We were treated like flower girls at Resolution Health, British shareholder Linkham cries out
By Patrick Alushula
| May 17th 2022 | 7 min read
Majority shareholders in the troubled Resolution Insurance say they were treated "like flower girls" and denied access to crucial information that would have rescued the underwriter.
Speaking exclusively to the Financial Standard, Resolution shareholders Linkham Services Ltd co-director Michael Cranfield said alongside his partner, Dominic Persad, they faced resistance in implementing what they considered the key in saving the firm.
This is the first time the directors of the UK-based insurance solutions provider are giving their side of the story since Resolution’s founder and shareholder Peter Nduati sued them, claiming that they failed to pump money into the business, which saw it placed under statutory management.
“We have been very clear with every party involved that money is not the solution. We don’t have millions of dollars to throw at problems,” said Mr Cranfield.
“The solution here is to ensure you are not throwing money at something that will catch fire again. You have to be able to realise a return and reinvest.”
Linkham feels that it is being treated like a flower girl in a company it owns. Despite controlling a 62.8 per cent stake, the Britons have not been allowed easy access to data on the day-to-day operations of Resolution.
Mr Cranfield said this is in complete contrast with the practice in markets such as Mauritius and South Africa, where “we know our underwriting results every day and get live feeds from clients all throughout the day.”
This, he said, ought to guide in deciding whether the pricing of premiums needs to be adjusted to make business sense.
Leapfrog exited Resolution by offloading its entire stake to Linkham Group, making the UK firm the majority shareholder.
A copy of the share purchase agreement dated May 18, 2020 seen by the Financial Standard shows that Linkham was to invest $7 million (Sh812 million in today's exchange rate) into Resolution Group for financial restructuring.
However, the parties in the contract, including Mr Nduati and Leapfrog agreed to vary this to $3 million on January 1, 2021.
Linkham committed, outside the share purchase agreement, to fundraise more money and address inefficiencies in the company.
Mr Nduati had reached out to Financial Standard for his side of the story when the regulator placed the firm under statutory management but postponed the interview, citing the suit he has filed against Mr Cranfield and Mr Persad.
It is a suit that Mr Cranfield terms a surprise even as he adds that they own a controlling stake in a firm where they could not make key decisions but were expected to come to its rescue.
“We were surprised by the lawsuit because he (Mr Nduati) essentially says we did not comply with the terms of the share purchase agreement, yet we invested $3 million (Sh348 million) into the company,” says Mr Cranfield.
“We haven’t gotten the level of information we wanted out of Resolution. At least we know what we don’t know.”
But Linkham’s frustration with the lack of information is not where the challenge ends.
Ordinarily, a majority shareholder would be entitled to make the key decisions and influence the direction of the company. That is what Linkham was expecting.
But the Insurance Act 2020 bars one from being appointed as an executive director, managing director, principal officer or any other senior management official of an insurer if such a person directly or indirectly controls more than a 20 per cent stake.
Linkham, with a 62.8 per cent stake, finds itself as a majority shareholder whose hands are tied when it comes to the day-to-day operations of the troubled underwriter.
“We had envisaged that, like in many markets, we would be allowed to have control. The control we wanted was to get down to the details. What we expected and what we got were two different things,” said Mr Cranfield.
And as Resolution desperately needed a solution, there was a limit to what Linkham could do. Yet money, Mr Cranfield said, was not the sole solution to Resolution’s problems.
“There are a lot of things we found out after the acquisition. Where things got difficult was in July last year when we were told we could not have day-to-day involvement in the company yet we needed that,” he said.
While this sounded new to Linkham, it was all along in the law. The regulator told Mr Cranfield and his partner that they could only try to run the company through committees and not sit on the executive board.
Linkham was not new to Resolution. It had, for over four years, provided travel insurance to the underwriter. That was long before it eventually bought the stake.
Linkham had seen Mr Nduati, then with a stake above 20 per cent, involved in the day-to-day affairs of Resolution.
That is what they thought they would do. But the law and a not very cooperative management — in Mr Cranfield’s assessment — stood in the way.
“The time we were taking to get data and information was too long. Whether it was deliberate to withhold the information or not, I am not sure,” he says.
When Financial Standard asked Mr Cranfield if looking back, he would say Linkham did not do due diligence before agreeing to take a controlling stake in Resolution, he took a long pause.
Afterwards, he explained how their hands were tied in getting deeper into understanding the affairs of the loss-making company they wanted to turn around but could not get the information they needed.
“That is a very good question. Some things came out of the woodwork afterwards, which were surprising to us. But you live or die by your decisions,” he said.
“We weren’t aware that we couldn’t have executive powers within Resolution until July last year, which makes things hard. We have to run a company by committees after every two weeks."
Linkham, for instance, had plans to do away with all the other general classes of insurance, including motor, which Resolution had diversified into and focus on what the firm was known for and was good at — health insurance.
About 90 per cent of Resolution’s loss had come out of motor insurance, and Linkham, therefore, wanted to pay out the entire motor book and exit this class that is hurting many underwriters.
This would have required interacting with underwriting teams, explaining the idea and getting to implement a restructuring process. But it was not going to be easy through committees.
As the fortunes of Resolution sank, their big plans remained on paper. They tried to fundraise money and so did Mr Nduati and Pine Creek Ltd — another of Mr Nduati’s companies that has a stake in Resolution.
Mr Cranfield said: "We can’t turn the ship around through committees.”
They reached out to the Insurance Regulatory Authority (IRA), asking to be allowed to roll up their sleeves and get to work.
“The response was: “That is the law.” It doesn’t help us, but we have to comply with it. It just made life a lot more difficult for us. You can’t run a company by committees. You have got to roll up your sleeves,” said Mr Cranfield.
The latest data from IRA shows the insurer returned an underwriting loss of Sh457.32 million in the financial year ended December 2021 as 11 out of 12 classes of insurance posted losses.
Incurred claims stood at Sh1.59 billion by the end of last year. In 2020, the company failed to submit its audited financial report to the regulator and was hit with a Sh3.2 million fine.
Linkham says it is still keen on saving the company. But the limit on its involvement in the day-to-day activities is for IRA and the insurance sector to decide.
Mr Cranfield estimates that at least Sh4 billion could be required, but adds that putting in money without addressing what ails the once-successful company would be unwise.
“We don’t want the company to collapse. We want to ensure there is still an offering we can take to the market. It will be a crying shame if Resolution could collapse,” he said.
Linkham has reached out to IRA and the Policyholders Compensation Fund (PCF) with proposals on how to get Resolution out of the woods. The company has also engaged a consultant.
Getting involved in the day-to-day activities of Resolution could mean Linkham selling down its stake to below 20 per cent or trying to manage through a consultancy firm.
Mr Cranfield feels the law should be relaxed to allow new shareholders with over 20 per cent stake for at least two years to get involved in management if there is to be the best outcome.
“It is very difficult when you are asking for reports, and you aren’t getting them. When a company is making losses, you've got to get granular and go for every detail to understand where the loss is coming from so that we can turn things around,” he said.
At 32, Mr Nduati founded Resolution Health, about six months after losing his job as general manager at AAR Insurance Kenya.
Resolution Health was incorporated in 2002, becoming the first company to be registered as an exclusive medical insurance provider in Kenya.
It later changed to Resolution Insurance in 2013, offering it room to branch into other general insurance products.
Now it has to shrink first before it can dare to expand again if Linkham is allowed to execute its strategy.
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