Wednesday, Sep 05, 2001
MARC has assigned a rating of A- (Single A minus) to MAA Holdings Berhad’s (MAAH) RM120.0 million nominal amount six-year structured serial bonds.
The rating assigned to MAAH’s bond issue is drawn from the insurer strength ratings 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 both the insurance funds, its extensive distribution channel, the strong operating performance of its life insurance business and the relatively untapped potential of cross-selling opportunities between the funds. Somewhat offsetting these strengths are a higher proportion of invested assets in real estate and equities and the increased financial leverage at the parent company, which limits its financial flexibility.
MAA’s life division ranks second amongst the 18 life insurers in the Malaysian market, measured by new business generated in 1999/2000, accounting for 14.6% of total industry new business premiums. The life division recorded a significant increase in new annualized business premiums to RM652 million, fuelled by the successful launch of annuity plans in July 2000. However, with the suspension of the plan by EPF effective May 2001, the company is now refocusing on achieving growth in traditional products. Its large agency system of 19,000 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.
Operating performance of the life division remained strong in FY2000. It continued to generate surpluses and superior operating returns despite the difficult economic climate in 1997/98 and the large investment losses incurred. 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. Business growth will skew towards non-par products to improve shareholders’ returns. Challenges remain in managing a rising volume of single premium business, which display higher potential variability of revenue and earnings, and increased pricing pressures. Industry liberalization will also have a long term dampening effect on profitability as foreign entrants, backed by more advanced product development skills and larger capital bases compete head-on with the local players.
MAA’s general division predominantly writes personal lines insurance, with motor constituting about two-thirds of net premium written. Its business strategy will remain focused on the motor and fire classes, while exposure to MAT will be reduced due to the volatile claims experience inherent therein. The company has in the last two years tightened underwriting guidelines by implementing flight to quality measures. This has resulted in the significant improvement in the loss ratio to 55% in FY2000. Its combined ratio, which strengthened to 88%, hovered about the industry average.
The general fund’s investment strategy is more aggressive with almost 45% of the funds invested in real estate and equities. MAA views the investment in real estate as a source of steady rental income flow and/or rental savings, in addition to potential capital gains. A weak liquid assets cover of technical reserves of 0.75 times and poor cash flow ratios can spark off liquidity concerns should claims develop less favourably than anticipated.
The parent holding company displayed strong cash flow coverage ratios in FY2000 owing to the high dividend income vis-à-vis the small operating cost structure. Dividend upstreamed by MAA represents the main source of repayment for the bonds. The RM43 million upstreamed by MAA in FY2000 represented a high 14x of MAA’s net profit for the year and half of total distributable retained earnings, leaving a balance of RM42 million in unallocated profit carried forward. Barring further weakening in the equities market, MARC expects the operating company to turn in a stronger performance in the near to medium term, which shall form the pool from which dividends are declared and paid to MAAH. A revolving credit facility is available to mitigate liquidity risk for the bond issue. In addition, the serial nature of the bonds with various maturities effectively reduces the debt size over the life of the facility and mitigates refinancing risk upon the final maturity of the bond. The pro-forma gearing surges to 0.74x after the bond issue and the double leverage potentially rises to 1.53x.
The rating assigned to MAAH’s bond issue is drawn from the insurer strength ratings 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 both the insurance funds, its extensive distribution channel, the strong operating performance of its life insurance business and the relatively untapped potential of cross-selling opportunities between the funds. Somewhat offsetting these strengths are a higher proportion of invested assets in real estate and equities and the increased financial leverage at the parent company, which limits its financial flexibility.
MAA’s life division ranks second amongst the 18 life insurers in the Malaysian market, measured by new business generated in 1999/2000, accounting for 14.6% of total industry new business premiums. The life division recorded a significant increase in new annualized business premiums to RM652 million, fuelled by the successful launch of annuity plans in July 2000. However, with the suspension of the plan by EPF effective May 2001, the company is now refocusing on achieving growth in traditional products. Its large agency system of 19,000 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.
Operating performance of the life division remained strong in FY2000. It continued to generate surpluses and superior operating returns despite the difficult economic climate in 1997/98 and the large investment losses incurred. 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. Business growth will skew towards non-par products to improve shareholders’ returns. Challenges remain in managing a rising volume of single premium business, which display higher potential variability of revenue and earnings, and increased pricing pressures. Industry liberalization will also have a long term dampening effect on profitability as foreign entrants, backed by more advanced product development skills and larger capital bases compete head-on with the local players.
MAA’s general division predominantly writes personal lines insurance, with motor constituting about two-thirds of net premium written. Its business strategy will remain focused on the motor and fire classes, while exposure to MAT will be reduced due to the volatile claims experience inherent therein. The company has in the last two years tightened underwriting guidelines by implementing flight to quality measures. This has resulted in the significant improvement in the loss ratio to 55% in FY2000. Its combined ratio, which strengthened to 88%, hovered about the industry average.
The general fund’s investment strategy is more aggressive with almost 45% of the funds invested in real estate and equities. MAA views the investment in real estate as a source of steady rental income flow and/or rental savings, in addition to potential capital gains. A weak liquid assets cover of technical reserves of 0.75 times and poor cash flow ratios can spark off liquidity concerns should claims develop less favourably than anticipated.
The parent holding company displayed strong cash flow coverage ratios in FY2000 owing to the high dividend income vis-à-vis the small operating cost structure. Dividend upstreamed by MAA represents the main source of repayment for the bonds. The RM43 million upstreamed by MAA in FY2000 represented a high 14x of MAA’s net profit for the year and half of total distributable retained earnings, leaving a balance of RM42 million in unallocated profit carried forward. Barring further weakening in the equities market, MARC expects the operating company to turn in a stronger performance in the near to medium term, which shall form the pool from which dividends are declared and paid to MAAH. A revolving credit facility is available to mitigate liquidity risk for the bond issue. In addition, the serial nature of the bonds with various maturities effectively reduces the debt size over the life of the facility and mitigates refinancing risk upon the final maturity of the bond. The pro-forma gearing surges to 0.74x after the bond issue and the double leverage potentially rises to 1.53x.