Monday, September 07, 2009

The Path - Why I Like KurniaAsia (A Lot)

KurniaAsia has had a turbulent 3-4 year period. It was and is still the top general insurance company in the country, an enviable position, but something happened along the way, it sputtered and stuttered as it did not realign their portfolio to a more balanced one that is more risk commensurate and risk viable. It has the network, it has the reach, but it did not have the cohesiveness as the business model was slanted.
Although KurniaAsia calls itself as Malaysia’s largest general insurer, it derived over 86% of its gross premium income in FY08 from the motor business.The financial year ended June 2008 (FY08) was a year to forget for KurniaAsia. Less than four years after its listing on the main board, it reported a net loss of about RM300mil, due mainly to an underwriting deficit of some RM400mil. The company has since pumped in another RM400m capital.

year net profit / market cap
2004 RM53.7m / RM1.9bn

2005 RM102.7m
2006 RM29.8m
2007 RM5.8m / RM1.7bn
2008 (RM301.8m) / RM0.8bn
2009 estd. RM50m

Just looking at the net profit figures through the year would reveal a startling trend. The motor insurance business gives an uneven earnings trend, and would put the company to take some exceptional risk in its business model. Institutional investors and analysts do not like haphazard earnings and uncertainty in claims / writeoffs. KurniaAsia was a lumbering giant that did not know what to do with its resources and penetration abilities.

The last 12 months was a sight to behold for those who have been following the company. Its like an MBA textbook case of successful management revamp. You can talk to anyone within KurniaAsia and they all can sense and feel the deep culture and management changes.
The group adopted the transformation theme when it appointed Capt K.H. Chia as the chief executive officer and managing director of Kurnia Insurans last July. The 30-year veteran of the insurance industry started as a life insurance agent and was previously the CEO of Citic-Prudential in China.

Management consulting firm McKinsey & Co was hired two years ago to provide advice and that led to the launch of Kurnia Asia’s Transformation of Operations and Performance (TOP) programme in July 2007. Says Chia: “Another thing that convinced me was he (Kua, the controlling shareholder) showed me the thick report by McKinsey. I agreed with a lot of things inside the report. These are critical areas and it’s challenging to execute the recommendations.”

An indication of the group’s intent to become less reliant on its motor portfolio is the fact that it now has a general manager (GM) in charge of the non-motor products. It is also looking to strengthen the selling of its products by others. Hence, it has GMs to oversee agency distribution and alternative distribution. When assembling the team, Chia felt it was important to have an impressive line-up and thus has identified people who are well-regarded in the industry. It is no wonder then that KurniaAsia’s management expenses for the first quarter ended September 2008 increased 2.7% from a year ago, largely because of the expansion of the Kurnia Insurans’ senior management team.

People in the industry would have noticed these dramatic changes in the way KurniaAsia conduct their business:
a) Now, they try to settle claims as quickly as they can (within 15 months), instead of dragging it out for as long as they can (which was their previous strategy) as they found the compounded interest cost (8% p.a.) was a killer and Malaysian courts usually favour the plaintiffs anyway.

b) They are concentrating on building the non-motor business, recognising the much better claims experience (for e.g., household fire claims ratio is around 5% only)

c) Phasing out declining non-profitable business. Previously, they were focused on volume and tried to "manage the portfolio" as it grew, but obviously, it didn't work.

d) Beefing up Kurnia's "Auto Assist" to include motorbikes which are supposed to arrive at the scene of accident/breakdown within 15 minutes of the call. They are trying to make this their key competitive advantage vis-a-vis other insurers. Of course they will still have their normal tow trucks and cars but motorcyles are the key "new" difference.

e) Setting up 300-400 workshops as "Kurnia express" touchpoints where customers can bring their vehicles after the accidents for immediate assessment and settlement (before the repair work is done) for own damage claims up to RM5,000. The cheque goes straight to the customer, not the workshop, so the incentive is for the customer to keep the repair costs as low as possible. More than 50% of their claims are less than RM5,000.

f) Reconfiguring and downsizing their branch network, replacing them with touchpoints at their panel workshops. This should help reduce costs. Kurnia is bringing potential customers to their doorsteps - it is up to them to convince the customers to use their cheques there.

