Friday, January 19, 2018

Where now for Asia Capital Re?

Asia Capital Re’s failure to secure a US$1 billion sale to Chinese investors has sent the company back to square one as it tries to effect a turnaround of its business.

The company announced last week that it was abandoning the proposed acquisition by Shenzhen Qianhai Financial Holdings and Shenzhen Investment Holdings, which would have seen the Chinese investors take 100% control of the company. ACR’s current owners include state-controlled investors Temasek of Singapore and Khazanah of Malaysia, as well as private groups such as 3i and Marubeni.

A sale would doubtless have brought a welcome end to their investment in a business that has struggled with continued underwriting losses and the uncertain outcome of its turnaround strategy.

“Our long-term strategic vision, growth ambitions and business priorities for ACR remain unchanged,” said Bobby Heerasing, group chief executive of ACR, when announcing the failure of the sale. “The business has been performing well over the last 12 months and ACR’s management and employees are fully on board and focused on executing on our strategy to continue delivering results.”

ACR, which celebrated its 10-year anniversary in 2016, was created by financial investors and the sale would have seen control pass to strategic owners with a long-term vision to build the business and deliver on its tag line: “In Asia. For Asia.”

Instead, the company will now continue with investors who are clearly looking for an exit — which may become increasingly difficult. Analysts say ACR has a record of missing performance targets and during the past few years it has seen its combined ratio rising and its return on equity dwindling. In 2016, its return was zero.

Things may yet get better. The new management team under Heerasing has presented a detailed strategy to improve underwriting performance and disclosure, and says that this has started to bear fruit during 2017. And AM Best notes that the company is supported by low underwriting leverage and good asset quality, including the high quality of its reinsurance assets and investment portfolio.

Even so, the cost of the failed sale cannot have helped matters. In preparation for the deal, the company consolidated its Malaysian businesses under a single holding company and has presumably incurred other costs related to the sale, such as advisory fees paid to bankers, lawyers and auditors.

As the deal limped from 2017 into the next financial year, costs would undoubtedly have risen. But ACR was also concerned that the uncertainty caused by this delay would have affected its January renewals.

“The timeline wasn’t compatible,” Heerasing told Reuters, adding it was a mutual decision to call off the deal.

The deal’s failure to close is somewhat unusual given that it had already won the approvals it needed from regulators. China’s National Development and Reform Commission cleared the acquisition in May, while two other key regulators, the Monetary Authority of Singapore and Bank Negara Malaysia, had both approved the deal in 2016.

Internal issues at one or both of the Chinese entities apparently caused the delay, though as both Shenzhen Qianhai Financial and Shenzhen Investment are basically owned by local governments, it is difficult to draw a line between “internal” and “government”. Financing was not a problem, according to Heerasing, which leaves room for some kind of objection to the deal by the Chinese authorities.

Some commentators have raised the issue of China’s capital controls and constraints on trophy acquisitions by companies such as Anbang, but the purchase of a 100% stake in a regional reinsurer hardly seems to fit the description of a forbidden deal.

Whatever the reason, ACR is now back to trying to turn its business around without the assistance of a Chinese state-backed owner. Heerasing has said that he has no plans to re-open the sale, but it is fairly clear that the company will entertain offers. The question is whether it will receive any. Or, if it does, will they be at an attractive price.

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