TEXT-Fitch revises Malaysia's Labuan Reinsurance's outlook to stable

Mon Dec 17, 2012 2:34am EST

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(The following statement was released by the rating agency)

Dec 17 - Fitch Ratings has revised the Malaysia-based Labuan Reinsurance (L) Ltd's (Labuan Re) Outlook to Stable from Negative. At the same time, its Insurer Financial Strength (IFS) Rating has been affirmed at 'A-'.

The revision in Outlook reflects the turnaround in Labuan Re's operating performance for the first nine months of this year, following weakened financial performance and capitalisation in 2011 as a result of several catastrophes in Asia. Based on unaudited figures for 9M12, Labuan Re's combined ratio (aggregation of the loss ratio and expense ratio) is estimated to have improved to about 100.5% (FY11: 125%), following various risk management initiatives to improve the quality of its portfolio.

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

Labuan Re has always sought to maintain a robust capital buffer to support business growth and absorb shocks. Its regulatory solvency ratio fell to 232% at end-2011 from 396% in end-2010, but remains above the regulatory minimum of 100%. Labuan Re in July 2012 issued USD55m callable cumulative subordinated bonds with a tenor of up to 50 years to boost capital resources. Consequently, financial leverage, measured as debt to total capital, rose 27% at end-September 2012 from 0% at end-2011, albeit still acceptable for its current rating.

Key rating triggers for an upgrade include a sustained improvement in its underwriting performance, with the combined ratio falling consistently below 95%, as well as boosting capital to commensurate with business growth. Conversely, key rating triggers for a downgrade include a significant deterioration in operating performance, with the combined ratio consistently above 105%, or a weakening of capitalisation relative to its business profile, with the financial leverage ratio increasing above 35% for an extended period.

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