Published on 13 Jan 2023.
RAM Ratings has reaffirmed the A1/Stable/P1 insurer financial strength ratings of MCIS Insurance Berhad (MCIS Life or the Insurer) and the A2/Stable rating of its RM200 mil Tier 2 Subordinated Debt (2021/2031).
Our rating action reflects the Insurer’s still-sound capitalisation amid higher bond yields, a conservative investment appetite and healthy liquidity. MCIS Life’s relatively weaker profitability and modest franchise in the domestic life insurance industry (under 3% share of annualised premium equivalent in 1H 2022) remain key factors moderating its ratings.
The Insurer’s successful execution of an aggressive growth strategy which focuses on the underserved and underinsured is clearly reflected in its above-industry new business (NB) growth of 40%-50% y-o-y since 2019. Sustained robust NB expansion would strengthen MCIS Life’s market share over time, though likely a longer-term prospect given the highly competitive operating environment.
MCIS Life’s capital adequacy ratio (CAR) remained above its individual target capital level (ITCL) at 216% as at end-June 2022 despite the impact of dampened bond valuations, driven by the rise in yields amid monetary policy normalisation. We continue to take comfort in the Insurer’s policy of maintaining a healthy 20-30 percentage point buffer between its CAR and ITCL.
Revaluation losses on bond holdings similarly weighed on the Insurer’s earnings, causing pre-tax profit to drop 19% to RM34.4 mil in 2021 (2020: RM42.7 mil). The slippage would have been more drastic if not for growth in overall premiums (from both new and in-force business), lower claim and benefit payouts and the release of some actuarial reserves. As bond yields increased further in 2022, MCIS Life’s earnings plunged into the red in the first half (RM19.9 mil loss; 1H 2021: profit of RM7.1 mil). Apart from the poor investment performance, the Insurer’s lack of scale is among the reasons for its weak profitability – its management expense and commission ratios are higher than the life insurance industry’s, averaging a respective 17% and 16% in the last five years (industry: 10% and 12%).
MCIS Life has kept its investment strategy conservative, with invested assets predominantly comprising government securities and corporate bonds rated at least AA- on the national rating scale (collectively 91% of total investments as at end-December 2021). The Insurer recorded poor investment yields of +0.5% in 2021 and -5.5% in 1H 2022, largely due to unrealised losses from weaker bond valuations. As the market stays volatile, MCIS Life’s investment performance is likely to remain challenged in the near term. The Insurer’s liquidity is still sound – its liquid assets to net insurance contract liabilities ratio standing at 0.7 times as at end-June 2022 (largely unchanged in the last five years).
News on Sanlam Limited’s plans to dispose of its controlling stake (51%) in MCIS Life resurfaced recently – we are closely monitoring potential developments on this front. 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
(603) 3385 2493
(603) 3385 2619
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Ratings on MCIS Insurance Berhad