London: Standard & Poor’s Ratings Services on Tuesday assigned it’s 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,” S&P in a statement said.
“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% of gross premium written in 2013), Kuwait (18%), Oman (15%), and Qatar (11%).
“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% 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% from 120% between 2014 and 2016, based on stable loss
performance and falling expenses. We predict investment yield will remain
modest at around 2%, 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%) and bonds (26%). 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% 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% 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 AED33
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% 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.”