MNRB Holdings Bhd - 2009

MARC has downgraded its rating on MNRB Holdings Berhad’s (MNRB) Islamic Medium Term Notes (IMTN) Issuance Programme of RM200 million to AA-IS from AAIS. The rating downgrade reflects MARC’s concerns with regard to a weakening of MNRB’s liquidity profile in addition to reduced cash flow prospects arising from a perceived trend toward lower dividend payouts by its main operating subsidiary, Malaysian Reinsurance Berhad (Malaysian Re). Malaysian Re’s ability to declare dividends has been constrained by the higher capital requirement imposed on the reinsurer under the risk-based capital (RBC) framework effective 2009 as well as its own weak earnings performance. The key credit consideration supporting the current rating is the national reinsurer status of Malaysian Re with an expanding premium base. Meanwhile, the outlook on MNRB’s rating is revised to negative from developing owing to concerns on the source of funding for MNRB’s IMTN principal repayment due in 2012. The resolution of the negative outlook hinges on MNRB’s ability to generate or secure financing for its debt repayment.

Malaysian Re is MNRB’s main subsidiary, and contributed more than 85% of group revenue in FY2009 (year end-March 2009); contributions in the past five years have ranged from 85% to 97%. Malaysian Re is also the market leader in the Malaysian general reinsurance industry with a market share of 60.1% in 2008 (2007: 61.9%), mainly due to the voluntary cession arrangement which allows the company to receive a steady stream of premium income from all direct general insurers in Malaysia. The fire and motor lines remain the largest contributors of Malaysian Re, contributing 60% of its premium income.

As the voluntary cession arrangement is due for revision in 2010, Malaysian Re has over the past few years intensified its efforts to grow its premium base to reduce its dependency on voluntary cession business. Accordingly, premium income from local and overseas treaty arrangements have contributed a larger share of the company’s income, with the proportion of revenue from voluntary cession business declining to 45.6% in FY2009 from 49.1% in FY2008. That said, MARC views the voluntary cession business is still important to Malaysian Re, given its still significant share in Malaysian Re’s underwriting portfolio, and more importantly, its higher profits due to a wider spread of portfolio risks. 

Despite the increase in its premium base by 20%, Malaysian Re’s pre-tax profits declined by 50% to RM55.3 million in FY2009 on the back of deteriorating claim experience and lower investment income amid volatile market conditions. The major sector, fire, reported an underwriting deficit (before management expenses) of 10.5% (FY2008:+2.8%), or RM27.7 million, as a result of more frequent occurrences of natural catastrophes. While the improved performance of motor and marine, aviation and transport (MAT) businesses somewhat mitigated the impact, MARC views that the motor underwriting results may not be sustainable. This is because the motor business is affected by the low tariff structure imposed by the government which has been unchanged since 1978. Meanwhile, dividend income from Malaysian Re’s 20%-owned associate, Labuan Reinsurance (L) Ltd (Labuan Re) decreased to RM2.4 million from RM9.5 million a year earlier. Labuan Re reported a loss of USD6.1 million (or approximately RM20.1 million) for the financial year ended December 31, 2008.

The contribution from MNRB’s takaful and retakaful businesses remain relatively negligible. While contribution (premium in takaful terms) from its main takaful company, Takaful Ikhlas Sdn Bhd (TISB), expanded by 35% to RM580.5 million in FY2009, the contribution to the group’s bottom line was still relatively small. MARC opines that these subsidiaries are not expected to distribute any meaningful dividends over the medium term, considering the low premium base of these takaful operators. 

At the holding company level, MNRB’s liquidity position has significantly weakened from a relatively healthy RM169.5 million of liquid assets as at end-FY2008 to RM36.4 million at end-FY2009. This was a result of a RM20 million injection into TISB and USD1.76 million (or approximately RM5.8 million) into Malaysian Re (Dubai) Ltd to strengthen their capitalisation; distribution of RM40 million dividends to its ultimate shareholders; and a RM44.5 million investment in a United Kingdom-based takaful company, Principle Insurance Holdings Limited (PIHL). MARC also notes a further injection of RM20 million into Malaysian Re in April 2009, thus almost exhausting MNRB’s available liquidity. Meanwhile, PIHL’s subsidiary, Principal Insurance Company Limited, which is trading under the name of Salaam Insurance, has since ceased underwriting new businesses due to its inability to meet funding requirements stipulated by the UK regulators. The recovery from this venture is expected to be minimal.

The contribution from Malaysian Re is critical to support MNRB’s revenue and, more importantly, its debt servicing capacity. However, Malaysian Re itself is faced with deteriorating claims and narrow underwriting margins. MNRB Group reported a net loss in 1HFY2010 as a result of a one-off RM51.8 million charge to Malaysian Re’s incurred but not reported claim (IBNR) reserves in compliance with the RBC framework. Without the one-off charge, the group would have reported a profit of RM25.7 million (1HFY2009: -RM7.6 million). Meanwhile, Malaysian Re is required to maintain a higher capital base in compliance with the RBC framework. MARC opines that Malaysian Re’s dividend payouts will likely be constrained by regulatory compliance considerations. MARC will be monitoring the company’s liquidity profile on a prospective 12 to 18 months basis. Any further material weakening of MNRB’s liquidity profile could put pressure on the rating. Conversely, meaningful improvements in its liquidity profile could lead to a revision in the rating outlook to stable.

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