Thursday, Jan 30, 2003
Malaysian Rating Corporation Berhad (MARC) has reaffirmed the rating of MAA Holdings Berhad RM120 million nominal amount six-year structured serial bonds.
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 a Revolving Credit Facility to meet coupon payment and bond redemption in the event of any shortfall. MAAH’s 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 channel, strong operating performance of its life insurance business and the relatively untapped potential of cross-selling opportunities between the funds. These are offset by an investment strategy more aggressive than industry norms and increased financial leverage at the parent company.
MAA’s life division topped the 18 life insurers in the Malaysian market, measured by new business generated in 2000/2001, accounting for 15.9% of total industry new business premiums. The life division recorded a significant increase in new annualized business premiums to RM1,349 million, fuelled by the successful launch of EPF Annuity Scheme in July 2000. However, with the suspension of the scheme by EPF effective May 2001, the company is now refocusing on achieving growth in traditional products. Its large agency system of 17,500 agents, and the high representation of Bumiputras is an important competitive advantage that has enabled MAA to capture a significant market share of the Bumiputra policyholder population. Efforts have been undertaken to further improve the quality of its large agent base.
Operating performance of the life division recorded further improvement in FY2001 with higher profitability and surplus registered. The lack of suitable long-dated investments, a common problem in the domestic market, will however, test the investment returns and bonuses illustrated to policyholders.
Going forward, the life division’s 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. Growth in non-par products was evident during the year which directly resulted in significant improvement in shareholder returns. Demand for annual premium business increased during the year, following the termination of EPF Annuity Scheme and the volatility of the stock market This is a positive development as it is expected to provide cash flow stability in future with recurring premium inflows. Industry liberalization will have a long term dampening effect on profitability as foreign entrants, backed by more advanced product research and development capabilities and larger capital bases compete head-on with the local players.
MAA’s general division predominantly writes personal lines insurance, with motor constituting about 68% of net premium written. Its business strategy will remain focused on the motor and fire classes. Growth in medical business in FY 2001 has boosted the general division’s top-line. However, its high claims experience and claims provisioning has adversely affected profitability of the division. This has resulted in higher loss ratio of 67% from 55% in the previous year. The division’s combined ratio therefore increased to almost 100% which was also contributed by a higher expense ratio.
The general fund’s investment strategy remains aggressive with almost 24% of the funds invested in real estate. Liquidity improved slightly with liquid assets cover of 0.86 times as compared to 0.75 times in the previous year due to improvement in recovery of outstanding premium balances. Similar to the life fund, the general fund’s large proportion of invested assets in the form of properties has limited the total amount that can be counted towards the solvency margin.
The parent holding company displayed lower cash flow coverage ratios in FY2001 owing to higher interest expense. Dividend upstreamed by MAA represents the main source of repayment for the bonds. The RM48.6 million dividend upstreamed by MAA in FY2001 represented a high 2x of MAA’s net profit for the year and 1x of total distributable retained earnings, leaving a balance of RM16.8 million in unallocated profit carried forward. Barring further weakening in the equities market, MARC expects MAA to turn in a stronger performance, which would mainly be contributed by expected favourable performance of the life fund. A revolving credit facility is available to mitigate liquidity risk for the bond issue. Gearing and double leverage ratios increased to 0.61x and 1.43x respectively after the bond issue.
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 a Revolving Credit Facility to meet coupon payment and bond redemption in the event of any shortfall. MAAH’s 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 channel, strong operating performance of its life insurance business and the relatively untapped potential of cross-selling opportunities between the funds. These are offset by an investment strategy more aggressive than industry norms and increased financial leverage at the parent company.
MAA’s life division topped the 18 life insurers in the Malaysian market, measured by new business generated in 2000/2001, accounting for 15.9% of total industry new business premiums. The life division recorded a significant increase in new annualized business premiums to RM1,349 million, fuelled by the successful launch of EPF Annuity Scheme in July 2000. However, with the suspension of the scheme by EPF effective May 2001, the company is now refocusing on achieving growth in traditional products. Its large agency system of 17,500 agents, and the high representation of Bumiputras is an important competitive advantage that has enabled MAA to capture a significant market share of the Bumiputra policyholder population. Efforts have been undertaken to further improve the quality of its large agent base.
Operating performance of the life division recorded further improvement in FY2001 with higher profitability and surplus registered. The lack of suitable long-dated investments, a common problem in the domestic market, will however, test the investment returns and bonuses illustrated to policyholders.
Going forward, the life division’s 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. Growth in non-par products was evident during the year which directly resulted in significant improvement in shareholder returns. Demand for annual premium business increased during the year, following the termination of EPF Annuity Scheme and the volatility of the stock market This is a positive development as it is expected to provide cash flow stability in future with recurring premium inflows. Industry liberalization will have a long term dampening effect on profitability as foreign entrants, backed by more advanced product research and development capabilities and larger capital bases compete head-on with the local players.
MAA’s general division predominantly writes personal lines insurance, with motor constituting about 68% of net premium written. Its business strategy will remain focused on the motor and fire classes. Growth in medical business in FY 2001 has boosted the general division’s top-line. However, its high claims experience and claims provisioning has adversely affected profitability of the division. This has resulted in higher loss ratio of 67% from 55% in the previous year. The division’s combined ratio therefore increased to almost 100% which was also contributed by a higher expense ratio.
The general fund’s investment strategy remains aggressive with almost 24% of the funds invested in real estate. Liquidity improved slightly with liquid assets cover of 0.86 times as compared to 0.75 times in the previous year due to improvement in recovery of outstanding premium balances. Similar to the life fund, the general fund’s large proportion of invested assets in the form of properties has limited the total amount that can be counted towards the solvency margin.
The parent holding company displayed lower cash flow coverage ratios in FY2001 owing to higher interest expense. Dividend upstreamed by MAA represents the main source of repayment for the bonds. The RM48.6 million dividend upstreamed by MAA in FY2001 represented a high 2x of MAA’s net profit for the year and 1x of total distributable retained earnings, leaving a balance of RM16.8 million in unallocated profit carried forward. Barring further weakening in the equities market, MARC expects MAA to turn in a stronger performance, which would mainly be contributed by expected favourable performance of the life fund. A revolving credit facility is available to mitigate liquidity risk for the bond issue. Gearing and double leverage ratios increased to 0.61x and 1.43x respectively after the bond issue.