Published on 25 Nov 2021.
RAM Ratings has assigned insurer financial strength (IFS) ratings of A1/Stable/P1 to MCIS Insurance Berhad (MCIS Life or the Insurer) and an A2/Stable rating to the Insurer’s proposed RM200 mil Tier 2 Subordinated Debt. The rating of the proposed bonds is one notch below the long-term IFS rating of A1 to reflect the status of the notes as unsecured and subordinated obligations of the Insurer.
MCIS Life is a small life insurance player with a market share of less than 3% in terms of annualised premium equivalent (APE). Since its rebranding in 2019, the Insurer has pursued an aggressive growth agenda and charted above-industry new business growth (1H 2021: +47% y-o-y; 2020: +14%; 2019: +39%), which has yielded some market share gains. The driving force behind the robust APE growth is MCIS Life’s strategic focus on insuring the underserved and underinsured, i.e., the bottom 40% income group and the lower end of the middle 40% group (B40 and M40, respectively) – with the Insurer’s recent partnerships opening more doors to these segments. The revenue impact of these initiatives will be more prominent in FY Dec 2021, as some of them were undertaken in late 2020/early 2021.
With a pre-tax return on assets of 0.9% for FY Dec 2020 (2017-2019 average: 0.6%), MCIS Life’s profitability is deemed weak. The Insurer’s lack of scale is among the reasons for its soft profitability, evident in higher-than-industry commission and management expense ratios (five-year average: 32%; industry’s five-year average: 22%). While MCIS Life has acknowledged that there is room to rein in costs, it is also investing in resources to support future business growth. Heightened reserving needs arising from expansion and persistently low interest rates could also weigh on the Insurer’s profit performance in the near to medium term. MCIS Life’s relatively stable investment returns partly moderates the earnings downside, as they have contributed around 25%-30% of aggregate premiums and investment income in the last five years.
Capitalisation stands as a key rating strength of MCIS Life. As at end-June 2021, the Insurer’s capital adequacy ratio (CAR) of 213% was adequately above its individual target capital level (ITCL). MCIS Life has generally maintained a 20-30 percentage points buffer between the CAR and ITCL, which offers some comfort that it will remain sufficiently capitalised. The Insurer’s RM200 mil bond issuance – targeted to be finalised before the year closes – is expected to raise its CAR to an estimated 252% based on end-June 2021 figures.
Incorporated in 1997, MCIS Life is a subsidiary of South Africa-based Sanlam Limited (the Group) via the latter’s emerging markets arm, Sanlam Emerging Markets Proprietary Limited (which owns 51% of the Insurer). As MCIS Life’s controlling shareholder, Sanlam steers the Insurer’s strategic direction and provides technical guidance in product development, pricing, innovation and analytics. Sanlam is one of the largest non-bank financial services groups in Africa – outside the continent, the Group is present in India, Malaysia, Lebanon, Europe, the UK, US and Australia.
In September 2021, Sanlam sold its life insurance and wealth management units in the UK, retaining only the asset management business in the country following the Group’s strategy to focus on its core markets of Africa and India. News concerning Sanlam’s intention to dispose of its controlling stake in MCIS Life surfaced later that month. We understand from the Insurer that it has not engaged in any discussions nor is it aware of such developments. So far, no regulatory process has been initiated. In our assessment of MCIS Life’s credit profile, we have considered Sanlam’s credit strength but did not accord any rating uplift to the Insurer. That said, a divestiture will warrant a reassessment of MCIS Life’s ratings given the Group’s involvement in the latter’s operations.
Loh Kit Yoong
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Ratings on MCIS Insurance Berhad