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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Asian Alliance Insurance (AAIC) - The Goose that laid the Golden Eggs!

Asian Alliance Insurance (AAIC) - The Goose that laid the Golden Eggs!

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
The Goose That Laid the Golden Eggs
A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus, they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth.

Has Asia Capital sold the golden Goose?

Asia Capital to book hefty capital gain from Asian Alliance exit - Daily FT 18.7.11
* Analysts say expensive buy but Soflogic sees major prospects in insurance via biggest industry acquisition in recent years
* Asia Capital Group is to book a hefty capital gain estimated to be between Rs. 1.5 billion and Rs. 1.9 billion via the impending sale of its stake in Asian Alliance to Softlogic Holdings Group.
* Asia Capital is likely to disclose the exact profit made once the deal is through.
* Asia Capital Group sold 53% stake or 20 million shares in Asian Alliance for Rs. 2.39 billion or at Rs. 120 per share. This stake was held by Asia Capital Plc (28%) and subsidiary Asia Fort Sri Lanka Direct Investment Fund (25%).

The majority of the holding at cost was Rs. 57 per share acquired in 2010/11 financial year when Asian Alliance became a subsidiary of ACAP. The duo didn’t take up the rights of Asian Alliance late last year at Rs. 65 per share. The cost of original 29% stake in Asian Alliance of ACAP Plc in 2008/9 was around Rs. 10.50 per share after which it sold 10% stake to make it an Associate in 2009/10. In that sale ACAP made a net profit of Rs. 78 million. Asia Capital closed the week at Rs. 98.10, down by Rs. 12.20 though it peaked to a high of Rs. 120 intra-week, which was also its 52-week highest beating the previous high of Rs. 117.90. In the previous week it closed up Rs. 4 to Rs. 110.30.

In what will be the biggest acquisition in insurance industry in recent years Softlogic Holdings Group last week announced it has signed a sales and purchase agreement to acquire 73.5% stake in Asian Alliance for a staggering Rs. 3.3 billion.

Apart from 53% stake from Asia Capital Group, the balance 20.3% stake is coming from Fast Gain International which owns around 3.5% stake in Asia Capital and a related party.

Fast Gain has been the biggest subscriber to Asian Alliance’s Rs. 815 million rights investing Rs. 585 million to acquire 24% stake or 9.096 million shares. Asian Alliance doesn’t appear to have a foreign shareholding; hence Fast Gain could be classified as a local entity. Though Asian Alliance Annual Report of 2010 shows Fast Gain holding 24% after the Rights Issue as at 6 January, 2011 and zero before Rights as at 31 December, 2010, its quarterly interim accounts as at 31 December, 2010 did show Fast Gain as number two shareholder with 24% stake as against zero a year earlier.

Be that as it may some analysts viewed the Softlogic buy as expensive but its Chairman and Managing Director Ashok Pathirage dismissed such opinion saying it was an opportunity cost and overall a good buy.

Known for strategic acquisitions and turning them around with Asiri Hospitals as a case in point, Softlogic is confident its entry into insurance will be a strategic fit to its healthcare, financial services and retail businesses.

Asian Alliance share last week peaked to a high of Rs. 145.20 but closed lower at Rs. 132, down by Rs. 6.50 from the previous week. Its 52-week highest was Rs. 202. In 2010 Asian Alliance’s highest share price was Rs. 95 whilst the lowest was Rs. 50 whilst it finished the year at Rs. 80.20.

In 2010, Asian Alliance posted its best ever results with revenue topping Rs. 2 billion mark. Its life businesses’ gross written premium grew to Rs. 1.2 billion from Rs. 1 billion whilst non life segment dipped from Rs. 496.7 million in 2009 to Rs. 430 million last year.

However non life business turned healthy with a pre-tax profit of Rs. 114 million as against losses in the previous three years whilst life business pre-tax profit improved to Rs. 253.6 million, up from Rs. 195 million in 2009.

The company earned an Investment Income of Rs. 692 million, the highest ever recorded at Asian Alliance to date. Prudent investment decisions, and the Equity Portfolio, which was well managed by Asia Wealth Management, were taken in accordance to the Insurance Board of Sri Lanka (IBSL) guidelines.

The Company’s total assets rose by 58% to Rs. 4.3 billion whilst net assets trippled and topped the Rs. 1.5 billion mark from Rs. 517 million in 2009. Life fund was Rs. 1.92 billion, up from Rs. 1.5 billion a year earlier.

Marking 10 years in business Asian Alliance Chairman Paul Ratnayeke described 2010 as hallmark year.

“We now have the highest Retention Rates in the industry of 70%, and in the year ended we recorded our highest ever Net Profit of Rs. 368 million, a 154% growth from the previous year,” he said.

“Asian Alliance continued to maintain healthy Solvency Margins in both the Life and Non-Life businesses, well above the stipulated requirements, adding further confidence to the security of all policyholders, he added.

“Gross Written Premiums (GWP) reached Rs. 1,673 million for the year ended, and the Net Profit after Tax attributable to shareholders of Rs. 368 million. A substantial contribution towards the Net Profit came from Investment Income from both the Life and General Funds, with a growth of 77% to Rs. 693 million. Reserves reached Rs. 498 million, an impressive growth of 86% from the previous year and testament to the sound management of your company.

