insurers within Kenya (apparently most prefer foreign owned firms that are perceived as stronger). In its other markets in Middle East, stronger re insurers now targeting e.g. Takafu. 
2. Re insurer rates are under competitive pressure. 
3. Forecast for 2007 based on ropey fx assumptions (Usd fx rate of 73 when its been sub-70 for most of this yr and £ rate of 146).
4.  GoK still has a 60% holding thus political interference (of the KNAC- sort) may still happen.
5.  Large claims (e.g. the Tsunami of 2005 ) can and do have material impact on KRe's numbers.
   
6. Cessation rights (which give KRe 18% guaranteed premiums from each insurer) come to end on or before 2011

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For: KenGen IPo priced at 11.90 reached 40 on first day; Scangroup (10.45 hit 15 and is now 26); Everready (9.50 hit 25 on debut); AK (10 hit high of 15). Get the picture?

Against:

• Over-subscription because Kenyans are price/return conscious thus IPOs are God-sent. Expect 300%+ over-subscription on the retail allocation.
  
• Delayed refunds: AK was text-book, KenGen was nightmare. KRe being GoK ,will sway towards the KenGen experience
• Diminishing marginal returns: Preference for institutional investors (means potentially there is lower upside in 2ndary market) and investor boredom may mean returns on the scale of 50-100% rather than 100%+