MARC has issued this update as part of its ongoing review of its AA/Stable financial strength ratings on BEST RE (L) Limited (BEST RE) and BEST RE Family (L) Limited (BEST RE Family). The rating agency intends to reassess the business and financial risk profiles and ratings of both entities following the adoption of their respective strategic plans which are expected to be unveiled at the end of May.

At the same time, MARC acknowledges BEST RE's increasing underwriting leverage and the operational challenges faced by BEST RE Family as a start-up retakaful operator. BEST RE Family posted a loss before zakat and tax of USD1.52 million for FY2011. Apart from the future strategic direction of both entities, MARC's review on their respective financial strength ratings will focus on initiatives to improve BEST RE's profitability and reduce underwriting leverage, as well as operating performance expectations for BEST RE Family.

The financial strength ratings on both entities had also previously assumed close credit linkages between the two entities which had resulted in the two entities being rated at the same level. The general reinsurance and family takaful operations were previously carried out by a single entity based in Tunisia prior to the transfer of the business to the then newly set-up BEST RE and BEST RE Family on October 1, 2010. MARC will also revisit the rating linkage between BEST RE and BEST RE Family in its review of their ratings and reassess whether the level of interdependence between the two entities has changed since the immediate post-reorganisation period or will alter going forward.  Should actual strategic and operational linkages be weaker than assumed, a more individualised approach to assessing the entities' creditworthiness will be warranted.

MARC understands that both entities have completed a strategic review of their respective reinsurer and family retakaful business operations. Management has indicated that strategic recommendations to exit less profitable markets and business will be made in their respective strategic plans.

BEST RE is expected to obtain some relief from underwriting leverage strain as the general reinsurer cuts back premium volume to reduce underwriting risk following very strong premium growth during the year ended December 31, 2011 (FY2011). Its underwriting leverage rose sharply during FY2011. While net premiums written increased to USD399.51 million, up from USD73.20 million for the financial period from February 4, 2010 (date of incorporation) to December 31, 2010, the reinsurer's shareholders' funds grew marginally. Internal capital generation was modest in FY2011 as a result of BEST RE's exposure to catastrophe loss events as well as high commission expenses during the year. Nonetheless, BEST RE remained profitable in FY2011 with a pre-tax profit of USD0.37 million.

BEST RE Family's loss before zakat and tax of USD1.52 million was largely attributable to a USD1.96 impairment loss on advances to its family retakaful fund. The family retakaful operator experienced an erosion of its capital base on account of its retained losses of USD1.33 million at the end of FY2011. Its shareholders' funds declined to USD8.67 million as at end FY2011 from USD10.19 million a year ago against an increase in net earned term assurance retakaful contributions to USD24.66 million from USD2.91 million for the financial period from February 4, 2010 (date of incorporation) to December 31, 2010.

MARC expects to conclude its review of both ratings in the next two months.

Contacts:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Milly Leong, +603-2082 2288 / milly@marc.com.my.