Upgraded SALAMA/Islamic Arab Insurance’s ratings to “A-” with a stable outlook

Standard & Poor’s has raised to ‘A-‘, up from ‘BBB+’ the counterparty and insurer financial strength of Dubai based Islamic Arab Insurance as well as the core operating subsidiaries of its wholly owned Labuan-based reinsurance sub-group. The outlook is stable.The ratings principally reflect the Salama/IAIC group’s strong capitalization, strong consolidated business position, and now strong and stable underwriting performance. Partially offsetting factors include investment strategies that are assessed as good, but which are nonetheless relative weaknesses because they introduce potential volatility through significant exposures to equity and property assets. Additionally, our analysis reflects the potential industry and economic risks relating to certain regions and lines of business in which the group is active.

The group enjoys a strong and still-developing business position with significant insurance operations in the United Arab Emirates (UAE), Algeria, Egypt, Senegal, Saudi Arabia, and Jordan. The business profile of the group also benefits from the strong, inward reinsurance franchise maintained by its wholly owned subsidiary, BEST RE, which writes inward reinsurance in over 60 countries across Asia, the Middle East, and Africa.

Consolidated group capitalization is also strong relative to risks; total shareholders’ funds at end-June 2011 were UAE dirham (AED) 1,634.7 million (including AED47.1 million of minority interests and AED191.5 million of intangible items). The quality of capital is deemed high, exhibiting only modest use of debt and little reliance on the revaluation of investments. Prospective risk-based capitalization is likely to remain at least strong, and the forecast position as of end-2011 is extremely strong. In S&p’s view, reinsurance protection is satisfactory, while reserving is appropriate relative to the short-tail, stable insurance, and inward reinsurance exposures underwritten by the group.

Operating performance across the group is also now strong. The group has displayed particularly stable underwriting results even across economic and industry cycles. The group’s net combined ratios have continued to cluster around the five-year average of 95.9%, despite current “soft” inward reinsurance terms constraining BEST RE in many regions. This is indicative of prudent risk selection.

Investments are regarded as good by S&P. However they are also potentially volatile given the significant, AED694.7 million holding of equities and the similarly significant AED279.4 million invested in properties reported at end-June 2011. The strong capital base of the group and the fact that a significant proportion of these equities are mutual fund assets for family takaful (life and savings) policyholders are offsetting factors. However, the significant levels of market risk leads S&P to regard the investment strategy as a relative weakness in the overall assessment of the group’s otherwise strong financial profile.

The stable outlook reflects the view that Salama/IAIC, its subsidiaries, and affiliates will together continue to enhance the group’s strong business and financial profiles. S&P anticipates that they will do so through a combination of selective business expansion and improving earnings; overall net income is expected to be about AED110 million for the whole of 2011. Gross and net premium income are both expected to increase by not more than 20% annually over the two-year outlook period, while net combined ratios are forecast to remain stable at about 95%.

S&P expects the group to continue to diversify geographically and by line of business. The ratings agency anticipates particular growth in UAE life activities and in the Saudi Arabian and Algerian insurance operations, as well as at BEST RE. Capitalization and quality of capital are expected to remain a particular strength. Modeled risk-based capital outcomes are likely to remain at least strong prospectively, and probably very strong as retained earnings largely offset any strains associated with forecast business growth. However, the group management is expected to increase paid-up share capital at BEST RE to $200 million in 2012, up from the current level of $150 million.

Any rating uplift is viewed as remote in the next two years. However, ongoing improvements in earnings and business position could ultimately prove supportive of a higher rating. This would particularly be the case if, at the same time, revenues become better balanced between the group’s insurance and reinsurance activities. S&P could take a negative rating action if earnings fall below expectations, or if the group fails to maintain strong capitalization, in line with expected growth in underwritten and investment risk exposures.