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%.
