A.M. Best affirms ratings of Islamic Arab Insurance Co. 'Salama'

The outlook for both ratings remains stable. The ratings reflect Salama's good business profile and strong risk-adjusted capitalisation.

Offsetting factors include the effect of the Thai flood losses on Salama's otherwise consistent underwriting profitability and its fast growth in gross written premiums in 2011.

Salama benefits from a well diversified business profile geographically, along with BEST RE (L) Limited's (BEST RE) reinsurance business in Southeast Asia and Salama's direct insurance portfolio in the United Arab Emirates.

Salama has subsidiaries and affiliates writing direct insurance business in Algeria, Egypt, Senegal and Saudi Arabia. Salama's focus on property business is gradually reducing as the significance of its smaller subsidiaries across the Middle East and North Africa region increases. A.M. Best expects Salama to experience overall contraction in underwriting in 2012 and 2013 as it reduces gross written premiums at BEST RE whilst growing its other regional subsidiaries.

Gross written premiums increased by 23% in 2011 to Dhs2,268m ($618m) due largely to a significant motor treaty written by BEST RE. This contract will not be renewed in 2012 as part of BEST RE's plans to reduce gross written premiums by 15% in each year to 2014, concentrating on removing unprofitable business from its portfolio.

Salama's overall level of profitability was reduced in 2011 by the effects of the Thai flooding on its subsidiary, BEST RE, with an improved performance by Salama compensating for this.

Between 2006 and 2011, Salama's combined ratio for non-life business fluctuated between 91% and 98%. In 2011, Salama achieved a combined ratio for non-life business of 98.1%, and A.M. Best expects the company to improve underwriting and overall performance as it rebalances its portfolio.

A.M. Best considers that Salama's level of risk-adjusted capitalisation is likely to remain at a strong level over the medium term. Salama's reinsurers generally hold an A.M. Best FSR of A- (Excellent) or above.

The group maintains a relatively conservative investment allocation, with 75% of investments held as short-term deposits, 9% as equities and 16% as real estate. A significant proportion of future profits are expected to be retained in order to support business growth.

A.M. Best views Salama's risk management capability as developing, with capital requirement and planning ability concentrated at BEST RE and a lower standard at other operating entities. In A.M. Best's opinion, there is no prospect of upward pressure on Salama's ratings in the short term.

Downward pressure might arise if the company's capital adequacy is materially impacted by significant increases in gross written premiums or poor underwriting performance.

The methodology used in determining these ratings is Best's Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best's rating process and contains the different rating criteria employed in the rating process.