TEXT-Fitch afrms Malaysia's Labuan Reinsurance at 'A-'

Fri Jun 22, 2012 6:27am EDT

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(The following statement was released by the rating agency)

June 22 - Fitch Ratings has affirmed Malaysia-based Labuan Reinsurance (L) Ltd's (Labuan Re) Insurer Financial Strength (IFS) Rating at 'A-' with Negative Outlook.

The rating reflects Labuan Re's diverse geographical spread with limited business concentration risks, highly liquid investment mix, and sound capital quality. However, the company faces challenges to manage the potentially high catastrophe exposure of its business portfolio and to increase its market presence amid keen competition.

The Negative Outlook reflects uncertainty over Labuan Re's operating performance, following the deterioration in its financial performance and capital level in 2011 as a result of several catastrophes in Asia during the year. Based on unaudited figures, Labuan Re's combined ratio for 2011 is estimated to be about 123.4% (FY10: 99.2%), driven by adverse claims experience arising from the various catastrophes in Asia, including the Thai floods, and earthquake at Christchurch, New Zealand. The company is taking various risk management initiatives to improve the quality of its portfolio.

Labuan Re has always sought to maintain a robust capital buffer to support business growth and absorb shocks. Its regulatory solvency ratio fell below 300% at end-2011 from 396% in end-2010, but still above the regulatory minimum of 100%. Labuan Re currently does not have any debt constraining operational and financial flexibility. Management is finalising its plan to issue up to USD55m callable cumulative subordinated bonds with a tenor of up to 50 years.

The rating may be downgraded if there is further significant deterioration in Labuan Re's operating performance, with a combined ratio consistently above 110%. The rating may also be downgraded if there is a sustained weakening of capitalisation relative to its business profile, with further adverse development of its claims experience from the Thai floods or the regulatory solvency margin ratio falling below 230% for an extended period. Conversely, the Outlook may be revised to Stable from Negative if Labuan Re is able to demonstrate sustained improvement in its underwriting performance as well as its capitalisation to better absorb shocks.

Established in 1992, Labuan Re is licensed under the Offshore Insurance Act, 1990 and incorporated in the International Business and Financial Centre of Labuan, which is an island off the coast of Sabah in East Malaysia. The company writes predominantly general reinsurance business.

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