Key Insurance Company Limited is considering a rights issue to raise much-needed capital to boost its capital base, which has taken a hit over the last year and a half.

The company’s new management has already agreed to and recommended the rights issue, which will be considered at a board meeting scheduled for Tuesday, September 8, 2020.

If the board approves the rights issue, it will then recommend to shareholders that they participate.

The rights issue will provide a much-needed lifeline for the financially ailing insurance company.

Key Insurance was taken over by the Grace Kennedy group earlier this year which bought majority control. Five months ago a new management team was put in place.

RIGHTS ISSUE

Cash-strapped companies can turn to rights issues to raise money when they really need it. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.

In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date.

The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

Given Grace Kennedy’s majority shares in Key Insurance it is anticipated that Grace will be making a sizable capital injection into the company via the rights issue.

STOCK PRICE TO BE DILUTED

With a rights issue, because more shares are issued to the market, the stock price is diluted and will likely go down. Shareholders can buy new shares at a discount for a certain period.

FINANCIAL PERFORMANCE

The combined impact of strategic and operational changes implemented by Key’s new management resulted in a reduction in the second quarter net loss from $144.5 million in 2019 to $25.4 million in June 2020.

The results reflect a significant improvement in performance over the first quarter ended March 2020.

The reduction in gross premiums written reflects Key Insurance’s strategy to refocus the portfolio into more profitable segments.

For the three months ended June 30, 2020, the company was able to grow net premiums written from $79.1 million to $206.3 million, an increase of 161 per cent when compared to the corresponding period in 2019.

Similarly, there was a 157 per cent increase in the net premiums written for the six months ended June 30, 2020, when compared to the six months ended June 30, 2019.

During the reporting period Key Insurance adopted IFRS 9 Financial Instruments in conformity with the Grace Kennedy Group’s accounting policy, resulting in a restatement of the prior period’s accumulated losses and additional charges for expected credit losses for the period.

Administration and other expenses increased by $14 million or 6.9 per cent compared to prior period due to redundancy costs as well as unanticipated legal and professional costs. As reported in the first quarter, the effects of the termination of the Motor Quota Share Reinsurance Agreement resulted in a one-time charge of $323 million to the Statement of Comprehensive Income.