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Ratings On Dubai-Based Salama / Islamic Arab Insurance And Its Core BEST RE Subsidiaries Kept On CreditWatch Negative
In our opinion, uncertainties relating to potentially significant loss-of-handset reinsurance liabilities in South Korea have hurt the competitive position and earnings of Salama/IAIC and its wholly owned BEST RE reinsurance subgroup. Nevertheless, capitalization across the Salama/IAIC group remains strong at AED 1,263.4 million (US$344.3 million), and risk-based capital adequacy appears strong or better under realistic stress scenarios. Although these ongoing uncertainties might have damaged the group’s competitive position and earnings potential in the short-term, if they remain strong, the group’s performance could return to pre-2011 levels, which were satisfactory. The ratings therefore remain on CreditWatch.
LONDON (Standard & Poor’s) May 6, 2013–Standard & Poor’s Ratings Services said today that it is keeping its ‘A-‘ counterparty credit and financial strength ratings on Dubai-based Salama/Islamic Arab Insurance Co. (P.S.C.) (Salama/IAIC) and its wholly owned core reinsurance subsidiaries, Malaysia-based BEST RE (L) Ltd. and BEST RE Family (L) Ltd. (collectively, the BEST RE subgroup) on CreditWatch with negative implications. Standard & Poor’s placed the ratings on CreditWatch negative on Jan. 25, 2013.
The CreditWatch placement followed reports of potentially significant liabilities at BEST RE (L) Ltd. in respect to loss-of-handset (mobile telephone) reinsurance written in South Korea. Although BEST RE (L) is now formally contesting these liabilities through the South Korean courts, legal resolution could take many more months. Because these potential liabilities follow substantial losses that BEST RE (L) incurred relating to the Thai floods of 2011, we believe that any protracted uncertainty relating to BEST RE (L)’s liabilities in South Korea and elsewhere could damage the competitive position– and therefore the earnings potential of the BEST RE subgroup. That subgroup constitutes a major part of the consolidated Salama/IAIC group (69% of consolidated gross premiums in 2012), and so we believe that both the competitive position and the earnings potential of the consolidated Salama/IAIC group are also threatened.
In our view, this problem is compounded by Salama/IAIC management not having replenished BEST RE’s capital to strong levels, though it remains adequate.
However, we continue to regard consolidated capitalisation at Salama/IAIC as at least strong under realistic stress scenarios. When we assess capital adequacy in terms of our risk-based capital model, consolidated outcomes are also strong or better under these scenarios. We believe the competitive position of the consolidated Salama/IAIC group remains strong, but we could revise this assessment downward to only good, depending on the extent of franchise damage and how successfully the group has addressed these risks.
Meanwhile, prospective near-term earnings remain difficult to predict given the situation in South Korea. If the currently disputed loss-of-handset liabilities become a legitimate claim recognised by the South Korean courts, then losses at the BEST RE subgroup could prove significant. In this case, a capital increase or mitigation by the parent, Salama/IAIC, might become essential to preserving BEST RE’s reputation and earnings capacity.
The CreditWatch placement reflects the uncertainties around the extent of the weakening in the reputation and revenue-generating capacity of BEST RE and its potential to undermine the group’s ratings. If we do lower the ratings, we expect that they will remain investment grade. If, however, we find the consolidated competitive position of Salama/IAIC and its subsidiaries to remain strong, and prospective earnings capacity to remain at least satisfactory, we could affirm the Salama/IAIC ratings instead. We expect to resolve CreditWatch status of the ratings by the end of July 2013.
Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor’s public Web site at www.standardandpoors.com.