RPT-Fitch Affirms Etiqa Takaful at IFS 'A' Rating; Outlook Stable

Wed Apr 30, 2014 4:50am EDT

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April 30 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Malaysia-based Etiqa Takaful Berhad's (ETB) Insurer Financial Strength (IFS) rating at 'A' with Stable Outlook.

KEY RATING DRIVERS

The rating reflects ETB's improvement in capitalisation, favourable operating profitability and good liquidity, and dominant market position in Malaysia's general and family takaful sector. The rating also considers its strategic status as one of the core operating subsidiaries within Maybank Ageas Holdings Berhad (MAHB). Fitch believes MAHB is capable of providing capital support to ETB if needed.

To comply with the new takaful capital regime in Malaysia that was introduced in January 2014, MAHB made a MYR300m capital contribution to ETB's operator fund to improve the firm's overall financial strength in 2013. ETB's risk based capital ratio on a consolidated basis calculated under Bank Negara Malaysia's new Risk-Based Capital Framework for Takaful Operators stood at 143.5%, moderately exceeding the regulatory minimum of 130%.

In light of the group's capital management approach, Fitch believes ETB will further enhance its regulatory capital ratio through additional capital contribution or retention of operating surplus within the operator's fund. ETB plans to issue up to MYR300m of subordinated sukuk in 2Q14. Fitch estimates this issuance will not have a material impact on the financial flexibility of the group as a whole as the financial leverage of MAHB on a consolidated basis will remain below 15% (end-2013: 10%).

ETB recorded better operating profitability in 2013 due partly to an improvement in underwriting margin from its general takaful fund. The company's combined ratio decreased to 86.1% in 2013 from 92.2% in 2012. Despite a reduction in contributions in 2013, favorable mortality experience and investment gains are likely to consistently support the operating profitability of the operator's family takaful portfolio. ETB's pretax return on assets in 2013 rose to 2.5% from 2.1% in 2012.

With more than 20 years of operating history, ETB remains the leading player in Malaysia's takaful segment. ETB has been able to market takaful products through multiple distribution channels, including conventional intermediaries, such as agents and brokers, and several bancassurance partnerships. Fitch believes extensive distribution coverage will enable ETB to sustain its business growth in the mid-term.

Fitch expects ETB's motor portfolio to remain challenged by the market-wide underwriting deficit of the third-party bodily injury and death (TPBID) motor insurance, as about 78% of ETB's general takaful business originates from the motor insurance class. Fitch does not expect the gradual adjustment in motor insurance premium pricing that was recently allowed by the regulators to have a significant positive impact on the underwriting result of ETB's motor portfolio in the near term.

RATING SENSITIVITIES

Key rating triggers that could result in a downgrade include:

- inability to increase ETB's statutory risk based capitalisation to a level consistently higher than 160%,

- a significant change in MAHB's financial leverage on a consolidated basis to more than 30% for a prolonged period,

- a reduction in the underwriting margin of ETB's general takaful portfolio with a combined ratio higher than 105% for a sustained period, or

- a material deterioration in lapse rates or in mortality experiences of the company's family takaful business.

An upgrade is unlikely in the near term as ETB's IFS rating is at the same level as Malaysia's Local-Currency Issuer Default Rating (IDR) of 'A', which is on Negative Outlook. A downgrade of Malaysia's 'A' Local-Currency IDR by more than one notch would likely result in a rating downgrade for ETB's IFS rating.

Additionally, evidence of an adverse change in ETB's financial metrics due to a tougher operating environment associated with a weakening sovereign rating could also lead Fitch to reassess the one-notch differential between the insurer's rating and the sovereign's Local Currency IDR.

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