How private equity firm lost billions in Resolution Insurance

Resolution Insurance

Resolution Insurance was headed to the grave if its owners could not recapitalise the business to the tune of Sh4.3 billion.

Photo credit: File | Nation Media Group

What you need to know:

  • Resolution Insurance was headed to the grave if its owners could not recapitalise the business to the tune of Sh4.3 billion.
  • Leapfrog and Resolution founder Peter Nduati struck a deal with Linkham to come on as the new shareholders.

UK private equity fund Leapfrog, which bought Resolution Insurance in 2014 for Sh1.7 billion, suffered a further loss of Sh346.5 million when it tried to sell its stake in the collapsed firm in a deal that required it to lend money to incoming shareholders Linkham.

Following years of losses, Resolution Insurance was headed to the grave if its owners could not recapitalise the business to the tune of Sh4.3 billion.

Leapfrog and Resolution founder Peter Nduati struck a deal with Linkham to come on as the new shareholders and refinance the business gradually.

The Insurance Regulatory Authority (IRA) agreed to an initial Sh1 billion injection by new owners. According to court filings by Linkham Services directors, Michael Cranfield, LeapFrog would help fund the deal through a $3 million loan.

Linkham would put in $7 million out of, which they would later get back $2 million from Peter Nduati and Pine Creek.

Despite agreeing to the arrangement LeapFrog partners failed to meet their end of the bargain leaving the PE firm smarting with losses. LeapFrog, which bought a majority stake for Sh1.7 billion and further put in Sh346.5 million loan to recapitalise the business has lost nearly Sh2.4 billion at the insurer.

“LeapFrog provided a $3 million loan to Resolution Group at the time of sale to help with its recapitalisation initiatives and place the group in a strong position moving forward,” Daniel Stacey Head of External Affairs at Leapfrog said in an email to Business Daily.

On January 8, LeapFrog lawyer MMAN advocates wrote to the IRA confirming the company had provided their end of the deal of $3 million, which is now lost after the insurer collapsed while their partners traded blame on who had failed to come up with the rest of the funds.

Mr Nduati in a court filing says the buyers Linkham Services Ltd, were supposed to inject $6 million (Sh692.8 million) into the business after purchasing a 55 percent stake from LeapFrog but only put in Sh346.5 million.

But Linkham says after they did their due diligence they resolved to change the sale agreement so they could only put in an initial sum of $3 million down from the $7 million. They claim they wired the money to Resolution Insurance account at Middle East Bank on February 8, 2021.

They quote a letter by LeapFrog partner Raimund Snyders dated January 13, 2021, that reads; “We confirm our agreement to the proposed amendment of clause 6.1 to reflect that the purchaser (Linkham) investment into Resolution Group shall be $3 million and not $7 million.”

An IRA letter to shareholders also confirmed they had promised to inject Sh1 billion into the company, which they later varied to Sh600 million only for the regulator to discover the shareholders did not inject funds as promised.

Peter Nduati

Resolution Insurance CEO Peter Nduati during the launch of Resolution travel insurance at the Sarova Panafric on November 19, 2013

Photo credit: File | Nation Media Group

LeapFrog confirmed the letter signed by the partners was a commitment to refinancing the business and supporting the deal that cumulated in fulfilling their part. “The letter in question is indicative of our commitment to enable the new shareholders to focus on further capitalisation of the business,” Mr Stacey said.

Resolution Insurance shareholders played games with the regulator for one and a half years while operating on negative working capital by promising to inject money that never came.

A failed bid by Holmarcom Group, blocking Xplico insurance’s Keith Beekmeyer from funding Linkham, and the failure of the shareholders to put in Sh1 billion led to the collapse of the insurer.

In October 2020, Resolution wrote to IRA indicating they were in dire financial stress and may not be able to trade beyond October 15, 2020.

The regulator says the insurer was operating at -170 percent of the required capital adequacy ratios and needed to inject Sh4.3 billion.

“The authority has noted with concern that despite availing Resolution Insurance Company with all the time to comply, to date there is no indication of compliance with the conditions imposed,” IRA said in a March 2021 letter to the firm.

Holmarcom Group was the initial buyer of Resolution Insurance but the deal fell apart in January 2020 forcing the company to search for new investors.

According to a suit filed by the founder Peter Nduati, he approached Linkham Services Limited to invest in the business and entered into the deal after the UK Group demonstrated proof of capital to be injected into the business of which the source of the said capital was disclosed to be New Point Capital Limited.

The deal was disclosed to the regulator in July who gave a two-week window to close it on condition that parties immediately deposit Sh1 billion with CBK in form of government securities and show that new buyers can raise the rest of the money to meet capital requirements.

Resolution owners started pussyfooting saying two weeks was not enough to get approvals from Kenya’s and Tanzania’s competition watchdogs but IRA refused to budge and cancelled the approval.

Resolution then re-submitted their application in August when IRA noted that Keith Beekmeyer Director and founder of New Point Capital was the financier of the deal through a bank guarantee and wrote to Resolution in September that the deal would not be approved if he was involved in it.

By October IRA told the company it planned to turn down the new application since Linkham Services did not have the money to back the deal. Resolution appealed the decision and got the regulator to approve the transaction subject to the company depositing Sh1 billion with CBK. But Resolution said the Bank would not release the money after IRA blocked Mr Beekmeyer and they told the regulator they were seeking alternative funding.

By November 2020 the regulator was getting impatient threatening to take action, asking Resolution to show cause but the insurer wrote back that they had a deal in the pipeline that they were confident would recapitalse the business.

IRA issued a notice to cancel their license by December 2020, which prompted Resolution to provide a letter from Bank of Africa confirming they had made available Sh1 billion in Linkham account.

IRA approved the deal on condition that Mr Beekmeyer or his associates would not be involved, and the funds would be transferred to Resolution before the end of December of which Sh500 million would be held in treasury paper.

By the end of that month Resolution again claimed the money could not be wired before the Competition Authority of Kenya approved the deal and IRA had lifted the notice to withdraw its license.

IRA agreed to list the notice and gave them up to January 15 to seal the deal or face regulatory action. By January 8, LeapFrog through their lawyer MMAN advocates confirmed they had provided their end of the deal of $3 million.

The regulator and Resolution owners held several meetings in February and March including with the National Treasury but nothing more came forth.

In April the regulator put Resolution Insurance under statutory management on failed rescue efforts sparking a blame game between the shareholders.