Fitch affirms Malaysian Reinsurance at IFS 'A'; Outlook stable

March 25: The following statement was released by the rating agency.

Fitch Ratings has affirmed Malaysian Reinsurance Berhad's (Malaysian Re) Insurer Financial Strength rating (IFS) at 'A'. The Outlook is Stable.

KEY RATING DRIVERS

The affirmation takes into consideration Malaysian Re's healthy financial fundamentals, as manifested by its sustained premium growth, consistently healthy financial performance and solid market franchise in Malaysia. The rating is constrained by the limited geographical diversification in its business portfolio, potential catastrophe exposure from its foreign businesses, and strong market competition in Malaysia and overseas. Malaysian Re's rating is not currently constrained by Malaysia's 'A' Local Currency IDR, but Fitch does not expect Malaysian Re to be rated by more than one notch above than Malaysia's Local Currency IDR.

The Stable Outlook reflects Fitch's expectation that Malaysian Re will maintain its sound financial performance, with the management placing strong emphasis on bottom-line profitability as opposed to mere top-line growth.

Malaysian Re is Malaysia's largest reinsurer by premium income. Fitch expects its market dominance to remain solid, given its strongly entrenched market positioning and franchise as well as continued support from local cedants. The company actively participates in various local industry initiatives, which has helped to foster strong business relationships with local insurers. The company had a market share of about 57.6% in 2012, based on industry estimates. Its average market share has been about 60% since 2007.

Malaysian Re's combined ratio was 94% for the financial year ended 31 March 2013 (FY13), a slight improvement from 96% for FY12. Based on preliminary figures for 9M13, net income is estimated to have totalled MYR117.5m, from MYR96.9m a year earlier. Its regulatory risk-based capital ratio was above 200% at end-December 2013, well in excess of the regulatory minimum of 130%. Malaysian Re estimated that its claims exposure pertaining to the missing airplane used on Malaysia Airlines' flight MH370 is likely to be manageable because its exposure is capped by its retrocession programme.

RATING SENSITIVITIES

An upgrade is unlikely for the company in the near term. However, key rating triggers that could lead to an upgrade include a significant sustained improvement in the reinsurer's credit profile, with the combined ratio falling consistently below 94% and the regulatory capital ratio above 220%. Key rating triggers for a downgrade are significant deterioration in the reinsurer's credit profile in terms of market franchise, premium sustainability, operating performance and capital levels relative to its business profile, with the combined ratio increasing above 105%, or the regulatory capital ratio falling below 180% for an extended period.

A downgrade of Malaysia's 'A' Local Currency IDR by more than one notch would likely result in a rating downgrade for Malaysian Re. Evidence of a deterioration in Malaysian Re's financial fundamentals due to a more challenging operating environment associated with a weakening sovereign rating, could also lead Fitch to reassess the one-notch differential between the reinsurer's rating and the sovereign's Local Currency IDR. - Reuters