This article first appeared in The Edge Malaysia Weekly on March 20, 2023 - March 26, 2023
MALAYAN Banking Bhd’s (Maybank) insurance and takaful arm Etiqa International Holdings Sdn Bhd (EIH) broke a five-year streak of gross written premium (GWP) growth last year, weighed down by a restructuring of its products in the Singapore market. It expects a strong rebound this year, however, with GWPs likely to see double-digit growth.
The group's general insurance business is expected to drive results.
“We foresee the group’s gross premiums growing more than 10% this year. At this point of time, the general insurance business is growing a lot faster [than life insurance],” EIH group CEO Kamaludin Ahmad tells The Edge in an interview. The 54-year-old has helmed the group since December 2013.
The life insurance business is likely to grow “at a moderate pace of at least 5%”, as persistent inflationary pressures have sent the disposable incomes of households down, he notes. "People are a bit more careful [with their spending] amid tight liquidity.
“For life insurance, it’s often considered to be not a necessity. On the other hand, general insurance is seen as a necessity because, for example, you have to renew your car insurance every year."
EIH, which operates in Malaysia, Singapore, Cambodia, the Philippines and Indonesia, saw total GWPs last year fall 3.3% year on year to RM11.09 billion, from RM11.47 billion.
Profit before tax (PBT) for the financial year ended Dec 31, 2022 (FY2022), also contracted 48% y-o-y to RM472 million, from RM907.6 million, dragged down by its operations in Singapore, which also suffered from volatile investment market conditions that year.
Partially offsetting this decline was the performance of the group’s four main operating entities in Malaysia: Etiqa General Insurance Bhd, Etiqa Life Insurance Bhd, Etiqa General Takaful Bhd and Etiqa Family Takaful Bhd, which reported a combined highest-ever PBT of RM1.07 billion in FY2022, up 14.9% y-o-y from RM931 million.
The group has managed to get back on its feet quickly, and the loss from its Singapore operations in 2022 has already been shrugged off by Kamaludin as a blip.
According to him, EIH's Singapore operations have returned to profit since last month as it diversified from universal life insurance products towards longer-tenure protection and investment-linked plans with higher margins.
Kamaludin also points out that a big chunk of the Singapore operations’ investment loss in 2022 was due to the mark-to-market accounting treatment of rising interest rates on its fixed income portfolios, including those in China, that forced a writedown of asset values. He notes that the mark-to-market loss will reverse when interest rates fall and the bonds get closer to maturity.
“That’s why we are not concerned by it at all. To me, it is more important to make sure that the business is growing, and growing in the right area,” he says.
“In this regard, the general insurance business in Malaysia and Singapore is still growing fast. I am talking about 20% to 30% kind of growth in Singapore. Part of the growth is attributed to the acquisition of intermediaries/agents there in early 2021.”
Kamaludin says the group is constantly reviewing its assets/liabilities matching needs with a view to mitigate the mark-to-market volatility. “For our business, which is long term in nature, it is very important for us to focus on acquiring good-quality assets with attractive long-term yields and hold it until maturity.”
The group’s FY2023 PBT is expected to return to its growth path, Kamaludin says, adding that it is expected to be “a lot better than what it was last year”.
At present, Malaysia accounts for 76% of the group’s net written premiums (excluding premiums ceded to reinsurers) and Singapore makes up 21%. The remaining 3% comes from its international operations in Indonesia, the Philippines and Cambodia.
Maybank’s insurance and takaful subsidiaries in Malaysia and Singapore are parked under Maybank Ageas Holdings Bhd, in which the banking group owns a 69.05% stake through EIH. Brussels-based insurer Ageas Insurance International NV owns the remaining 30.95% in Maybank Ageas.
Meanwhile, its operations in Indonesia, the Philippines and Cambodia come under EIH.
Group’s growth will continue to outpace rest of industry
Maybank Ageas, which provides its insurance services under the Etiqa brand, is currently the largest general insurance and takaful operator in Malaysia, with a market share of 14.3%, or RM3.63 billion, of the combined general insurance and takaful industry GWP of RM23.56 billion.
Of the group’s net premiums written in general insurance in 2022, 55% originated from motor insurance.
“In the last four to five years, we have continued to outpace the general and takaful insurance market, growing at a compound annual growth rate of 8% versus the industry’s CAGR of 3%. Last year, we grew faster by about 18% y-o-y and [the momentum] continues into 2023. We are looking at a growth of about 30% y-o-y in January and February,” says Kamaludin, who is also group CEO of Maybank Ageas.
This is no mean feat. “If you look at the other large players with revenue of more than RM1 billion, four or five of them either have flat growth or saw a slight decrease in growth. Then you have players like Etiqa growing at a 15%-to-18% clip in most of the years since 2017,” says Kamaludin, who attributes the better results to a shift in mindset within the group.
