AMBest Takaful Review 2011

A.M.
Bests
TAKAFUL Review
2 0 11 E D I T I O N
Contents
2 Foreword
By Vasilis Katsipis, General Manager, Life Insurer Ratings and
Emerging Markets, A.M. Best Company
4 rating Methodology For

takaFul (Sharia CoMpliant) inSuranCe CoMpanieS
10 SaMple takaFul rating Meeting agenda
11 related MethodologieS
11 Understanding Universal BCAR:

A.M. Bests Capital Adequacy Ratio for Insurersand Its Implications for Ratings
15 Assessing Country Risk
19 a.M. BeStS Country riSk tierS

20 FinanCial Strength ratingS and Sovereign Credit riSk FaQ
22 artiCle

Tackling Takaful: Opportunities and Challenges in a Growing Market
24 SaMple aMB Credit reportS
24 ACR ReTakaful MEA B.S.C. (C)

29 Salama Islamic Arab Insurance Company (P.S.C.)
37 guide to BeStS FinanCial Strength ratingS

38 guide to BeStS deBt and iSSuer Credit ratingS
39 ContaCt uS

A.M. Bests Takaful Review
Foreword
hE yEAR 2010 was a year of continued expansion for most Takaful markets, but also one of
continuing challenges, as is reflected by few new
ventures being established. Many operators have
suffered capital losses as a result of the revaluation of assets
at a time when underwriting profits are declining due to
increased competition. More recent start-ups have had to
face harsher competition than they anticipated when their
original business plans were put in place.
VASILIS KAtSIPIS
General Manager,
Life Insurer Ratings
and Emerging Markets
A.M. Best
It seems that in many markets price competition rather

than ethical values has become the selling point for Takaful
products. More Takaful companies are focusing on providing competitive premiums rather than differentiating their
offering on their Islamic principles. This is born out of
necessity as the competition for personal lines of business
has intensified.With capital-intensive projects often postponed as a result of recent economic turmoil, insurance
companies around the world have been increasingly focusing on personal lines business.
While this may be the case globally, it impacts hardest companies that are still in the early
stages of their operation. In recent years there have been several Takaful start-up operations,
especially in the Middle East. All companies, including Takaful, had been benefiting from the
strong growth of the market up until 2008 and in many cases in 2009, too, masking the fact
that many markets have more companies than they could accommodate.The slowdown in
many of these markets in 2010 has meant increasing competition for personal lines of business. In this environment many insurers seem to make brave but unwarranted assumptions
about the potential growth rates of personal lines. This is a troubling development for any
company operating in these markets but particularly for start-ups, as many Takaful companies are, that have not had time to build their franchise and can only win business on price.
A.M. Bests main focus is the assessment of financial strength and policyholders security,
and as such we are particularly interested in the rationale and financial incentives on which
the allocation of profits between policyholders and shareholders is based.We believe that a
pattern of profit accumulation within the policyholders (Takaful) fund and its clear segmentation are vital to demonstrate an unequivocal commitment to the Takaful model and
protection for policyholders.
Overall capitalisation of the Takaful market is strong having benefited either from good
levels of retained profits among long-standing operators or significant capital injections for
the newer companies.This is despite the fact that several Takaful operators have suffered
recently from a concentration of assets in equities and real estate resulting in higher capital
losses than many traditional companies. The policyholder funds of the younger companies
remain significantly under-capitalised as a result of the up-streaming of profits to the operators funds even in the early years of their development. This seems a precarious position
given the continuing competitive nature of the market.
The publication of the Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings by the Islamic Financial Services Board in December 2010 has been
a significant development in providing local regulators with guidance on the regulation of
Takaful companies. A.M. Best hopes that regulators of Takaful companies will adopt the advice provided therein. This is particularly important as in most jurisdictions it is unclear as
to which law (sharia or national) will take precedence in a case of a Takaful insolvency and
even less clear as to the subordination of the qard to the policyholders obligations.
Segmented and strong Takaful funds should be able to provide not only increased certainty against the risks of insolvency, but also the essential component within a profit distribution model which shows tangible additional benefits to policyholders. Such a framework
should be capable of successfully attracting new target markets as part of a long-term
strategy. This would not only be in line with the Islamic principles of mutuality that Takaful
entities are designed to achieve, but also could attract other insureds with ethical attitudes
which are not exclusively Islamic.
A.M. Best believes that the next couple of years will test the resolve and commitment
of several new Takaful operators as they are faced with lower business volumes and / or
underwriting losses due to unrealistic pricing. Their reaction to these challenges will define
the importance of the Takaful segment in markets in which they compete with traditional
insurers. n
April 2011
Rating Methodology
Published
February 11, 2008
Takaful (Sharia Compliant)

Insurance Companies
t
Related RePoRts
Methodology:
Rating European Mutual Insurers
Methodology:
Understanding Universal BCAR
Methodology:
A.M. Best's Perspective on
Operating Leverage
Methodology:
Risk Management and the
Rating Process for Insurance
Companies
Methodology:
Country Risk
Rating analysts
Carlos wong-Fupuy,
Managing Senior
Financial Analyst
+(44) 20-7397-0287
Carlos.Wong-Fupuy@ambest.com
vasilis katsipis,
Assistant General Manager
+(44) 20-7397-0278
Vasilis.Katsipis@ambest.com
Billy kwan,
Financial Analyst
+(852) 2827-3405
Billy.Kwan@ambest.com
ContRibutoRs list
Manfred nowacki,
Group Vice President
Moungmo lee,
Assistant General Manager,
A.M. Best Asia-Pacific Ltd.
edward easop,
Vice President
hIS REPoRt hIghLIghtS the main issues arising when applying A.M. Bests rating
methodology to takaful insurance companies.Takaful insurance (or insurance compliant with Islamic beliefs) is clearly on the rise, particularly in the Middle East and Malaysia,
and despite their many similarities with conventional mutual operating structures,
A.M. Best believes there are distinctive issues with these companies that need to be highlighted. However, it is important to mention that the main principles on which A.M. Bests
financial strength methodology are based remain unchanged, regardless of the type of
company being analysed.
As is discussed later, each takaful company must establish a Sharia board that sets the
basic rules and principles governing the takaful companys activities, and ensuring that
it operates within Islamic Sharia principles. A.M. Best will not specifically comment on
takaful companies degree of compliance with Sharia. However, as part of the interactive
rating evaluation, A.M. Best will discuss items such as: the organizations corporate and
management structure; the type of takaful business model employed; corporate governance and the role of the Sharia board; and the insurers performance versus key strategic
and financial objectives. For further information on the breadth and depth of the rating
evaluation, please refer to page 10Sample Takaful Meeting Agenda.
The discussion that follows includes: a review of some of the key principles of takaful;
how these principles are incorporated into a takaful companys business model; and how
A.M. Bests rating methodologies are applied in the assessment of these organizations.
prinCipleS oF takaFul
The first takaful insurer was established in Sudan in 1979, and the market now has grown
to comprise more than 100 companies, including windows (operations affiliated with
conventional insurers). Takaful includes both general (non-life) and family (life) products.
The family product line includes life and health insurance plans, as well as education, accident and travel medical plans.The surge of takaful companies in recent times is a response
to the commonly accepted incompatibility between Islamic beliefs and the conventional
insurance model.
Takaful insurance is essentially a cooperative risk-sharing program established for
the well-being of the community. The purpose of this system is not to generate profit,
but to uphold the Islamic principle of Al-Takafulbear ye one anothers burden. As
a result, takaful insurance is based on the concept of mutual cooperation, solidarity
and brotherhood. Takaful participants contribute (donate) to help protect one another
against the impact of unpredicted risk and catastrophe, whereas in the conventional
insurance model, policyholders pay premiums to protect themselves, or their interests,
from some form of risk.
Other Islamic beliefs or principles that takaful operations intend to address are the
avoidance of both uncertainty, particularly in terms of the amount and timing of claim payments to be made; and excessive profit (seen as usury), be it in the form of payments received in the event of death, or any form of financial interest (i.e. bond coupon payments).
Underwriting and actuarial techniques apply in a similar manner as under conventional
insurance, in that the takaful insurer evaluates the risk of potential loss and establishes a
contribution (premium) base appropriate for that aggregate risk to protect the pool from
undue losses. However, unlike the risk-based premium paid by a policyholder in a conventional insurance model (where each insured pays a rate commensurate with the assumed
level of risk), each takaful participant shares equally in supporting the pool in recognition
of the underlying principle of mutual cooperation.
As to reinsurance, it also should be based on the takaful pooling concept.The reinsurer
should act primarily as a risk manager (retakaful operator) and should not profit excessively from the underwriting results. However, because of the relative lack of capacity and
quality of true retakaful carriers, reinsurance with conventional reinsurers may be permitted under certain specified conditions and limitations.
takaFul ModelS & StruCtureS

