MAA: It is a fair deal

PETALING JAYA: The sale of its insurance business by MAA Holdings Bhd for RM344 million, which translates into 1.35 times book value, is a fair deal as it addresses the insurance company’s need for more capital as well as inflow of cash for the group, said MAA chief executive officer and managing director Muhammad Umar Swift.

“I think it’s a fair valuation, we wouldn’t hope for more. You look [at] where the business is, the competition we’re under, you would also have to factor in the CAR (capital adequacy ratio). Now it’s being addressed by someone else and that changes, in our mind, the actual purchase price of the company,” Umar told The Edge Financial Daily in an exclusive interview.

“We love this asset but what’s probably more important is the survival of the group,” he said.

Umar said the valuation of 1.35 times book value for the sale of the insurance business to Zurich Insurance Co Ltd was indeed fair because together with the acquisition price, Zurich would have to commit a huge sum to increase the level of CAR to a minimum of 130%. With the additional RM667 million required, which is on top of the acquisiton price of RM334 million, this will translate into more than RM1 billion, 4 times price to book.

“We need a significant sum for capital… about RM430 million which would meet the the minimum prescribed level for CAR of 130%. But even at the minimum prescribed level, you’re not going to pay dividends … for that, it’ll need to be at least about 180% (to be able to pay dividends) and that would be another RM667 million,” he explained.

“When you look at shareholder’s fund of RM280 million and you’re looking for RM667 million, you’re basically looking at doubling your capital to hold on to the asset. Would shareholders agree to that? I don’t think so. At the end of the day it is a fair price because we went through a fair process ... we didn’t just talk to Zurich, we’d talked to other people as well,” he said.
Umar: Insurance is very much today, but takaful is the future.

Umar added that as the MAA group knew the new CAR framework would be an issue, it started addressing it by planning to sell its stakes in its insurance business, as early as four years ago.

It is no secret that MAA was under pressure to sell its insurance business under Malaysia Assurance Alliance Bhd (MAAB) due to inadequate capital reserves.

In March last year, the group was given an extension of time of 12 months by Bank Negara to meet the minimum supervisory target level of CAR that is to be maintained by all insurers under the risk cased capital framework. The framework requires an insurer to maintain a capital adequacy level that matches its risk profile.

It is understood that the group applied for a further extension and has until August this year to raise the money to meet the central bank’s requirement.

Umar noted that the holding company had not received any dividend payments from MAAB since 2006 as any profit made by the latter had been allocated for capital as the insurer strived to meet its CAR.

On top of the looming need to address its CAR, the MAA group also had a pressing need to repay debt obligations including the RM140 million due in December.

“After much debate we do not see an easy way to raise these funds. We’ve explored different avenues — rights issue, bilateral debt, PE funds — but at the end of the day, the best solution is an elixir that leaves the new vehicle well-capitalised. Shareholders have an on-going business in the new entity and we have cash coming to us,” Umar explained.

“When we look at this transaction, it needs to be seen in the context of capital requirement of the business, the need to repay financial obligations of RM140 million due in December. So in one transaction we’re addressing capital, we are supporting the business, we’re positioning ourselves for the long term because we know we’ll have additional funds coming in two years’ time and more importantly, we no longer have financial obligations,” he said.

After the sale of its insurance arm and repayment of debt, the group is expected to have net cash of about RM164 million, or 53.9 sen per share.

With the insurance business constituting some 80% of the group’s business now sold off, what is left for the group? What are its strategies for growth moving forward?

MAA has big plans for its takaful business. It intends to position itself for its takaful business, and expects the business to record high growth in terms of gross contribution, — gross premium in takaful terminology — of at least 30% in the next five years.

It has an internal target to grow the takaful gross contribution to RM1 billion in 2015 from RM268 million in 2010.

“Insurance is very much today, but takaful is the future. We can actually position ourselves for the takaful licence. It is well-capitalised and growing nicely and we make sure that it is doing what it needs to, as well as our mutual fund business,” Umar said.

The strategy to grow the group’s takaful business would be through an agency business. “Takaful is long term. If you look at the size of the premium, it is lower than the (conventional) insurance business because it’s a different socio-economic group. So, it’s got great long-term potential and it ought to grow. Takaful is very much a five-year story,” he said.

The group’s takaful business, which started operations in 2007, saw growth rates of its gross contribution of 313% in 2008, 43% in 2009 and 71% in 2010. It is projected to grow by 32% this year before moderating to 30% annually for the next four years.

Umar pointed out that MAA could not afford to have two licences, as both the insurance and takaful businesses are very capital-intensive. Hence, the group plans to just focus on one.

“The transaction was driven by the need for MAA Holdings, as a financial institution, to protect its brand and its takaful licence, repay its debt on time and make sure it has adequate capital. And as the way we see the RBC requirement for capital as it is, we can’t support two licences. If you’re a large multinational, I’m sure you can support numerous licences but for us we can support one and so we target one,” he said.

He added that the RBC requirement of 130% CAR for insurance companies does not include takaful business but there is likely to be one in the future.

MAA’s takaful business saw its bottomline jump more than 100% to RM7 million for FY10. It is still in its early days for this business which only started in 2007. Nevertheless, MAA would need to work hard and fast in growing its business if it intends to use its takaful business to fill the big void left by the sale of its insurance arm. The group also has plans to grow its unit trust management company.