The rating reaffirmation reflects the financial strength of the general and life insurance funds of its main subsidiary Malaysian Assurance Alliance Berhad (MAA) and the support provided by the Revolving Credit Facility to meet coupon payments and bond redemption in the event of a shortfall. MAA Holdings Berhad’s (MAAH) income is almost wholly derived from dividends upstreamed by MAA. MAA’s strengths include the good market position of the insurance funds, its extensive distribution channels, positive growth in the operating performance of its general insurance business and relatively untapped potential of cross-selling opportunities between the funds. These are offset by an investment strategy more aggressive than industry norms; lower operating surpluses in the life fund following the suspension of the EPF Annuity Scheme in 2001 and the relatively high financial leverage at the parent company.

MAA’s life division (for FY 2001) topped the 18 life insurers in the Malaysian market, measured by new business generated (including annuity) in 2001/2002, accounting for 33.1% of total industry new business premiums. In FY 2002, the life division experienced contraction in new business premiums of RM527 million following the suspension of the EPF Annuity Scheme in May 2001. Excluding the annuity business, the life division recorded increase in new business premiums by 41% reflecting the company’s efforts in refocusing growth in ordinary life and investment linked products. Its large agency base of 18,000 agents, and the high representation of Bumiputeras are important competitive advantages that enabled MAA to capture a significant market share of Bumiputera policyholder population.

Operating performance of the life fund correspondingly declined during the year due to lower premium income coupled with the increase in policy and benefit claims. Surpluses declined due to the RM73 million provision for diminution in value of investments.

Going forward, the life division operating results are expected to be driven by higher market penetration as the industry remains relatively undeveloped and the potential for revenue growth is strong. Non-par policies continued to chart favourable growth reflecting management’s strategy in increasing shareholder return. Demand for single premium policies increased during the year in tandem with the increase in non-par ordinary life and investment linked policies.

MAA’s general division remain focused on the motor, medical and personal accident, and fire insurance, with motor accounting for 75.0% of total net premium written in FY 2002. Although revenue generated by the division increased by 20.3% in FY 2002, profitability was hampered by its high claims experience, claims provisioning and commissions which resulted in a higher loss ratio of 68.4% compared to 66.5% in FY 2001.

The parent holding company displayed lower cash flow coverage ratios in FY 2002 owing to higher interest and management expenses. Dividend upstreamed by MAA represents the main source of repayment for the bonds. The RM59.4 million dividend upstreamed by MAA in FY 2002 represented 234% of MAA’s net profit for the year. A revolving credit facility is available to mitigate liquidity risk for the bond issue. Gearing ratio increased marginally to 0.63x (FY 2001: 0.61x) whilst the double leverage ratio eased to 1.38x (FY 2001: 1.43x) as at end December 2002.