Mitsui turns to FD and bonds

  • Business
  • Tuesday, 01 Apr 2003


MITSUI Sumitomo (M) Bhd, the country's number one marine cargo insurer has found a way to beat the rising tide of “investment blues'' by diverting some of its massive funds to fixed deposits (FD). 

Of the nearly RM400mil it has in its total investment fund, the Japan-based company has of late placed more than RM320mil in FD and is finding the business move not only relatively profitable but more importantly less risky. 

Chief executive officer Fabian Wong Yin Onn said the investment market for insurers has taken a turn for the worse with weakening returns and higher diminution in the value of stocks. 

“As such, we have come up with a strategy to move into FD more aggressively and invested more than 82% of our total investment funds in the portfolio,'' he said. 

Mitsui has for the financial year (FY) 2002 invested 5% in equity, less than 1% in properties, with the bulk going into FD.  

Fabian Wong

A marginal amount has also gone into low risk assets and about 12% into Malaysian Government Securities (MGS). 

Mitsui's business breakdown is as follows - fire (35%), motor (27%), marine (19%), and miscellaneous and liability class (19%). 

Wong said the company's preference for the FD portfolio was mainly because returns greatly helped maintain claims' paying ability, an important financial obligation of any insurance company. 

“What is noteworthy here is that such payments are done more expeditiously and very much to the customers' satisfaction,'' he said. 

Another vital reason for investment in FD was that the returns were “consistent'' and therefore ensured the company would not have to resort to liquidating other key assets, something that would not be good for the overall bottomline in the long run. 

Why is Mitsui focusing more on FDs? 

“Because we have observed that the local equity market has not been able to provide the kind of satisfactory returns the company has been seeking for years,'' Wong said. 

If FDs are a critical source of investment returns for Mitsui, so is the bond market. 

“The bond market is a potentially viable source of income and our investment department is constantly on the lookout for new bond issues which we could take up,'' Wong explained. 

As part of the company's diversification plan for the FY2003, the investment department has been asked to identify specific bonds that provide the highest yields compared to FD. 

“Once the identification has been made, we will consider moving a portion of our investment funds into the bond market or even private debt securities (PDS). We are planning to put in between 5% and 10% over a period of one to three years,'' Wong said. 

And, how is Mitsui is going about its investment in PDS? 

Wong said the company's investment department had begun contacting various leading banking institutions, especially merchant banks that deal extensively with bonds of all kinds. 

And, the results are already beginning to show as in the past one month, the company has managed to purchase some high-yielding bonds from two large commercial banks. 

With regard to its participation in the local equity market, the company has taken a major decision to sell off those non-performing stocks, especially those that give poor dividends while retaining the core blue chip stocks in the KLSE. 

The end result of Mitsui's investment management strategy is to get above average market returns for the FY2003.  

For the FY2002, the company has registered a RM275mil gross premium return, an increase of 5% over the previous year. 

“As far as our claims' ratio is concerned, we have recorded a slight improvement, about 2% compared to FY2001, as a result of restructuring our underwriting policies and ensuring adequacy of premium pricing,'' Wong said. 

Medical rates were also increased for some classes, while for burglary/liability classes, premium costs also saw an upswing. 

Mitsui's pre-tax underwriting profits for FY2002 stood at RM16.1mil, compared to only RM8.4mil the previous year, an improvement of over 92%.  

Its investment income for the FY2002 coming from FDs, equity market and MGS stood at RM15.3mil, an increase of 97% over the previous year. 

Overall operating profit before tax for Dec 31, FY2002 stood at RM31.5mil, an improvement of 97% against the preceding year. 

One crucial challenge facing Mitsui is how to deal with the nearly 30% increase in reinsurance costs. 

“We have been able to offset the rise in reinsurance costs by better underwriting results and higher investment income over the past two years,'' Wong said. 

“For FY2002, our premium budget stood at RM275mil while in FY2001 it was around RM263mil. The RM300mil premium budget for FY2003 is feasible in spite of the many odds facing the sector,'' Wong said. 

And why not? Thanks to its diversification programme implemented early last year, the company is now seeing income emanating not only from business transacted with traditional Japan-based multinational companies, but also local corporations, a move that confirms Mitsui's market penetration is still growing in spite of difficult market conditions. 

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