• Losses and increased uncertainty at the Salama/IAIC group’s largest subsidiary, BEST RE (L), weigh on the business and financial risk profiles of the consolidated group.
• Consequently, we are lowering the core group rating profile, and therefore the ratings on Salama/IAIC itself, to ‘BBB+’ from ‘A-‘.
• Under our recently revised criteria for rating insurers, we regard the Salama/IAIC consolidated group’s business risk profile as satisfactory, and its financial risk profile as strong.
• The negative outlook reflects our concern that any material worsening of either the business risk or financial risk profiles at BEST RE may increase the volatility of the group’s capital and earnings, and may further damage the reputation of the group as a whole.

Standard & Poor’s Ratings Services today lowered to ‘BBB+’ from ‘A-‘ the counterparty credit and financial strength ratings on Dubai-based Salama/Islamic Arab Insurance Co. (P.S.C.) (Salama/IAIC). At the same time, we removed the ratings from CreditWatch with negative implications, where they had been placed on Jan. 25, 2013. The outlook is negative.

Under the revised insurance criteria we published on May 7, 2013, we consider 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 what we view as intermediate risk from the industry and country risk of the consolidated group’s various operations, and an adequate competitive position overall. The group premium is balanced between primary insurance written in the United Arab Emirates (UAE), Algeria, Saudi Arabia, Egypt, Senegal, and Jordan and inward reinsurance written in some 60 countries by the wholly owned BEST RE subgroup. Our adequate assessment reflects this diversification but also the substantial contraction in premium income levels at the BEST RE subgroup. Significantly reduced premium levels at the subgroup have also caused a fall in premium levels and earnings potential at the consolidated group level.

Meanwhile, the strong financial risk profile reflects what we consider are the consolidated Salama/IAIC group’s very strong capital and earnings, its moderate financial risk position, and its adequate financial flexibility.

Under our revised criteria, we combine these factors to derive our anchor of ‘a-‘. However, the group credit profile (GCP) is set one notch lower at ‘bbb+’. It is modified by our assessment of enterprise risk management (ERM) as adequate and also of high importance to the group, combined with our view of general management and governance as fair.

Salama’s primary insurance operations continue to perform well, with particularly good prospects in the UAE (life and non-life) and Algeria. However, the BEST RE subgroup has been hit by major losses from the Thai floods of 2011 and by contested claims that are being made against it by a South Korean cedant for “loss of handset” mobile telephone cover. BEST RE’s franchise has been damaged by the combined effect of these actual and potential losses. The difficulties at BEST RE have prompted senior management to downsize BEST RE’s operations. Given the reinsurance subgroup’s size and significance relative to the consolidated parent group, we consider that the decline in BEST RE’s business position and potential earnings prospects has had a similar, if less significant, effect at the level of the consolidated group as a whole.

We have revised our view of the BEST RE subgroup’s group status to its parent to strategically important from core because the subgroup’s activities, size, and earnings potential have reduced. The change in group status also reflects, to some extent, the parent’s unexpected delay in implementing its stated intention of providing explicit capital support to bolster the balance sheet strength and market perception of BEST RE.

Nevertheless, we anticipate that Salama will provide BEST RE with tangible capital support in the near term, and that group management will continue to reinforce the risk and general management structures across the group, which together should help stabilize the weakening commercial and financial position of the reinsurance subgroup in particular.

Despite the group and subgroup’s current difficulties, we continue to regard the consolidated Salama group’s capital adequacy as extremely strong; its current net assets are approximately UAE dirham (AED) 1.2 billion (US$340 million). Even if potential losses at BEST RE in relation to the loss of handset claims crystallize at the most severe levels currently envisaged, we expect that consolidated capital adequacy would likely return to extremely strong levels within the next two years through earnings on primary insurance and the reduction of risk at BEST RE. However, the absolute size of the Salama/IAIC group remains somewhat modest compared with global peers, and our capital modeling may therefore not fully represent its actual risk position. Thus, we assess the consolidated group’s prospective capital and earnings as very strong, but no higher.

Meanwhile, the Salama/IAIC group’s overall moderate risk position results from concerns relating to potential volatility stemming from BEST RE. To a much lesser extent, it is also hampered by the quality of some of the banks at which the group holds its considerable cash balances.

We regard the group’s liquidity position as adequate. Its financial flexibility is also assessed as adequate, notably because it already has a robust capital base and can generate sufficient additional cash or capital at the consolidated group level to meet what we consider to be relatively modest potential needs. However, the reinsurance subgroup has a higher need for support. As BEST RE is currently unlikely to raise additional funding from external sources, it remains dependent on its parent for ongoing implicit and explicit support. Given our view of BEST RE’s strategic importance to Salama/IAIC, we would expect the parent to offer such support.

Our assessment of management and governance at both the group and subgroup levels is fair, and we continue to assess ERM–which we regard as highly important, given the elevated risk profile of the group, particularly at BEST RE–as adequate. Our assessment is based on what we consider to be the likely benefits of the material restructuring and reduction of risk already implemented at BEST RE, and on the additional reinforcement of processes and procedures already being implemented by senior management. Similarly, we expect that the management and governance procedures, together with planned staffing improvements across the whole group, will continue to be refined and reinforced.

We have also lowered to ‘BBB’ from ‘A-‘ the counterparty credit and financial strength ratings on Salama/IAIC’s wholly-owned, Malaysia-based reinsurance subsidiaries, BEST RE (L) Ltd. and BEST RE Family (L) Ltd. (together the BEST RE reinsurance subgroup). The ratings remain on CreditWatch negative (see “Malaysia-Based BEST RE Entities Downgraded And Kept On Watch On Weakened Group Status And Stand-Alone Credit Profile,” published today).

The negative outlook reflects our expectation that we could lower the rating over the upcoming one to two years if:
• Consolidated capital adequacy falls significantly and permanently below extremely strong levels; or
• Reputational difficulties at BEST RE cause our view of the Salama/IAIC group’s own reputation and consolidated competitive position to weaken.

We could revise the outlook to stable if the situation at BEST RE stabilizes without causing material financial or reputational issues for Salama/IAIC.