MARC DOWNGRADES THE RATING OF MNRB HOLDINGS BERHAD'S RM200 MILLION ISLAMIC MEDIUM TERM NOTES TO A+IS from AA-IS.; OUTLOOK STABLE

Dec 30, 2011 -

MARC has downgraded its rating on MNRB Holdings Berhad’s (MNRB) RM200 million Islamic Medium Term Notes (IMTNs) to A+IS from AA-IS. The outlook is stable. The rating action reflects weakened holding company level financial metrics following two consecutive years of losses for the financial years ending March 31, 2010 (FY2010) and FY2011, and thin cash flow coverage measures. The lowered rating also incorporates MNRB’s reliance on externally provided liquidity to address the forthcoming December 2012 notes maturity. The losses, due largely to lower dividends upstreamed to the holding company by principal reinsurance subsidiary Malaysian Reinsurance Berhad (Malaysian Re), had reduced MNRB’s shareholders’ funds, exerting upward pressure on the holding company’s double leverage ratio. The ability of MNRB’s operating subsidiaries to upstream higher dividends, meanwhile, continues to be inhibited by the need for Malaysian Re to maintain a larger capital buffer under a risk-based capital (RBC) regime as well as the still modest profits generated by MNRB’s operating subsidiaries relative to Malaysian Re.

The stable outlook on the rating reflects adequate mitigation of refinancing risk associated with the notes which are due in their entirety on December 10, 2012 and acknowledges the flexibility which MNRB has with regard to selling down of its stake in Takaful IKHLAS Sdn Bhd (Takaful IKHLAS) to pare down debt.

As in previous years, Malaysian Re continues to dominate the group both in terms of assets and earnings. Malaysian Re remains the main contributor of the group’s earnings, accounting for 85% of the group’s total revenue in FY2011. It contributed RM180.0 million of the reinsurance segment’s operating profit in FY2011, higher than the group’s RM158.1 million consolidated operating profit before incorporating its share of associate’s results. The reinsurer continues to maintain a leadership position in the domestic reinsurance market with a market share of over 50% of net reinsurance premiums. Malaysian Re continues to derive over 70% of its premium volume from its home market, of which voluntary cessions continue to be a key component, while growing its presence in the overseas reinsurance market. The reinsurer continues to maintain a solid financial profile that is characterised by strong risk- adjusted capitalisation, conservative investment risk tolerance and, favourable underwriting and operating profitability despite the inherent earnings volatility in certain business lines with high exposure to natural catastrophes.

MNRB’s other operating subsidiaries include Takaful IKHLAS, an eight-year-old takaful operator which has seen fairly strong growth in its family takaful business since its inception. The growth and expansion of the takaful business has necessitated significant capital support from MNRB and increased debt leverage at the holding company as a consequence. The takaful operator does not contribute enough profitability as yet to offset the capital support-related pressure on the holding company’s financial profile. During the six months to September 30, 2011 (1HFY2012), MNRB had injected RM100 million of new equity capital into Takaful IKHLAS in preparation for the upcoming implementation of the takaful RBC framework in 2012. MNRB has the option to sell down its equity holdings in the takaful operator to a strategic business partner, although the timing remains uncertain. MARC believes that the sell-down strategy could hold the key to securing a more immediate improvement in the holding company’s credit profile and adapting to a more challenging competitive landscape ahead for takaful operators.

The group recorded lower net earned premiums of RM482.1 million for 1HFY2012 compared to RM505.8 million for the preceding year’s corresponding period mostly on account of a higher amount of premiums ceded to reinsurers. The high number of weather-related natural catastrophes in Asia during the calendar year 2011 and a corresponding sharp increase in insurance claims are expected to lower full year profitability for FY2012. The group posted a net loss of RM5.9 million for the three months to September 30, 2011 (2QFY2012) on account of higher claims incurred at Malaysian Re; its cumulative net profit for the 1HFY2012 of RM37.0 million was 21.9% lower compared to the preceding year’s corresponding period.

Notwithstanding the observed volatility in year-to-year underwriting profitability, MARC expects Malaysian Re to continue to sustain a satisfactory underwriting performance by maintaining its disciplined approach to underwriting and an adequate retrocession programme. The rating agency acknowledges that in the short term, slower global and domestic economic growth and excess reinsurance capacity could weigh on the reinsurer’s earnings.

At company level, MNRB posted a smaller net loss of RM14.8 million in FY2011 (FY2010: RM59.6 million) and registered a 49.5% increase in its revenue as a result of higher dividend received of RM15.1 million (FY2010: RM10.2 million) and higher management fees charged to its operating subsidiaries. The dividend income was sufficient to fund profit payment on the holding company’s IMTNs. MNRB had modest cash and bank balance of RM75,000 as at end-March 2011. MNRB’s double leverage ratio remained elevated at 129% (FY2010:127%). With regard to the forthcoming December 2012 notes maturity, MARC derives comfort from the holding company’s favourable access to bank financing. The holding company has indicated that it will be refinancing the IMTNs with new term financing and is currently evaluating the refinancing offers obtained from several financial institutions.

The stable outlook reflects expectations that the maturing notes will be refinanced in an orderly manner and that MNRB will manage growth of its operating subsidiaries in the next 12 months such that additional pressure on holding company leverage is mitigated.

Contacts:
Lim Mei Ching, +603-2082 2267/ meiching@marc.com.my;
Milly Leong, +603-2082 2275/ milly@marc.com.my.