In assigning Labuan Reinsurance (L) Ltd's (Labuan Re) claims-paying ability rating, MARC has taken into consideration the company's healthy capitalisation with the backing of strong shareholders support, conservative investment strategy, strong liquidity, together with the standing and depth of experience of its management team. Offsetting these factors are the company's modest size, its short operating history, increased competition in its core market and the adverse impact of the current local and regional economic conditions on its underwriting and investment portfolio.

After having sold its book to Malaysian National Reinsurance Berhad at the end of 1995 following the change in its shareholding structure, Labuan Re effectively commenced writing business in 1996. Malaysian business accounted for 88.3% of gross premium in 1997. By September 1998, this proportion had fallen to 68%, primarily due to growing Asian and Middle East volumes. MARC expects that Labuan Re's Malaysian dependence will continue to decline although Labuan Re's presence in Non-Malaysian markets is currently limited and will take several years to be established. The portfolio is somewhat skewed towards Fire (47.8% of gross premiums) and Motor (16.5%), with Marine (12.1%) and Engineering (10.7%) making up the balance. About 48% of the company's business is written via proportional treaties, 26% non-proportional treaties and 26% facultative coverages. MARC expects the premium growth in 1998-1999 to be relatively modest, reflecting the slowdown in the Malaysian market generally. Labuan Re is also expected to face increasing competition with the emergence of well-capitalised global players in its core Malaysian market.

Underwriting results, as evidenced by a combined ratio of 116% (FY 96 : 121%), look poor and reserves at close to 100% of net written premium would normally be at the bottom end of the acceptable range for a reinsurance company. However, a major factor in the loss experience is the short-term impact of currency exchange rates on business written and reserved in one currency and reported in another. Also, as might be expected with a start up operation, expenses have surged with the setting up of new computer systems and the recruitment and training of new staff. MARC believes the company has made a fundamentally good start and reserves are conservatively estimated given the short history and an effectively clean slate from 1996. MARC expects the combined ratio to drop below 105% within the next two or three years as the currency influence unwinds, expenses stabilise and the company develops a wider spread of risks.

Labuan Re's investment policy is conservative with roughly three-quarters of assets invested in highly liquid fixed income securities and short-term deposits. The quality of fixed income assets is high, composed of foreign government bonds and treasury bills. Quoted shares accounted for 21% of total invested assets or 24% of shareholders' funds. MARC expects the investment returns to drive the company's profitability, going forward.

Labuan Re's liquidity is strong underpinned by healthy underwriting cash flow ratios and a high proportion of short-term assets in the investment portfolio. Liquid assets (including bonds quoted outside Malaysia) covered technical reserves by a very strong factor of 3.7x. This is consistent with the overall liquidity to remain strong in the context of a modest growth (if not flat) in premium volumes for 1998 and 1999.

Labuan Re's capital is solid with an available of US$140.2 million in 1997, representing over 35x the Offshore Insurance Act's minimum solvency margin requirement. Operating leverage is expected to remain low, in line with the 0.2x recorded for the past two years, given the modest premium growth projected for this year. Labuan Re has crafted a conservative reinsurance programme to protect itself from large single losses using a combination of facultative reinsurance and proportional and non-proportional treaties. A worst case event would only expose about 0.7% of the company's shareholders funds.

In light of the above factors, MARC has assigned a claims-paying-ability rating of A to Labuan Re.