Idea of the week: don’t overlook this small life insurance player in Malaysia, MCIS Insurance

Highlights

- MCIS Insurance Berhad is one of the oldest names in the Malaysia insurance field.

- Net earned premiums has grown continuously over the years. Net profit declined in FY21 and 1H22 due to revaluation loss in investment, but MCIS would have been looking at decent profit if not for the paper loss.

- Subordinated bond due in 2031 yields approximately 4.52% for yield to next call and 4.86% for yield to maturity. Considering its growing premiums and healthy credit ratio, we think MCISIB 5.300% 29Dec2031 Corp (MYR) is a pretty good option for conservative investors.

Company background

MCIS Insurance Berhad, also known as MCIS Life, is one of the oldest names in the Malaysia insurance field. The company has been around Malaysia for more than 50 years and became part of the Sanlam Group (largest insurance company in Africa in terms of market capitalisation) in 2014. The credit rating for MCIS is A1 (RAM) with a stable outlook while the discussed bond is rated as A2 (RAM). As of 1H22, MCIS is still a small life insurance player in the domestic market with a market share of under 3% in terms of annualised premium equivalent (APE). 

For context, APE is a widely used metric in the life insurance industry to ascertain sales. It is the sum of the regular annualized premium from the new business plus 10% of the first single premium in a given period. The formula is founded on the assumption that a single premium would be in effect for 10 years.

It is to be taken note that the discussed bond in this article has a call option feature where MCIS has the option to redeem the bond on call date. The next call date is on Dec 2026. However, we deem the chances of calling is low as it would affect the company’s capital adequacy ratio.

Focus on offering higher margin products

In terms of product offering, MCIS offers a greater number of non-participating and investment-linked plans than participating investment plans. This is because the profit margins of the former two plans are higher than the latter, where MCIS will need to share its profit to policyholder under the participating plan in forms of dividends or bonuses. In non-participating policy, profits and dividends are not shared. According to Economictimes, the discrepancy in margins is quite noticeable where non participating insurance products generally yields between 25% to 40% while participating products only yields around 9%-15%. 

Other than that, its management expense and commission ratios are higher than the average life insurance player. According to RAM ratings report, MCIS has an average of 17% and 16% respectively for the two subject matters in the past 5 years (2017-2021) while life insurance industry has an average ratio of 10% and 12% respectively. We think that this is due to MCIS efforts to attract and retain talents to expand its business.  

Table 1: MCIS products overview

Steady growth in revenue

MCIS net earned premiums has grown continuously over the years as seen in chart 1 below. While there is a decline in net profit for FY2021 and plunging into the red in 1H22, this is mainly due to revaluation loss in its bond investment. Without the paper loss, MCIS would have been looking at a decent profit of RM191.9 million amid higher premiums earned and lower claims and expenses in 1H22.

That said, we expect their profitability to improve going forward, due to higher investment income on the back of higher bond yields and lower fair value losses on financial investments due to stabler bond prices.

Apart from that, MCIS has seen improvement in its combined ratio - percentage of premiums that an insurance company uses to pay for acquiring and servicing insurance, where it at last recorded underwriting profit (97%) after several years of underwriting loss.

Chart 1: MCIS earnings trend

Table 2: MCIS profitability

Adequately capitalised and healthy credit ratios

Capital adequacy ratio (CAR) is applied to measure the insurer’s available capital to its risk profile at all times. As at June 2022, its CAR stood at 216%. While it is slightly lower than the industry aggregate of 223.6%, it positions well above the Bank Negara Malaysia’s (BNM) minimum regulatory requirement of 130%.

It is also higher than the individual target capital level (ITCL) of 190% whom corrective measures would need to be deployed should CAR falls below the ITCL. Over the years, MCIS has habitually maintained a 20-30 percentage points buffer between its CAR and ITCL to offer some comfort to regulators as well as investors that it will remain sufficiently capitalised.

Other than that, excluding 1H22, its interest coverage ratio (profit or loss before tax/ interest expenses) has been excellent, where it recorded more than 30 times of interest coverage in the past few years. The negative interest coverage for 1H22 is mainly due to the revaluation loss in investment, which we think is transient and would probably go back to positive coverage before long. If we exclude the revaluation loss, the interest coverage for 1H22 would be at approximately 33 times. 

