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Published on 15 November 2016
RAM Ratings has reaffirmed the AA2/Stable/P1 insurer financial strength (IFS) ratings of Malaysian Reinsurance Berhad (Malaysian Re or the Reinsurer). Concurrently, we have also reaffirmed the AA3/Stable rating of the Reinsurer’s RM250 million Subordinated MTN Programme (2015/2030). The debt facility, which qualifies as tier-2 capital under Bank Negara Malaysia’s Risk-Based Capital Framework for Insurers, is rated 1 notch below Malaysian Re’s long-term IFS rating to reflect its status as an unsecured and subordinated obligation of the Reinsurer.
Malaysian Re’s credit fundamentals are expected to remain supportive of its ratings despite its sub-optimal earnings performance in FY Mar 2016. The Reinsurer’s pre-tax profit plummeted to RM7 million from RM196 million a year earlier. The decline had largely been triggered by a rise in catastrophe and attritional losses, the bulk of which were below their respective retrocession deductible levels. A significantly weaker ringgit in the second half of 2015 had inflated its overseas claims, exerting further downward pressure on underwriting results. Consequently, the Reinsurer’s claims and combined ratios deteriorated to a respective 74% and 107% in FY Mar 2016 (FY Mar 2015: 61% and 93%). Moreover, subdued investment yields amid financial market volatilities had limited the contribution to Malaysian Re’s bottomline.
As at end-March 2016, Malaysian Re had boosted its reserves coverage to 143.6% (end-March 2015: 127.2%), by making full provision to treaty limits for all its large claims, unless specified loss amounts were advised by cedents; potential claims were adequately supported by its reserves. At the same time, the Reinsurer’s liquidity and capitalisation remained healthy while its position as Malaysia’s national reinsurer, anchored by its disciplined underwriting, continued supporting its long-term viability and ratings.
As the country’s national reinsurer, Malaysian Re has cultivated long-standing and strong relationships with local cedents. The Reinsurer accounted for 52% of the industry’s RM1.5 billion of domestic gross premiums in 2015, supported by steady earnings from regulatory “voluntary cession” (VC) arrangements. The gradual reduction in VC levels in recent years has, however, led the Reinsurer to expand overseas. This diversification entails higher risks and greater volatility, particularly in catastrophe-prone regions. That said, Malaysian Re has a selective expansion strategy and is disciplined in its underwriting and risk management.
Going forward, a persistently weak underwriting performance (with a combined ratio of above 105%) and a capital-adequacy ratio that falls below the Reinsurer’s individual target capital level without signs of improvement would exert negative pressure on its ratings. Conversely, the ratings may be upgraded if the Reinsurer can demonstrate sustained improvements in its financial performance while maintaining favourable liquidity and capital positions.
Analytical contact Media contact
Siew Shwu Ying Padthma Subbiah
(603) 7628 1071 (603) 7628 1162
shwuying@ ram.com.my padthma@ram.com.my
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