For takaful programmes to be financially sound over the long term, as well as to provide
incentive to takaful insurers to develop and promulgate these programmes to provide
Muslims with alternatives to conventional insurance, these operators to some degree must
be rewarded through profits in a more traditional sense. However, profits are not the end
goal of the operation.
Muslims believe there is unity in diversity, so there is not one preferred operating model
for takaful insurers. Sharia scholars generally agree on certain fundamental components
that are required to be an accepted takaful company; however, operational differences are
tolerated as long as there is no contradiction to any essential religious tenets.There are
now three primary operating models.
taawuni Model
The Taawuni model (cooperative insurance) practices the concept of pure Mudharabah
in daily transactions, where it encourages the Islamic values of brotherhood, unity, solidarity and mutual cooperation. In the pure Mudharabah concept, the takaful company and the
participant share the direct investment income, while the participant is entitled to 100%
of the surplus, with no deduction made prior to the distribution.
From the Taawuni concept, there are two basic models, Al Mudharabah and Al Wakalah.
In reality, there are many variations of these basic models, but these variations fundamentally follow one of these two conceptual frameworks.
Al Mudharabah. This is a modified profit- and loss-sharing model.The participant and
the takaful insurer share the surplus.The sharing of such profit (surplus) differs based on
a ratio mutually agreed to between the contracting parties. Generally, these risk-sharing arrangements allow the takaful insurer to share in the underwriting results from operations,
as well as the favourable performance returns on invested premiums.
Al Wakalah. This is a fee-based model. Cooperative risk-sharing occurs among participants where a takaful insurer simply earns a fee for services (as a Wakeel, or Agent) and
does not participate or share in any underwriting results.The insurers fee may include a
fund management fee and a performance incentive fee.
waqf Model
Unlike the Al Mudharabah and Al Wakalah models, Waqf operates as a social/governmental
enterprise, and programmes are operated on a nonprofit basis. Under the Waqf model, the
surplus or profit is not owned directly by either the insurer or the participants, and there
is no mechanism to distribute the surplus funds. In effect, the insurer retains the surplus
funds to support the participant community.
This model, with a single surplus fund, is most like a conventional mutual insurance
model. As such, it is rated in a very similar manner to conventional mutuals. For further
information on the rating dynamics of mutual insurance companies, please see A.M. Bests
Rating European Mutual Insurance Companies.
The remainder of the report will highlight the unique elements of takaful companies following the Taawuni model, and how these factors are incorporated in the rating analysis.
Main CharaCteriStiCS oF takaFul CoMpanieS

Takaful insurers have certain unique characteristics that recognize the key principles of
Al-Takaful and fundamental Islamic beliefs.
The establishment of two separate funds: A takaful (or policyholders) fund and an
operators (or shareholders) fund. The takaful fund operates under pure cooperative
principles, in a very similar way to conventional mutual insurance entities. Underwriting
deficits and surpluses are accrued over time within this fund, to which the operator has
no direct recourse. As a result, the takaful fund effectively is ring-fenced and protected
from default of the operators fund. Management expenses and seed capital are borne by
the operators fund, where the main income takes the form of either a predefined management fee (to cover costs) or a share of investment returns and underwriting results (or a
combination of both).
Solidarity principle and equal surplus distribution: Given the fact that the takaful
fund is seen as a pool of risks managed under solidarity principles, it is not meant to
accumulate surpluses at levels excessively higher than those strictly needed to protect the fund from volatile results and to support further growth. Likewise, any fees or
Rating Methodology
profit shares received by the operator
Retakaful Capacity and Financial
should be just sufficient to cover mansecurity issues
agement and capital costs while keepReinsurance following the same applicable
ing the company running as an ongoing
Islamic principles as takaful insurance is
concern.
known as retakaful. Reinsurance of takaIn case of financial distress for the
ful business through retakaful companies
takaful fund, the operator is commithas been somewhat controversial within
ted to provide it with an interest-free
the Islamic insurance marketplace, as the
loan, Qard Hasan, for however long it
growth of direct takaful writers has far
is deemed necessaryproviding an adoutpaced the available capacity of retakaditional layer of financial security to the
ful. In addition, from a financial strength
participants.
perspective, there have been ongoing concerns over the placement of reinsurance
The surplus distribution structure is
with lower or non-rated retakaful compaexpected to be managed carefully and
nies, as opposed to higher rated convenin a balanced way, so that neither politional reinsurers. As a result, takaful insurcyholders nor operator make excessive
ers in effect face issues with both retakaful
profits at the expense of the other party.
capacity and financial security.
Restricted investments: Sharia comThis has caused takaful companies to
pliance refers not only to the operadevelop alternate strategies, including reintional structure of the company, but
suring on a conventional basis, contrary
also to its investment policy. Takaful
to the preference of seeking retakaful supcompanies must avoid investing in traport. In recognition of this market reality,
ditional fixed-income securities (due to
the Sharia scholars have allowed takaful
the coupon interest payment attached).
companies to seek support from convenInstead, they are allowed to invest in
tional reinsurers under confined conditions.
sukuk (or Islamic bonds, where coupon
However, the preference still is to utilize
payments take the form of a profit share
retakaful companies whenever possible.
on a particular enterprise). Moreover,
Another manner in which takaful insurers have addressed the issue of retakaful
investments in stocks (in principle alcapacity is to co-insure (a form of reinsurlowed) should avoid the financing of
ance) each others direct takaful writings to
non-Islamic activities (such as alcohol
reduce the heavy reliance on conventional
or gambling).
reinsurance support.
In practice, these restrictions often
The shortage of retakaful capacity may
translate into an excessive conceninhibit the growth of the takaful industry;
tration in stocks (due to the relative
however, A.M. Best has observed that the
scarcity of sukuk), lower than average
issue of retakaful capacity has begun to
credit ratings (increased counterparty
ease recently as an increasing number of
exposure) and high geographical connew retakaful companies are being estabcentration.
lished in response to the market demands.
Establishment of a Sharia board:
As part of the rating evaluation, as with
An essential component in a takaful
any insurer, A.M. Best will review the takacompanys corporate governance is the
ful insurers reinsurance program and the
establishment of a Sharia board, in addiquality and diversity of its reinsurance protion to the conventional board of direcviders, including the exposure to counterparty credit risk.
tors. The Sharia board is made up of
recognised Islamic scholars, who ensure
the companys operational model, profit
distribution policies, product design and investment guidelines comply with Islamic
principles.
The global shortage of recognised Islamic scholars in the insurance arena and lack
of consensus in terms of what constitutes Sharia compliance is, in A.M. Bests view, a
challenge for more rapid development of the industry. Having said this, the emergence
of some inter-regional and government-supported initiatives in this respect, as well as
the participation of individual scholars in more than one Sharia board, are positive
signs of a gradual but slow trend toward convergence.
analySing a takaFul CoMpany

As with conventional mutual insurance companies, takaful insurers have certain limiting
features inherent to their business model, such as a relative lack of financial flexibility
compared with stock companies, or increased concentration risk compared with broadly
Exhibit 1
Basic
Model
ExhibitTakaful
1
diversified insurers. However, both
basic takaful Model
Investment returns
conventional mutuals
on capital
Seed capital
Operators Fund
and takaful companies
typically experience a
Administrative fees
number offsetting facShare of investment returns
Qard hasan
Management expenses
(and/or underwriting results)
tors that are viewed
(interest-free loan,
if needed)
positively in the rating Commissions
process, including
high levels of retained
Policyholders (Takaful) Fund
surplus and increased
persistency ratios
and customer loyalty.
Premiums
This section discusses (donations)
Claims
some unique elements
Investment returns
of takaful insurers
and how these are
Exhibitin1the rating process.
assessed
Basic Takaful Model
two Separate Funds a two-Stage risk-Based Capital approach

Investment returns
Given that one of the key
characteristics
of a takaful operation
is the existence of two sepaExhibit
2
on capital
Seed capital
Operators
rate funds (the takaful fund
and
the operators
fund),Company
the starting point for assessing the fiAnalysing
aFund
Takaful
nancial strength of a particular insurance company is to apply Bests Capital Adequacy Ratio
Administrative fees
(BCAR) proprietary model to the
takaful fund
in a way very similar toMarket
a mutual
company.and regulatory environment
Risk-adjusted
capitalisation
environment
Share
of investment returns
Qard
hasan
This
first-tier
analysis
compares
the
takaful
funds
surplus
to
the
capital
required
topersonal
sup- and SME lines
Restricted
investment
policy
Management
expenses
underwriting
results)
(and/or
So
far
restricted
to
(interest-free loan,
Higher counterparty
Commissions
Uncertainty
to competitive
port
the funds obligationsif needed)
to participants,
per therisk
BCAR model. The BCAR
ratioasfor
the taka-advantages compared with
Geographical
concentration
ful fund, as well as an analysis of the
trends in
the ratio and other keyconventional
metrics, isinsurance
the primary
Higher stockholding concentration
Country risk may have negative impact due to early stages
driver of A.M. Bests assessment of
thelimitations
takaful companys balance sheet
strength.
ALM
of development of market and regulatory environment
(Takaful)
Fund
A second-tier capital assessment
also
is
performed
onsurpluses
the operators
fund.Thesuch
second-tier
Policyholders
Financial flexibility
restricted
to accrued
Safeguards
as policyholders funds ring-fencing and
Lack ofposition
retakaful capacity
interest-free
loan fromtooperator
analysis compares the surplus
of the operators fund to the capital
required
sup- yet to be tested
port the funds obligations, per the BCAR model.
Premiums
applied than
to
An
operators fund with BCAR
much
higher
strength
its corresponding takaful
applied
to financialBCAR
(donations)
shareholders
fund
policyholders
fund
Claimsof the whole insurance
fund normally will enhance the Investment
capitalisation
assessment
in
respect
(1st Tier analysis) returns (2nd Tier analysis)
operation, reflecting the increased financial strength provided to the takaful funds participants.This enhanced financial strength stems from the operators obligation to provide an
interest-free loan (Qard Hasan) to the takaful or policyholders fund in situations of financial
Operating performance
distress. In cases where such
a loan
has selection
been made
to the
takaful fund, the loan will be conPotential
for adverse
due to crude
pricing
sidered part of the takaful
funds
capitaltobase.
Need
for operators
recoup expenses
Financial Strength Rating
Typically higher expense ratios (lack of
Exhibit 2
(FSR)
economies of scale?)
Exhibit 2
Analysing a Takaful
LowerCompany
investment yields due to restricted
analysing a takafulinvestment
Company
policy
Risk-adjusted capitalisation
Restricted investment policy

Higher counterparty risk
Geographical concentration
Higher stockholding concentration
ALM limitations
Financial flexibility restricted to accrued surpluses
Lack of retakaful capacity
BCAR applied to
policyholders fund
(1st Tier analysis)
Market environment and regulatory environment
So far restricted to personal and SME lines

Uncertainty as to competitive advantages compared with
conventional insurance
Country risk may have negative impact due to early stages
of development of market and regulatory environment
Safeguards such as policyholders funds ring-fencing and
interest-free loan from operator yet to be tested
BCAR applied to
shareholders fund
(2nd Tier analysis)
Operating performance
Potential for adverse selection due to crude pricing

