Kurnia Group
Transformation paying off for Kurnia
THE EDGE - Monday, August 24th, 2009
Kurnia Asia is the largest motor insurer in Malaysia with a market share of
18.8%. Its share of the non-motor general insurance market is only 3%.
Kurnia went through a challenging time in FY2008, posting a net loss of RM301.8
million due to the need to increase its claims reserve to a confidence level
of 75% (from 65% previously) to comply with Bank Negara Malaysia’s risk-based
capital framework, which came into effect on Jan 1, 2009. In addition, losses
were exacerbated by its high overall claims ratio of 139.7% due mainly to losses
from its third party motor insurance.
In Malaysia tariff rates for motor insurance are regulated. Unfortunately,
the tariff rates for third party motor insurance are too low for most insurance
companies to cover claims.
Following its losses in FY2008, Kurnia undertook a transformation programme,
headed by Captain K H Chia, the managing director and CEO. Captain Chia, who
joined the company in July last year, has over 30 years of experience in the
industry, with stints at multinational corporations in Malaysia and China.
Under its transformation exercise, Kurnia:
- Reduced its claims ratio by dropping loss-making third party motor insurance.
This led to a decline in revenue but large underwriting losses were eliminated.
Its revenue for the three months ended March 31, 2009, fell 8.4% to RM257.8
million but it made an underwriting surplus of RM4.1 million compared to
a loss of RM48 million for the same period last year. Many other motor insurers
are following Kurnia’s lead in dropping loss-making third party motor
insurance.
- Grew its non-motor business where the claims ratio is significantly lower.
For the nine months ended March 2009, its profitable non-motor business accounted
for 17% of revenue compared to only 13% for the same period last year
- Strengthened its claims management by facilitating the quick settlement
of claims under RM3,000. Quick settlement helps put a cap on claims that
tend to escalate overtime.
- Is looking to reduce its management expense ratio (management cost/revenue).
It reduced its management expense ratio to 20% for the three months to March
2009 from 24.6% for the same period last year. The longer-term aim is to
reduce this to 15%.
- Is boosting its human resources initiatives to ensure proper execution
of its vision. The job description of staff has been clearly spelt out. Remuneration
is now tied to performance and meeting KPIs.
- Is enhancing its services so that it will become the motor insurer of choice.
It has introduced Kurnia Auto Assist whereby the holder of a comprehensive
policy can press a button and a Kurnia rider will arrive at the scene within
half an hour to assist in a breakdown or accident.
Once the transformation is completed, Kurnia will have a strong platform to
grow its revenue in a profitable manner.
Meanwhile, its efforts appear to be paying off. It made a net profit of RM14.4
million for the nine months to March 2009 compared to only RM1.4 million for
the same period last year. With higher underwriting profits and lower operating
costs, its prospects are likely to improve.
In the medium term, a reform of the motor insurance industry may be required.
As insurance companies now have to comply with the risk based capital framework,
motor insurers should be allowed to set motor tariffs according to the individual
risk of the policy holder. As is practised in other countries, other factors
should also be taken into account in assessing motor premiums apart from the
capacity of the vehicle, sum insured and the number of claim-free years. In
that way, premiums charged can match risk and responsible drivers do not have
to subsidise high risk drivers.
Kurnia trades at a relatively high price-to-book of 5.1 times due to the impairment
of its capital following its losses in FY2008. With better profitability, Kurnia
hopes its capital base will grow to match the size of its business.
The consensus forecast is a net profit of RM68.6 million and an earnings per
share (EPS) of 4.5 sen for the year ending June 2010. This puts the stock at
a price-earnings ratio (PER) of 11.6 times for the current financial year.
However, Kurnia has posted a net profit of RM26.4 million for the three months
to March 2009. If that is annualised without assuming further improvements,
a net profit of RM105.6 million or an EPS of seven sen is implied. This means
its PER will only be 7.5 times.
Kurnia’s growth is dependent on the successful execution of its transformation
and profits in the next few quarters will the barometer of its progress.