JAKARTA (TheInsiderStories) – Still hanging in the balance, the restructuring of Indonesia’s troubled AJB Bumiputera 1912 mutual insurance company has raised hard questions about why successive governments allowed it to continue to hemorrhage cash for nearly two decades.
The Financial Services Authority is reviewing a new scheme to save the oldest insurance firm in the country, after more than a year of attempting to restructure the insurer’s operations.
Wimboh Santoso, Chairman of FSA, told the local media that the process is about to unwind, adding that the regulator will re-allow the firm to once again sell its products after temporarily suspending commercial transactions during restructuring.
“We will change the rescue scheme, since what we tried before apparently didn’t work. There was no cash flow whatsoever coming in, so we aborted the scheme,” he admitted Thursday (15/2).
AJBB was first set up by a group of teachers in 1912 and has remained the country’s only mutual insurance company. It is Indonesia’s oldest life insurer, with total assets of US$1.1 billion as of 2015. The insurer was placed into restructuring by FSA in 2013 after it became clear its premium revenue could not meet claims payments.
The Board of Commissioners of FSA decided to take over the management of AJBB on 21 October 2016 after restructuring efforts by company management were judged to have made little progress. FSA appointed seven statutory managers to replace the directors and commissioners of the company.
Last year, a rescue plan was proposed. However, the implementation of the restructuring scheme has encountered its own legal and business obstacles.
The existing rescue scheme involved a capital injection by PT Evergreen Invesco, which has since been renamed Bumiputera Investasi Indonesia, including a capital injection from Indonesian tycoon Erick Thohir. However, apart from Rp500 billion injected into the restructuring, another Rp1.5 trillion that had been pledged has yet to be received.
The statutory managers had also been working on a bancassurance contract with a state-owned bank up until mid-2017. However, that deal as well was never realized.
As part of the restructuring, a new entity, Asuransi Jiwa Bumiputera (AJB), was launched in February 2017. Under the revised arrangement, AJB will handle new AJBB business. All assets, such as its brand, regional offices and branch offices, and its workforce, were transferred to the new insurer. High-value properties located in strategic areas, estimated to be worth Rp4.16 trillion, were transferred from AJBB. The value of property left in AJBB was only Rp2.34 trillion.
The transfer of the Rp4.16 trillion of property assets was agreed upon, to be paid with Rp860 billion in cash and the remaining IDR3.3 trillion in the form of promissory notes that mature within three years.
AJB will also disburse 40 per cent of its profits to AJBB for the next 12 years. AJB is controlled by PT Pacific Multi Investama, a subsidiary of publicly-listed investment and textile company PT Evergreen Invesco, brought in to rescue AJBB.
Meanwhile, AJBB is in a run-off position, except for the continued premium contributions of existing policyholders.
Critics argued that the deal did not take into account the goodwill and branding value of AJBB. They also said that the cash settlement of Rp860 billion would have no significant effect on AJBB. In addition, profits of AJB are not assured.
Meanwhile, the inability of AJBB to fulfill its obligations to policyholders numbering around 6.7 million poses a potential structural risk to the financial system. There is also a risk of class action.
Clearly, AJBB is not a done deal. Analysts say there is no evidence the anticipated cash flow, and better and leaner management practices, will yield sufficient funding to meet maturing policies over coming decades.
If not, FSA might be forced to cut the benefits of millions of policyholders, a potential shock that could result in its case being raised in Parliament, and cause President Joko Widodo a massive political headache.