Need for operators to recoup expenses
Typically higher expense ratios (lack of
economies of scale?)
Lower investment yields due to restricted
investment policy
Financial Strength Rating

(FSR)
Rating Methodology
This consolidated view of capital, in effect combining the takaful and operators fund
for analytical purposes, is particularly important in the assessment of takaful insurers in
the early years of operation. Currently, it is not uncommon for the operators fund to be in
a stronger relative position, given the relatively short track record of most companies with
the resulting low level of surpluses accumulated at a takaful fund level.
An operators fund with a weaker financial strength position will not detract from the
overall analysis significantly, since the operators fund cannot access the takaful fund surplus. However, in all cases, regardless of which fund is in a stronger relative position, it also
is important to note that this two-tier analysis is supplemented further by a comparison
of the capital accumulation trends in each of the separate funds to ensure an appropriate
balance in the surplus distribution and fee structure.
Main drivers of Balance Sheet Strength in a takaful Company

Given the comparatively restricted investment policy of a typical takaful company; its consequent higher levels of counterparty risk; geographical concentration; and higher than
average proportion of stock holdings, capital requirements in many cases are significantly
larger than for a conventional company of a similar size.
The limited classes of invested assets long have been a barrier to the growth of the
takaful industry, as well as a limitation on the development of more long-term products,
due to the difficulty in addressing asset-liability management issues.The current situation
has improved as the capital markets in Islamic countries have begun to mature and more
Sharia-compliant investment products are available in the market. However, demand is
still higher than supply, resulting in increased expense for such investment products.
In terms of insurance risk borne by takaful companies, the currently moderate exposures
and relative specialisation on domestic and small to medium-sized corporate lines should be
expected to keep the capital requirements (as per the BCAR model) modest.These factors,
nonetheless, easily can be more than offset by rapid growth of business and excessive concentration in a few product lines, with resulting pressures on capital needs.
An essential feature of all takaful models is participants sharing of the underwriting surpluses/deficits.Accurately determining the surplus/deficit is, therefore, fundamental to the
accounting process. Setting aside a reserve for contingencies always raises the question as
to who of the policyholders own it, i.e. the participants that helped set it up or later generations.This is relevant because the significance of the reserve in the initial years of takaful
operations is likely to be substantially greater than in subsequent years.This effectively will
result in earlier participants paying to stabilize underwriting results for later participants.
Despite the possible inequity in a pure sense, the building up of a contingency reserve is
desirable to enable stability in underwriting results and make it practical to expand the size
of the risk pool (as there will be limits to what amounts the takaful operator will be able to
provide as Qard Hasan in case of deficits). A.M. Best considers contingency reserves as part
of the capital and surplus of a company when assessing balance sheet strength.
As with conventional insurance operations, an important driving factor in the rating decision for a takaful company is its degree of financial flexibility (i.e. the companys ability to raise
equity capital).As with mutual companies, the capital available normally would be expected to
reflect significant surpluses accrued over the years within the takaful fund.This component of
the analysis is focused mainly on the operator because of the mutual nature of the takaful fund
and its inherent lack of financial flexibility.The assessment normally involves a detailed analysis
of the ownership structure (and shareholders solvency) and the record of share debt issues.
A.M. Best monitors carefully the quality of the reinsurance programme to assess a takaful
companys balance sheet protection through reinsurance.This is particularly relevant given
the previously mentioned lack of retakaful capacity (and virtual nonexistence of retro-takaful),
which may force direct insurers to compromise the security of their acceptants.
operating performance issues in a takaful Company

In principle, any fees paid to the operator on average should be lower than the difference
between premiums and claims. In other words, as long as the takaful fund continues to generate
surpluses in the long term, there should be no major reason for concern. Having satisfied this
condition, at a second level of analysis, A.M. Best believes that to ensure the ongoing existence
of the whole insurance operation, it is important as well that the operator at least can cover its
expenses from the fees received from the policyholders fund.
During the past few years, takaful companies (particularly in the Middle East) have shown
higher expense ratios than their conventional counterparts.The main driver, however, seems to
be more a lack of economies of scale and comparatively lower use of technology, rather than
solidarity principles. A.M. Best would expect the current gap to narrow in coming years as takaful business volumes continue to expand rapidly. In addition,A.M. Best expects that over time,
the issue of higher expense ratios will be somewhat mitigated by higher customer loyalty and
policy persistency driven by the participants belief in the principles of takaful.
As for investment returns, given takaful companies constraints in asset management, higher
concentration in shares and in a particular geographical region, and increased counterparty
credit risk, A.M. Best expects, takaful funds on average to yield lower risk-adjusted returns, experiencing higher volatility and credit defaults. Despite the continuous growth in the supply of
Islamic securities, A.M. Best believes the investment opportunities are bound to remain limited
for years to come.
Market environment and Country risk

Despite the continued impressive growth of the takaful sector overall, rapid growth has not
been experienced in all product lines, as the expansion of general or non-life business has
outpaced that of the family or life product line. In addition, the typical size of a takaful company remains smaller than that of a conventional insurer. Takaful insurers tend to be smaller,
in part due to their relative lack of operating experience (takaful insurers have only been
in existence since 1979), and the more limited operating profile of takaful insurers when
compared with conventional insurers that have diverse operating platforms and more than a
century of operating history.
Going forward,A.M. Best believes the main opportunities and challenges for the sector overall
are the development of more robust life insurance platforms, and compulsory lines such as
motor third-party liability and health within the non-life business (in particular countries). A
growth area within the corporate product line is medium-sized business risk products within
the energy and construction sectors, which continue to expand. In general, retention levels
for corporate product lines have been improving gradually, providing a more stable base for
growth, although the largest risks still are expected to be ceded to the international markets.
A.M. Best believes it is not yet clear whether takaful companies offer any competitive advantage within this market environment. It is debatable whether there is actually an untapped demand (especially in family/life insurance business) due strictly to religious beliefsand whether
this can be unlocked easily through the offer of takaful products.
A material component of the rating process focuses on the market position of the companyits diversification in terms of client base, business lines and distribution network. In
particular for takaful companies based in the Middle East, all these factors are related closely to
A.M. Bests country risk assessment.The early stage of development of complementary sectors
or activities (e.g. Islamic bonds, bancassurance or Internet distribution and retakaful capacity)
often may have a negative impact on the final rating assigned.
regulatory environment and risk Management

Moreover, in A.M. Bests opinion, some of the regulatory safeguards (e.g., ring-fencing of assets
within the takaful fund, interest-free loans from operators in case of solvency difficulties, etc.)
are yet to be tested.The development of the Islamic insurance industry, including the regulatory
environment, needs to keep pace with the rest of the financial industry in the region (especially banking).
In A.M. Bests view, a robust regulatory regime is crucial for the development of a risk management culture. A.M. Best believes that given their constraints, takaful companies need to develop
and demonstrate that they can apply an adequate risk-based approach to investment management (because of the reduced investment opportunities); capital adequacy and reserving (given
the need for building up surpluses in the long term, especially for family/life business); and
pricing/adverse selection control (given the restrictions on charging extra risk premiums for
policyholders representing a greater risk of loss than the aggregate participant pool).
Overall, one of the unique challenges facing takaful companiesand A.M. Best as it endeavours to assess their financial strengthis the need to ensure that the objectives set by their
Sharia boards are consistent with key performance indicators based on conventional sound
financial and risk management.That includes establishing processes to address all material risks,
despite the challenges presented by the limited capacity of retakaful, and concentration risks
presented by restrictive investment guidelines and the limited geographic diversity of the current takaful marketplace. n
Sample Takaful Rating Meeting Agenda

organization Structure and overview
Ownership and Participant Requirements

Overview of Corporate Structure
- takaful Model employed
- relationship between takaful Fund and operators Fund (Sharing of profits)
Management Structure and Board of Directors
- Senior Management
- Board of directors (if applicable)
- Sharia Board
Assessment of Business Environment
Key Strategic Objectives and Financial Targets
- takaful Fund
- operators Fund
Corporate governance
Mission Statement
Managements Perspectives on Key Risks
Risk Management Framework
- roles and responsibilities
- Corporate oversight
- Sharia Compliance
Board Involvement
Systems and Internal Controls
Capital Structure
Composition
- takaful Fund
- operators Fund
Capital Management Strategy
Capital Adequacy
- takaful Fund
- operators Fund
- Qard hasan
Sources and Uses of Capital
Cash and Liquidity
product development and underwriting
Product Offerings
- general (non-life)
- Family (life and health)
Geographic Footprint
Retention
Cycle Management Strategy
Price Monitoring and Controls
Expansion Initiatives and New Products
External Risk Factors
Marketing and Business production

Competitive Market Position
- within takaful Market
- within Broader insurance Market
Distribution Sources
Distribution Productivity
Production by Line of Business
Business Strategies
- By line of Business
- Short term
- long term
Growth Targets by Line of Business
Claims and loss reserves
Severity and Frequency Trends (General)

Mortality and Morbidity Trends (Family)
Claims Administration
New Potential Claim Emergence
Loss Reserves
Managements Perspective on Reserve Adequacy
reinsurance
Reinsurance Program Overview

Reinsurance Providers
- retakaful providers
- Commercial providers
Catastrophic Reinsurance Programs
Credit Risk Analysis
Net Retention
investments
Balance Sheet Composition

Investment Strategy and Guidelines
Performance of Portfolio
- Gross and Risk-Adjusted Yields
- performance versus Benchmarks
Asset-Liability Management
Credit Risk
Concentration Risk
- By asset type and geographic
- availability of Sharia Compliant assets
Capital Markets Risk
Financial performance
Profitability by Line of Business

- Sources of profits
- profit Sharing between takaful and operators
Fund
- Projections
Operating Expenses Operators Fund
- trends
- Expense Management Initiatives
- Reported Expenses vs. Reimbursement from
takaful Fund
- Budgets
Catastrophe Management Framework

