(The following statement was released by the rating agency) Overview -- During 2012, Oman Insurance'sOIC.DU exposure to high-risk assets has been reduced well beyond our expectations; this should reduce potential volatility in earnings and capital adequacy. In addition, material reductions in financial leverage are expected to improve the company's financial flexibility. -- We consider that these developments signal an increasing awareness of enterprise risk management and support the strategic ambitions of the new management team. -- We are therefore raising the long-term ratings on UAE-based Oman Insurance to 'A-' from 'BBB+'. -- The stable outlook reflects our expectation that Oman will maintain a strong financial risk profile over the rating horizon. Rating Action On Nov. 16, 2012, Standard & Poor's Ratings Services raised its long-term counterparty credit and insurer financial strength ratings on Oman Insurance Co. (PSC) to 'A-' from 'BBB+'. The outlook is stable. Rationale The upgrade reflects our view of the progress made by Oman Insurance in improving its financial risk profile over the past 12 months. The improvements go well beyond our expectations and should reduce capital volatility and support the company's already strong operating performance track record. Oman Insurance, which is based in the United Arab Emirates (UAE), has sharply reduced certain of the concentrated positions in its investment portfolio. As a result, on Sept. 30, 2012, high-risk assets represented just over 40% of the portfolio (2011: 61%). Equity and real estate investments now amount to 64% of total capital (2011: 96%). Under our base-case scenario, we expect the proportion of equity securities to fall further by mid-2013 to just below 15% of invested assets. We also anticipate that high-risks assets will total around 25% of invested assets and roughly 30%-35% of total capital by year-end 2013. At that point, we expect Oman to be operating in line with its long-term target asset allocation and it should therefore remain around this level. We had previously considered Oman's equity-orientated investment strategy to be high-risk and a weakness to the rating, but we see management's proven ability to reduce investment risk and the development of more-stringent controls to avoid such concentrations as a positive factor. The management team that took over during 2011 has in our opinion been successful in managing down the company's investment risk profile in line with its stated tolerances. We anticipate the company's commitment to maintaining a more-conservative investment stance through asset diversification should result in reduced earnings volatility and improved risk-based capital adequacy. In our opinion, the group's overall financial risk profile is now considered strong and has improved significantly through 2012 as investment risk has fallen. According to our risk-based model, capital adequacy is currently extremely strong, largely due to reduced investment risk and strong year-to-date earnings. We expect capital adequacy to remain at least strong over the rating horizon. In our opinion, Oman's financial flexibility is now commensurate with an 'A-' rating, as management have successfully paid off most of the company's long-standing bank facilities. Our base-case scenario anticipates that financial leverage will be roughly 5%-8% by year-end 2012 and that remaining investment leverage will be paid off in full through early 2013. We recognize the potential for increased risk-based capital requirements over the rating horizon, given the company's strategic growth ambitions and its intention to diversify through writing inward facultative reinsurance business in the Middle East and North Africa (MENA) region. However, we consider that Oman has sufficient capital for prudent growth in line with its historical underwriting track record. Oman's operating performance is considered a strength to the rating and has not been constrained by the change in management team. We anticipate that Oman will continue to outperform the market and post top-line growth of between 5%-10% in 2013, as competitive pressure in non-life lines is offset by growth in its life business. Furthermore, we expect Oman's combined ratio to be around 85% and in line with its historical performance; this is impressive compared with similarly rated peers. (Lower combined ratios indicate better profitability. A combined ratio of greater than 100% signifies an underwriting loss.) We continue to apply our insulated ratings criteria to Oman to reflect its independence from its parent, UAE-based Mashreqbank (BBB+/Stable/A-2), which owns 63.65% of the company (see "Group Rating Methodology and Assumptions," published on Nov. 9, 2011). Mashreqbank benefits from two notches of government support under our criteria for rating government-related entities (see "Rating Government-Related Entities: Methodology And Assumptions," published on Dec. 9, 2010). In assessing Oman under both these criteria, we have used Mashreqbank's stand-alone credit profile (SACP)--not our public rating--as the base point. Thus, the ratings on Oman can be up to three notches above the SACP of its parent (currently 'bbb-'), as long as this does not exceed Oman's own SACP, which is now 'a-'. Outlook The stable outlook reflects our expectation that Oman will maintain a strong financial risk profile over the rating horizon, demonstrated by a conservative investment strategy in line with newly implemented guidelines and minimal leverage. It also reflects our expectation that the company's strong operating performance track record will not be diminished by its growth strategy. We anticipate that the company will retain its strong competitive position within the local market as it expands both organically and through strategic partnerships. We could lower the ratings over the next 12-24 months if capital adequacy were to deteriorate below a strong level according to our model or if we observed a return to high levels of financial leverage. This could result from a material change in asset allocation toward high-risk assets, increased capital requirements triggered by aggressive expansion or material acquisitions, or if underwriting profitability metrics significantly underperform those assumed in our current base-case scenario. In addition, any actions that jeopardized the company's financial strength would be negative for the rating. We could also lower the rating if the autonomy of Oman from its parent were compromised to such an extent that it is no longer considered an insulated subsidiary, according to our criteria. Oman's SACP is currently three notches above that of its parent. Under our insulated subsidiary rating criteria, the ratings on Oman cannot exceed Mashreqbank's SACP by more than three notches. This means that if we revise down Mashreqbank's SACP, this would also trigger a lowering of the ratings on Oman. Conversely, the ratings on Oman cannot be raised above the current level without an improvement in the SACP of Mashreqbank. The outlook on Mashreqbank is currently stable. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal. -- Principles Of Credit Ratings, Feb. 16, 2011 -- Group Rating Methodology And Assumptions, Nov. 9, 2011 -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010 -- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010 -- Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 -- Interactive Ratings Methodology, April 22, 2009 Ratings List Upgraded
To From Oman Insurance Co. (PSC) Counterparty Credit Rating Local Currency A-/Stable/-- BBB+/Stable/-- Financial Strength Rating Local Currency A-/Stable/-- BBB+/Stable/-- (Caryn Trokie, New York Ratings Unit) ((Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net)) Keywords:
