Corporate issue study: Issues in MAA Group (former insurance company)

By: Iliyas Ismail

(written for an assignment report in 2018)

Background to the case

MAA Group is a public investment company listed in Bursa Malaysia. Since 2011, the company has been classified under the Public Note 17 (PN17) category, a category that Bursa gives to companies facing financial issues based on their given criteria. For MAA, during 2011, the company in order to reduce its debts decided to sell off its entire stake in the company’s major business of conventional insurance, MAA Assurance, to Zurich International for RM344 million. This move resulted in the company being relegated to PN17 status on September 30^th, 2011.

The company was rendered without a core business as MAA was known as an insurance-based company and MAA Assurance was its main business activity. Share prices dropped lowest in the period of the previous two years and their management board had to decide on the next business to be involved in and to save the company’s financial situation and image, especially in the eyes of investors. MAA Group was instructed to provide a regularization plan to Bursa in order to outline their financial strategies for the company and risk being listed of Bursa. Since 2011, the company has requested and been granted postponement to submit this plan until 2018.

Many steps were taken and is still being taken by the group in an attempt to lift the company out of its PN17 status since 2011, but it appears that the company is still unable to do so until today. Although selling off its conventional insurance business, they were still then involved with the Islamic insurance (takaful). Strategies taken include finding the right core industry to be involved in by leaving the previously involved insurance industry (including takaful) completely. However, it is yet to be seen if they will be able to find a sustainable core business and meet their objective of shedding its PN17 status.

Company’s relevant information

MAA Group Berhad or MAAG is a Malaysian investment company listed on the main board of Bursa Malaysia. It was established in 1968 as Malaysian American Assurance Company Berhad (MAAB) and started off as an insurance company offering general and life insurance. The company later changed its name in 1985 to the Malaysian Assurance Alliance Berhad or MAA Assurance.

MAA Holdings Berhad was then formed as the holding group for MAA Assurance and other subsidiaries that were not involved in insurance. However, in 2011, the company in order to write off its increasing bad debt and rectify its situation of revenue losses due to declining market share in the insurance field, decided to sell off its insurance arm to Zurich International. This major move effectively meant that the company has sold off its core business and exited the industry that they were known for in the country, namely conventional insurance. They however held on to their stake in the takaful sector until the management board decided to sell that off as well in 2015.

Since 2011, the company has explored various industry to venture into and currently is mainly an investment company. MAA Corp is one of its group subsidiaries in which MAA Group has a 100% effective interest. The subsidiary is involved in various activities including property management services and investment holdings. MAA Corp’s subsidiaries are also involved in consultancy works for example MAA Corporate Advisory Sdn Bhd which provides corporate advisory.

It is also involved in the education sector Kasturi Academia Sdn Bhd, and still owns an insurance company in the Philippines via MAA Assurance Philippines as well a retail mortgage lending business in Australia via Columbus Capital Pty Limited. At present the company’s asset stands at RM779 million.

The decision to sell off its conventional business is due to high commercial loans extended by the group that were in default, market share losses in their competition with other players and were making losses (The Sun Daily, 2016).

Although also having a drop in its profit between 2017 and 2016, the company is in actuality still at a good financial condition overall. The fact of the matter is that the company is not categorized under the PN17 due to having high level of debts or consistently making huge losses, but for the fact that it is not having a core business activity. MAA group has for years pushed though different agendas in its struggle to find the most appropriate business to venture into.

Problem

The main issue facing the company is to remove the PN17 status that the company acquired since 2011. Management board of MAA Group has since then struggled to find the most appropriate business activity to be involved in as the main activity to earn them profits, but their efforts has not been successful. 

There are currently 22 companies listed by Bursa as being having the status of PN17, upon which these companies risk delisting if not able to submit its regularization plan on time, or otherwise granted an extension in its submission. MAA Group was again granted an extension on its deadline to submit the regularization plan until 31 October, however it is believed that they will again be given the approval to extend that due date.

For the sake of clarity, PN17 companies have earned themselves those status by meeting the following criteria. According to Bursa, these companies have either;

1) Shareholders equity on a consolidated basis is 25% or less of the issued and paid up capital

2) receivers or managers have been appointed over the asset of the listed issuer, which assets account for 50% of the total assets.

