Janashakthi looks for more with AIA General Insurance buy

Janashakthi Insurance MD Prakash Schaffter (left) all smiles with Chairman W.T. Ellawala and CEO Jude Fernando at the press conference to announce AIA General Insurance buy – Pic by Daminda Harsha Perera

• Rs. 3.2 b acquisition to be financed via Rights Issue first announced three months ago

By Shehana Dain

Janashakthi Insurance Plc’s quest for a bigger market share is expected to come to fruition with the announced acquisition of AIA’s general insurance subsidiary for Rs. 3.2 billion, funds for which will be met via the Rights Issue first announced in August.

On 19 August the company announced a Rights Issue of one for two at Rs. 18.50 each to raise Rs. 3.3 billion. At that time of the announcement, it merely said cash was to fund the future expansion of the insurance business. 

The August announcement suggests the Janashakthi-AIA deal may have been in the making since then. An EGM has been called on 16 October for shareholder approval for the Rights.

At present Janashakthi general business is the third largest behind Sri Lanka Insurance Corporation and Ceylinco Insurance.

The strategic notion behind the acquisition according to Janashakthi Insurance PLC CEO Jude Fernando is to bridge the significant gap between the industry leaders.

“We have been the third in the general insurance industry since 2005 and that’s not a good place to be because there was a huge gap between us and our contenders. Our strategy behind this acquisition is to get closer to the leading spot,” he noted.

With the proposed acquisition of AIA’s general insurance business which accounts for 6% of the segment, Janashakthi’s market share is expected to rise to 17.4% from 11.4%.

In the first half Janashakthi’s general insurance GWP was Rs. 3.6 billion up from Rs. 3.2 billion a year earlier. Net benefits and claims rose to Rs. 1.9 billion from Rs. 1.6 billion. Pre-tax profit from the business was down to Rs. 252 million from Rs. 373 million. Assets of general insurance were Rs. 11.95 billion as at 30 June 2015, marginally down from Rs. 12.2 billion as at 31 December 2014. Liabilities were Rs. 7.7 billion up from Rs. 7.5 billion.

AIA’s general business assets amounted to Rs. 6 billion as at 30 June 2015. In the first half AIA’s general business had gross written premium worth Rs. 1.97 billion up from Rs. 1.43 billion a year earlier. AIA general insurance business finished the first half with a net loss of Rs. 22.15 million, as against a profit of Rs. 59.3 million a year earlier.

Commenting on the valuation Janashakthi PLC Managing Director Prakash Schaffter said: “We had professionals who did the valuation for us it was not only the net asset value of the organisation but other factors were considered as well. The purchase consideration is Rs. 3.2 b, the accounts of AIA general will indicate net assets worth close to Rs. 2 b. So you’re looking at a multiple of about Rs 1.6 times of net assets. That’s not the only method of valuation method we used; we also used discounted cash flows based on future estimated profits especially with the streamlining of share services which is where the synergistic effect will come in. We used all these components to anticipate future returns.”

Janashakthi will also absorb AIA’s general business staff numbering 236. The transaction is scheduled to finalise on or before 31 October.

Schaffter revealed that AIA Sri Lanka as a formality would summon an EGM and payment would only be made subsequent to the EGM approval from the shareholders, after which steps would be taken to go forward with the transaction.

“It does not constitute a major transaction for AIA Sri Lanka but because they just segregated the business nine months ago, they would prefer a form of transparency to go to the shareholders to get a specific consent from the shareholders for the acquisition.”

Post finalising of the payment, according to Janashakthi PLC Chairman W.T Ellawala a proposed process of amalgamation will take place. “After the payment is finalised, we intend to start a process of amalgamation. The intention is to amalgamate and integrate the general insurance business of AIA to Janashakthi General Insurance. We believe the process will take about three months or even less, if the regulators have all the information they need for the approval,” he added.

Ramesh further went on to say that listing of AIA General within the next three years was definitely on the cards.

“Based on the regulations new insurance companies will have to list within three years of registration, which takes us to 2018, not 2016. The 2016 regulation applies to existing companies at the time the law came into place. Most of the companies formed with segregation, AIA General, Janashakthi General, are all post the regulation, so they would come in as new companies. This gives a three-year time scale, we would definitely go for a listing but that will depend on post amalgamation results.”