Pan Africa buys additional stake in Gateway Insurance

Pan Africa Insurance Holdings has acquired an additional five per cent stake in Gateway Insurance, raising its equity in the subsidiary to 56 per cent.

The Nairobi Securities Exchange-listed company first bought into the general insurer in March last year, acquiring a 51 per cent stake for Sh561 million.

Pan Africa chief executive Mugo Kibati told the Business Daily that the company subsequently raised its interest in Gateway to 56 per cent at a cost of about Sh55 million.

The company had announced that it would buy additional shares in Gateway to make the subsidiary’s founders comply with insurance regulations that cap ownership by individuals at 25 per cent.

Pan Africa did not say to what level it was prepared to raise its stake in Gateway but noted that the extra shares would be bought from the family of the company’s founder, the late Godfrey Karuri.

The additional shares were to be bought at the same price of Sh17.56 per share that Pan Africa paid to buy the initial 51 per cent stake.

The move by Pan Africa to raise its stake in Gateway signals its confidence in the company’s future prospects though the subsidiary’s earnings have deteriorated following its acquisition.

Acquisition of Gateway marked a change in strategy at Pan Africa which in 2011 exited the general insurance business to focus on life policies by selling its 39.9 stake in APA Insurance for Sh855 million.

The company later said it needed to re-enter the general insurance business if it was to get a share of economic growth driven by sectors such as construction.

This prompted the Gateway acquisition whose completion coincided with increased competition in Pan Africa’s mainstay life insurance business where it previously was among the largest players.

Gateway’s performance has, however, disappointed, with Pan Africa taking a Sh564 million hit from the subsidiary last year and contributing to a 97 per cent fall in the parent firm’s profit in the year ended December.

READ: Pan Africa Insurance profit falls 97pc on Gateway acquisition

Pan Africa reported that the excess value it anticipated from the takeover of Gateway has surpassed the net worth of the subsidiary by the Sh564 million.

This means Pan Africa paid a hefty premium in the acquisition whose payback is likely to take longer than initially expected.

The accounting loss contributed to the 97 per cent drop in the listed firm’s net profit to Sh27.3 million in the review period, down from Sh871.1 million the year before.

“The profit was also adversely impacted by the goodwill impairment of Sh564 million recorded in the year,” Pan Africa said in a statement.
“This relates to goodwill recognised in respect of the acquisition of Gateway in February 2015.”

The company said the write-down of the goodwill was brought by an increase in provisioning for claims and adoption of a more conservative business valuation process.

Gateway made a net loss of Sh171.7 million in the year ended December, narrowing the restated net loss of Sh688.3 million a year earlier.

The subsidiary had reported net profits in previous years when it was in the hands of some 20 shareholders, including the family of the late Karuri.

Pan Africa’s gross premiums from life insurance dropped 12 per cent to Sh4.6 billion in the year ended December.

Besides the weak performance of Gateway, Pan Africa’s profit fall was also driven by rising interest rates and a bear run at the Nairobi bourse that marked down the value of its investment securities.