Best Re (L) Ltd and Best Re Family (L) Ltd - 2011

The report has been updated from the original report issued on March 2, 2011. The key amendments is the organisational details of Salama Group in page 5.

MARC has assigned an insurer financial strength rating of AA to BEST RE (L) Limited and BEST RE Family (L) Limited (collectively referred to as the BEST RE Group) on Malaysia’s national rating scale. The companies were set up when the original Tunisia-based entity BEST RE transferred its business to Labuan in October 2010 following a group restructuring exercise. The assigned ratings are underpinned by BEST RE’s growing reinsurance franchise in its primary market in the Far East region, its geographically diversified underwriting portfolio as well as its historical underwriting profitability. For the purpose of assigning the ratings, MARC’s analysis has focused on the historical operating performance of BEST RE and the financial profiles of the two entities post-reorganisation. The incorporation of two operating entities to segregate its conventional reinsurance and family retakaful operations in order to facilitate regulatory compliance is not expected to fundamentally impact the consolidated credit and business risk profiles of the two entities. MARC continues to view the credit profiles of the two entities to be strongly linked due to the high level of operational integration between the two entities. The outlook on the ratings is stable.

BEST RE is a reinsurance company incorporated in Tunisia in 1985. With a view to capitalise on the growth opportunities in the Far East region, as well as the more conducive offshore financial platform in Malaysia, the business of BEST RE, including its operations and underwriting portfolio, were transferred to the two newly set up Labuan entities, BEST RE (L) Limited and BEST RE Family (L) Limited, which will transact general reinsurance and family retakaful business respectively. BEST RE (L) Limited and BEST RE Family (L) Limited are capitalised at USD140 million and USD10 million respectively. The BEST RE Group is wholly owned by Dubai-based Salama Group, one of the largest takaful groups in the world comprising seven direct takaful entities in addition to BEST RE. BEST RE is the largest entity within the Salama Group, accounting for more than half of the group assets and 28% of the group profits in 2009.

BEST RE is a regional reinsurer and it has managed to establish a fairly meaningful franchise in Asia, the Middle East and African countries over the past few years. Including the Tunisia and Labuan offices, BEST RE currently has nine offices handling businesses from over 70 countries. Much of BEST RE’s business consists of  proportional  treaties  which subject the entity to significantly less earnings volatility than non-proportional reinsurance business. BEST RE focuses on underwriting business in the emerging markets of Far East (such as China, Korea, Indonesia and Malaysia) and North Africa facilitated by predominantly broker distribution. Businesses from the Far East region experienced the strongest growth and accounted for 74% of the underwriting portfolio in FY2009 from 66% a year ago. BEST RE continued to yield increasing treaty volume, while reinsurance business written through brokers continues to show year-on-year increase given the growing demand and established relationships with local cedants. BEST RE’s main lines of business are fire insurance, which accounted for half of the company’s gross premium in FY2009, followed by miscellaneous accidents (17%), marine (12%) and engineering (11%). The family retakaful business, which started three years ago, remains small to date, contributing only 4% to the company’s gross premium.

MARC believes that the continued soft reinsurance rates in 2011 and excess global reinsurance capacity will pose challenges to achieve sustained growth in profitability. Nonetheless, MARC expects continued ability on the part of both entities to underwrite profitably as a consequence of BEST RE’s underwriting discipline and enhanced risk management processes. MARC views BEST RE’s underwriting profitability as good; it has generated satisfactory underwriting results in a soft reinsurance market amid pressure on pricing and acquisition costs. Its combined ratio increased to 95.7% in FY2009 (FY2008: 93.2%) partly due to catastrophic events during the year, in addition to the impact of a change in unearned premium reserves (UPR) reserving basis. Overall, MARC considers BEST RE’s underwriting margins over the past few years to be healthy, which attest to BEST RE’s sound technical underwriting.

BEST RE’s investment return was low with an investment yield of only 1.6% in FY2009, reflecting a low interest rate environment and prudent investment strategy. In addition, BEST RE’s financial results remained pressured by the high financing costs of its 20-year subordinated debt, resulting in return on assets (ROA) of only 2.01% in FY2009. BEST RE’s low-tax operating environment provides meaningful support for its after-tax profitability. Moving into 9MFY2010, BEST RE managed to sustain its current financial performance as indicated by an annualised ROA of 1.93%.

Aggressive growth over the past few years has exerted pressure on BEST RE’s capital adequacy metrics, as reflected by the decline of the company’s equity-to-assets ratio to 25% as at end-9MFY2010 from 41% five years ago. Post re-organisation, however, the aggregate capitalisation of the newly incorporated entities has been strengthened. MARC expects the capital strength of the two operating entities to remain satisfactory in relation to their current rating levels. The stable outlook on the ratings of both entities reflects MARC’s expectation of continued sound through-the-cycle underwriting performance based on prudent underwriting standards and retention limits.

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