MCIS bleed due to medical inflation, but bond call remains highly likely

RAM rating action

RAM Ratings downgraded MCIS Insurance Berhad’s (MCIS Life) Insurer Financial Strength (IFS) rating from A1 to A2. Concurrently, its RM200 million Tier 2 Subordinated Debt (MCISIB 5.300% 29Dec2031 Corp (MYR)) was downgraded from A2 to A3. Nevertheless, the outlook on both ratings was revised from Negative to Stable.

The rating action reflects persistent underwriting losses and structurally unfavourable product mix:

1) MCIS registered a loss in insurance service amounting to RM23.2 million in FY2024, which persisted into FY2025 with a RM31.4 million loss.

2) Pre-tax losses widened to RM18.6 million in FY2025, compared to a RM0.5 million pre-tax loss in FY2024.

3) Over 80% of total new business (NB) in was concentrated in single-premium savings plans and yearly renewable group employee benefit (EB) policies. These short-term and low-margin offerings exposed earnings to immediate medical claims inflation and regulatory overrun costs without accumulating a sufficient Contractual Service Margin (CSM) profit buffer under MFRS 17.

Medical inflation is weighing on MCIS’s underwriting performance

The concern for MCIS is the deterioration in its insurance service result. This is caused by the spike in Malaysia’s medical inflation.

Table 1: Group’s profit or loss statement

Medical inflation in Malaysia remains particularly elevated, with the gross medical trend expected to increase from 15% in 2025 to 16% in 2026, significantly above the Asia-Pacific average of around 10%. Higher labour costs, pharmaceutical prices and increased utilisation of advanced medical technologies have all contributed to the escalation in healthcare costs.

MCIS is not alone in facing these pressures. Malaysia’s life insurance industry recorded approximately RM9.4 billion in medical payouts in 2025, representing a 5.3% increase from 2024. The industry-wide increase in medical costs has therefore become a structural challenge for insurers rather than an isolated issue at MCIS.

The deterioration is primarily concentrated in the insurance service result, rather than across the group’s entire P&L. This is important because it suggests that the current weakness is largely an underwriting issue that can potentially be addressed through repricing, product restructuring and tighter claims management.

The scale of medical claims also highlights the pressure on margins. In FY2025, MCIS paid out an estimated RM491 million in claims, against total insurance revenue of RM494.3 million, before accounting for other operating and administrative expenses. A similar trend was already evident in FY2024, when insurance service expenses of RM489.9 million exceeded insurance revenue of RM460.7 million.

Regulatory measures to delay the recovery

The operating environment is unlikely to improve immediately in 2026.

In response to double-digit medical inflation, Bank Negara Malaysia (BNM), together with the Ministry of Health (MOH) and Ministry of Finance (MOF), introduced the RESET Strategy, a multi-stakeholder framework aimed at improving the long-term affordability and sustainability of medical insurance and healthcare.

For insurers, annual premium increases for medical insurance have been capped at 10% until the end of 2026, limiting the speed at which insurers can fully pass through higher medical costs. Since 1 September 2024, insurers have also been required to offer consumers an option to purchase new MHIT products incorporating a co-payment feature, which is intended to encourage more prudent healthcare utilisation and ultimately help contain claims costs.

Meanwhile, the healthcare sector itself is undergoing structural changes. The Ministry of Health has outlined a roadmap to shift private hospital remuneration from the traditional fee-for-service (FFS) model towards a diagnosis-related groups (DRG) model, with implementation targeted from 2027.

Unlike the FFS model, where hospitals are generally reimbursed based on individual services provided, DRG-based remuneration is designed to encourage greater cost efficiency and reduce unnecessary tests, procedures and over-utilisation.

Taken together, these measures should be positive for the long-term sustainability of the medical insurance industry. However, the benefits are unlikely to be immediate. We therefore expect 2026 to remain a challenging year for MCIS, with a more meaningful recovery likely only from 2027 onwards.

Management’s turnaround strategy

Management has initiated several measures to rebuild underwriting margins and stabilise the group’s financial profile.

