RAM Ratings has reaffirmed Hong Leong Assurance Berhad’s (HLA or the Company) respective long- and short-term claims-paying ability (CPA) ratings, at AA2 and P1.

Published on 27 December 2013

RAM Ratings has reaffirmed Hong Leong Assurance Berhad’s (HLA or the Company) respective long- and short-term claims-paying ability (CPA) ratings, at AA2 and P1. Concurrently, we have also reaffirmed the AA3 rating of the Company’s Subordinated Note Programme of up to RM500 million. Both long-term ratings have a stable outlook.
The ratings reflect HLA’s respectable market position as a mid-sized (fifth largest) life insurer in Malaysia, with over 40 years’ track record and a fast-growing franchise. HLA is the insurance arm of the larger Hong Leong Financial Group Berhad and derives strong financial flexibility from the latter, which has been factored into the Company’s CPA ratings.
Over the past 5 years, HLA has been rapidly expanding its life business. The weighted premiums of new business grew at a CAGR of 27.7% against the industry’s 10.9%. In terms of new business regular premiums, HLA leads the industry with a market share of 22% in 2012.  The Company’s earnings quality is robust as it prioritises regular premiums (which constitute over 95% of its gross premiums) to ensure earnings sustainability. Consequently, HLA’s conservation ratio remained favourable at 94% in FY Jun 2012 (industry average for 2012: 85%). HLA’s 3-year ROA and pre-tax profit margin of 2.4% and 12.4% respectively are on par with its peers. Nevertheless, pre-tax profit dipped 23% y-o-y in FY Jun 2013 due to higher reserves and benefits payments. To enhance profitability, HLA is expanding its investment-linked (IL) portfolio and has repriced par products in 2013. Meanwhile, the Company’s operating efficiency remains favourable with an expense ratio of 24% in FY Jun 2013.
The ratings also considered the Company’s adequate capitalisation. The issuance of the RM500 million Subordinated Note Programme in February 2013 and a healthier surplus in 1Q FY Jun 2014 had boosted the Company’s risk-based capital-adequacy ratio (CAR) to above 220% as at end-1Q FY Jun 2014. Going forward, management has indicated a post-dividend CAR of around 200%.
Meanwhile, the ratings are moderated by HLA’s aggressive portfolio growth which may have been achieved at some expense to pricing. The repricing of par products and emphasis on IL products augur well for profitability, although sufficient traction in the latter goal has yet to be seen given the strong competition in this popular product class. Further, the low interest environment remains a challenge for HLA, as it does for the industry.
Potential upside to HLA’s ratings could arise from significant sustained progress in HLA’s overall financial metrics, including an improvement in market share without compromising earnings quality, profitability and capitalisation. Conversely, persistent deterioration in these areas, including an inability to minimise pricing errors, could result in downward rating pressure.

Media contact
Siew Shwu Ying
(603) 7628 1071
shwuying@ram.com.my