MNRB Holdings Bhd - 2008 / 2009

MARC affirms its AAIS rating on MNRB Holdings Berhad’s (MNRB) RM200.0 million Islamic Medium Term Notes (IMTN) Programme with a developing outlook. The affirmed rating of the investment holding company largely reflects the sustainable business profile of its core operating subsidiary, Malaysian Reinsurance Berhad (Malaysian Re) and its adequate, although weakened recent operating performance in the context of large rising claims and challenging financial market conditions. The rating also incorporates prudent levels of financial leverage and strong debt service coverage at the holding company level. MNRB remains substantially reliant on dividend upstreaming by Malaysian Re to meet its debt service obligations and for the preservation of its financial flexibility. The developing outlook reflects the challenging underlying operating conditions in reinsurance and insurance sectors and the likelihood for underwriting performance and investment earnings to remain pressured, both of which could expose MNRB’s reinsurance, takaful and retakaful entities to potential volatility in capital strength.

MNRB is the holding company of Malaysian Re, Takaful Ikhlas Sdn Bhd (Ikhlas), MNRB Retakaful Berhad and Malaysian Re (Dubai) Ltd. Malaysian Re, in turn, holds a 20% stake in Labuan Reinsurance (L) Ltd (Labuan Re). The main profit contributing entity of the Group, Malaysian Re, is the largest player in the domestic reinsurance market with a 61.9% market share of gross reinsurance accepted premiums in 2007. This reflects existing voluntary cession (VC) market arrangements with local general insurers which will remain in force until end of 2009. Malaysian Re continues to make good progress in preparing for challenges arising from lower cessions from domestic insurers going forward. This is evidenced by declining dependence on gross premium income generated by its VC business. Local and overseas treaty business has in recent years, contributed more significantly with share of revenue from VC declining to 49.1% in FY2008 (FY2007: 53.8%). Malaysian Re’s underwriting results for the year ended March 31, 2008 (FY2008) and for the nine months ending December 2008, were adversely impacted by higher claims incurred. The reinsurer’s financial results for the first half of FY2009 (1HFY2009) showed a 61.0% drop in pre-tax profit to RM21.3 million compared to the corresponding period in FY2008. The poorer performance is attributed to an underwriting deficit of RM8.8 million and a 25.5% decline in investment income to RM24.8 million (1HFY2008: RM33.3 million). Malaysian Re’s risk-based capital (RBC) adequacy is expected to remain good based on its RBC parallel report as at end March-2008, which places Malaysian Re’s total required capital at RM409.3 million against its total capital available of RM607.4 million. The reinsurer’s reliance on retrocession protection remains modest at 14.5%.

Although MNRB reported a consolidated loss of RM21.4 million for the nine months ending December 2008, its consolidated capitalisation remains strong in light of its low gearing and modest double leverage ratio at holding company level. Apart from poorer results reported by Malaysian Re, the Group’s share of associate, Labuan Re’s loss also weighed down the consolidated results of MNRB. On a positive note, both takaful entities registered improvements in their financial performance. Ikhlas’ contribution to the Group’s net profit more than doubled to RM6.4 million while MNRB Retakaful showed a small profit in 1HFY2009. Gearing ratio at holding company level stood at a modest 0.3x and is not expected to rise sharply in view of its low debt appetite and prudent dividend policy.

Dividends upstreamed by Malaysian Re continues to be the main source of operating cash flow and debt servicing for MNRB, Malaysian Re’s dividend payout, as measured by dividends paid out in respect of FY2008, was 50.1% (FY2007: 47.0%) in FY2008. MARC believes that despite a challenging business environment, Malaysian Re and MNRB’s takaful and retakaful subsidiaries should continue to sustain positive market share trends and maintain adequate profitability. There would, however, be negative pressure on the rating in the event that the downward trend in operating performance and cash flow coverages were to continue over an extended period, and should capital adequacy levels be significantly reduced.

Major Rating Factors

Strengths

• Well-established domestic reinsurance franchise of core operating subsidiary, Malaysian Reinsurance Berhad (Malaysian Re)
• Favourable underwriting track record of Malaysian Re; and
• Low gearing and modest double leverage at MNRB Holdings Berhad (MNRB).

Challenges

• Uptrend in claims of reinsurance entities;
• Potential volatility in capital strength of component insurance entities stemming from increased pressure on underwriting and investment performance;
• Uncertainty as to the continuity of voluntary cession market arrangements post 2009; and
• Increased competition with new reinsurance capacity.