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26 May | Friday
RAM Ratings reaffirms Etiqa Takaful’s AAA/Stable/P1 ratings
RAM Ratings has reaffirmed the AAA/Stable/P1 insurer financial strength (IFS) ratings of Etiqa Takaful Berhad (ETB or the Takaful Operator) as well as the AA1/Stable rating of ETB’s RM300 million Subordinated Sukuk Musharakah (2014/2024). The Subordinated Sukuk is rated 1 notch below ETB’s long-term IFS rating to reflect the status of the instrument as an unsecured and subordinated obligation of the Takaful Operator.
 
The ratings take into consideration ETB’s leading position in the Malaysian takaful industry and its healthy credit metrics. As the nation’s top composite takaful operator, ETB accounts for more than half of the general takaful sector’s gross contributions and ranks second in family takaful, with a 15% market share of gross contributions. ETB’s ratings also benefit from its strategic importance as the takaful arm of the Maybank Ageas Holdings Berhad (Maybank Ageas) group, from which support is forthcoming when required. Notwithstanding a corporate exercise to separate ETB’s general and family takaful operations into single-licence companies, its strategic importance to the Group is expected to remain unchanged. ETB’s business position gains from the extensive distribution network of its ultimate parent, Malayan Banking Berhad. 
 
Despite revenue compression from a decline in ETB’s family takaful gross contributions, the Takaful Operator recorded a higher pre-tax profit of RM344 million in FY Dec 2016 (FY Dec 2015: RM249 million) on account of better investment returns and the improved underwriting profitability of its general takaful fund. Driven by the higher valuations of private debt securities, ETB’s consolidated investment yields recovered to 5.3% in fiscal 2016 (fiscal 2015: 4.8%). Meanwhile, ETB’s net underwriting margin widened to 13.4% in the same period (fiscal 2015: 8.7%) due to the release of prior-year reserves. These factors had contributed to an increase in ETB’s pre-tax profit margin and ROA to a respective 15.5% and 2.6% (FY Dec 2015: 11.1% and 2.0%, respectively).
 
ETB’s general takaful reserves coverage stood at a satisfactory 121% as at end-December 2016 (end-December 2015: 128%). With earnings accretion, the Takaful Operator’s regulatory capital-adequacy ratio was a higher 181% as at the same date (end-December 2015: 163%), a level which we consider moderate.
 
Moderating the ratings are challenges faced by ETB’s family business, where the bulk (90%) of its family takaful new business continues to emanate from single-contribution policies sourced from its credit-related and group businesses. The dominance of these products subject the Takaful Operator’s revenue to some volatility. We note management’s efforts to grow regular-contribution products to improve earnings quality,although meaningful traction could take time.
 
Elsewhere, the impending second phase of motor tariff liberalisation (effective 1 July 2017) may have a significant bearing on ETB’s underwriting performance, given the dominance of motor contributions in ETB’s portfolio (81% of net earned contributions). While its outcome is uncertain at this juncture, we believe ETB has the requisite scale and management capability to remain competitive.
source: RAM Rating Services Berhad
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