RAM Ratings reaffirms Etiqa Takaful’s AAA/P1 ratings

Published on 05 May 2015

RAM Ratings has reaffirmed the AAA/Stable/P1 claims-paying ability ratings of Etiqa Takaful Berhad (ETB or the Takaful Operator). Concurrently, we have reaffirmed the AA1/Stable rating of its RM300 million Subordinated Sukuk Musharakah.

The ratings reflect ETB’s well-entrenched franchise as Malaysia’s largest takaful operator, with its general takaful accounting for almost half of the industry’s gross contributions. ETB derives strong operational support and financial flexibility from its parent, Maybank Ageas Holdings Berhad (Maybank Ageas) that also operates Etiqa Insurance Berhad (rated AAA/Stable/P1). As a member of the Maybank Group, ETB benefits from the vast network of its ultimate parent, Malayan Banking Berhad (rated AAA/Stable/P1).

In FY Dec 2014, ETB charted a ROA of 2.5% and pre-tax profit margin of 14.1% (peer median: 2.4% and 11.8%, respectively). Despite a 6% drop in gross contributions, ETB’s pre-tax profit rose to RM281 million, reflecting management’s profit focus strategy by prioritising wider-margin products such as fire and personal accident lines while repricing or downsizing low-yield products. Healthy investment returns and improved claims as well as expenses have more than made up for the lower top line.

The ratings also reflect the Takaful Operator’s strengthening capitalisation and prudent reserving practices. Capitalisation was boosted by the issuance of the subordinated sukuk which qualifies as Tier 2 capital – ETB’s statutory capital-adequacy ratio was at 159% as at end-December 2014. Meanwhile, ETB’s takaful funds continue to be well-reserved. The general fund’s net technical reserves to net earned contributions ratio stood at 132%, while the core family takaful fund had a 39% surplus – levels that provide a sufficient buffer against future liabilities.

Moderating the ratings are challenges faced by ETB’s family business, where revenue from credit and group products have not grown much since FY Dec 2012. Adjusting for a one-off group business, gross contributions contracted by an average of 6%. Following the tightening of financing guidelines by the central bank and consolidation of the government sector, new business contributions from these segments continue to slow, with a 2% y-o-y decline (on an adjusted basis) in FY Dec 2014. Elsewhere, single contributions continue to dominate the earnings stream, although we note management’s efforts to push regular contributions to improve earnings quality.

Factors that could trigger downward rating pressure include a sustained deterioration in new-business growth, investment losses, a combined ratio of more than 105% and significant weakening of capitalisation to below 140%. A reduction in Maybank Ageas’ equity ownership will also be a negative rating trigger, although we view this as a remote possibility.

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