Fitch publishes Etiqa Takaful's IFS 'A' rating; outlook stable

Reuters

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Sept 9 (Reuters) - (The following statement was released by the rating agency)

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

Key Rating Drivers

The rating reflects ETB's leading position in Malaysia's takaful market, extensive distribution coverage, an operating history of 20 years, its sound liquidity and its favourable operating margins. The rating also recognises ETB's position as a core operating subsidiary within Maybank Ageas Holdings Berhad (MAHB).

The rating acknowledges the seniority of takaful participants after the introduction of the new Islamic Financial Services Act in March 2013. The new Act states takaful participants' seniority over unsecured creditors within the takaful's and operator's funds in the winding up of a licensed takaful operator. ETB is a dominant player in Malaysia's takaful market, capturing about 50% of gross contributions in 2012 and 36% of new business in the general and family takaful segment. Wide agency coverage, along with its bancassurance arrangement with Malayan Banking Berhad, have given ETB a competitive edge over its competitors, especially newly formed takaful operators.

ETB has generated satisfactory operating profitability over the past five years. Strong business quality and economies of scale are key in maintaining the underwriting margin of the company's general takaful business despite its high exposure to the low-margin motor insurance. Consistent investment gain and favourable mortality experience have contributed positively to the operating margin of ETB's family takaful portfolio. Its overall operating performance compares favourably with that of its peers, with pre-tax return on assets stable at 1.5%-2.1% over the past two years, versus peers' -8.8%-10.1%.

Offsetting these positive rating attributes includes weak standalone capitalisation as measured by Fitch's internal model; the requirement to make capital contribution after the implementation of risk based capitalisation (RBC) takaful framework in January 2014; and market-wide underwriting deficits from third-party liability motor insurance.

While ETB's RBC as measured by Fitch's capital model remained weak in FY12, Fitch believes MAHB is able to fund ETB's capital requirement when the new capital regime for takaful operator comes into effect. The underwriting performance of ETB's general takaful fund, however, will continue to be constrained by the industry-wide poor claim experience of third-party liability motor insurance.

Rating Sensitivities

An upgrade is unlikely in the near term as ETB's IFS rating is the same level as Malaysia's Local-Currency Issuer Default Rating (IDR) of 'A', which is on Negative Outlook. Under Fitch's criteria, ETB is rated above the sovereign's given its leading market position in Malaysia and the capital strength of MAHB, but no more than one notch due to its business focus in Malaysia.

Negative rating triggers include further decline in ETB's risk based capitalisation as measured by Fitch's internal capital model or a significant deterioration in the underwriting profitability of ETB's general takaful portfolio with a combined ratio persistently higher than 105% (FY12: 92.2%). The rating may also come under pressure from a material deterioration in lapse rates or a substantial change in mortality experiences of the company's family takaful business; or a significant increase in MAHB's financial leverage on a consolidated basis to more than 30% (FY13 forecast: 11%) for a prolong period. A downgrade of Malaysia's Local-Currency IDR of 'A' to more than one notch below ETB's IFS rating would also result in a downgrade in the insurer's rating.

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