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. It 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. 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, which accounted for 45.6% of its premium income in FY2009. The fire and motor lines remain the largest contributors of Malaysian Re, contributing 60% of its premium income. 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.

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 capital injections into its subsidiaries, distribution of dividends to its ultimate shareholders and a RM44.5 million investment in a United Kingdom-based takaful company, Principle Insurance Holdings Limited (PIHL). PIHL’s subsidiary, Principal Insurance Company Limited, which is trading under the name of Salaam Insurance, has since ceased underwriting new business due to its inability to meet funding requirements stipulated by the UK regulators. MARC also notes a further injection of RM20 million into Malaysian Re in April 2009, thus almost exhausting MNRB’s available liquidity.

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, as at end-September 2009, Malaysian Re’s capital adequacy ratio (CAR) stood at 161%, higher than the regulatory requirement of 130%. The internal CAR, which must be set higher than the regulatory requirement, has yet to be established. 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 – 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.

Note: Malaysian Reinsurance Berhad (“Malaysian Re”) is a wholly owned subsidiary of MNRB Holdings Berhad (“MNRB”). Malaysian Re is a shareholder of Malaysian Rating Corporation Berhad (“MARC”) but does not hold more than 4.9% shares in MARC. MARC’s shareholders are not involved in MARC’s credit rating process or influence the eventual credit rating assigned by MARC’s rating team.

Contacts:
Lim Kok Seng, 03-2090 2272/ kokseng@marc.com.my;
Anandakumar Jegarasasingam, 03-2090 2250/ kumar@marc.com.my