Best Affirms Malaysia’s Labuan Re Ratings

A.M. Best Co. announced that it has affirmed the financial strength rating of “B++” (Very Good) and the issuer credit rating of “bbb” of Malaysia’s Labuan Reinsurance with a stable outlook.

“The rating reflects the company’s improved underwriting performance, solid capitalization, conservative investment strategy and strong liquidity portfolio,” Best said.

The rating agency noted: “Labuan Re has achieved consistent improvement in underwriting performance over the past two years. The company recorded underwriting profits of $5.5 million in fiscal year 2003, compared to 2002’s loss of $9.5 million. The company has achieved the lowest combined ratio over the last five years, benefiting from the significant improvement in the loss ratio to 64 percent in fiscal year 2003 from 77 percent in fiscal year 2002.

“The company is securely capitalized with a low net premium leverage ratio. The local solvency margin, which stood at 615 percent at the end of fiscal year 2003, reflects Labuan Re’s adequate solvency position. The Best’s Capital Adequacy Ratio, which measures capitalization on a risk-adjusted basis, further demonstrates solid financial strength of the company.

“Driven by its conservative investment strategy, Labuan Re maintained strong liquidity of its investment portfolio with 59 percent of the total assets invested in cash and 28 percent in fixed income securities as of June 2004. The operating cash flows have been maintained at a good degree of financial flexibility with limited exposure to the equity market.”

Best indicated, however, that “offsetting these positive factors are the weak profitability of the overseas portfolio, declining investment returns and comparatively small market size in the local market. Given the company’s existing underwriting capacity, along with intensified competition against other domestic and foreign reinsurers in the overseas market, Labuan Re will continue to face challenges in achieving a high profit in the intense international reinsurance marketplace.

“The net investment yield declined to 1.7 percent in fiscal year 2003 from 3.1 percent in the previous year. With expectations that the increase in interest rates will be modest in the mid term, the continuously low investment return will exert extra pressure on Labuan Re’s investment yield and the overall profit margin.”