Business Takaful

Source: The Edge Daily, 5th May 2008

The emergence of a Middle Eastern shareholder in composite Islamic insurer Syarikat Takaful Malaysia Bhd (Takaful Malaysia) would give the local insurer more financial clout to expand globally and even embark on mergers and acquisitions (M&A) to stay ahead in the highly competitive domestic market.
Moreover, Malaysia’s second-largest syariah-compliant insurance company would be able to tap its new partner’s links with global infrastructure companies and cross-sell its general policies.

“Once we get the capital and we have new partners as our shareholders, it (M&A) is possible. We hope to cross-sell some of our products to cover some of the infrastructure projects that they are embarking on both in Malaysia and overseas,” Takaful Malaysia’s group managing director Datuk Hassan Kamil tells The Edge.

To recap, Takaful Malaysia told the exchange last year that it had obtained Bank Negara Malaysia’s approval to begin talks with two foreign institutional investors — Islamic Arab Insurance Co P.J.S.C (SALAMA) and Abu Dhabi-Kuwait-Malaysia Strategic Investment Corp — with the view to disposing of up to 49% in the insurer to one of the Middle East companies.

The pricing of the new shareholder’s entry is not known but it will certainly enlarge the local firm’s shareholders’ equity. As at June 30, 2007, Takaful Malaysia had a shareholders’ base of RM335.3 million and market capitalisation of about RM221 million.

The pricing of insurers varies according to their licence and the quality of their assets. General insurers command about 1.2 times book value while life insurers are more expensive. Composite insurers with a takaful licence can fetch more than two times book value, depending on whether they have a captive market. For instance, CIMB group disposed of a portion of its insurance arm to Aviva plc at more than 2.5 times book value because it had a combinaton of Islamic insurance licence and captive market.
Takaful Malaysia, whose parent company is Bank Islam, has a captive market but it is not as large as CIMB group’s.

Although the emergence of a Middle Eastern shareholder in Takaful Malaysia, possibly in the next few months, will pave the way for the insurer to penetrate the Gulf region, Hassan admits that applying for an insurance licence in the Gulf is not an option because the industry there is already competitive.
Instead, Takaful Malaysia — Malaysia’s first Islamic insurer — will develop its offerings at home and collaborate with Middle Eastern banks to distribute its products in the Gulf.
The insurer hopes to expand its portfolio of investment-based offerings on top of its protection-oriented products. At present, its investment-based offerings, such as myAL-AFDHAL, are developed with the help of other financial institutions.

Hassan, who declines to specify how much foreign money will be pumped into Takaful Malaysia by its new shareholder, says about a third of the incoming funds will be channelled into the insurer’s existing operations in Indonesia, the company’s sole foreign revenue contributor to date.

“We will probably see a larger impact on Indonesia because the capital is much needed to invest in the company’s infrastructure, especially in information technology,” he says, adding that the insurer will also invest in establishing its distribution network there.

Takaful Malaysia’s unit PT Syarikat Takaful Indonesia has arrangements with a bank in the republic to tap the financial institution’s distribution channel to capitalise on the country’s untapped takaful market.

Also on the cards for Takaful Malaysia, which is 67.89%-owned by BIMB Holdings Bhd, are potential inroads into new markets in China and the UK, where the local firm’s expertise in product design is sought.

The entry of a foreign shareholder and Takaful Malaysia’s overseas expansion are deemed pivotal to the long-term survival of the company, whose financial performance has dropped due to a more competitive landscape in the home market. The insurer, which used to monopolise the local market, has to compete today with seven rivals, including CIMB Aviva Takaful Bhd, Takaful Ikhlas Sdn Bhd and Etiqa Takaful Bhd.

In Malaysia, Takaful Malaysia, which already has 100 outlets, plans to leverage BIMB’s estimated 90 branches nationwide to sell its insurance policies, a cheaper expansion mode than building an agency base like conventional insurers, says Hassan.

Takaful Malaysia posted a net loss of RM3.63 million in 2QFY2007 ended Dec 31, compared to a net profit of RM4.51 million a year earlier, due to a RM10 million loan write-off in subsidiary Asean Retakaful International (L) Ltd. Revenue declined 29.6% to RM199.62 million from RM226.59 million previously.