Natural and Man-Made Catastrophe Exposure
analysis
Catastrophe Models Used

Probable Maximum Loss and Tail Risk Analysis
Risk Aggregation and Mapping
enterprise risk Management (erM)*
ERM Framework
Risk Correlation
Modeling Capabilities
Risk Tolerance and Risk Management Objectives
other
Regulatory
Legislative
Judicial
* A.M. Bests expectation of a companys ERM capabilities will vary depending on an insurers scope of
operations, size and risk complexity. In some cases, a separate ERM meeting may be required.
10
Related Methodologies
Published
a.M. Bests Capital adequacy ratio for insurersand its implications for ratings
december 15, 2010
hE PuRPoSE of thIS REPoRt is to document the existing criteria and methodology related to A.M. Bests Universal BCAR model, which is used on these companies
that do not file U.S. or Canadian statutory statements.
introduCtion
The objective of A.M. Bests rating system is to provide an opinion of an insurers financial
strength and ability to meet ongoing obligations to policyholders.The assignment of an
interactive rating is derived from an in-depth evaluation of a companys balance-sheet
strength, operating performance and business profile as compared with A.M. Bests quantitative and qualitative standards.
For interactive ratings, A.M. Best believes the balanced approach of evaluating a company on both quantitative and qualitative levels provides a better analysis of a company and
also results in a more discerning and credible rating opinion.
A.M. Bests quantitative evaluation is based on an analysis of numerous key financial
tests and supporting data.These tests, which underlie A.M. Bests evaluation of balancesheet strength and operating performance, vary in their importance depending on a
companys characteristics.
A companys quantitative results are evaluated on their own merits and also are compared with industry composites as established by A.M. Best. Composite standards are
based on the performance of other insurance companies with comparable business mix
and organizational structure.These industry benchmarks are adjusted when needed to
reflect changes in underwriting, economic and regulatory market conditions.
BalanCe-Sheet Strength
In determining a companys ability to meet its current and ongoing obligations to policyholders, the most important area to evaluate is its balance-sheet strength, since it is the
foundation for policyholder security. Performance then determines how that balancesheet strength will be enhanced, maintained or eroded over time. Balance-sheet strength
measures the exposure of a companys capital to its operating and financial practices. An
analysis of a companys underwriting, financial and asset leverage is very important in assessing its overall balance-sheet strength.
Underwriting leverage is generated from current premium writings, reinsurance recoverables and loss reserves. In order to assess whether a companys underwriting leverage
is prudent, a number of factors unique to the company are taken into account, including type of business written, quality and appropriateness of its reinsurance program, and
adequacy of loss reserves.
Financial leverage is created through debt or debt-like instruments (including financial
reinsurance) and is reviewed in conjunction with a companys underwriting leverage. An
analysis of financial leverage is conducted at both the operating company and holding
company levels, since debt at either level could place a call on the insurers earnings and
strain its cash flow, leading to financial instability.
Asset leverage measures the exposure of a companys capital to investment, interest rate
and credit risks.The volatility and credit quality of the investment portfolio, recoverables
and agents balances determine the potential impact of asset leverage on the companys
balance-sheet strength.
A companys underwriting, financial and asset leverage also are subjected to an evaluation
by Bests Capital Adequacy Ratio (BCAR), which allows for an integrated review of these
leverage areas.The universal BCAR model calculates the Net Required Capital to support the
financial risks of the company associated with the exposure of assets and underwriting to
adverse economic and market conditions and compares this required capital to economic
capital. Some of the stress tests within BCAR include above-normal catastrophes, a decline
in equity markets and a rise in interest rates.This integrated stress evaluation permits a more
discerning view of a companys balance-sheet strength relative to its operating risks.
A companys BCAR result is extremely useful in evaluating its balance-sheet strength,
but BCAR is only one component of the analysis. In addition, balance-sheet strength is
only one component of the overall financial strength rating, which also includes operating
Related RePoRts
Criteria
Bests Credit Rating Methodology

Global Life and Non-Life Edition
Risk management and the
Companies
Rating Members of
Insurance Groups
11
performance and business profile. BCAR is very often a minimum requirement to support
a rating, but other factors driving expectations of future balance-sheet strength drive the
rating as well. All of these factors are important to the overall rating process.
overview oF BCar
A.M. Bests capital formula uses a risk-based capital approach whereby net required capital
is calculated to support three broad risk categories: investment risk, credit risk and underwriting risk. A.M. Bests capital adequacy formula also contains an adjustment for covariance, reflecting the statistical independence of the individual components. A companys
adjusted capital is divided by its net required capital, after the covariance adjustment, to
determine its BCAR.
inveStMent riSk
Investment risk includes three main risk components: fixed-income securities, equities and
interest rate. Capital charges are applied to different asset classes based on the risk of default,
illiquidity and market-value declines in both equity and fixed-income securities. Additionally,
higher capital charges are ascribed to affiliated investment holdings, real estate, below-investment-grade bonds and nonaffiliated, privately traded common and preferred shares because
of the illiquid nature of the asset and/or the potential volatility of the reported value.
A.M. Bests capital model incorporates an interest-rate risk component that considers
the decline in market value of a companys fixed-income portfolio as a result of rising
interest rates.The interest rate risk calculation will reflect the fact that companies writing
life and annuity products will have an exposure to disintermediation and cash-flow mismatch risks, whereas a company writing property/casualty products will have an interestrate risk exposure when a shock event occurs.
Investment risks are typically the main drivers of a life insurers capital requirements.
Credit riSk
Capital charges are applied to different receivable balances to reflect third-party default
risk. Credit risk factors are ascribed to recoverables from all reinsurers, including affiliates. Required capital for credit risk may be modified after taking into account acceptable
collateral offsets for reinsurance balances; the quality of the reinsurers that participate in
the companys reinsurance program; and the companys dependence on its reinsurance
program. Also included in the credit risk component are charges for premium balances
receivable; accrued retrospective premiums; deposits in pools and associations; funds held
by ceding insurers; and other, miscellaneous receivables.
underwriting riSk
This category encompasses the risks associated with net loss and loss-adjustment expense
reserves, net premiums written and net unearned premiums.The reserve component requires capital based on the risk inherent in a companys loss and loss-adjustment expense
reserves, adjusted for A.M. Bests assessment of its reserve equity.The net premiums written component is a forward-looking component and requires capital based on the pricing risk inherent in a companys expected book of business for the upcoming year. The
unearned premium component reflects the exposure to pricing risk on business written
in the past but is still unearned as of the current evaluation date.
Required capital for the underwriting risk components may be increased to reflect an additional surcharge for excessive exposure growth. In addition, there is credit for a well-diversified book of business, but this credit is minimized for those companies that maintain small
books of many lines of business and may not necessarily have expertise in each of them. For
those composite companies that write both property/casualty and life insurance, the amount
of diversification credit may be increased to reflect the additional benefits from diversifying
across insurance sectors.
For life and health insurers, underwriting risks are divided into mortality risks and morbidity
risks. Mortality risks are based on volume of insurance in force, net of reserves and reinsurance,
with risk charges grading lower for higher amounts at risk. Morbidity risks vary by line of business and therefore warrant different charges. A.M. Best believes risk profiles of individual and
group health lines are substantially different, with individual lines bearing higher risks.
For property/casualty insurers, underwriting risk is typically the largest risk category
and usually accounts for two-thirds of a companys gross required capital.
12
Collectively, the investment, credit and underwriting risk components generate more
than 99% of a companys gross required capital, with the business risk component
generating minimal capital requirements for off-balance-sheet items. A companys gross
required capital, which is the sum of the capital required to support all of its risk components, reflects the amount of capital needed to support all of those risks if they were
to develop simultaneously. However, these individual components then are subjected to
a covariance calculation within the BCAR formula to account for the assumed statistical
independence of these components.This covariance adjustment essentially says that it is
unlikely that all of the individual risk components will develop simultaneously, and this
adjustment generally reduces a companys overall required capital.
A.M. Best recognizes the distortions caused by the square root rule covariance adjustment, whereby the more capital-intensive risk components are disproportionately accentuated while the less capital-intensive risk components are diminished in their relative
contribution to net required capital. Nevertheless, by using other distinct capital measures,
A.M. Best can counterbalance this apparent shortcoming.
deterMination oF availaBle Capital

A.M. Best makes a number of adjustments to a
companys reported capital within its universal
capital model to provide a more economic and
comparable basis for evaluating capital adequacy.
Different accounting methods and regulatory
requirements across the world require numerous adjustments to a companys reported capital.
Goodwill and other intangible assets are eliminated. Pre-event catastrophe reserves are removed
from the loss reserves and moved into available
capital on a tax-effected basis. Adjustments for
any embedded value in unearned premium reserves, loss reserves and fixed-income securities
are made if the company has not already reflected
these in its reported capital. Further adjustments
are made to capital to reflect other non-balancesheet risks, including catastrophe exposures and
debt-service requirements.
available Capital Components