What is a good company? Why do we like certain companies? A company can stay undervalued for the longest time if there are no catalysts to change the path the company is on. KurniaAsia basically had a Christian-like born again experience. It saw that it did not have the management leadership to change its business model, the management will (or rather the lack of) to revamp the way things were being done - it was under leveraging its massive network. The board hired the right person to effect those changes.

By doing that, it puts the company onto a "sustainable growth and value-add path". Maintaining that discipline would easily push the market cap of the company way past what it had achieved as a high in the past. It went as high as RM1.9bn in market cap before on a under leveraged business model. Taking RM2bn as the new market cap target, on 1.5bn shares, I think KurniaAsia is strong buy and hold till it hits RM2bn / 1.5bn shares = RM1.33 per share. Considering it is currently just RM0.56 a share, you can do the math.

Earnings should more than double next year, which would bring the PER down to 6x-7x (based on a combined ratio of 96% vs 99% in the last q). A tariff revision should bring this combined ratio down even further and enhance the overall profitability of the business. The previous transformation programme called Transformation of
Operations and Performance (TOP), launched in Jul 07, was completed in Jun 09. It is now replaced by a new plan, dubbed Mission 15.

Overall, TOP has yielded the
following positive results by June 09:
  • Agency turnaround programme – RM48.3m savings from the reduction of unprofitable business realised from Jul to end-Jun 09.
  • 312 unprofitable motorcycle agents suspended.
  • Unprofitable agents barred from issuing unprofitable third-party policies.
  • Sales stimulation programme – RM9.8m impact from the increase in profitable motor policies and business from newly recruited agents.
  • 506 new productive agents recruited.
  • Motor comprehensive renewal campaign – RM2.7m impact through an increase in renewal cases.
  • Risk selection enhancement – RM30.9m savings achieved through initiatives to enhance risk selection.
  • Claims process enhancement – own damage (OD) adjuster waiver – RM1.1m savings in adjuster fees achieved.
  • Claims process enhancement – OD factory / firm – overall OD claims approval within seven days of 76% compared to 56% in FY07-08; RM2.3m savings achieved through lower OD claims payout by reducing leakages.
  • Claims process enhancement – third party bodily injury (TPBI) – RM4m impact from BI settlement strategy (to accelerate settlement of outstanding cases to avoid paying more in the future); RM3.4m savings achieved from fewer solicitor appointments due to direct settlement approach.
  • Claims process enhancement – third party property damage (TPPD) – average payout amount is 4.8% lower in Jun 09 compared to FY07-08 through reduction of leakages; RM2.7m achieved as at 30 Jun 09.
  • Fraud investigation unit (FIU) – RM4.2m saved.
  • Increase in comprehensive policy – private car third-party policy ratio dropped to 31% from 46% in FY07/08; commercial vehicle third-party policy ratio dropped from 61% to 30%.
Mission 15
The group launched its second wave transformation programme
Mission 15 in Jul 09. The four objectives for the programme are:
• Enhancing customers/agents’ experience through simpler processes with fewer
• Improving employee satisfaction through clear, focused jobs and elimination of
low value-added tasks
• Creating a culture of performance by enabling rewards through superior
economics and regulatory compliance
• Creating profit and loss capacity to invest in new value creating initiatives and
hiring top talent for critical roles

Mission 15 focuses on the following areas:

• Branch and operations – operations centralisation; branch reconfiguration;
marketing executive coverage
• Claims management – Kurnia Express redesign; claims redesign; Kurnia Auto
Assist (KAA) redesign
• Alternative channels developments

• Other initiatives – collections; real estate monetisation; supporting functions
redesign 3-5 year aspirations.

With the transformation programme in place, the management is targeting to achieve the following five aspirations over the next 3-5 years:

• Combined ratio (including claims, commission and management expense) of 90% vs. 98% in FY09

• Motor and non-motor mix of 65:35 vs. 82:18 in FY09
• Achieve and maintain management expense of 15% vs. 22% in FY09

• Increase contribution from alternative distribution channels to 20%, from only 6-7% currently (93-94% sales via agency force)

• Maintain a leading market position; the group currently has higher market shares of 9.8% for general insurance premium and 18.8% for motor insurance premium

These achievements were significant in revamping the philosophy and thinking behind their business mindset. Some of the improvements may be yielding only small sums of real monetary change but these are value accretive over the longer term, and what I would call the "path to professional success".
That's the internal revamp within KurniaAsia. Investors should start paying attention to the industry and the stock in particular because there are upcoming structural revamps for the local insurance industry as well.

