This article first appeared in The Edge Malaysia Weekly on July 11, 2022 - July 17, 2022

AMMB Holdings Bhd will receive RM287 million upon the completion of a corporate exercise to dispose of its general insurance business to Liberty Insurance Bhd (LIB), which will go toward boosting the banking group’s Common Equity Tier-1 capital ratio, its CEO Datuk Sulaiman Mohd Tahir says.

The exercise, for which it recently secured regulatory approval after almost a year in the making, will ultimately result in a merger between AmGeneral Insurance Bhd (AGIB) and LIB.

AMMB will end up with a 30% stake in the enlarged entity, which is set to become the country’s largest motor insurer — toppling Allianz General from the top spot — and a leading property and casualty insurer.

Sulaiman, in response to questions from The Edge, says the exercise will be value accretive.

“We are expecting profit to improve as the [enlarged] business grows. On completion of this transaction, AMMB will receive RM287 million which will boost our CET-1 ratio,” he says, without elaborating on the extent that the ratio might be boosted.

“The final gain/loss to be recorded by AMMB will depend on the net asset value of AGIB on the completion date and the disposal consideration, which is subject to adjustment on completion,” he adds, when asked about the disposal gain and if AMMB would rule out paying special dividends with it.

AMMB’s CET-1 ratio, which fell to around 11% following its hefty RM2.83 billion settlement with the government over legacy issues in relation to 1Malaysia Development Bhd last year, has since risen to 12.2% as at end-March this year.  The group told analysts that it believes it has sufficient capital to resume regular dividends. It paid out five sen in the last financial year.

AMMB had, on July 19 last year, announced that its subsidiary AmGeneral Holdings Bhd would sell a 100% stake in AGIB to LIB for about RM2.29 billion in a cash-and-shares deal.

AMMB holds a 51% stake in AmGeneral Holdings, while Australia’s largest general insurer — Insurance Australia Group Ltd (IAG) — holds the remainder 49%.

On June 28 this year, the parties obtained the regulatory approval for the deal from the Minister of Finance. They subsequently entered into a sale and purchase agreement on July 1. IAG will exit.

The disposal consideration will be split between RM1.35 billion cash and RM939 million for a 30% stake in LIB, which includes irredeemable non-cumulative convertible preference shares.

Following the deal, AMMB will enter into a 20-year new bancassurance partnership with the new insurance group.

Sulaiman says he expects the exercise to be completed “soon”. “We are pleased to have come to this level of fruition and we certainly look forward to completing this exercise soon.”

As it stands, AMMB’s general insurance business is a substantial contributor to the group’s income. It derived income of RM532 million from general insurance in the financial year ended March 31, 2022 (FY2022) — far bigger than that from investment banking (RM361 million) and almost as big as business banking (RM558 million).

Analysts have said that they are “neutral” on the deal as, despite the potential disposal gain, it will reduce AMMB’s general insurance earnings contributions in the longer term.

“Going forward, AMMB is likely to have a slightly lower earnings base, as its effective stake in the insurance business will be lower [from 51% to 30%], and this will not be immediately offset by synergies from the combination with LIB, in our view,” Nomura Research banking analyst Tushar Mohata said in a report after the deal was first announced last year.

Sulaiman, however, highlights that there is “enormous” upside for this business.

“We expect this exercise to allow us to focus on our core business while leveraging on LIB’s strengths in growing the insurance business further. AMMB has been a major shareholder of AmGeneral Insurance for more than a decade and with LIB coming on board, we are confident that this will strengthen our footprint in the general insurance business as we are certain that there is enormous upside for this business in the years to come,” he says.

“It is crucial to note as well that LIB will grow its franchise and we will be part of this growth story, which will definitely have a positive impact on the bottom line,” he adds.

According to AGIB’s website, it insures one in every seven cars in Malaysia and was ranked the country’s Top 2 motor insurer last year with a market share of 14.5%, based on Insurance Services Malaysia (ISM) data as at December 2021. For overall general insurance, AGIB — through its two well-known brands AmAssurance and Kurnia Insurans — was ranked Top 2 last year in market share.

The merger comes at a time the insurance industry is seeing increasing challenges amid further detariffication or liberalisation, which will result in competitive pressure on the pricing of motor and fire products for general insurance and takaful operators.

Additionally, digital insurers and takaful operators are expected to be introduced into the market in the next few years.  Nevertheless, Sulaiman says the group has a strong partner in LIB and he remains positive on the Malaysian market.

“There are a great number of complementary strengths that we will be leveraging on to drive excellence and growth in the local insurance market. The combined entities’ market share for motor insurance will increase to 20%. This will strengthen our position as the largest motor insurer in Malaysia. Furthermore, from an overall general insurance perspective, this exercise will expand our market share to 12%,” he says.

Sulaiman goes on to say that the partnership with a global player like LIB will drive better opportunities within the non-motor space, complementing AMMB’s small- and medium-sized enterprise (SME) growth strategy. “This dovetails with our plan to appeal to a wider corporate clientele, resulting in stronger uptake for our services and products,” he adds.

GlobalData, a data and analytics company, projects that Malaysia’s general insurance industry will grow at a compound annual growth rate of 4.8% from RM17.67 billion in 2021, to RM22.31 billion in 2026, in terms of direct written premiums.  

AGIB’s audited financial statements show that the company made a net profit of RM246.52 million in FY2022 (ended March 31) compared with RM248.35 million a year earlier. As for LIB, its net profit fell to RM52.09 million for the year ended Dec 31, 2021 from RM82.45 million the year before.

Bloomberg data shows that of 14 analysts that track AMMB, eight have a “buy” call on the stock while six have a “hold”. The average 12-month target price was RM4.02, which suggests further upside from the stock’s closing price of RM3.85 last Thursday, giving it a market capitalisation of RM12.75 billion. The stock has gained 23.1% this year.

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