Reported Capital
equity adjustments:
unearned premiums
assets
loss reserves
reinsurance
debt adjustments:
Surplus notes
debt-Service requirements
other adjustments:
potential Catastrophe losses
Future operating losses
Future dividends
goodwill
other intangible assets
ForMula driverS
A companys gross capital requirement within A.M. Bests capital model is generated
primarily from its investment, credit and underwriting risks. A company that maintains a
more aggressive investment portfolio, is heavily concentrated in one asset or sector, or is
heavily dependent on pyramided capital likely will generate a lower BCAR value. Companies that have excessive exposure to third-party credit risk or are heavily dependent
on reinsurance likely will generate lower BCAR scores.The amount of required capital
generated from the underwriting risk components is largely a function of the companys
mix of business, amount of available capital, growth in exposure, stability of loss development, profitability, loss-reserve adequacy and length of claims payout. All other things being equal, the absolute BCAR score of a company will be lower because of higher capital
requirements associated with greater indicated reserve deficiencies, as well as unstable or
unprofitable business.
In addition, the model can be adjusted in response to various market issues. Some examples of the issues that can impact capitalization include rate changes, the stage of the underwriting cycle, changing reinsurance products and reinsurance dependence.The ability of the
model to respond to these market issues makes it a robust tool that assists in the evaluation
of the companys balance-sheet strength.
The basis of risk measurement for some of the key drivers of required capital in the
universal BCAR model is expected policyholder deficit. A.M. Best adopted the concept of
expected policyholder deficit to better calibrate the models loss-reserve and premium-risk
factors, as well as other risk factors in the model.The concept of expected policyholder
deficit allows risk charges to be calibrated to a specific level of insolvency risk and also takes
into consideration the expected cost, or severity, of insolvency.
13
BCar iS an aBSolute MeaSure
The universal BCAR model produces an absolute score, which is
the ratio of the companys adjusted capital to its own net required
capital.This company-specific capital ratio indicates whether its
capital strength aligns with A.M. Bests Secure or Vulnerable rating
categories and is based on the specific risk profile of a companys operations.A BCAR score below 100% would be considered vulnerable.
Given strong, stable operating performance and sound risk management, the chart at right provides a reasonable guide for the minimum
BCAR levels needed to support A.M. Bests Financial Strength Ratings.
bCaR guidelines
additional StreSS teSting
Vulnerable:
90
80
70
60
50
40
<40
A.M. Best also will stress a companys BCAR score for a second
catastrophic event according to the procedures outlined in its April
2006 methodology report titled Catastrophe Analysis in A.M. Best
Ratings. The testing will incorporate natural catastrophes and/or
man-made events such as terrorism to monitor how sensitive a
companys balance-sheet strength is to a second catastrophic event.
bCaR
secure:
175
160
145
130
115
100
implied
balance sheet
strength
a++
a+
a
aB++
B+
B
BC++
C+
C
Cd
ConCluSion
The tools to allocate capital and understand capital strength continue to evolve.These tools
often vary in theory, purpose and outcome. It is important to remember that, while they can add
significant value, they are only tools. A.M. Bests proprietary universal BCAR is one of those tools
that look at capital needs well above financial solvency. A.M. Best will continue to enhance BCAR
going forward to improve its accuracy in measuring balance-sheet and operating risk.
BCAR is important to A.M. Bests evaluation of both absolute and relative capital strength. Consistent with standards embedded within the universal BCAR model, A.M. Best would expect that wellmanaged and highly rated companies will maintain capitalization levels in excess of the minimum
amounts required to support their current ratings.
A.M. Best is quick to caution, however, that although BCAR is an important tool in the rating
process, it isnt sufficient to serve as the sole basis of a rating assignment. BCAR, like other quantitative measures, has some limitations and doesnt necessarily work for all companies. Consequently,
capital adequacy should be viewed within the overall context of the operating and strategic issues
surrounding a company. Business profile and operating performance are important rating considerations in evaluating a companys long-term financial strength and viability as well as the quality
of the capital that supports the BCAR result. In addition, any holding company considerations also
will play a key role in evaluating the financial strength of an insurance company.
In closing, A.M. Best believes that well-managed and highly rated insurers will continue to
focus on the fundamentals of building future economic value and financial stability, rather than
on managing one, albeit important, component of A.M. Bests rating evaluation. n
14
Assessing Country Risk
Published
april 8, 2009
.M. BESt dEfInES CountRy RISK as the risk that country-specific factors could
adversely affect an insurers ability to meet its financial obligations. Country risk is
evaluated and factored into all A.M. Best ratings. As part of evaluating country risk, A.M.
Best identifies the various factors within a country that may directly or indirectly affect an
insurance company. In doing so, A.M. Best separates the risks into three main categories:
economic risk, political risk and financial system risk. Given A.M. Bests particular focus on
the insurance industry, financial system risk is further divided into two sections: insurance
risk and non-insurance financial system risk.
A.M. Bests evaluation of country risk is not directly comparable to a sovereign debt rating,
which evaluates the ability and willingness of a government to service its debt obligations.
Though country risk analysis does consider the finances and policies of a sovereign government, the final assessment is not guided by this sole purpose. Additionally, A.M. Bests country risk evaluation does not impose a ceiling on ratings in a given domicile.
A.M. Bests approach to country risk analysis employs a data-driven model that scores the
level of risk present in a given country, plus a qualitative assessment of country-specific conditions that affect the operating environment for an insurer. Countries are placed into one of
five tiers, ranging from CRT-1 (Country Risk Tier 1), denoting a stable environment with the
least amount of risk, to CRT-5 (Country Risk Tier 5) for countries that pose the most risk and,
therefore, the greatest challenge to an insurers financial stability, strength and performance.The
conceptual relationship between the relative level of country risk and the rating of an insurer is
depicted in Exhibit 1 below.
Exhibit 1
Relationship between Ratings and CRts

above average rating
average rating
Below average rating
Crt-1
aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-
bb+ bb bb-
b+ b b-
Crt-2
bb+ bb bb-
b+ b b-
Crt-3
bb+ bb bb-
b+ b b-
Crt-4
bb+ bb bb-
b+ b b-
Crt-5
bb+ bb bb-
b+ b b-
Related RePoRts
Criteria
In short, as country risk increases (measured by a higher assigned tier), the distribution of
ratings migrates down the rating scale as the level of risk approaches CRT-5.This same relationship effectively applies to any significant category of risk an insurer faces, i.e. higher risk
exposure pressures financial stability.
Key elements of country risk can be managed or mitigated, effectively reducing the impact on
an insurers rating. As a result, it is possible that A.M. Bests highest ratings can be achieved in any
country. Country risk is not a ceiling or cap on insurer ratings; it is one of many rating factors.
Country Risk Tier assignments are reviewed annually, though significant events and developments are tracked continuously and may cause an interim change to a countrys tier assignment. CRTs are assessments of the current conditions in a country, but they are designed to
remain stable through the business cycle.Therefore, political and industry outlooks as well as
economic forecasts are integrated into the assessment process.
eleMentS oF Country riSk

The three risk categories in A.M. Bests country risk assessmenteconomic risk, political
risk and financial system riskwill be defined below, and some of the key variables used
will be discussed (see Exhibit 2).
Economic risk is the likelihood that fundamental weaknesses in a countrys economy
will cause adverse developments for an insurer. A.M. Bests assessment of economic risk
evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability.
Political risk is the likelihood that governmental or bureaucratic inefficiencies, societal
Risk Management and the

Companies
Rating Members of
Insurance Groups
Rating analysts
edward easop, Vice President

+1 (908) 439-2200 Ext. 5781
Edward.Easop@ambest.com
andrea keenan,
Managing Senior Financial
Analyst, Country Risk Group
+1 (908) 439-2200 Ext. 5084
Andrea.Keenan@ambest.com
James Gillard,
Senior Financial Analyst,
Country Risk Group
+1 (908) 439-2200 Ext. 5818
James.Gillard@ambest.com
15
tensions, an inadequate legal system or inter- Exhibit 2
national tensions will cause adverse develop- Components of
Country Risk analysis
ments for an insurer. Political risk comprises
the stability of a government and society; the
Macroeconomy
effectiveness of international diplomatic reeconomic prospects
lationships; the reliability and integrity of the
Risk
international transactions
legal system and business infrastructure; the
government Finance
efficiency of the government bureaucracy;
and the appropriateness and effectiveness of
economic policy
the governments economic policies.
Business environment
Financial system risk (non-insurance) is
Political government Stability
the risk that financial volatility may erupt
Risk
Social Stability
due to inadequate reporting standards,
weak banking systems or asset markets or
international diplomacy
poor regulatory structure. Non-insurance
legal System
financial system risk considers a countrys
non-insurance Financial system Risk:
banking system, accounting standards and
Banking System
government finances, and it assesses how
vulnerability
vulnerable the financial system is to external or internal volatility. Basel II, World Bank
reporting Standards & regulations
Financial
Insolvency Principles and International AcSovereign debt
system
counting Standards all are referenced in the
Risk
insurance Financial system Risk:
analysis, as are the performances of banks,
government & legislation
equity indices and fixed-income securities.
Insurance risk is the risk that the insurance
Supervisory authority
industrys levels of development and public
insurer accountability
awareness; transparency and effectiveness of
regulation; reporting standards; and regulatory sophistication will contribute to a volatile financial system and compromise an insurers ability to pay claims. Insurance risk, which A.M. Best considers as a distinct subsection
of financial system stability, is addressed separately because of the importance of and A.M.
Bests specific focus on the industry. The assessment is based heavily on the Insurance
Core Principles (ICP) of the International Association of Insurance Supervisors (IAIS). A.M.
Best employs a sizable subset of the 28 ICPs by organizing them into three categories: 1)
government commitment to an open and well-regulated insurance industry, 2) adequacy
of supervisory authority and its supporting infrastructure, and 3) insurer accountability.
CalCulating Country riSk

The country risk assessment begins with the running of the Country Risk Model to generate a score. The score is a weighted average of the three risk categories.The main equation for calculating the Country Risk Score is as follows:
Score = [EIE + PIP + FS(IFSi + IFSni)]2
Where IE = Economic Risk
IP = Political Risk
IFSi = Financial System Risk (insurance component)
IFSni = Financial System Risk (non-insurance component)
= weight applied to each category of risk
In special circumstances, such as where a given domicile has a particularly strong relationship with anothersuch as Guernsey with the United Kingdoman additional calculation is
added that integrates the larger domiciles influence on the stability of the smaller.
The base equation is a simple weighted average of the three categories of risk used in
country risk analysis. A country with a higher country risk score indicates a more risky environment as compared with a country that has a lower country risk score.The score then is
squared, representing the non-linear relationship between the score and the actual country
risk present in the country.
The country risk score provides a baseline of evaluation for each country. After the model
is run, the Country Risk Group evaluates additional qualitative factors that would influence
the overall score, or one particular category of risk.
16
Country riSk tierS