“If you think about it, you don’t consume insurance until something happens. So, we made the mindset shift to ensure that when it is consumed, the experience at the point of claim has to be good. In this regard, we pay workshops higher labour rates than many of our competitors for motor vehicle repairs. We rely on them to take good care of our customers.
“Over time, people started talking about why cars [insured by Etiqa] get resolved quicker than others. So, we build our reputation that way. Because of that, the growth has been steady. And we don’t really see our competitors catching up because they are more focused on distribution. While that is important, sometimes, the focus is so much on who can give better incentives to the distributors. This is not sustainable because actions like that can only escalate. It is a never-ending game, so we don’t want to take that kind of approach. We take the customer angle; although it means it can be costly upfront for us, in the long run, we think we can gain. And it has been proven as such.”
And Etiqa is not stopping there. Kamaludin says the group will continue to focus on customer-focused products such as its "drive less, save more" motor insurance plan and Etiqa Smile application, which is aimed at increasing customer stickiness. “Our thinking is, how do you work with customers so that their risk is mitigated and their premiums can be lowered at the same time?”
Meanwhile, Etiqa ranked third among 17 life insurance and family takaful companies in the country as at September 2022, behind AIA and Great Eastern, holding a market share of 12%, or RM2.75 billion, of total new business premiums of RM22.5 billion.
Kamaludin notes that Etiqa’s life and family takaful insurance growth also outpaced that of the industry as a whole, albeit by a smaller margin. Between 2017 and 2021, the business grew at a CAGR of 8% whereas the industry’s CAGR was about 6%.
‘Our focus remains on driving organic growth in Malaysia’
Kamaludin says while the group is open to good opportunities that could add synergy to its business in Malaysia, its primary focus is on organic growth.
“About 30 years ago, there were about 50 general insurance companies and 20 life insurance companies, but only one takaful operator. Consolidation in 2000 had reduced the number of players in the industry [to 23 and 17 respectively] despite the issuance of 10 new takaful licences. The industry saw Generali recently acquiring a 70% stake in AXA Affin joint ventures in Malaysia. It also saw Liberty Mutual Insurance Bhd acquiring AmGeneral Insurance Bhd. Perhaps, the significance of the latest round of consolidation is that the companies involved are foreign-based insurers.
“The expectation is if a local company were to be the acquirer, it is going to be a company like us. But if we were to invest a large chunk of money just to add 10% to 15% to our overall revenue, would that be the best use of our assets? As it is, our general insurance business is already recording organic revenue growth of 15% to 18% a year.”
He points to two considerations when looking at mergers and acquisitions (M&A) as a way to achieve growth. “First is in terms of size: How much is it going to add to our total revenue? Second is you are going to put money upfront. For the general insurance business, most of the contracts are on a yearly basis. [Therefore,] there is no guarantee that the company’s customers will stay with you when you undertake a merger. After a while, you could be questioning yourself, ‘What did we buy?’
“On the life insurance side, because the contract is long term in nature, acquiring or merging with another company makes more sense but, then, it has to be sizeable. The challenge to this is that there are not many players that are available. There are currently only 17 life insurance and family takaful players and the revenue disparity between the largest player and the smallest one is big. The ones outside of the top 10 are really small. So, it wouldn’t add much to our size if we were to acquire these companies.
“Still, our ears are always on the ground. We won’t say we won’t listen but we are going to be discerning if we were to do any [M&A] exercise. For now, our focus remains on driving organic growth in Malaysia.”
Asean aspiration
Likewise, Etiqa is in no hurry to seal M&A deals as part of its aspiration to become an Asean leader in insurance.
“Different countries have different requirements and roles in terms of shareholding. It is not a straightforward matter of just going in and starting a business,” says Kamaludin.
“So, first, we have to figure out how we are going to grow these operations. We want to emulate our [Malaysian] general and life insurance capabilities in countries where we have operations. We have licences to operate both life and general insurance in Singapore, Cambodia and the Philippines.
“In Indonesia, we currently do only general insurance but, obviously, we want to be looking at the possibility of doing life insurance as well. But we are not in a rush. We need to ensure that we have a good local partner.
“While Cambodia has a small population, we are growing fast there because we are just starting out. This is a greenfield for us. We don’t expect the market to be big anytime soon but we think, 10 years down the road, it will pay dividends for us to enter early.
“Every market has strong market potential in a different way. Malaysia is still very lucrative. But to prove that we are really an Asean player, we need to do well in all these other countries. Currently, contribution from operations outside of Malaysia and Singapore is just 3%, and I don’t see the composition changing much in the next two years mainly because the Malaysian market is still doing very well.”
Among Asean insurers by gross premiums, Etiqa has climbed from fifth in 2019 to third in 2021, behind Great Eastern and Singapore’s NTUC Income.
