Standard & Poor’s Ratings Services said that it lowered to ‘BBB-‘ from ‘BBB’ the counterparty credit and insurer financial strength ratings on United Arab Emirates (UAE)-based takaful insurer, Dubai Islamic Insurance and Reinsurance Co. (Aman). The outlook is stable.
The ratings reflect our view that despite Aman’s good competitive position in the UAE and adequate capitalization, its overall financial profile has declined as it pursued marginal, high-risk investment strategies. Its investment losses were compounded in 2011 by underwriting and overall operating losses. These losses have resulted in part from the need for additional write-downs on the substantial portfolio of equities, and also from technical deficits on the main motor account.
Aman’s capitalization remains adequate, although the absolute level of shareholders’ funds fell to AED151.1 million ($41.1 million) in the interim accounts to end-September 2011, down from AED176.9 million at the start of the year. This decline was caused by the balance-sheet depreciation of certain equity investments and to combined technical and investment losses totaling AED20.7 million on the income statement. Although Aman’s capital adequacy was alleviated by a slight fall in premium contributions during the first nine months of 2011, the prospective risk-based capital position remains adequate. Aman therefore faces what we expect to be a difficult trading year in 2012 with a reduced capital base that could shrink even further if investment values fall or the company fails to generate satisfactory technical returns.
Nevertheless, despite growing competitive pressures, we expect Aman to maintain its traditionally good position in the UAE insurance sector, particularly Dubai. We anticipate that gross premiums written in 2011 will approach AED500 million (AED140 million, net of reinsurance). We expect it to achieve this through well-diversified distribution channels; it uses agents, brokers, local bank alliances, and direct sales through branches. It also has good prospects for further development of its life and health insurance activities. By using its local market knowledge and technical expertise, Aman benefits from good access to aviation and other local commercial lines business that it can then substantially cede to international reinsurers in exchange for largely risk-free fees and commissions.
The stable outlook reflects our view that the economic and industry risks confronting Aman are now fully factored into the ratings. We expect that, inclusive of asset depreciation, Aman will declare comprehensive losses for 2011 of around AED18 million, and that shareholders’ funds will decline to approximately AED150 million. However, we expect a modest improvement in 2012, when premium and commission revenues should stabilize at or slightly above the 2011 levels. We anticipate that Aman will return to technical profitability in 2012, achieving net combined ratios below 100%.
During 2012, we also expect management to reduce risk in its operations through selective underwriting and prudent use of reinsurance. However, given the company’s unwillingness to realize losses on equity holdings, we do not expect Aman to reduce its market risk. Consequently, if shareholders’ funds fall further due to depreciation of investments, we would expect management to take radical remedial action, and if necessary raise new capital.
If current levels of market risk remain, but satisfactory earnings are achieved, the ratings will remain unchanged. If losses continue to diminish capital levels, then we will consider a negative rating action. We see no realistic upside potential for the ratings in the near term.