The assignment of CRTs to score ranges is based on A.M. Bests assertion that the risk in
countries can be categorized loosely to provide a basis of comparison, provided that country-by-country differences are acknowledged.Therefore, CRTs can be classified, in a typical
scenario, by the following:
CRt-1: Predictable and transparent political environment, legal system and business
infrastructure; sophisticated financial system regulation with deep capital markets; mature
insurance industry framework.
CRt-2: Predictable and transparent political environment, legal system and business
infrastructure; sufficient financial system regulation; mature insurance industry framework.
CRt-3: Developing political environment, legal system and business infrastructure with
developing capital markets; developing insurance regulatory structure.
CRt-4: Relatively unpredictable and non-transparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory
structure.
CRt-5: Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent
insurance industry.
The characteristics of a country with a stable insurance industry environment that are
favorable for an insurance company are highly correlated with those countries that are
economically large, stable, diverse and efficiently regulated, with stable political regimes
supported by a strong and credible legal system.
annual and event-driven reviewS

The Country Risk Model is updated on an annual cycle.Therefore, at a minimum, each
country that is assigned a Country Risk Tier is reviewed annually.This review includes the
model-driven score, the qualitative analysis
Exhibit 3
and the committee process each year. DurCountry Risk evaluation Process
ing the interim period, the Country Risk
Group continually monitors world events
approved Crts
Crt proposal with
and developments and assesses their potenpublished
impact Study
tial impact on any tier assignments.This process is facilitated through the maintenance
of a watch list that identifies countries that
rating impact
global report
are experiencing a significantly increased
Study Conducted
released
level of volatility that has the potential to
impact the CRT.
Country risk group evaluation
It is unusual for a country to be moved
up or down the scale outside of the annual
review cycle, as the CRTs are designed to
implied Crt
move through the business cycle and are not
subject to frequent upgrades or downgrades.
Country risk Model output =
Therefore, while recent developments are
Country risk Score
factored into the analysis of country risk,
they often are not significant enough to warrant an off-cycle change in the tier assignment. In the event of a change in CRT, the ratings of the companies domiciled in that
country will be subject to review.
applying Country riSk to ratingS

A.M. Bests ratings are an independent opinion based on a comprehensive quantitative and
qualitative evaluation of a companys balance sheet strength, operating performance and
business profile. Country risk is one of many factors considered in evaluating a company
according to these three characteristics.The level of consideration given to country risk,
i.e. the potential impact on the rating assignment for a company, is determined on a caseby-case basis for each insurer, based on its financial strength, position in the market and
ability to mitigate or manage its exposure to country risk.
A.M. Bests Country Risk analysis seeks to identify those aspects of a country that may create a difficult or unpredictable environment for an insurer.A wide array of issues is accounted
for that can compromise predictability. For example, a poorly regulated banking system, poorly executed monetary policy or illiquid equity market would leave a financial system more
17
tr y
un
Co risk
an pe
a er
i
n
Co du lysi
m st s/
po ry
sit
e
ad Cap
eq ita
ua l
cy
eag
an nt
M me m
a
te
prone to collapse. On average, most compaExhibit 4

nies in CRT-1 or CRT-2 countries would not be incorporating Country Risk
impacted adversely by their operating environindustry
ments (i.e. country risk). In CRT-3, CRT-4 and
trends
CRT-5, there is an increasing probability that
&
environmental factors will affect a companys
analysis
ability to fulfill policyholder obligations.
A.M. Best employs neither a notching
process nor a ceiling in applying country risk
Company
to ratings. Country risk is one of many factors
rating
that are integrated into a Bests Rating. It can
be compared to other components of the
rating analysis such as enterprise risk manageenterprise
ment (ERM); senior management discipline
risk
and track record; capital management; and
Management
competitive market position, among others,
in how it is integrated into a rating outcome
(see Exhibit 4). Analysts, in being informed of country risk issues, are able to apply the rating
process to a company and ascertain what risks are of particular concern for a given insurer.
To aid analysts in this process, the Country Risk Group offers internal briefings and mapping
guides that serve as benchmarks when comparing insurers across countries and regions. n
Exhibit 5
Rating translation
Financial Strength Ratings (FSR) and Issuer Credit Ratings (ICR)
a-
B++
bbb+
bbb
B+
bbb-
secure
a+
18
iCR
bb+
bb
B-
bb-
C++
b+
b
C+
b-
ccc+
ccc
ccccc
C-
non-investment grade
a-
a++
FsR
investment grade
iCR
aaa
aa+
aa
aaa+
a
Vulnerable
FsR
A.M. Bests Country Risk Tiers

A.M. Best defines country risk as the risk that country-specific factors could adversely affect
the claims paying ability of an insurer. Country risk is factored into all A.M. Best ratings.
A.M. Bests country risk methodology, Assessing Country Risk (see page 15), presents the
country risk evaluation process and describes how country risk is integrated into
Bests Credit Ratings.
The 76 countries evaluated by A.M. Best are listed according to their Country Risk Tier in the
table below.
CRt-1
Australia
Austria
Canada
Denmark
Finland
France
Germany
Gibraltar*
Guernsey*
Isle of Man*
Luxembourg
Netherlands
Norway
Singapore
Sweden
Switzerland
United Kingdom
United States
CRt-2
Barbados*
Belgium
Bermuda
British Virgin Islands*
Cayman Islands*
Hong Kong
Italy
Ireland
Japan
Liechtenstein*
Macau
New Zealand
Slovenia
South Korea
Spain
Taiwan
CRt-3
Bahamas*
Bahrain
China
Cyprus
Israel
Kuwait
Malaysia
Malta
Mexico
Netherlands Antilles*
OMan
Poland
Qatar
CRt-4
Antigua & Barbuda*
Brunei Darussalam
Egypt
India
indOnEsia
JOrdan
Kazakhstan
Mauritius
Morocco
Panama
Philippines
Russia
tunisia
Turkey
CRt-5
Belarus
Bosnia and Herzegovina
Dominican Republic
Ghana
Jamaica
Kenya
Lebanon
Nigeria
Ukraine
Vietnam
* Denotes countries to be considered Special Cases by A.M. Best. For an explanation of a special case and
more information on the Country Risk Methodology, please see Assessing Country Risk on page 15.
19
FAQs
Published
February 24, 2011
Financial Strength Ratings and

Sovereign Credit Risk FAQ
S
oVEREIgn CREdItwoRthInESS has deteriorated significantly during the most

recent economic cycle, as governments have used fiscal policy extensively to stimulate their respective economies.This fiscal stimulus has predictably led to higher deficits,
larger government debts and in turn higher sovereign credit risk.This document addresses
frequently asked questions about A.M. Best Co.s handling of sovereign credit issues.
does a.M. Best rate government debt (i.e. sovereign ratings)?

no. A.M. Best specializes in insurance ratings and does not issue a ratings opinion on the
creditworthiness of sovereign governments.
does a.M. Best place a sovereign ceiling on its insurer Financial Strength ratings (FSrs)?
no. A.M. Best does not place a cap on its FSRs based on the sovereign credit rating of the
country in which the rated entity is domiciled. Not placing a ceiling on the FSR of a company is based on two concepts. Firstly, A.M. Best believes it is possible that a company can
be more financially secure than the government of the country in which it is domiciled.
Secondly, A.M. Best believes that a sovereign default in a given country, while clearly creating a more difficult operating environment, would not necessarily lead to an insurance
company in the domicile failing to meet its policyholder obligations.
does a.M. Best factor sovereign credit risk in its rating process?
yes. A.M Best does incorporate sovereign credit risk in its rating process. Firstly, since
insurers tend to hold a high proportion of domestic sovereign bonds, the investment position of the insurer is evaluated carefully. Risk charging of assets based on, among other
things, the credit quality of the asset is included in the analytical process. In addition,
the concentration of an investment portfolio is assessed to determine how exposed the
insurer is to any one entity, including the sovereign.
Secondly, A.M. Best incorporates country risk into all of its ratings. A.M. Bests country risk analysis incorporates the degree of economic, political and financial system
(both insurance and non-insurance) risk. The creditworthiness of a government is factored into the evaluation of country risk in a given domicile. (For more information on
A.M. Bests country risk analysis, please see the methodology Assessing Country Risk
on page 15.)
does a change (upgrade/downgrade) in a governments sovereign credit rating

change its Country risk tier?
Rating analysts
andrea keenan,
Managing Senior Financial
Analyst, Country Risk Group
+1 (908) 439-2200 Ext. 5084
Andrea.Keenan@ambest.com
James Gillard,
Senior Financial Analyst
+1 (908) 439-2200 Ext. 5818
James.Gillard@ambest.com
20
not necessarily. A.M. Best categorizes countries into one of five Country Risk Tiers
(CRTs). Given that A.M. Bests view of country risk is less stratified than the standard
credit market scale, it would not be possible for there to be a one-to-one correspondence
between movements in CRTs and movements in sovereign credit ratings.
Sovereign credit risk is one input into the Country Risk Model. The CRT incorporates political, economic and financial system (both insurance and non-insurance)
risk; and while the governments creditworthiness is factored into the model, it is
only one of many indicators. In addition to the change in sovereign credit quality,
the cause of the improvement/deterioration is examined, be it rising debt, a slowing
economy or political upheaval. These underlying factors, which are often the basis
for a decline in sovereign credit quality, are captured in the analysis and more directly influence the tier assignment.
does a governments sovereign credit rating downgrade impact an insurers

