Country’s sole reinsurer suffering from low valuations
MNRB Holdings Bhd , the sole local reinsurer in the country, suffers from low valuations because of the risks associated with the nature of its business and a recent spike in calamities in Malaysia, analysts have pointed out.
At its current share price of RM3.59, MNRB is trading at 0.6 times its price to book value.
This is lower than global insurers, analysts point out.
Malaysian banks also trade at a higher price to book, with Maybank at 1.56 times and Public Bank at 2.43 times.
Analysts say that reinsurance is a risky and volatile business and any form of calamities or disasters will affect claims.
“As the claims nature of the business is risky, global reinsurers tend to see volatile results and have traded at 0.6 to 1.3 times price-to-book.
“The Malaysia Airline MH370 and MH17 tragedies and the recent floods in the east coast could cast a pall over MNRB’s earnings.
“A reinsurer should trade at heavy price-to-book discounts to normal insurance companies.
“Reinsurers worldwide trade like that, but MNRB trades at an even heavier discount to global reinsurers because its global peers are more established, bigger, and well capitalised to absorb any claims volatilities,” one analyst says.
After eight consecutive quarters of profits, the group once again plunged into the red when it posted a net loss of RM20.09mil for its third quarter ended Dec 31, 2014 compared with a net profit of RM13.98mil. This was recorded on the back of lower revenue of RM606.71mil compared with RM635.62mil previously.
The company had said the marginally lower revenue was a result of the reduction in gross premiums and contributions by its reinsurance and retakaful subsidiaries respectively as well as lower investment income recorded by its takaful unit.
The decline in net profit was due to several large losses mainly due to the provision for Peninsula Malaysia flood losses recognised during the current quarter which affected the results of the company’s reinsurance and retakaful subsidiaries.
In an announcement to Bursa Malaysia, the group says that profit for the financial year ending March 31, 2015 is not expected to outperform the previous financial year’s results.
Kenanga Research, which is reiterating its “trading buy” on the counter with a fair value of RM4.35, in a recent note says it anticipates a rebound in net profit with a more sustainable claims ratio of less than 70% moving into financial year 2016.
Having said that, it adds that premiums growth could be slightly muted owing to the implementation of the goods and services tax (GST).
Malaysian Reinsurance Bhd (Malaysian Re), a wholly-owned unit of MNRB Holdings, is targeting to expand its business in Europe, Singapore and Hong Kong in the next two years to drive its earnings and broaden its reinsurance market beyond Asean.
Malaysian Re, which is the largest contributor to the group, at the moment is also the biggest national reinsurer in Asean in terms of market presence as well as gross premiums.
Elaborating on the company’s expansion drive, Malaysian Re new president and chief executive officer Zainudin Ishak in an interview says the group is targeting to have an equal contribution in terms of gross premiums for both its local and overseas markets for the financial year ending March 31, 2017.
Currently, the ratio in terms of the contribution in premiums for the domestic market to that of overseas market is 60:40, he adds.
Malaysian Re’s total gross premiums last year stood at RM1.3bil.
For its overseas operations, MNRB Holdings has operations in Dubai via its 100% owned subsidiary, Malaysian Re (Dubai) Ltd and also provides reinsurance services to its insurance clients in Indonesia and in the region.
The unit in Dubai provides reinsurance services to the Middle East and North Africa markets (MENA).
“We want to replicate our success in Dubai in markets which we are targeting like Europe, Singapore and Hong Kong which are more disciplined in terms of underwriting practices, have good regulatory framework, strong governance and (practice) international standards.
The group at the moment is doing a feasibility study in these markets.
“These markets will be the new engine of growth for the group moving forward.
“Markets such as these provide good premium growth as insurance operators are more aware of the need to reinsure to lessen their operational risk and ensure they can meet claims more efficiently,’’ Zainudin explains.
The research house says the group’s quarter on quarter (qoq) increase in the net claims ratio to 75% was due to a few large claims relating to the recent floods in Kelantan, Terengganu and Pahang and possibly claims relating to Malaysia Airline MH370 and MH17.
According to Kenanga, there may be a pressure on the group to consider a joint-venture or merger and acquisition due to the likelihood of higher costs to split its general and family (life) takaful licenses under the Islamic Financial Services Act (IFSA) and Financial Services Act (FSA) 2013. The Acts, which came into force effective June 30 2013 , requires composite insurance and takaful players to split and have separate licenses by 2018.
On another note, Zainudin says the group is unfazed with foreign competion in the reinsurance space as it has the track record and expertise to handle and underwrite such business.
“Competition will lower the reinsurance rates but it is good for the market as it provides efficiency, for example, in the disbursement of claims.
“For us, we believe in maintaining a strict underwriting discipline and that has been our strength,’’ he adds.
He says the outlook of the reinsurance market is bright due to the rollout of the various infrastructure projects as it provides reinsurance coverage for the mega projects in the country which have been insured.
One of the challenges in the reinsurance business is the lesser number of general insurers in the market as a result of mergers and acquisitions by foreign insurers, he says, adding that, however, this should be viewed positively as foreign-based insurers bring in best practices and expertise to the industry.