Tuesday, December 30, 2014

RAM Ratings reaffirms Hong Leong Assurance’s AA2/P1 claims-paying ability ratings


Published on 29 December 2014
RAM Ratings has reaffirmed the AA2/stable/P1 claims-paying ability (CPA) ratings of Hong Leong Assurance Berhad (HLA or the Insurer). Concurrently, we have reaffirmed the AA3/stable rating of the Insurer’s RM500 million Subordinated Notes Programme. The Subordinated Notes Programme is rated 1 notch below HLA’s long-term CPA rating to reflect its status as unsecured and subordinated obligations of the Insurer, that qualify as tier-2 capital under Bank Negara Malaysia’s Risk-Based Capital Framework for Insurers. The reaffirmation is premised on the continued improvement in HLA’s financial metrics, on account of its sturdy operating performance  underpinned by the healthy growth of its new business income, distribution synergies with Hong Leong Bank Berhad (rated AA1/Stable/P1 by RAM Ratings), and commendable capitalisation.
In FY Jun 2014, HLA’s pre-tax profit more than doubled to RM277.5 million despite slightly slower premium growth. In the last 2 years, HLA has shifted to a profit-focused strategy by underwriting investment-linked products that are in demand and yield broader margins. This, coupled with the repricing of some key par products and improved operating efficiencies, have lifted HLA’s top and bottom lines; its ROA of 2.6% compares favourably with the peer median of 2.2%. This healthy profitability and surplus build-up underpin HLA’s strong capitalisation; its capital-adequacy ratio (CAR) stood at 233% as at end-June 2014. Meanwhile, the Insurer has maintained its earnings quality by strategically targeting regular-premium over single-premium products, as evidenced by its high persistency ratio of 98% over the past 3 years.
HLA remains a mid-sized life insurer; it ranks fourth among 14 Malaysian life and composite insurers in terms of weighted new business premiums, accounting for 11.4% of the market in 3Q 2014. Although HLA has strengthened its market presence through portfolio expansion, it is still some distance from the market leaders. That said, we expect HLA to maintain its franchise and market position, supported by a strong management team and leveraging on the distribution network of Hong Leong Bank. Bancassurance is also set to expand further, anchoring a 20% premium growth targeted for fiscal 2015.
Sustained improvement in HLA’s scale of operations, without compromising its earnings quality or capitalisation, would lend support to a rating upgrade. Conversely, any deterioration in the growth of new business premiums, substantial investment losses or aggressive expansion at the expense of pricing would pressure HLA’s rating, as would the weakening of the Insurer’s CAR below 200%.

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

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