3) The closure of the listed issuers subsidiary or associated company which accounts for around 50% of the company’s total assets.

4) Default in payment by the issuer.

5) Auditors having given an adverse disclaimer on the company’s latest financial report.

MAA group has met the criteria number 3, and the reason it has taken them quite a long while to be in the condition is mostly due to regulatory requirements they have faced. While they are required to be able to have a core business, at the same time, they are involved in the takaful industry, which means that they have to abide by certain requirements by the Islamic Financial Services Act (IFSA) 2013 that allows such companies to only be involved in the financial services sector. According to its directors, this renders them in a difficult position as they are then only allowed to purchase or acquire certain companies in this field, most of which are highly expensive, such as the bank or other insurance company. This limits them to the many options of acquiring companies which could meet their current business plans and financial situation.

However, in 2016 the company announced that it was selling its takaful arm, MAA Takaful Bhd, to Zurich Insurance Co for RM393.75 million (the Edge Markets, 2016). This strategic move has released them from the aforementioned constrain of having limited sectors that they could be involved in as they are no longer bound by the IFSA requirements. Notwithstanding, they are still considering the various options to decide on their main business, as in 2018, the management board are still facing difficulties deciding which sector should they play a major role in.

Considerations have included the manufacturing sector, especially after their exit from the takaful business however a change to another industry is a challenge due to less expertise in the new field. The challenge ahead for the company is to decide on an actionable plan to either acquire a new business or use any of the existing ones to grow, the latter would be a much challenging plan due to it would take a longer time to do so. So long as the are not able to do this they will remain stuck in the PN17 list and risk being delisted.

Although not being heavily indebted, remaining in the PN17 does not portray a good image to investors and especially would be investors. Thus, the company views the current position as not being sustainable and sees an actionable plan to be executed immediately to rectify the situation.

To map the problem faced by MAA, director Muhammad Umar Swift has in the past mentioned that MAA Group will seek to diversify into the manufacturing and education sector and would be able to lift itself out of PN17 status within 12-18 months from the period of June 2016 (The Star). However, as of now it still did not succeed and is currently still in the same situation as before. According to the company’s 2017 annual report, they have engaged with various industry in trying to rebrand itself including oil and gas, retail and trading, manufacturing, hospitality, green energy and many others.

Problem Analysis and recommendation

In terms of profit generated, the group had witnessed a substantial drop in profit making on paper. Its 2016 profit was actually due to their disposal of MAA takaful, and in 2017 no such major disposal was undertaken. Thus, as mentioned, in terms of overall financial health, the company is actually not in such a bad state. However, the group was involved in the winding up of several inactive subsidiaries in August of 2017 that were involved in providing tuition services, this liquidity had provided some revenues to the group.

In 2017, the company was once again involved in the process of land acquisition and investment in such as purchase of office buildings and land. The company has for several years now been involved in property investment that it is actually recommended that the company be involved in such activity as a main business. A joint venture with other well-established property development group such as MahSing or MK Land could be considered, or smaller companies if they could not find the necessary expertise could also be in discussion. The amount of assets that the company has at the moment would allow the company to take the risk to start such a business.

MAA Group is also involved in the education sector, while this is a good business and can be considered to be transformed into a major activity for the group, it is recommended that they remain within the minor activities of the company. The education tuition business is a smaller part within the education services of the country, however they could also consider starting a small college to supplement that effort to diversify.

MAA Group should focus all its efforts in trying to meet their objective of being lifted out of PN17. The group should consider investing more for consultancy costs with outside firms to get input on how to move forward. These consultants could suggest them on the various industry that they could be involved in based on the background and expertise of the management board. Any background that they have in other fields could be harnessed to assist them in being developed to a more focused area to be explored further.

It is observed that the company is in a rather comfortable position, it does not have a high amount of debt, and so that would probably be one of the reasons that they could not find a major business activity to be focused in as the sense of urgency is not there. It might be there previously but not at the current situation. This condition is not sustainable and any future economic issue would affect the company and risk it being delisted.

Conclusion

MAA Group needs new perspectives and fresh ideas quick to have a change in direction to their company. Having a comfortable cash flow does not mean that the company should not put this as their priority as the wind could change and time could be hard in the future for the company so now is a good time to continually grow.