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S&P affirm ratings on Oman Insurance Co 'A-'; outlook positive

July 20, 2014

Standard & Poor's Ratings Services have affirmed its 'A-' insurer financial strength and counterparty credit ratings on United Arab Emirates (UAE)-based Oman Insurance Co. (PSC). The outlook remains positive.

"We believe the current management team at Oman Insurance, which has been in place since 2011, has been able to effectively steer the company through a period of rapid change and significant restructuring. The team brings a wide depth and breadth of experience to the organization, and has helped drive advances in its strategic planning, financial management, and execution of key initiatives. Furthermore, we believe accountability across the team is more widespread due to the establishment of a cohesive executive committee, with clearly defined roles and responsibilities. As a result of improving management and governance practices at Oman Insurance, we have revised our assessment of management and governance to satisfactory from fair.

"We believe management has demonstrated the ability to formulate a clear and ambitious strategy for the organization and has now developed a track record of implementation and delivery on its key targets. In our view, the expertise of the management team has been supportive of strategic execution and prompted significant improvements in the company's financial strength. The company has demonstrated this through significant derisking and deleveraging of its balance sheet, by formalizing its internal processes and risk management framework, as well as making its first strategic acquisition in Turkey.

"During the past two years, Oman Insurance has seen material improvements in its financial risk profile, which in our opinion should help reduce capital volatility and support the company's good earnings track record. Steps taken to introduce more stringent controls around investment policy, a defined investment risk appetite, and commitment to maintain a more conservative investment stance through asset diversification have been successfully executed by the management team, in our view.

"The affirmation reflects our view of the company's satisfactory business risk profile and its very strong financial risk profile. Its increasingly diversified competitive position continues to be underpinned by its position as one of the market leaders in the UAE insurance market (by gross premium written in 2013). We believe that Oman Insurance has proven resilient to a period of significant change within the company and that it is now positioned to sustainably diversify across the region. While the company grew 20 per cent in 2013, we also note deterioration in technical earnings, with a higher than average net combined (loss and expense) ratio of 93 per cent (2012: 84 per cent). We expect premium growth of 10 per cent-15 per cent for 2014 as the company grows its reinsurance business and considers other regional expansion opportunities, with a combined ratio sustainably below 90 per cent through to 2016 as we expect the impact of legacy issues and some distortion from large losses from prior years will not be repeated prospectively.

"Our assessment of industry and country risk for Oman Insurance remains intermediate. Despite the company's diversification strategy into Turkey and the wider Gulf region away from the UAE, this assessment is unlikely to change until international operations become more significant in scale in markets that we view as having differing industry and country risk to that of the UAE. Our assessment of Oman Insurance's very strong financial risk profile reflects its very strong capital and earnings, supported by extremely strong capital adequacy and positive earnings generation. We consider that Oman Insurance has sufficient capital for prudent growth in line with its historical underwriting track record, and would expect this to be maintained through to 2016.

"We continue to apply our insulated ratings criteria to Oman Insurance to reflect its independence from its parent, UAE-based Mashreq bank, which owns 63.65 per cent of the company. In assessing Oman Insurance, we use the group credit profile (GCP) of Mashreq bank as the starting point, which includes potential government support for the parent bank. The ratings on Oman Insurance, in line with its stand-alone credit profile (SACP), cannot exceed the GCP (currently 'bbb+') by more than three notches. Currently, the ratings of Oman Insurance are one notch higher than the GCP.

"The positive outlook reflects our expectation that the ongoing diversification of Oman Insurance's revenues and earnings will likely improve its business risk profile and that its financial risk profile will not weaken as a result.

"We may raise the ratings over the next 12 months if expansion plans help to develop a sustainable geographic footprint outside of the UAE, while returning to underwriting profitability discernibly better than the market."

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Source: CPI Financial

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