Financial Strength rating?
It depends. Sovereign ratings on their own are not a driver of an insurers financial
strength rating. However, as issues arise with sovereign debt, analysts identify those
companies impacted by the issues, including the credit risk of the sovereign government
considering any rating downgrades, potential liquidity concerns and any potential change
in the operating environment of the country. Additionally, as the credit quality of sovereign
debt changes, it is incorporated in the evaluation of the domiciles country risk. Beyond
the worsening sovereign credit quality, the cause of the deterioration is examined be it
rising debt, a slowing economy or political upheaval.The different impacts of specific
company issues and overarching country risk are incorporated into the ratings process on
a company-by-company basis.
Therefore, it is possible that a sovereign credit rating downgrade could lead to the
downgrade of an insurers FSR, regardless of whether it is currently rated above or
below the sovereign. While a downgrade of sovereign debt does increase country risk
and could impact a companys rating, most downgrades of a company rating are triggered by an increase in company-specific risks. n
21
Article
This article was published
in the April 2010 issue of
Gulf Insurance Review.
http://girmagazine.net-genie.co.uk
Tackling Takaful
Opportunities and Challenges
In a Growing Market
S EConoMIES ARound thE woRLd show further

signs of stability, there is a growing sense of optimism
for niche and specialist insurance markets.
Takaful, which is
still in its infancy
takaful growth in numbers
stages compared
There are varying estimates of the
to conventional
current size of the takaful market,
insurance, is exalthough the general expectation
pected to remain
is that it will experience further
one of the fastest
growth. Below are a range of
growing sectors
industry estimates:
of the insurance
n Between 2004 and 2007, the
industry. The
average annual growth rate for
Sharia-compliant
takaful was about 25% (adjusted
yVEttE ESSEn
cover is regarded
for inflation), versus 10.2% of
Head of Market Analysis as likely to benefit
that in the conventional market,
from changing soA.M. Best
according to data from Swiss Re.
cioeconomic charThe reinsurers report Insurance in
acteristics in the
Emerging Markets: Overview and
Middle East and Asia, where there is low insurance
Prospects for Islamic Insurance
penetration as well as an increasing knowledge of
stated that global takaful premiums
of approximately USD 1.7 billion
the benefits of insurance.
were written in 2007 and could
Other factors likely to help fuel growth inreach USD 7 billion by 2015.
clude the introduction of compulsory motor and
health cover in some countries, combined with
n Global takaful contributions
the increasing availability of takaful insurance as
rose to USD 3.4 billion in 2007,
compared with USD 2.5 billion in
an alternative to conventional insurance.
2006, according to Ernst & Young.
Demographics, combined with increasing
The accountancy firm, in its World
wealth in parts of the Middle East and Asia, are
Takaful Report 2009, said Saudi
expected to help drive growth. It is estimated that
Arabia was the biggest market
one quarter of the world populationaround 1.5
in the Gulf Cooperation Council
billion peopleis Muslim, and 60% of Muslims
(GCC), with contributions totalling
are under the age of 25. Insurance penetration in
USD 1.7 billion in 2007, and
the Middle East and Asia is low, although Islamic
Malaysia the largest takaful market
countries are believed to produce 23% of the
in Southeast Asia with contribuwealth generated by emerging markets.
tions of USD 800 million.
Projected growth figures for the takaful
n When Generali announced in
market vary hugely but all suggest that it is set
late 2009 that it was considering
to gather pace (see sidebar, Takaful Growth in
the launch of a takaful joint venture
Numbers). But are these phenomenal growth
with the Qatar Islamic Bank (QIB),
rates realistic?
Italys largest insurance company
takaFul during unCertain tiMeS

Although there has been optimism about the
prospects for takaful over the past few years, in
reality, takaful operators have faced challenging
22
said worldwide premium volumes

are forecast to reach USD 20 billion in 2015. Generali added it
expected 30% of business to be
underwritten in the GCC market.
times. The economic downturn has created difRating takaful operators

ficulties for all insurance companies around the
Takaful operators have some
world, but Takaful operators have faced addifeatures inherent to the business
tional pressures, as they tend to be relatively new
model of conventional mutual
start-up ventures.
insurance companies. For examGrowth has been lower than expected, largely
ple, their risks tend to be more
due to consumers being driven by price during
concentrated than most broadly
the economic downturn, and buying cheaper
diversified insurers.
cover from conventional insurers. The convenHowever, there are a number of
tional insurers have been in a better position to
factors which can be viewed posioffer lower premiums to price-sensitive customtively for takaful companies as part
ers. Not only are these insurers usually larger in
of the ratings process. Like mutusize, but they tend to have lower expense ratios,
als, they are in theory expected to
plus an existing customer base.
have higher levels of retained surTakaful operators, meanwhile, have suffered
plus, increased persistency ratios
and customer loyalty.
from capital adequacy pressures. A.M. Bests
starting point for rating takaful companies is
A.M. Best therefore assesses
to use Bests Capital Adequacy Ratio (BCAR)
the financial strength of a takaful
to help assess balance sheet strength (see
operator by applying the propriesidebar, Rating Takaful Operators). The BCAR
tary Bests Capital Adequacy Ratio
(BCAR) model to the takaful fund
tests are run for policyholders funds, sharein a way similar to its application
holders funds, and the two combined, and
to a mutual company. The BCAR
this model has highlighted that takaful operamodel is applied to the policyholdtors have been facing a number of key issues,
ers fund and shareholders fund.
particularly a lack of financial flexibility for
As the takaful model is a relasome companies.
tively
new concept, operators often
Compared to conventional insurance comhave
limited
underwriting and distripanies, takaful market participants have much
bution
track
records and must conmore restricted investment policies, resulting in
sequently demonstrate the ability to
a high concentration of assets in a sole investbe self-sufficient.
ment or in a few investments. As the supply of
Despite operators often having
Sukuk (bond) products in the market is limited,
a
short
track record, A.M. Best is
investment in equities tends to be considerably
still
able
to provide a rating. Manhigher than for conventional insurers.
agement team track records will be
According to International Financial Services
considered as part of the ratings
London (IFSL), there was an increase in Sukuk
process, and an assessment will
issuance from a low of USD 15 billion in 2008
be held of the ownership structure
to USD 20 billion in 2009. However, the Sukuk
of the operator. Takaful companies
market is by no means stable. Troubles with
are unlikely to have enterprise risk
Dubai World as a result of its delayed repayment
management (ERM) processes as
of a USD 4 billion Sukuk in December could
developed as those of conventional
insurers, but this still forms a part of
have shaken the bond market significantly had
our ratings process.
support not been forthcoming from neighbouring emirate Abu Dhabi.
Furthermore, as operators tend to have a
significant equity holding due to the shortage of Sukuk products, Dubai Worlds delayed
repayment is likely to have created volatility in the investment portfolio of a number of
takaful insurers.
Owing to lower than expected demand for takaful products, combined with investment challenges, some operators have revisited business plans. The retakaful market
has also had to scale back its predictions to reflect more moderate premium growth,
and as a result of its relative youth, participants tend to be significantly smaller than
international reinsurers. Many retakaful operators are consequently relying on nontakaful business to achieve critical mass.
Funding challenges are present in all markets, and raising money for takaful ventures has
been a worldwide problem. At the end of last year, Salaam Halal Insurance, the UKs first
Islamic insurance company, which has 10,000 policyholders, closed to new business. It
failed to raise sufficient additional capital.
23
Article
A.M. Best is also aware that some takaful and retakaful players that were considering
setting up at the end of 2008 and at the beginning of 2009 put off their plans as global
financial uncertainty created difficulties with obtaining funding.
a roSier Future?
There are some signs that the takaful market is seeing increased activity, according
to data from consultancy firm Ernst & Young. The accountancy firm has noted that
takaful operators dominated the list of initial public offerings in the Middle East
during the fourth quarter of 2009, due largely to the flotation of three Saudi
Arabiabased insurers.
The biggest was Al Khaleej Insurance (also known as Gulf General Cooperative
Insurance Company), raising USD 21.3 million in the fourth quarter. Meanwhile, Al
Alamiya Cooperative Insurance Company and Buruj Cooperative Insurance Company
raised USD 16 million and USD 13.9 million, respectively.
However, Ernst & Youngs data demonstrates the financial markets are not completely out of the woods. Total regional initial public offering deals in the Middle East last
year were just one-sixth of the value of floats in 2008.
The past couple of years have been challenging for the takaful market, but as the
global economic downturn shows further signs of receding, there is hope that the
demand for takaful products will rise.
During this time of continued belt-tightening, the desire to have products designed
to be compliant with Sharia law is outweighed by the need to have cheaper insurance. It will take some time before buyers mentalities change, but there are number of
factors which could help takaful operators win more business.
Takaful operators face intense competition from already established conventional insurers, but they could benefit from customer loyalty driven by belief in takaful principles.
Many Muslim nations, which tend to have low insurance penetration, are also experiencing ongoing economic development.This is thought to be a key driver for growth.
Currently, operators do have higher expense ratios than conventional insurers do,
as they lack economies of scale and tend to have a lower use of technology. However,
A.M. Best expects as volumes increase, expense ratios will decrease.
Strengthening riSk ManageMent praCtiCeS

While the prospects remain bright for the takaful market, there is a need to improve
industry risk management practices.
A.M. Best believes that given the challenges faced by takaful operators, they must
develop and demonstrate their ability to apply an adequate risk-based approach to
investment management, given their reduced investment opportunities. Takaful insurers also often have a concentration of risk, offering just a handful of products within a
confined geographical space.
As takaful insurers must build up surpluses in the long termparticularly if they
are offering family and life productscapital adequacy and reserving are an especially important part of an operators risk management approach.
Likewise, operators must demonstrate robust pricing and that adverse selection
control systems are in place, owing to the fact that operators face restrictions on
charging extra risk premiums for policyholders representing a greater risk of loss
than the aggregate participant pool.
Additional risk management challenges also include the limited capacity of the
retakaful market.
While there is potential for the takaful market to grow, A.M. Best believes it will
only flourish provided appropriate regulatory standards are in place to help promote
solid risk management. However, the extent of regulatory intervention will partly
depend on the success of takaful.
As yet, some of the current regulation has to be tested, such as the ring-fencing of
assets within the takaful fund and the use of an interest-free loan (qard hassan) from
operators in the event of solvency difficulties.
The creation of more consistent standards is already becoming more important. At the
end of 2009, the Islamic Financial Services Board (IFSB) took an important step in the
24
creation of harmonised regulatory guidelines

(see sidebar, Regulation on the Agenda). By
approving the issuance of draft proposals, it
is attempting to create supervision of takaful
operators consistent with that of the conventional insurers.
A.M. Best believes that, in particular, the IFSBs
guidelines creating solvency requirements for
both the takaful fund and the shareholders
fund give much needed clarity to both regulators and takaful operators alike. This should
result in greater transparency for the takaful
industry, encouraging the establishment and
publication of accounts for the separate funds.
Regulation is crucial in helping to create better risk management practices, but it is not the
sole driver. An insurance rating can additionally
act as a focal point for setting a strategic objective, as well as being used for major internal
projects such as improving a companys risk
management. Although companies seek a rating
for a variety of reasons, it can also act as a tool
providing independent oversight and support
corporate governance processes.
BeneFitS oF diverSiFiCation
Regulation on the agenda
In December, the Islamic Financial

