(The following statement was released by the rating agency)
Dec 21 -
— Capital remains strong across the consolidated Salama group. The group’s current and prospective risk-based capital adequacy appears extremely strong when modeled.
— The group’s overall competitive position is also strong, with leading insurance operations in the United Arab Emirates, Algeria, Egypt, Senegal, and Saudi Arabia, and also the separate operations of the BEST RE subgroup, which writes inward reinsurance in over 60 countries.
— Operating performance suffered in 2012 due to heavy claims at the BEST RE subgroup following floods in Thailand in late 2011. Nevertheless, these losses have now been paid or fully reserved and we expect operating performance in 2013 and 2014to return to the higher levels seen historically.
— We have therefore affirmed the ‘A-‘ ratings on Dubai-based Salama/IAIC and on its strategically core operating subsidiaries in the Malaysia-based subgroup, BEST RE.
— The stable outlook reflects our view that both the business and financial profiles of the group will remain strong prospectively.
On Dec. 21, 2012, Standard & Poor’s Ratings Services affirmed its ‘A-‘ long-term counterparty credit and insurer financial strength ratings on Dubai-based Salama/Islamic Arab Insurance Co. (P.S.C.) (Salama/IAIC) and its core operating subsidiaries BEST RE (L) Ltd. and BEST RE Family Ltd. (collectively, the BEST RE reinsurance subgroup), both based in Labuan, Malaysia. The outlook is stable.
Our ratings reflect the Salama/IAIC group’s particularly strong capitalization, strong consolidated competitive position, strong liquidity, and similarly strong financial flexibility. These factors are partially offset by the group’s operating performance, which, although typically good, was hit in 2011 and 2012 by severe, protracted losses relating to the floods in Thailand during late 2011. We also assess the group’s investments as good, but a relative weakness to the overall ratings. The group is exposed to market risk through its still-sizable property and equity asset holdings, and to the credit risk implicit in holding some cash deposits with lower-rated or unrated banks.
Salama/IAIC in the United Arab Emirates (UAE), together with its unrated insurance subsidiaries and affiliates in Algeria, Egypt, Senegal, Saudi Arabia, and Jordan, and its large, wholly owned reinsurance subgroup, BEST RE, enjoys an overall strong competitive position, providing well-diversified, Sharia law-compliant insurance (takaful) and reinsurance (retakaful). The consolidated group wrote UAE dirham (AED) 2.3 billion (US$618.0 million) of gross premium in 2011, or AED1.9 billion net of outward reinsurance protection.
Despite steady growth across the primary insurance businesses of the group, under our base-case scenario we anticipate that overall gross premium could decline by around 12% in 2012 to just below AED2.0 billion given the significant action to reduce risk that has taken place at the BEST RE non-life subsidiary; during 2012 the subgroup largely withdrew from writing facultative reinsurance covers. We expect the reinsurance subgroup’s gross premium to have declined by some 20% in 2012 toward AED1.3 billion, a level of premium that we consider likely to remain reasonably stable in 2013.
The Salama group’s capitalization is particularly strong, with shareholders’ equity as of end September 2012 reported at AED1.5 billion (including AED52.8 million of minority interests and AED190.3 million of intangible items). Although capital is down 7.2% from the AED1.6 billion level reported at the start of the year, the capital adequacy of the group when modeled is still comfortably in excess of our expectations for extremely strong risk-based capital outcomes, and we expect this to continue. Quality of capital is also deemed high, with only modest use of debt, few intangibles, and little reliance on unrealized capital gains on investments.
Meanwhile, reinsurance protection is considered satisfactory, while we regard the strengthened reserving across the group, including the BEST RE subgroup, to be adequate relative to its largely short-tail outstanding claims. In particular, we expect group management to act promptly to ensure that risk-based capital adequacy at BEST RE (L) returns to an at least strong level when modeled, if stand-alone capitalization at the reinsurer proves to have been significantly depleted by losses related to the Thailand floods.
In our opinion, liquidity is also strong; the group has significant cash and near-cash holdings that totaled over AED1.1 billion in June 2012. Cash and marketable securities of AED1.5 billion represented 107.7% of total net technical reserves. Financial flexibility is similarly seen as strong given the surplus capital held by Salama/IAIC, which can be rapidly applied to the support of individual group members. Similarly, we consider that the group has strong access to additional external support, if required.
After the high cost of Thailand flood-related losses in 2011 and 2012, which was somewhat higher than we anticipated, we expect operating performance to return to an at least good level and to become more stable in 2013 as the BEST RE subgroup withdraws from types of activity that could be more volatile. Nevertheless, profitability, although expected to remain at least good, may well remain a relative weakness when compared with the group’s strong ratings. We note that at the end of September 2012, the group reported comprehensive losses of AED114.8 million, although it had been reporting a small profit of AED33.8 million mid-year, and had generated earnings of AED50.1 million during 2011. All these results have been depressed by increased estimates of BEST RE’s Thailand flood-related net exposure. That said, the position is now stabilizing. The net combined ratio for the first nine months of 2012 was 112.2%. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) Our base-case expectation is that the group’s net combined ratios will return to their historical level of around 95% in 2013 and subsequent years, with returns on revenue and equity around 5%.
We regard investments as good, but potentially somewhat volatile given the AED239.9 million holding of equities and, more particularly, the AED274.7 million investment in properties. Given the strong capital base of the group, these investments do not cause us particular concern but they do lead us to regard investments as a modest relative weakness in our overall assessment of the group’s otherwise strong financial profile.
In our view, we are unlikely to raise the ratings over the two-year rating horizon. However, further tangible advances in the sophistication of enterprise risk management across the group, together with an ongoing improvement in earnings to a strong level, could ultimately prove supportive of a higher rating, particularly if at the same time revenues and earnings become better balanced and diversified between the group’s various insurance and reinsurance activities.
We could lower the ratings if both the size and quality of earnings do not improve to sustainably good or better levels as specified above, or if capital adequacy at the group level or any core subsidiary falls for a prolonged period below strong levels.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal.
— Interactive Ratings Methodology, April 22, 2009
— Group Methodology, April 22, 2009
Salama/Islamic Arab Insurance Co. (P.S.C.)
BEST RE Family (L) Ltd.
BEST RE (L) Ltd.
Counterparty Credit Rating A-/Stable/—
Financial Strength Rating A-/Stable/—