“The Life Division contributed 69% to your company’s bottom line, exhibiting an excellent performance with GWP of Rs. 1,243 and underwriting profit of Rs. 318 million. In view of this performance the Actuarial Consultant recommended an interim bonus to the policy holders of Rs. 90 million. In the coming year the Life Division will be looking to product innovation and improvement in customer service to increase customer retention rates, and aims to increase its Annualised New Business Premiums (ANBP) by 25%, supported by the proposed opening of a further 10 branches.”

Chairman Ratnayeke said the Non-Life Division will focus this year on restructuring and streamlining processes, as well as on training of staff to increase standards of professionalism and productivity.

“Our maxim this year is ‘Asian Alliance is in the business of protection’. The industry has seen a lot of other insurance companies packaging investment products in the guise of insurance. We however firmly believe in sticking to the principles of insurance, and continue to offer pure insurance products, focusing instead on capitalising on our stability and risk averseness. We believe this will stand us in good stead and sustain us through many more years,” the Chairman said in the 2010 Annual Report.

Asian Alliance first quarter results for 2011 are still pending.

Asian Alliance Timeline

July 12
Deal between Softlogic Group and Asia Capital Group and connected parties announced for the former to buy 73% stake in Asian Alliance for Rs. 3.3 billion

2010/11 Financial Year
March 2011
Asia Capital Plc sells 1.2 million shares (3.3% stake) of Asian Alliance Insurance Plc.

5 January, 2011
12.5 million shares of Asian Alliance listed pursuant to a 1:2 Rights Issue

Nov/December 2010
Asian Alliance raises Rs. 812.5 million via a one for two Rights Issue at Rs. 65 per share (12.5 million shares x Rs. 65) to restructure Group financial assets.

23 August, 2010
Asia Capital PLC acquires 1.3 million shares (5% stake) of Asian Alliance Insurance Co PLC for Rs. 74 million or Rs. 57 per share

19/20 August, 2010 (Asian Alliance becomes a subsidiary of ACAP)

Asia Capital Group acquires 6 million shares (24% stake) of Asian Alliance Insurance Co Plc for Rs. 343.75 m or Rs. 57 per share, making the latter a subsidiary once again. This included Asia Fort Sri Lanka Direct Investment Fund buying 3 million shares (12% stake) of Asian Alliance at Rs. 57 per share each or for Rs. 171 million from Fast Gain International

4 March, 2010
Vallibel Investments sells 3.75 million shares or 15% stake at Rs. 50 per share to Fast Gain International Ltd; Vallibel Leisure sells 397,000 shares at Rs. 50 each and K.D.D. Perera sells 737,100 shares at Rs. 50 and Rs. 51 each. Fast Gain overall bought 4.84 million shares or 19.35% at Rs. 50 each.

2009/10 Financial Year (Asian Alliance becomes an associate of ACAP)

June 2009 Asia Capital Plc sells 10% stake to reduce holding to 19%. Gross profit on disposal was Rs. 124 million (Rs. 49.50 per share) whilst net profit was Rs. 78 million.
Group holding amounts to 41.75% stated at cost of Rs. 150 million. As at March 2010, Group had divested 10% of its holding in Asian Alliance.

2008/9 Financial Year
Asia Capital Plc had 29% stake in Asian Alliance amounting to 7.25 million shares with Rs. 10.50 per share at cost.

2Asian Alliance Insurance (AAIC) - The Goose that laid the Golden Eggs! Empty ACAP sale of AAIC Mon Jul 18, 2011 11:33 am

invest77


Equity Analytic
Equity Analytic
http://www.ft.lk/2011/07/18/asia-capital-to-book-hefty-capital-gain-from-asian-alliance-exit/

Have we seen the true markiet reaction for the sale? from the moment the announcement was made ACAP prices has gone down. Is there a reason why a share is going down with a huge capital gain i am holding on to some ACAP and cannot decide to whether sell or not as i think market is yet to react to the news and that the overall market conditions that prevailed last month was the reason to the down turn.

Thanks

invest77


Equity Analytic
Equity Analytic
I think AAIC is making losses on operating activities and only making money through ACAP managed investment portfolio.

Aro


Equity Analytic
Equity Analytic
@invest77 wrote:http://www.ft.lk/2011/07/18/asia-capital-to-book-hefty-capital-gain-from-asian-alliance-exit/

Have we seen the true markiet reaction for the sale? from the moment the announcement was made ACAP prices has gone down. Is there a reason why a share is going down with a huge capital gain i am holding on to some ACAP and cannot decide to whether sell or not as i think market is yet to react to the news and that the overall market conditions that prevailed last month was the reason to the down turn.

Thanks

My suggestion is to hold .. however it is your call at the end of the day .... Huge capital gains means there would be some decent dividend that should be announced by ACAP.. my expectation is Rs10/share at least .. but saying that since the announcement its been down hill ... I think this is a reflection of what is happening to the entire market in todays context … but saying this we need to be aware of possible further declines that could happen .. like you I too have invested in ACAP and i'm hopeful for a reasonable gain

Hiru


Manager - Equity Analytics
Manager - Equity Analytics
I think that the market had reacted to the deal well before it was finalised, so the prices may come down.

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