Takeover of Tahan no surprise to industry

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Bank Negara Malaysia’s move to take control of general insurer Tahan Insurance Malaysia Bhd does not come as a surprise, industry players say.

The ailing general insurer has been bogged down in high liabilities and has few new businesses compared with its competitors, says an industry player.

Another says the move may indicate that Tahan has not met the risk-based capital framework requirement that all general and life insurers in the country have to comply with.

Under the new framework, the supervisory target capital level of insurers should have reached at least 130% by Jan 1, 2009. Tahan Insurance has not submitted to Bank Negara its annual audited financial results for FY2007 and FY2008 ended Dec 31. It was granted an extension until May 31 this year to do so.

Last Friday, however, the central bank assumed control of Tahan Insurance to safeguard the interests of policy holders following the insurer’s non-compliance with capital requirements and non-fulfilment of capital ratios. The central bank, in a press statement, said Tahan Insurance’s business operations will proceed as usual.

It is noteworthy that Tahan Insurance’s general insurance business was put up for sale last year and attracted three suitors — Allianz Insurance Management Asia Pacific Pte Ltd, Tokio Marine Asia Pte Ltd and Canadian insurer Fairfax Asia Ltd.

Allianz has dropped out of negotiations while the status of talks between Tahan Insurance and the other suitors is unknown. Tahan Insurance’s life insurance business, perceived to be the more lucrative segment, was sold to AXA Affin Life Insurance Bhd in 2006.

Bank Negara’s takeover of Tahan raises this question: Do other insurers face a similar fate?

More than a year ago, Bank Negara had exercised a certain amount of control over MAA Assurance due to its slew of non-performing corporate loans.

The difference between Tahan Insurance and MAA, says an industry player, is that the holding company of MAA Assurance did not have any solvency issues. “Also, unlike Tahan Insurance, MAA Assurance has retained its life insurance licence, which will contribute more profit to the company,” he adds.

Tahan Insurance’s financial condition is aggravated by the problems faced by its parent company Idaman Unggul Bhd, which entered PN17 status at the end of February last year, the industry player says.

Last Friday, trading in Idaman’s shares was halted after Bank Negara took control of Tahan Insurance.

It is noteworthy that Idaman took over the listing status of Idris Hydraulic (Malaysia) Bhd, a company that used to be linked to former KFC Holdings (M) Bhd’s managing director Datuk Ishak Ismail.

Idris Hydraulic was a politically linked stock and a darling of the stock market during the 1993 bull run. However, Idris Hydraulic lost its shine after its shareholders’ funds fell into negative territory. It had to undergo a restructuring exercise, which saw the eventual listing of Idaman Unggul.

As part of the restructuring of Idris Hydraulic, Idaman set up a special vehicle known as Lambang Pertama Sdn Bhd (LPSB) five years ago to issue about RM233.99 million redeemable secured loan stocks (RSLS) to the creditors of Idris Hydraulic.The RSLS were to be redeemed from the proceeds of the disposal of assets. After several extensions, the RSLS expired last week.

Nevertheless, Idaman last week announced that it had a potential investor for LPSB in Daiwa Securities SMBC Singapore Ltd, which has requested further information on LPSB. Idaman said it has been in discussions with Daiwa on the proposed disposal of LPSB.

Idaman also said it has received a letter from Rabobank International, expressing interest in being an offshore consultant for the restructuring of the company’s loan stocks via the disposal of LPSB as well as to look into funding requirements for the group. Rabobank will work with a Malaysian adviser in relation to the exercise, Idaman announced.

One of Idris Hydraulic’s primary residual assets is the timber rights — for 100 years — of its forest management unit under a sustainable forest management licence agreement sealed between the company and the Sabah government on Sept 10, 1997. The agreement covers 234,552ha of permanent forest reserves in Sabah.

Idaman, however, made no mention of the status of a share purchase agreement, dated Dec 31, 2008, whereby it agreed to sell LPSB to Satin Court Sdn Bhd for RM400 million cash. The deal is presumed to have fallen through.

For the year ended Dec 31, 2008, LPSB posted a net loss of RM13.08 million and an audited consolidated net loss of about RM255.7 million.

Despite the possible sale of timber assets that could see Idaman channel funds into Tahan Insurance to support its operations, Bank Negara’s assumption of control over  the general insurer shows that the central bank has no confidence in Tahan’s survival.Nevertheless, in an announcement to Bursa Malaysia last week, Idaman said there was no financial impact on the company from this latest development for now.

This article appeared in the Corporate page of The Edge Malaysia, Issue 756, May 25-31, 2009.