Why Sh3.6bn cash hole lowers chances of reviving collapsed Resolution Insurance
Mr Peter Nduati, the founder of Resolution Insurance.
Hopes of reviving collapsed Resolution Insurance Company Ltd have faded after the statutory manager appointed by the industry regulator last year revealed that at least Sh3.6 billion is required to bring back the firm to solvency.
Documents filed in court by Policy Holders Compensation Fund, the statutory manager of the collapsed insurance company, said shareholders of the firm would be required to inject the amount, which includes the Sh600 million minimum capital requirement for an insurer to transact general insurance business.
Resolution Insurance was placed under statutory management in April last year after defaulting on its customers and auctioneers carted away items at its head office.
The Commissioner of Insurance Godfrey Kiptum revealed that after an analysis of the viability option of the insurer and the inadequacy of the shareholders' revival proposal, the manager recommended liquidation of the company.
“That based on the analysis of the viability option of the insurer above (Resolution) and the inadequacy of the shareholders revival proposal, it (the statutory manager) recommends to me to pursue liquidation of the company in accordance with the provisions of the Insurance Act and Solvency Act,” Mr Kiptum said.
“Pursuant to the provisions of Section 67(C)(n) of the Insurance Act, the Applicant herein is enjoined to consider the Report of the Statutory Manager and thereafter make appropriate recommendations to the Board of Directors of the Insurance Regulatory Authority (IRA),” he added.
The official further said the board of directors of the IRA would then decide on revival or liquidation.
At the same time, the statutory manager applied to the court to suspend any proceedings against the company, pending the determination of the case.
Justice Nixon Sifuna directed the case to be heard on July 4, after extending the term of the manager for another six months.
Sh6.5 billion
The orders obtained stopping the cases have practically preserved the assets of both the company and its policyholders.
The company collapsed with more than Sh6.5 billion in client cash, insurance claims, and creditor funds after its shareholders failed to recapitalise the business.
Resolution Insurance was founded by Peter Nduati and its collapse comes after the company raised funds from several investors and expanded into medical and general insurance business.
He later sold a majority stake to Leapfrog Investments.
Trouble started for the firm in 2017 when the regulator introduced changes in the insurance law, requiring additional capital to meet the risk of the business.
Last year, the IRA said the insurer had collected Sh4.1 billion in premiums from policyholders out of which 90 percent were medical customers.
The firm also owed creditors and had pending claims from the insurance business totalling Sh2.5 billion, an indication of the long list of clients and suppliers eager to recover their funds from the failed insurer.
While seeking an extension of the term of the statutory manager, which ended on April 20, lawyer Benson Millimo said the manager was yet to accomplish several tasks, including tracing, preserving, and securing the properties of the company and also value and audit of the properties of the insurer.
Mr Millimo further said the manager has been trying to recover debts and sums of money due and owing to the company and recommend restructuring and whether the company ought to be revived or liquidated.
“It is in the best interest of the company, policyholders, creditors, and the insuring public that the extension sought herein is granted,” the lawyer said.
While moving to court, the manager said the Resolution was insolvent to the tune of Sh2.98 billion.
According to the manager, the its liabilities stood at Sh3.7 billion while realisable current assets stood at Sh748 million.
“To present an informed recommendation to the Board of Directors of IRA, the Applicant herein requires adequate time to analyse the Statutory Manager's report as well as any other document(s) and or information relevant to the matters in question,” Mr Kiptum said in an affidavit.
He said the statutory manager intends, among others, to engage shareholders with a view of granting them an opportunity to inject capital for a revival.
Liquidating the company
Mr Kiptum said the board will require time to study the recommendation of the Commissioner and that of the statutory manager before deciding on either reviving or liquidating the company.
“The conclusion of the aforementioned outstanding tasks on the part of the Applicant and the Board of Directors of IRA is crucial to the determination or otherwise of all the issues touching on or relating to the insurance company as placed under statutory management,” Mr Millimo said in the petition.
Resolution Insurance became the first underwriter to fold after relative stability in the sector since the collapse of Concord Insurance in 2013.
The sector witnessed a spate of collapses, including United Insurance in 2005, Standard Assurance in 2009, and Blueshield in 2011, prompting the formation of the PCF 17 years ago to cushion holders of insurance policies where companies are unable to meet obligations.
They were put into receivership but their shareholders and the regulator have been caught up in endless litigation, leaving policyholders to wait for decades without recovering their money.
The law was changed so that when an insurance company is unable to honour claims, the commissioner of insurance would either take away the licence or place it under statutory management and PCF would immediately start the process of compensation.
The change in law, however, would not apply retrogressively, meaning legacy failures have to wait until the court liquidated them to issue compensation to shareholders.
