RAM reaffirms Asian Alliance Insurance ratings of BBB

Friday, 2 December 2011 00:00 -     - {{hitsCtrl.values.hits}}

RAM Ratings Lanka has reaffirmed Asian Alliance Insurance PLC’s (“AAI” or “the Company”) long and short- term claims-paying-ability ratings at BBB- and P3; the outlook on the long-term rating remains stable.

The ratings are upheld by the Company’s good capitalisation and liquidity as well as its adequate financial performance in the life segment. Meanwhile, the ratings are moderated by its size, weak financial performance in the general segment and high exposure to equity investments.

AAI continues to be a medium-sized player in the insurance industry, with a composite market share of 2.44% in terms of gross written premiums (“GWP”) as at end-December 2010.

AAI’s life segment dominated its GWP, accounting for 74.26% as at FYE 31 December 2010 (“FY Dec 2010”).

Going forward, however we expect AAI to place more importance on the general division given the recent change in ownership. AAI is now owned by the Softlogic Group (94.59%), a welldiversified conglomerate.

The management of AAI views the acquisition positively as it would bring many operational and financial synergies.  That said, RAM Ratings Lanka envisages these benefits to only materialise over the medium to long term. AAI’s life segment, which accounts for the lion’s share of its GWP (74.26%),grew at a sturdy 23.15% year-on-year (“y-o-y”) during FY Dec 2010 (FY Dec 2009: 4.02%); it grew a further 17.67% (annualised) in 1H FY Dec 2011. In contrast, the general segment contracted by 13.30% y-o-y owing to the discontinuation of unprofitable contracts during fiscal 2010. However, the division turnover improved by 23.32% (annualised) in 1H FY Dec 2011, supported by the introduction of new branches.

AAI’s life-underwriting performance is viewed to be adequate, with its life claims ratio being the lowest among its peers.  However, as policies mature, claims have started to trickle into the life segment; absolute claims increased to Rs. 103.08 million in FY Dec 2010 (FY Dec 2009: Rs. 87.53 million). Meanwhile, the Company’s general underwriting performance is deemed weak; its claims ratio is the highest among its peers.  That said, AAI has discontinued unprofitable business lines, as reflected by its reduced absolute claims; absolute claims reduced to Rs. 246.35 million in FY Dec 2010 from Rs. 272.41 million in FY Dec 2009.

Going forward, however, we expect improved underwriting results in the general segment as corrective actions taken have begun to bear fruit. Moreover, during 1H FY Dec 2011, the claims ratios in both the general and life segments improved to 76.11% and 8.36% respectively on the back of the growth in GWP (1H FY Dec 2010: 91.69% and 11.15%).

Nonetheless, AAI’s high overheads have continued to pressure its composite expense and combined ratios. In FY Dec 2010, these weakened to 70.50% and 97.05% respectively owing to high policy acquisition costs and branch expansions (FY Dec 2009: 59.53% and 90.94% respectively). Furthermore, AAI had to bear a portion of the parent’s overheads under the previous owner. This, together with the improved top line, has seen the ratios improve further in 1H FY Dec 2011.

Despite the strong growth in GWP in the life division, the Company’s net underwriting margins weakened to 2.94% (or Rs. 38.76 million) from 9.03% (or Rs. 104.73 million) the previous year owing to high overheads as well as underwriting losses in the general division, which widened to Rs. 171.72 million in FY Dec 2010 from RS. 135.17 million the previous year due to lower GWP.

That said, AAI made pre-tax profits of Rs. 370.58 million during fiscal 2010, an all-time high, supported by improved investment returns from its equity portfolio.

On a related note, during 1H FY Dec 2011, underwriting margins in both life and general improved as policy acquisition costs reduced while the GWP of the general segment rebounded. However, pre-tax profits were affected by weak from the investment portfolio and general segment’s performance.

AAI had channelled a large portion of its investments to the equity market as reflected by the change in the investment composition.

Equity accounted for 43.81% of the investment portfolio as at end-1H FY Dec 2011 (end-FY Dec 2010: 30.91%) while government securities accounted for 29.27% (end-FY Dec 2009: 53.39%). The Company’s overall profitability improved during FY Dec 2010 with the booming bourse (investment yield: 22.81%) but was hit during 1H FY Dec 2011 with the stock market downturn and receding interest rates (investment yield: 4.19%). Meanwhile, the Company’s liquidity position is considered to be good; its ratio on liquid assets to total insurance funds had improved to 1.66 times as at end-FY Dec 2010 (end-FY Dec 2009: 1.22 times), surpassing its peers.

AAI’s capitalisation is deemed good. In line with the Rs. 812.50 million rights issue in November 2010, AAI’s ratio of shareholder funds to insurance funds and to total assets improved to 68.86% and 35.88% respectively.

These capitalisation ratios have surpassed its peers’. However, we note that losses in the general segment and dividends paid eroded capitalisation levels to Rs. 1.28 billion as at end-June 2011 from Rs. 1.56 billion as at end-December 2010. The Company’s overall solvency margin stood at 2.78 times as at end-June 2011.