KUALA LUMPUR (Dec 30): Malaysian Rating Corp Bhd (MARC) lowered its rating on MNRB HOLDINGS BHD []’s (MNRB) RM200 million Islamic medium term notes (IMTNs) to A+IS from AA-IS after the reinsurer suffered two consecutive years of losses and thin cash flow coverage measures.
The ratings agency said on Friday while the outlook for the debt notes was stable, the downgrading reflected weakened holding company level financial metrics after losses for FY ended March 31, 2010 (FY2010) and FY2011.
“The lowered rating also incorporates MNRB’s reliance on externally provided liquidity to address the forthcoming December 2012 notes maturity,” it said.
MARC said the losses were due largely to lower dividends upstreamed to the holding company by principal reinsurance subsidiary Malaysian Reinsurance Bhd (Malaysian Re). These had reduced MNRB’s shareholders’ funds and 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.
As for the stable outlook on the rating, MARC said this reflected adequate mitigation of refinancing risk associated with the notes which are due in their entirety on Dec 10, 2012 and acknowledged the flexibility which MNRB had with regard to selling down of its stake in Takaful IKHLAS Sdn Bhd (Takaful IKHLAS) to pare down debt.
MARC said 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.
It added 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,” it said.
According to MARC, during the six months to Sept 30, 2011 (1HFY2012), MNRB injected RM100 million of new equity capital into Takaful IKHLAS to prepare for the 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,” it said.
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.
The ratings agency said on Friday while the outlook for the debt notes was stable, the downgrading reflected weakened holding company level financial metrics after losses for FY ended March 31, 2010 (FY2010) and FY2011.
“The lowered rating also incorporates MNRB’s reliance on externally provided liquidity to address the forthcoming December 2012 notes maturity,” it said.
MARC said the losses were due largely to lower dividends upstreamed to the holding company by principal reinsurance subsidiary Malaysian Reinsurance Bhd (Malaysian Re). These had reduced MNRB’s shareholders’ funds and 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.
As for the stable outlook on the rating, MARC said this reflected adequate mitigation of refinancing risk associated with the notes which are due in their entirety on Dec 10, 2012 and acknowledged the flexibility which MNRB had with regard to selling down of its stake in Takaful IKHLAS Sdn Bhd (Takaful IKHLAS) to pare down debt.
MARC said 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.
It added 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,” it said.
According to MARC, during the six months to Sept 30, 2011 (1HFY2012), MNRB injected RM100 million of new equity capital into Takaful IKHLAS to prepare for the 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,” it said.
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.
