(Repeat for additional subscribers)
April 30 (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.
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.