A.M. Best Downgrades Al Fajer Retakaful Insurance Company KSCC; Ratings Remain Under Review With Negative Implications

Jun 18, 2009

OLDWICK, NEW JERSEY, U.S.A., June 18, 2009—A.M. Best Co. has downgraded the financial strength rating to B++ (Good) from A- (Excellent) and the issuer credit rating (ICR) to "bbb+" from "a-" of Al Fajer Retakaful Insurance Company KSCC (Al Fajer Re) (Kuwait). The ratings remain under review with negative implications.

The downgrades and under review status with negative implications of Al Fajer Re reflect the lack of management controls over the investment strategy in the first year of the company's operation. A large portion (around 30%) of the company's total investments is placed with The Investment Dar (TID), (a Kuwaiti investment company) which has defaulted in May 2009.

A.M. Best is of the opinion that there was both lack of controls and weak corporate governance on the investment side of business in the first year of Al Fajer Re's operation. This translates into a partial failure of the company's enterprise risk management (ERM). Following the departure of the Managing Director in September 2008, the investment committee is only comprised of members from the main shareholders with the senior management of Al Fajer Re not having investment input. Al Fajer Re's investment policy, which allowed for the very high concentration of investments in one single issuer (30%), is currently suspended and until further notice funds upon maturity are being placed with regional banks offering governmental guarantees. Despite the new investment strategy being very conservative, A.M. Best believes that there is a risk of concentration in certain banks, as there are not a large number of Shariah compliant banks.

Despite the company's effort to implement new measures for the control of investments going forward, A.M Best believes that this is likely to take some time to be put in place and start showing results.

A.M. Best notes, however, that Al Fajer Re has met its underwriting targets both in terms of gross written contributions and performance, as projected in the initial business plan (the figures are according to the draft accounts for the financial year ended March 2009). A.M. Best expects the company to grow up to 40% per annum in the next two years (lower than the 65% originally anticipated) with a combined ratio below 100% and start producing positive underwriting results from 2011 and improving thereafter.

In addition, A.M. Best believes that Al Fajer Re's risk-adjusted capitalization on a combined basis is strong and is likely to remain at a strong level even in the event of non-recoverability of TID investments. However, risk-adjusted capitalization for the retakaful fund on a stand alone basis is no longer self sustainable in this case. The recent default of one of the main shareholders of Al Fajer Re (with a 20% stake), Global Investment House (Kuwait) (GIH), has not changed the company's commitment to the reinsurer; however its restructuring plan is being followed closely.

For Best's Credit Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

The principal methodologies used in determining these ratings, including any additional methodologies and factors that may have been considered, can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.