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S&P: Dubai based insurer AIG MEA Ltd. assigned 'A' long-term ratings; outlook stable

August 6, 2014

Standard & Poor's Ratings Services today assigned its 'A' long-term counterparty credit and insurer financial strength ratings to Dubai-based AIG MEA Ltd. (AMEA). The outlook is stable.

"Our ratings reflect our view of AMEA's fair business profile, based on its adequate competitive position and moderate industry and country risk. We also take into account our assessment of the company's moderately strong financial profile, reflecting moderately strong capital and earnings, an intermediate risk position, and adequate financial flexibility. We combine these factors to derive an anchor and stand-alone credit profile (SACP) of 'bbb'. Our views of the group's management and governance and enterprise risk management are neutral and do not affect our assessment.

"Our ratings incorporate three notches of support because, in our view, AMEA is strategically important to its ultimate parent, American International Group Inc. (AIG Inc.). The company shares the group name, is highly integrated with its parent, and has benefited from parental capital injections to support new business opportunities. AMEA also benefits from significant reinsurance arrangements, primarily from other AIG group companies. That said, the subgroup's contribution to group income is modest, in absolute terms.

"Overall, we consider that AMEA faces moderate industry and country risk. This reflects the weighted-average assessments of industry and country risk in the four countries where AMEA writes business: Kenya (56 per cent of gross premium written in 2013), Kuwait (18 per cent), Oman (15 per cent), and Qatar (11 per cent).

"Our assessment for Kenya--where AMEA writes over half its business--reflects high country risk and moderate industry risk. Country risk factors balance relatively high economic growth against high risk institutional and governance factors. We expect to see reasonably profitable growth in the Kenyan insurance industry, dented by high levels of fraud and some natural catastrophe exposure. We do not expect planned business growth in AMEA's chosen territories over the next two years to change our assessment of industry and country risk.

"AMEA has an adequate competitive position. In our view, the company's profile has neither overt strengths nor overt weaknesses. The company benefits from some geographic diversity, albeit mostly in small underpenetrated markets. As with other AIG subsidiaries, operating performance constrains our view of competitive position because AMEA has higher expenses than peers. In contrast, loss performance has been better than average across AMEA's targeted territories at about 50 per cent over the past five years. AMEA's higher expenses stem from high initial upfront marketing expenditure and operational recharges levied by the subgroup's parent. Distribution is neutral to our analysis--sales are predominantly intermediated through nonexclusive agents and brokers. A recent exclusive bancassurance agreement will increase controlled distribution, although this is not expected to affect our overall view of the company's competitive position.

"We expect AMEA's moderately strong capital and earnings to remain at the current level. In our base-case scenario, we assume underwriting results will improve to 100 per cent from 120 per cent between 2014 and 2016, based on stable loss performance and falling expenses. We predict investment yield will remain modest at around 2 per cent, reflecting the company's conservative deposit-focused portfolio, and expect no dividends to be paid between 2014 and 2016. By 2016, net income under these conditions will be about UAE dirham (AED) 25 million ($6.8 million). We anticipate that AMEA will maintain capital adequacy at a 'AA' level of confidence and that its parent will provide capital infusions to offset new business strain.

"In our view, AMEA's intermediate risk position benefits from a largely conservative investment portfolio primarily comprising cash (71 per cent) and bonds (26 per cent). The company's assets are exposed to financial sector concentration, although they are mostly held with strongly rated international banks. Kenya's regulator requires AMEA to hold assets in Kenya. As a result, AMEA holds 26 per cent of its total portfolio in high-risk assets such as Kenyan equities and Kenyan long-dated bonds. We expect the proportion to fall to around 20 per cent as the company seeks to reduce its exposure to these assets.

"AMEA has adequate financial flexibility in our view, reflecting a debt-free balance sheet and modest operating cash flows. Its parent has demonstrated its support through capital infusions that supported the acquisition of books of business. We expect capital infusions between 2014 and 2016 of about AED 33 million ($9 million). Any future support would likely be provided by AMEA's parent, the retention of earnings, or through increased reinsurance utilization.

"We regard AMEA's enterprise risk management (ERM) and management and governance practices as neutral rating factors. Our assessment of ERM as adequate reflects our view that risk-management culture and risk controls support the range of risks written by the company and are aligned to those of its parent.

"We assess AMEA's liquidity as exceptional, based on inflows of premium income and a cash-focused investment portfolio. The absence of issued debt or confidence-sensitive liabilities also supports our assessment.

"The stable outlook for AMEA reflects our expectation that the company will post operating performance in line with our base-case scenario and maintain moderately strong capital and earnings.

"We could lower the rating if AMEA's gross premium grew significantly more in Kenya than in other countries, so that Kenyan gross premium written was 70 per cent or more of the total written. Such a concentration would cause us to lower the company's business risk profile because it would be exposed to greater industry and country risk.

"We could also lower the rating if AMEA's parent failed to provide capital injections to support new business in a timely manner, leading us to reassess AMEA's strategic importance to its parent.

"We view an upgrade as unlikely at this stage."

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Source: CPI Financial

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