MARC has downgraded its insurer financial strength (IFS) rating on BEST RE Family (L) Limited (BEST RE Family) to A+ from AA with a stable outlook

MARC has downgraded its insurer financial strength (IFS) rating on BEST RE Family (L) Limited (BEST RE Family) to A+ from AA with a stable outlook, to reflect the rating agency's revised approach of notching up the family takaful operator's standalone credit assessment on account of parental support uplift from its ultimate holding company, Islamic Arab Insurance Co (IAIC or SALAMA). MARC's previous rating approach was to consider BEST RE Family and its sister entity BEST RE (L) Ltd (BEST RE) as one analytic unit in BEST RE's immediate post-restructuring phase, which had resulted in the two entities being rated at the same level. The two entities had been formed pursuant to the re-domiciling of BEST RE Group to Labuan from Tunisia in 2010.

Under the revised rating approach, BEST RE Family's IFS rating derives two notches of uplift from its standalone credit assessment of A- based on MARC's expectation of moderately high support from SALAMA, which MARC has rated AA/Stable principally on publicly available information. BEST RE Family's standalone credit assessment of A- reflects its strong capitalisation relative to its business risk profile, its conservative and liquid investment portfolio, and positive underwriting during the first six months of 2012 (1H2012). These positives are moderated by its short operating history and modest size as a family retakaful provider.

MARC's expectation of moderately high support from SALAMA considers the strategic importance of BEST RE Family to SALAMA Group, the family takaful business being a strategic focus area for the group. However, in the near-to-intermediate term, MARC expects BEST RE Family to remain a small part of the SALAMA Group's overall business and earnings base. BEST RE Family's total assets of US$33.5 million accounted for a very small percentage of SALAMA's total assets of AED4.9 billion or US$1.3 billion as at end-June 2012.

MARC's public information rating on SALAMA, meanwhile, reflects its geographically diversified reinsurance and takaful operations and good capitalisation. The group has established a strong foothold in Far East Asia, Middle East and Africa. BEST RE continued to be a major contributor to SALAMA's consolidated premium income in 2011, at 66% in 2011 although this is anticipated to decline as the general reinsurer cuts back its gross written premiums in 2012 and exits unprofitable business.

BEST RE Family has continued to exhibit positive growth momentum, aided by the low level of retakaful peneration in its target markets of Far East Asia and North Africa, and good access to Middle East business. Its gross written contributions (GWC) grew 51% to reach US$28.1 million in 2011, from a relatively small base. BEST RE Family is mainly a treaty family retakaful provider; currently its family retakaful business is centered on providing term assurance retakaful cover, mostly on proportional treaties.

MARC believes BEST RE Family should remain a strategic operating platform for SALAMA Group to tap the growth potential afforded by demand for family retakaful cover from family takaful operators in Southeast Asian and Middle East. By country, Indonesia represented 20% of BEST RE Family's exposure based on earned premiums at end-2011, followed by Malaysia at 17%. Other large earned premium contributors are Kuwait (15%), Jordan (10%) and UAE (7%). BEST RE Family's high percentage of proportional treaty business, at 70% of its GWC, provides significant earnings stability.

BEST RE Family posted a maiden net profit of US$0.3 million in 1H2012 since its inception. Its underwriting profitability rebounded with a lower claims ratio of 88% in 1H2012 compared to 94% in 2011. BEST RE Family also saw an increased level of shareholders' equity as a result of the rebound in its profitability; its shareholders' funds rose to US$8.96 million as at end-June 2012 from US$8.67 million at year-end 2011. BEST RE Family's sound liquidity, driven by its liquid and conservative investment portfolio, continues to be viewed by MARC as a credit strength.

Going forward, BEST RE Family's  IFS rating will continue incorporate MARC's assessment of the ability and willingness of SALAMA to extend financial support to the family retakaful operator, as needed. Accordingly, BEST RE Family's IFS rating is sensitive to changes in parental support considerations and its stand alone credit profile.

Contact: Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

23 January 2013