1) The group is actively phasing out legacy loss-making group EB (group employee benefits insurance) policies and lower-margin single-premium savings products. At the same time, agency capacity is being reallocated towards individual, regular-premium life and protection products, particularly for the M40 segment.

We view this shift positively as regular-premium, longer-duration protection products provide a more sustainable source of recurring premiums and allow MCIS to accumulate CSM under MFRS 17 over a longer period. This should provide the group with a more stable earnings base and greater breathing room compared with its previous reliance on short-duration and lower-margin products.

The timing is also relevant given the planned introduction of MediAsas in 2027, a voluntary medical insurance and takaful plan expected to offer basic coverage starting from RM65 per month. While the new scheme could improve insurance accessibility, it may also increase competitive pressure on lower-margin medical insurance products.

2)  MCIS is also implementing rate increases across its medical portfolio, phased in accordance with BNM's multi-year repricing framework.

New product iterations incorporate co-payment and deductible features, which should help discourage over-utilisation of medical services.

3) 51% shareholder Sanlam Limited continues to provide technical and operational backing to reinforce underwriting discipline and risk governance. Sanlam has hold its stakes in the group since 2014, serving as strategic investment alongside India, for Sanlam Emerging Markets venture.

The key risk here is execution. Repricing cannot fully offset medical inflation immediately, particularly while premium increases remain subject to regulatory constraints. Nevertheless, the cumulative effect should become increasingly visible in the insurer’s underwriting results as the repricing programme matures.

We expect profitability to recover from 2027 onwards

We expect MCIS Life to remain under pressure in 2026, but believe the group is positioned for a gradual recovery and return to net profitability around 2027-2028.

The current weakness is primarily concentrated in the insurance service result, while the group continues to generate positive net financial results. This suggests that the deterioration is not yet indicative of a broad-based balance sheet problem.

As medical repricing takes full effect, the product mix shifts towards regular-premium protection products and claims management improves, we expect the insurance service result to gradually stabilise.

Bond call remains highly likely despite the earnings weakness

Despite MCIS Life’s weaker earnings, we continue to believe there is a high likelihood that MCISIB 5.300% 29Dec2031 Corp will be called on 29 December 2026, its first call date.

This is because:

1) Tier 2 capital instruments lose regulatory capital efficacy once they enter their final 5 years to maturity (post-call date). If left uncalled, the regulatory capital credit for the RM200 million note begins amortising downward annually by 20%, rendering the note inefficient for capital adequacy purposes relative to its 5.30% coupon cost.

2) Failing to call a Tier 2 subordinated bond on its first call date creates significant reputational damage, driving up future cost of debt for both the issuer and its parent group. Given Sanlam Limited’s global profile and oversight, letting a sub-debt pass its first call date without exercise is unlikely.

3) The bond continues to trade near par value (100.00–100.60), reflecting market expectations that the bond will be called on schedule at par.

Looking at its balance sheet, refinancing the existing subordinated instrument appears to be the more likely route should MCIS proceed with the call. Interestingly, this bond (alongside a modest RM11.9 million in lease liabilities) constitutes the only debt of the group.

Recommend existing investors to hold

Overall, we acknowledge the deterioration in MCIS Life's credit profile and expect 2026 to remain a challenging year, primarily due to elevated medical inflation and the limited ability to fully pass through higher claims costs under the current regulatory framework.

However, we view the current weakness as manageable rather than structural. Management is actively repositioning the business towards longer-duration regular-premium protection products, while medical repricing and co-payment measures should gradually improve underwriting performance. Combined with Sanlam's strategic and operational support, we expect MCIS to return to profitability around 2027–2028.

For MCISIB 5.300% 29Dec2031 Corp, we continue to see a high probability of redemption on its first call date of 29 December 2026. The declining regulatory capital benefit of leaving the instrument outstanding, the group's limited existing debt burden and Sanlam's support all provide strong incentives for MCIS to refinance and call the bond.

Therefore, we recommend existing investors to continue holding MCISIB 5.300% 29Dec2031 Corp (MYR).

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 hold a NIL position in the abovementioned securities.