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Dubai-Based Insurer Salama/IAIC Outlook Revised To Stable; 'BBB+' Ratings Affirmed

August 4, 2014

Standard & Poor's Ratings Services has revised its outlook on Dubai-based Salama/Islamic Arab Insurance Co. (P.S.C.) (Salama/IAIC) to stable from negative. At the same time, S&P affirmed the 'BBB+' counterparty credit and financial strength ratings on Salama/IAIC.

"In our view, the uncertainty surrounding liabilities at Salama's reinsurance subgroup, Best Re, has significantly reduced. Best Re has reached a final, out-of-court settlement with a South Korean insurer and all legal proceedings in this respect have now ceased. At the same time, in respect of its remaining liabilities from the 2011 Thai floods, we also understand that Best Re has reached final agreements to settle most of the claims, and that the claims of only a few cedants remain subject to negotiation. Best Re has written almost no new non-life business in 2014. We believe that these developments reduce risk to Salama's creditworthiness, triggering the outlook revision.

"The ratings reflect our view that the consolidated Salama/IAIC group displays a satisfactory business risk profile and a strong financial risk profile. The satisfactory business risk profile is based on our assessment that the industry and country risk from the consolidated group's various operations is intermediate, and our view that the group's competitive position is adequate. Significantly reduced premium income from Best Re has resulted in reduced premium levels and earnings potential at the consolidated group level, and narrowed its sources of premium income to the Middle East and Africa.

"We consider the consolidated Salama/IAIC group's capital and earnings to be very strong, its financial risk position to be moderate, and its financial flexibility to be adequate, causing us to assess the financial risk profile as strong. We combine these business and financial risk factors to derive our anchor of 'a-'. However, the group credit profile (GCP) is one notch lower, at 'bbb+', because we assess enterprise risk management (ERM) to be of high importance to the group, but only adequate, and we view general management and governance as fair.

"We expect consolidated capital adequacy to remain at extremely strong levels for the next two years through earnings on primary insurance and the substantial reduction of risk at Best Re. Salama/IAIC's primary insurance operations continue to perform well. It has particularly good prospects in the life and non-life markets in the UAE and in Algeria. Historically, Salama has a track record of consistent underwriting profitability on its primary book of insurance business, and we expect the group to revert to underwriting profitability in 2014 and beyond. We anticipate an annual combined ratio of between 95 per cent and 98 per cent in 2014-2016. We expect investment activities to support earnings prospectively, although investment yields will remain at less than two per cent.

"The stable outlook reflects our expectation that Salama/IAIC's capital, maintained by earnings, will continue to support the current ratings through 2016. We expect Salama/IAIC's business model will continue to develop, as its business in its core markets of the UAE, Algeria, and other neighbouring countries grows steadily and profitably.

"We would consider lowering the ratings if Salama continued to underperform its peers in its domestic markets, which we do not anticipate in our base-case scenario. We may also consider lowering the ratings if the company increased its business volumes materially in markets where industry and country risk is higher, such as some North African countries. A material increase in the company's exposure to higher-risk assets could also lead us to lower the ratings.

"We do not expect to raise the ratings over the two-year rating horizon. Because market conditions are generally soft, we do not consider it likely that Salama/IAIC will substantially enhance its competitive position or outperform its peers materially. Nor do we expect sufficient seasoning of ERM and governance improvements to cause us to revise our assessment of these factors in the medium term, although this could occur over the longer term."

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Source: CPI Financial

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