Absa Group now writes off Sh219m in First Assurance

Johannesburg-based Absa Group has written off Sh219.5 million of its investment in Kenya’s First Assurance, indicating that the subsidiary’s performance has been below expectations since the multinational acquired it in 2015.

The impaired amount represents the premium –also known as goodwill— that Absa paid to buy the company.

“Goodwill relating to First Assurance Kenya Limited amounting to 29 million Rand (Sh219.5 million) was impaired,” the multinational said in a trading update.

Goodwill represents the premium on the purchase price of an asset above its fair value and is written off down the road if the asset is for instance unable to generate the projected cash flows.

Absa did not elaborate on what caused it to impair the investment. The multinational, then trading as Barclays Africa, acquired a majority 63% stake in First Assurance in 2015.

It paid Sh2.8 billion which included the cost of buying the shares and an additional Sh722 million as additional capital to grow the business.

The move was meant to help grow its local subsidiary’s footprint in the insurance sector, which in the past decade has attracted banks that are looking to expand their revenue streams away from the traditional corporate and retail lending market.

The multinational’s local banking subsidiary Absa Bank Kenya already ran an assurance arm which in March 2019 took over First Assurance’s life insurance business. This left First Assurance to focus on general and medical insurance business.

Earlier this month, South African rating agency GCR affirmed a negative outlook on First Assurance, which carries a national scale financial strength rating of BBB+ (KE), citing “potential for persistent liquidity and solvency pressures that are likely to arise from slower than anticipated disposals of investment property as earnings pressures persist.”

“While the insurer disposed investment property for around Sh340 million, we view execution risks in relation to the sale of the rest of the investment property valued at Sh1.1 billion to be high,” the rating firm said in a note.

GCR added that it expects the disposal of the remaining portfolio held for sale to be more protracted relative to prior projections.

The agency said that First Assurance’s 2021 earnings were constrained by high loss ratios in the motor insurance business after the economy was reopened but noted improvements in underwriting profitability after prudent cost management.