For its liquidity ratio, MCIS posted a positive cash to short term debt of 1.84 which is an increase of 7% from 2021. This signifies that the insurer has more cash and cash equivalents than its current liabilities which dwindles the odds of not meeting its short-term obligations. Overall looking, MCIS credit ratios are astonishingly healthy.

Table 3: MCIS credit ratios

Conservative investment strategy

As an insurance company, MCIS endorses a conservative investment strategy where the composition of its investments are predominantly government securities and corporate bonds that are rated at least AA-. For track record, it registered an investment yield of +0.5% in 2021 and -5.5% in 1H22 due to unrealised losses from weaker bond prices.

Chart 2: MCIS investment income (including realised and fair value gain/loss)

Chart 3: MCIS investment portfolio as at 1H22

Focusing on the underserved and underinsured demographic

Since 2019, MCIS started to focus its attention in serving the underserved and underinsured group, namely those who fall in the bottom 40% income category(B40), the lower end of the middle 40% income category(M40) and migrant workers. The reasoning behind is because the insurance business for these segments is less competitive as opposed to the better insured higher end of M40 and T20 segment.

As an illustration, MCIS with its distribution partner Merchantrade have jointly rolled out the government’s Perlindungan Tenang voucher initiative to penetrate the B40 community. This pivot has been proven successful, where MCIS registered continuous new business growth henceforth (39% y-o-y in 2019, 14% y-o-y in 2020 and 42% y-o-y in 2021).

Berjaya Corporation’s potential acquisition of a 51% equity stake in MCIS

Earlier on, Berjaya Corporation via a Bursa Securities filing dated 9 January 2023 has expressed its intention to buy a controlling stake in MCIS subject to Bank Negara Malaysia (BNM) approval. As of today, there’s still no confirmation from the parties and we opine that talks are still ongoing between Berjaya and MCIS’s parent, Sanlam Limited. Should the conglomerate succeed in acquiring MCIS, MCIS may benefits from it in terms of having more resources and financial support to expand the insurance business. With that said, the development of the talks will need to be monitored closely to assess its significance. 

In the circumstances where MCIS does change hands, bondholders shouldn’t be fret as the new owner would presumably assume the bond’s liability in a normal takeover deal. 

Risks

Investors should be aware that the MCISIB 5.300% 29Dec2031 Corp (MYR) is a subordinated debt. This means that in the event of winding up or liquidation, bondholders of MCISIB 5.300% will be subordinated to other debtholders.

Malaysia is on the cusp of a recession which causes consumers to be generally more mindful about their spending and tailoring their purchases. Hence, the desire to buy and renew insurance policies might wane resulting in a stagnant or even a drop in MCIS earnings.

Insuring the lower income segment (B40) is getting more competitive. For illustration, ‘Perlindungan Tenang’, an insurance incentive initiated by Malaysia government for B40 community is joined by at least 12 other insurance providers like AIA and Great Eastern. This translates into 35 different plans to choose from and MCIS accounts for two of the 35. Therefore, we will have to keep tabs on how MCIS will fortify its competitiveness in this segment.

Conclusion

MCIS Insurance Berhad is one of the oldest names in the Malaysia insurance field. The credit rating for MCIS is A1 (RAM) with a stable outlook while the discussed bond is rated as A2 (RAM). Its net earned premiums has grown continuously over the years. While there is a decline in net profit for FY2021 and plunging into the red in 1H22, this is mainly due to revaluation loss in its bond investment. Credit wise, the insurer manages its credit profile superbly, with a low cash to short term debt.

Its subordinated bond due in 2031 yields approximately 4.52% for yield to next call and 4.86% for yield to maturity. Considering its growing premiums and healthy credit ratio, we think MCISIB 5.300% 29Dec2031 Corp (MYR) is a pretty good option for conservative investors.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in MCISIB 5.300% 29Dec2031 Corp (MYR) and the analyst who produced this report holds a NIL position in the abovementioned securities.