This article first appeared in The Edge Malaysia Weekly on December 17, 2018 - December 23, 2018

MALAYAN Banking Bhd’s insurance arm, Etiqa Insurance and Takaful, expects to close the year with a lower net profit than 2017, as investment income falls in a weak equity market. And with the economy cooling and facing continued risks from the US-China trade war, Etiqa group CEO Kamaludin Ahmad points to more rough times ahead.

“We foresee that going into next year it will be more challenging. With the government continuing on its tightening path, we see a slowdown in infrastructure projects and construction,” he tells The Edge in an interview.

“Property development companies will still be experiencing a slowdown in their activities and the order books of many construction companies are likely to deplete, which will affect our general insurance premiums,” he says.

Exacerbating the challenges faced by Etiqa is the adoption of the new Malaysian Financial Reporting Standards (MFRS) 9 on Jan 1 this year. The new accounting standard requires the group to provide for anticipated losses rather than the previous practice (MFRS 139) of making provisions only when the losses are incurred.

“We have to mark-to-market [recognise changes in] the value of our equity investments in our P&L [profit and loss] every month, which has caused a bit of volatility in terms of our results on a month-on-month basis,” Kamaludin explains.

Then, there is the uncertainty of the ongoing US-China trade war, which affects both Etiqa’s sales and investment income.

“On the sales side, the uncertainty makes people less willing to commit themselves to something new, like buying life insurance, which requires a long-term commitment,” Kamaludin says. “The year 2019 will be difficult.”

“As a group, we remain focused on those things that are within our control. It is more important that our underlying business generates better margin sales because that would determine the long-term profitability of the organisation.

“And despite the challenging environment, we remain committed as a national player in the industry to get more Malaysians insured, as well as to get more Malaysians to increase their coverage,” he says, noting that Malaysians remain both underserved and underinsured.

“On a year-on-year basis, we may see some ups and downs because of the market situation, but as long as we are growing our top line, and in areas that will give us better profit margins, then we are confident of the continued success and financial standing of Etiqa,” he says.

In the second half of 2018, the group’s life insurance business saw a slight moderation in growth as consumers became more mindful of their spending due to economic and political uncertainties.

“There was also the spillover effect of the government’s move to scale back or cancel mega infrastructure projects, which resulted in consumers becoming more mindful of their spending. So, we saw a little bit of a slowdown in the life and family takaful businesses,” Kamaludin says.

This was partially offset by growth in the general insurance and general takaful businesses, thanks to the three-month tax holiday that led to a jump in car insurance sales.

“Even after the Sales and Services Tax was introduced in September, we are still seeing an increase in sales,” he says.

Etiqa’s pre-tax profit fell 19.8% year on year to RM537 million for the nine-month financial period ended Sept 30 (9MFY2018).

“We have always ensured that our expense growth is contained between 50% and 60% of our revenue growth. This year is an exception as we invested in technological and distribution capabilities for future growth, resulting in a higher expense level. That, plus the financial market volatility, has resulted in a lower profit,” says Kamaludin.

In contrast, the top line has been positive, with gross premiums, a measure of insurance revenue, climbing 18.4% year on year — the highest in the past five years — to RM5.43 billion for 9MFY2018.

Etiqa remains on target to achieve double-digit premium growth this year, Kamaludin says. “Our mandate is to surpass the industry growth for us to continue to climb the market ranking.”

Amid the challenging times, Etiqa is also bracing for an uptick in claims.

“Historically, when times are bad, you do see an uptick in claims and you do see increased fraudulent claims. On our part, because of our Fast & Easy vision that allows our customers to get their claims quickly, we may be an easy target for fraudulent claims,” says Kamaludin.

To counter this problem, the group has invested in artificial intelligence-powered systems to detect fraudulent claims and identify high-risk customers. “This will also relieve our employees from having to worry about catching fraudsters and focus on disbursing payments for eligible claims fast,” he adds.

Still, the 51-year-old would not describe the challenges lying ahead as the most challenging period of his career.

“Personally, the first few years after joining Etiqa (in June 2012) were more challenging because we were trying to change the way we were doing things.

“In the past, we had been growing for the sake of business growth. This meant that while we were getting the business in, it may not have been generating future profit.

“But we wanted to make sure that whatever we sold was not over-promising. We wanted to give the best deal to the customers,” Kamaludin recalls.

The overhaul saw Etiqa lose some market share in 2013 and 2014. But since then, it has more than reversed course. Today, Etiqa is the clear leader in the general takaful segment with more than 50% market share. It ranks No 3 on the family takaful list, with a 15% market share.

It is currently in fifth place in the general insurance segment with a 12% market share and is No 6 in the life insurance business with about 7% market share.

Etiqa wants to be No 1 in three to five years

While Kamaludin recognises that Etiqa is up against big foreign insurers like AIA, Prudential and Great Eastern, which have been in the insurance business for longer, he remains undeterred and is confident that Etiqa can overtake these players to become the overall market leader.

“If you combine the market share of life insurance and family takaful, we are now the No 4 player, up from sixth spot a year ago.

“This [becoming the market leader] is not going to happen immediately. It is probably going to take three to five years.

“But while we have that ambition to be the undisputed market leader, more importantly, we don’t want to be sidetracked by that growth target that we compromise on our services. Because, really, you can build your agency force pretty quickly, get them to focus on sales by pushing products, but whether or not it is in the best interest of the consumers, that may be questionable. We don’t want to be like that,” he says.

Kamaludin is confident that if Etiqa’s strategies of fast and easy claims payment and giving the best advice to customers are executed well, the growth of the group is assured.

Etiqa’s affiliation with the country’s largest lender by assets is also a major boon. The group is able to leverage about 350 Maybank branches and the Maybank2u platform to distribute its products. By itself, Etiqa is supported by about 10,000 agents and has a network of 24 branches.

Etiqa has also expanded into Singapore, the Philippines and Indonesia by leveraging Maybank’s regional network for growth in overseas markets.

Currently, Malaysia accounts for 82% of Etiqa’s total sales and Singapore, 14%, while the remaining 4% is from the Philippines and Indonesia.

“While overseas operations still account for less than 20% of the group’s total sales, these three markets are growing faster than Malaysia. We expect overseas contribution to hit 30% in three years,” Kamaludin says.

The group is in advanced talks with Cambodian regulators to expand its life and general insurance business into the country next year.

On the potential listing of Etiqa on Bursa Malaysia, Kamaludin says: “Your guess is as good as mine. Listing is really a shareholders’ call. As far as management is concerned, we are all about building capability.”

Rumours of Maybank preparing to spin off and list its insurance arm have been doing the rounds since 2016. Reports of a potential listing resurfaced in April this year.

Open to acquisitions

“We are always open to acquisitions, although that is not our core strategy because we are already pretty sizeable. If we were to acquire, we would have to see whether it is going to add size, bring capabilities we don’t have, whether the integration will be seamless and whether the price makes sense to us,” Kamaludin says.

“In fact, our entry into Indonesia was via the acquisition of a small company there,” he says, referring to Etiqa’s acquisition of a 75% stake in Indonesian general insurance company PT Asuransi Asoka Mas for IDR207.2 billion last year.

“But the reason for the acquisition was not really because we wanted to add size there. In some cases, it is because you cannot get a new licence so your entry has to be via acquisition,” Kamaludin says.

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