1. BNM has already allowed Kurnia to turn away unprofitable third party policies (which allows claims of unlimited liability for bodily injury which are "long tailed" in nature) and policies covering commercial vehicles. Previously, if Kurnia turned away a bus, they would get a 'phone call' from BNM. When Kurnia started to decline 3rd party business, it appears that the other industry players also followed suit. All the unprofitable business is being channeled to MMIP, which is jointly owned by all the general insurers in town and charges 50% more than conventional policies. With MMIP, at least the 3rd party risk is shared among all and the premiums are higher. Kurnia's 3rd party policies are only 18% of overall policies (private car) vs 34% last year. Commercial 3rd party is down to 1/3 of the 35% done in 2008.

2. BNM is close to allowing them to revise motor tariffs, which have not been changed in the last 31 years. For e.g. 3rd party insurance in Malaysia for a married 28 yr old female costs USD38, vs USD68 in Thailand, USD189 in Indonesia and USD 873 in Singapore!

3. BNM may allow them to categorise theft as a separate insurance cover and priced according to the risk taken. Theft is a major issue for them.

4. BNM may allow the industry to limit the liability on 3rd party policies, which is a major positive as these are the costly suits which can drag on for years.

How not to like KurniaAsia!? RM0.55 vs RM1.33, I think that is achievable within the next 12 months.
Back to my target of 30% within 6 months, that should be a cinch. Hedge funds should really send me a cheque when this works out as planned. Finding a company that just makes money is too simple, one can buy a plot of land and plant oil palm and sell for profit, but how defensible is that business model - not very. It can be copied easily and there are many things you cannot get to the economies of scale side of things. The network, revenue, number of clients, penetration, brand's acceptance, etc... all constitute the infrastructure and assets of the company - whether they get deployed properly is up to management's leadership and execution of the right plans.

KurniaAsia just gets almost all the ticks in my list and as mentioned before, a company can be on a path to nowhere or somewhere ... take the various broking firms, each of these broking firms has "chosen a path to be on" by virtue of their thinking, the management's vision and the general professionalism of staff hired, every company has set out on a certain path, whether they do it deliberately or unwittingly ... ECM Libra, TA Securities, SJ Securities, OSK ... you get the same products at each firm, yes some are better capitalised but they all at one time were about the same size with the same capital. The path that each company has set for itself is very clear, you can almost predict where each of these companies will be in 5 years or 10 years time. Some will still be exactly the same, why??? Some would have grown compounded wise by 10% p.a.... why?

It is for these very reasons that I find KurniaAsia has steered itself onto the correct path of professionalism, improving its business model and defensibility of its net margins in the right product mix ... hard to see it not being top class company in the future. Most foreign firms research do not cover insurance stocks, as more and more people discover it, the price appreciation will reflect the changes made.

Sometimes you can have 10 buy reports and no sells on the one stock and the bloody stock still won't move - why, because anyone who wanted to buy would have bought, and all are waiting to sell to fresh buyers, it takes time to lure in fresh "capital".

A 'tarnished' counter would have lost many investors, just like KurniaAsia, its revamp and reinvention would gradually win them back, hence the uptrend will be more sustainable - how far ahead do you think we are to discover KurniaAsia now, and the impending structural changes for the insurance industry?

p/s photo: Zhou Weitong


solomon said...

Insurance sectors still have to brace thru some wild turbulent waters.

I like this line "Sometimes you can have 10 buy reports and no sells on the one stock and the bloody stock still won't move - why, because anyone who wanted to buy would have bought, and all are waiting to sell to fresh buyers, it takes time to lure in fresh "capital".

But, given the same capital I still like Dutaland and Utusan.

Ooi Beng Hooi said...

Didn't expect Capt K.H. Chia to leave Kurnia Asia so soon...