MNRB Holdings Bhd - 2007

MARC has assigned a rating of AAIS  to MNRB Holdings Berhad’s (MNRB) Islamic Medium Term Notes (IMTN) Issuance Programme of RM200.0 million. The rating outlook is stable. This rating is reflective of the financial strength of its operating subsidiary, Malaysian Reinsurance Berhad (Malaysian Re) as well as MNRB’s strong consolidated capitalisation and financial flexibility. Partially offsetting these strengths are the prospective capital needs of its lesser established takaful and retakaful businesses and their limited capacity to provide reliable dividend streams during the tenure of the notes. Additionally, the moderate growth outlook for the domestic general insurance industry will limit upward rating momentum in the near term. The rating assumes that the voluntary cession (VC) arrangement Malaysian Re currently has with the domestic general insurers will be largely maintained.

Malaysian Re was established as the national general reinsurer underwriting all types of domestic and foreign facultative and treaty reinsurance business. Malaysian Re continues to remain the principal source of group dividends and primary contributor of MNRB group’s revenues and profits (over 90%) though this could gradually reduce with increasing contributions from the takaful insurance business. Malaysian Re is the market leader in the domestic general reinsurance industry commanding 54.6% market share in 2006. In turn, motor and fire lines formed the largest contributors to Malaysian Re in terms of its net premiums.

Malaysian Re has managed to grow its gross reinsurance premiums whilst decreasing its high dependence on voluntary cession (VC) business through increasing its local and overseas treaty business. Over the past five years Malaysian Re’s share of revenue from voluntary cession business declined significantly from 70.3% to 53.8% in FY2007. Malaysian Re is also well diversified in terms of its single ceding insurer exposures with no individual exposure representing more than 6.0% of its gross premiums for FY2007.

Malaysian Re recorded underwriting profits of at least RM53 million in each of the past 5 years, although its results were eroded by higher claims in FY2007 due in part to natural catastrophes. Notwithstanding the inherent volatility of general insurance underwriting claims (especially long tailed claims), MARC expects Malaysian Re to maintain its capability to generate underwriting profit with good retrocession support. Its investment portfolio is highly liquid and conservative.

MNRB’s consolidated capitalisation is viewed as strong in the light of its low gearing and double leverage ratios. Its gearing ratio would remain a modest 0.29x even with full drawdown of its notes facility.

Dividends upstreamed by Malaysian Re will constitute the main source of operating cash flow and debt service for MNRB. Malaysian Re’s dividend payout for FY2007 was 47.0% (FY2006: 53.5%). MARC believes that Malaysian Re’s cash flows would remain highly resilient in the event of a significant reduction in VC business and be able to support MNRB’s obligations under the notes issuance. Additionally, MARC is of the view that the Risk Based Capital (RBC) regime will not severely curtail dividend payments to MNRB.

Major Rating Factors

Strengths

• Well-established domestic reinsurance franchise; and
• Improving geographical diversification.

Challenges

• Demands on capital resources from its growing takaful and retakaful insurance businesses;
• Uncertainty as to the continuity of voluntary cessions; and
• Potential for heightened competition with new entrantS.