Meanwhile, there has been much talk over the years about Maybank preparing to spin off and list Etiqa on the local stock exchange. To this, Kamaludin says: “The answer is it really depends on the shareholders, but talk about this matter has been quiet so far.”
No respite for markets in 2023, says Etiqa
By Cheryl Poo
Outperforming the local equity and global bond markets will be difficult this year as the market environment will continue to be challenging, says Norlia Mat Yusof, group chief investment officer (investment management division) of Maybank Ageas Holdings Bhd. Maybank Ageas is a partnership between Malayan Banking Bhd and Brussels-based Ageas Insurance International NV.
“The outlook for the year is very much dependent on the [movement of] interest rates. If they remain flat, it will be [manageable] in terms of the mark-to-market effect on the group’s profitability,” Norlia tells The Edge in an interview.
“In terms of the economy, if borrowing costs remain low at current levels, it will raise affordability while spurring growth as it allows potential homebuyers to get cheaper financing rates.”
She says rising interest rates over the past year have led to mark-to-market losses for the group’s fixed-income portfolios, as it was forced to write down asset values. However, the investment loss has no cash impact and is expected to be reversed in future years when the assets reach maturity.
“We hoped to get an uplift from equities, but that didn’t happen. On the contrary, the investment performance was somewhat lifted by the fixed income asset class towards the last two months of 2022 as the 10-year Malaysia government bond yield fell from 4.5% to close at 4.06% on growth concerns ahead,” she adds.
The benchmark FBM KLCI fell 4.6% during the year to close at 1,495.49 points on Dec 30, 2022. It is currently down 4.8% year to date, having ended at 1,403.93 points last Wednesday.
Norlia notes that Etiqa’s equity portfolio is still small, accounting for not more than 5% of its total investments in the past five years. Fixed income makes up about 90% of its investment portfolio.
“I think this is the right decision as the equity market has not been performing for the past eight years. There was a time when our equity portfolio went up as high as 10% of total investments, but we brought it down to 5% when the stock market wasn’t going anywhere,” she says, adding that the group now focuses on stable dividend-yielding stocks as well as those in the banking, telecommunications and utility sectors.
Asked if Etiqa had benefited from the 2021 rally in glove stocks, Norlia says Etiqa is guided by the 5% allocation to equity investments. “What we put into glove counters was just enough. We avoid sector concentration risks in order to [maintain] a diversified portfolio.”
Despite the challenging market conditions, Maybank Ageas’ financial statements for the financial year ended Dec 31, 2021 (FY2021) show that its net investment income grew 11.5% to RM1.47 billion from RM1.32 billion in FY2020. For 1HFY2022, its net investment income came in at RM788.9 million, up 11% from RM709.77 million a year earlier.
Still, the right balance of inflation rate and interest rate hike is important for a healthy economy. “When the inflation rate goes up and interest rates remain low, it may have a negative impact on the local currency. But I believe the government will bring more foreign direct investments into the country, which will help cushion the weakness in the ringgit,” says Norlia.
She notes that in a volatile interest rate environment, an accurate reading of its movements is crucial and this is where data analytics play an important role for the group.
“We equip our fund managers with the required skill sets to perform data analytics because with that, they are able to forecast interest rates and market directions more accurately. This guides our market outlook and investment strategy accordingly.”
Investment limitations for insurers
“Where then do we put our money? If fixed income, we are hit by mark-to-market losses. If [fixed] deposits, the rate was still very low last year,” says Norlia, pointing out that the 10-year Malaysian government securities (MGS) yielded slightly above 4% last year and the yield has largely remained below 4% so far this year.
In addition, at any given time, insurance companies in Malaysia can only invest up to 10% of their total investments in overseas markets. “So even if you can get good returns from a foreign investment, it will not be able to pull up the overall return given our maximum exposure to foreign investment under regulation is only 10%,” she says.
“We have plans to grow big in the China market. This is part of our 10% allocation to overseas markets, which include fixed income and equity. If we were to invest in foreign bonds, we would do a 100% hedge so that we don’t have to take currency risk because fixed income has a long tenure. We also plan to invest in sovereign bonds issued by Gulf Cooperation Council countries such as Abu Dhabi and Qatar that are AA-rated.
“If you go into foreign equities, you don’t hedge the currency because of the dynamic nature of equity markets. Therefore, when we buy, we go with the view that the currency will also give us potential returns as there is the potential for a strengthening currency. Then, we can ride both the returns from the currency and the underlying stocks.”
Norlia is encouraged by the government’s proposal to spend RM4.8 billion on the digital economy as well as RM1.5 billion on digital start-ups, as announced during the retabling of Budget 2023 last month.
“This will encourage Bursa Malaysia-listed companies to go digitally abroad, which in turn can help improve their earnings. This will help lift the performance of the FBM KLCI.”
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.