RAM Ratings has assigned a final long-term rating of AA1/stable to the Etiqa Takaful Berhad’s (ETB or the Company) proposed Subordinated Sukuk Musharakah Facility of up to RM300 million (Subordinated Sukuk)

Published on 09 May 2014

RAM Ratings has assigned a final long-term rating of AA1/stable to the Etiqa Takaful Berhad’s (ETB or the Company) proposed Subordinated Sukuk Musharakah Facility of up to RM300 million (Subordinated Sukuk). Concurrently, the Company’s AAA/stable/P1 claims-paying ability (CPA) ratings have been reaffirmed.
ETB is the largest takaful operator (out of 11) in Malaysia, with strong market presence. The Company has consistently accounted for more than 40% of net contribution income in the takaful industry. It is the takaful arm of Maybank Ageas Holdings Berhad (Maybank Ageas or the Group) that also owns Etiqa Insurance Berhad (EIB, which carries CPA ratings of AAA/stable/P1 from RAM). Both EIB and ETB are operated as a single master brand and managed by the same senior management team. ETB derives strong support and financial flexibility from its parent, and this has been factored into the Company’s CPA ratings.
The Company has been posting favourable financials in the last 5 years, backed by healthy surpluses from its core takaful funds. ETB’s 3-year average pre-tax margin of 9.0% and ROA of 2.1%, compare well against the peer medians of 9.0% and 2.0%. The ratings also reflect ETB’s prudent reserving practices and favourable liquidity. As at end-December 2013, its general fund had a 129.5% coverage against takaful certificate liabilities while its family takaful funds had a 39.4% surplus. Meanwhile, the Company’s ratio on liquid assets to takaful certificate liabilities stood at a favourable 1.4 times.
ETB is adequately capitalised. Based on Bank Negara Malaysia’s new Risk-Based Capital Framework for Takaful Operators which came into effect 1 January 2014, the Company’s consolidated capital adequacy ratio (CAR) stood at 143.5% as at end-December 2013. This is above the minimum CAR of 130%. RAM notes that the risk-based capital computation for takaful operators differs from that of conventional insurers. With the issuance of the proposed Subordinated Sukuk, the Company’s prospective CAR should hover around 165% by end-December 2014. We note that ETB’s main takaful funds are adequately capitalised although its annuity funds (constituting 14% of its total takaful liabilities) are currently under-capitalised. Nevertheless, its shareholders’ fund shows a robust CAR of about 301%, underscoring the Company’s strong ability to support these funds, if needed.
Meanwhile, the ratings are moderated by anaemic growth of ETB’s new business partly due to competition, a narrow product range and targeted market segment. However, recent product launches may stimulate future growth. We also note the dominance of single contribution in ETB’s revenue mix – these are mainly from group accounts which are more price-sensitive.
Downside pressure on ETB’s ratings could arise from persistent deterioration in its overall financial metrics, including an inability to generate or sustain new business growth, combined ratio above 105%, CAR deteriorating to below 130% and weakening reserves adequacy. Though there is no indication, reduction (if any) in equity ownership from Maybank Ageas will also be a negative rating trigger.

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