Published on 22 Nov 2019.
RAM Ratings has assigned a rating of AA3/Stable to securities under Hong Leong Assurance’s (HLA or the Insurer) proposed Subordinated Notes Programme of up to RM2.0 billion. Concurrently, we have reaffirmed the Insurer’s AA2/Stable/P1 insurer financial strength (IFS) ratings as well as the AA3/Stable rating of its RM500 mil Subordinated Notes Programme (2013/2025). Securities under HLA’s subordinated notes programmes are rated one notch below its long-term IFS rating to reflect their status as unsecured and subordinated obligations of the Insurer.
The IFS ratings consider the Insurer’s healthy new business generation, strong distribution capabilities and sound capitalisation. These strengths are balanced by a less prominent franchise, compared to market leaders. While HLA has retained its position as Malaysia’s fourth-largest life insurer, its distance from the top three which collectively command almost 60% of the industry’s weighted new business premiums has widened. The Insurer’s market share dipped to 9% of the industry’s weighted new business premiums in 2018 (2017: 10%; 2016: 12%) due to a greater emphasis on investment-linked (IL) policies tailored for protection needs.
HLA’s distribution capabilities remain strong, anchored by its agency force and access to the branch network of its sister company, Hong Leong Bank Berhad. The Insurer’s new business premiums trended downwards to RM699 mil in FY June 2019 (FY June 2018: RM745 mil) in view of the realignment of its business focus away from participating plans and towards IL policies. Although subdued premium growth is expected over the near to medium term as IL policies are smaller in terms of average premiums, the shift in product mix will be supportive of HLA’s embedded value and earnings stability over the longer run.
Meanwhile, HLA’s in-force premiums recorded a second consecutive year of decline as some limited-pay products reached the end of their premium paying period. The downtrend, which may continue for another year before stabilising thereafter, had also caused the Insurer’s persistency ratio to fall to approximately 77% for the past two financial years (FY June 2017: 85%). Adjusting for limited-pay products, the ratios for FY June 2018 and FY June 2019 are relatively stable at 88% and 86%, respectively. That said, the subdued economy and cost of living pressures have recently posed challenges to persistency trends. IL plans may also have weaker persistency, given that customers have greater flexibility to execute transactions on unitised investments.
A combination of lower new business and in-force premiums caused HLA’s gross premiums to contract 5.1% to RM2.8 bil in FY June 2019. Despite reduced premiums and assumption changes that have led to higher reserves requirements, the Insurer’s pre-tax profit was a higher RM286 mil (FY June 2018: RM274 mil) as a result of a better investment performance and increased net transfers from the surpluses of life insurance funds. Owing to expectations of interest rate cuts and volatile equity markets, uncertainties in investment markets prevail.
The Insurer’s end-June 2019 capital adequacy ratio (CAR) is sound, although lower year-on-year due primarily to higher capital requirements for market risk capital charges, in view of unfavourable interest rate movements. HLA’s CAR will contract in view of the upcoming redemption of its existing RM500 mil Subordinated Notes and a proposed lower issuance amount of RM300 mil under the up to RM2.0 bil Subordinated Notes Programme. The Insurer’s capital position is expected to be gradually replenished with earnings retention. HLA’s liquid assets stood at RM12.1 bil or 0.8 times its net insurance contract liabilities as at end-June 2019, providing an adequate buffer to meet any liquidity needs from potential claims.
Ann Kimberly Lee
(603) 3385 2533
(603) 3385 2577
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Ratings on Hong Leong Assurance Berhad