Services Board (IFSB) took steps
to help define the regulatory capital
requirements for takaful insurers
and thus raise the supervisory
standards of takaful.
The international standardsetting organisation issued an
exposure draft for public consultation, entitled, Solvency Requirements for Takaful Undertakings
(ED-11).
The exposure draft aims to set
forth key principles on the solvency
requirements for takaful undertakings. This obviously needs to
cater to the specificities of Islamic
finance.
Its key principles are hoped to
foster the confidence of the market
towards the integrity and stability
of the takaful undertakings as well
as providing the takaful undertakings a competitive niche among
the insurance providers.
Provided takaful operators have investors with

The guidelines include setting
long-term views, the takaful market should evolve
solvency requirements for both the
takaful fund and the shareholdand exercise better risk management practices as
ers fund, a move which A.M. Best
new diverse products come on stream.
believes is particularly important
To avoid competing for market share against
given the quasi-mutual status of
more experienced conventional insurers with lonthese companies and the segregager underwriting track records, takaful operators
tion of funds. It has also spelled out
could look at offering different product lines.
possible scenarios when a superAs the takaful market is still young, the range of
visory authority could intervene to
products will take some time to develop. Howprotect Takaful participants.
ever, family takafulranging from savings and reAs part of a five-month consultirement products to critical illness covercould
tation period, the IFSB is holding a
represent an opportunity for growth, as well as
roundtable discussion, workshop
diversification.
and public hearing to gauge comThere generally is a lack of family protection
ments from the financial commuavailable, and by offering a variety of different
nity. Meetings have already been
types of cover to customers, policyholders could
scheduled for the United Arab
become accustomed to buying Sharia-compliant
Emirates, Bahrain and Malaysia.
products, rather than being driven back to conMore information is available on
ventional insurance through lack of choice.
www.ifsb.org.
However, if critical mass is not established in
lines such as family insurance, takaful products
could be unprofitable. Operators could also look into cross-selling products, and diversifying
their risks by considering entering new geographical territories.
The takaful market is very fragmented, with many small market participants and few large,
dominant players. This could change through increased regulatory requirements, which may
in turn lead to better expense ratios in the long run.
Ernst & Young estimates the size of the global takaful market could be as high as
USD 7.7 billion by the end of 2012. The challenges for takaful operators are diverse,
ranging from competing against conventional insurance companies, to educating prospective clients about the advantages of Sharia-compliant insurance. Yet despite these
hurdles, the prospects for the takaful market still look bright. n
25
Sample AMB Credit Reports

aMB Credit report - inSuranCe proFeSSional For
ACR RETAKAFUL MEA B.S.C. (C)

non-life reinsurer
ultimate parent: aCr retakaful holdings limited
Gajria Tower, 8th Floor, Seef District, PO Box 1591, Manama, Bahrain
Web: www.acrretakaful.com
Tel: 973-1738-8350
Fax: 973-1738-8351
AMB#: 90059
Ultimate Parent#: 52141
report revision date: 12/14/2010
BeStS FinanCial Strength rating

Based on our opinion of the companys Financial Strength, it is assigned a Bests Financial
Strength Rating of A- (Excellent).The companys Financial Size Category is Class VIII.
rating rationale
Rating Rationale: The rating reflects ACR ReTakaful MEA B.S.C. (c)s strong capitalization and the strong commitment of investors. The rating also recognizes the companys experienced management team and underwriting expertise.
ACR ReTakaful MEA is strongly capitalized with paid-up capital of USD 200 million. As demonstrated by its Bests Capital Adequacy Ratio (BCAR) combined with
the application of A.M. Bests start-up company rating methodology which has
more stringent requirements, ACR ReTakaful MEAs risk-adjusted capitalization is
expected to be adequate to support the companys premium growth for the next
three years.
As a new company formation lacking historical financial statements, A.M. Bests expectations are based on financial projections provided by ACR ReTakaful MEA. These projections anticipate a controlled rate of growth and sound operating results.
Bests Financial Strength rating: a-
outlook: Stable
FiVe yeaR Rating histoRy

date
bests FsR
12/14/10
a-
11/09/09
a-
07/29/08
a-
BuSineSS review
ACR Retakaful Holdings, a holding entity incorporated in Dubai in 2008, underwrites
business in the retakaful segment through two Sharia compliant retakaful operating
entities: ACR ReTakaful SEA Berhad and ACR ReTakaful MEA B.S.C. (c). The holding
company has been capitalized at USD 300 million by three shareholders: Khazanah
Nasional, Dubai Islamic Investment Group and ACR Capital Holdings. ACR ReTakaful MEA, which was incorporated in Bahrain, explores business opportunities in the
Middle East.
ACR ReTakaful MEA focuses on large risk businesses in the retakaful markets, writing a
broad range of risk products from property, engineering, marine, aviation, energy and motor to casualty business on both a treaty and facultative basis. In addition to the dedicated
focus on retakaful business, the company also capitalizes on quality opportunities arising
from the conventional markets.
ACR ReTakaful MEA and ACR ReTakaful SEA have an internal proportional retrocession arrangement with associated companies within the ACR Group. The companies source business in their market and share the business among all the associated
26
companies based on the respective underwriting capacity of each company. The

companies, in return, receive inward business from the ACR Group. ACR ReTakaful
MEA and ACR ReTakaful SEA have diversified geographically their underwriting risk
through this retrocession arrangement.
In 2009, ACR ReTakaful MEA generated gross contributions (GC) of USD 77.7 million.
For the year to June 2010, 48% of ACR ReTakaful MEAs GC was derived from inward premium received from the ACR Group.
Property business was the largest portfolio, accounting for approximately 34% of total
GC (excluding an intercompany retrocession arrangement) for the first half of 2010.This
was followed by motor (28%), marine (14%) and engineering (13%). Energy and casualty
accounted for the remainder.
ACR ReTakaful MEA is run by a team of executives who possess both extensive experience and in-depth knowledge of their markets, supported by underwriting, claims and
risk management expertise at Asia Capital Reinsurance Group Pte. Ltd. (ACR).To mitigate
against any potential operational risk, the company adopts similar underwriting guidelines
and pricing models to ACR and controls its risk exposures by using ACRs risk management platform.
In view of the current landscape in the retakaful sector (which is still evolving with increasing numbers of market participants), A.M. Best remains cautious about the capability
of ACR Retakaful Holdings to achieve its planned business growth combined with sound
underwriting profitability. Nonetheless, A.M. Best believes that the consistent growth in
the takaful industry in several designated markets will benefit ACR Retakaful Holdings
operations over the long term.
FinanCial perForManCe
As ACR ReTakaful MEA is a newly formed reinsurer and so lacks an operating history,
A.M. Bests analysis and expectations are based on financial projections provided by
the company for the first five years. A.M. Best will closely monitor premium growth
and operating results to ensure that they are in line with expectations.
Leveraging off the underwriting experience of ACR Group, the two retakaful funds are
expected to achieve break-even results in their early stages of operation. Both operators
intend to retain planned earnings within the retakaful fund to support ongoing business
growth, regardless of wakala fee expenses and the sharing of investment profits from
the retakaful funds on a Mudaraba basis. A.M. Best will monitor closely the financial performance of the operation against its stated business plan.
ACR ReTakaful MEA recorded net income after tax of USD 4.2 million in its first full
fiscal year of operation (January to December 2009).The underwriting results of the
retakaful fund also reported a surplus (after deduction of the wakala fee and sharing of
investment profits) of USD 3.8 million. ACR ReTakaful MEAs loss ratio stood at 64.8% in
2009, which was slightly higher than the assumptions used in the original business plan.
Nonetheless, this is a commendable loss ratio for a young organization with an unseasoned portfolio.
CapitaliZation
To support ACR Retakaful Holdings accelerated business growth in its early stages of operation, the company infused MYR 325 million (USD 100 million) into ACR ReTakaful SEA
and USD 200 million into ACR ReTakaful MEA.
Underwriting leverage (which is defined as the ratio of net written contributions to the
sum of both shareholders and retakaful funds) is expected to remain well below 1 time.
As a start-up entity, the risk-based capital (BCAR) score of ACR ReTakaful MEA is subject
to more stringent requirements based upon the companys operating profile. In view of
the Qard al Hassan (interest-free loan) available to the retakaful policyholders fund from
the shareholders fund through a trust deed arrangement, A.M. Best believes that the riskbased capital position for the policyholders will be adequate to support planned business
growth over the next three years.
A.M. Best closely monitors and compares the actual BCAR score to the original projected score to ensure that new companies remain in line with initial expectations. With
the support from their major shareholders, ACR Retakaful Holdings operating entities
are expected to manage their capital base conservatively and keep risk exposures within
planned tolerances.
27

Source of information: audited Financial Statement
Summarized accounts as of december 31, 2009
StateMent oF inCoMe
12/31/2008
usd(000)
12/31/2008
usd(000)
77,655
2,539
gross premiums written

reinsurance ceded
77,655
17,580
2,539
966
net premiums written

increase/(decrease) in gross unearned premiums
increase/(decrease) in reinsurers share unearned premiums
60,075
42,078
11,505
1,573
2,290
858
net premiums earned

other technical income
29,502
55
141
29,557
141
-96
19,227
84
net claims incurred
19,131
84
Management expenses
Acquisition expenses
3,494
3,179
76
35
6,673
111
Total underwriting expenses
25,804
195
Balance on technical account
3,753
-54
non-teChniCal aCCount:
net investment income
Other income/(expense)
6,026
-5,575
3,238
-1,781
Profit/(loss) before tax
4,204
1,403
Profit/(loss) after tax
4,204
1,403
420
140
3,784
1,263
1,263
5,047
1,263
12/31/2009
aed(000)
201,403
12/31/2008
usd(000)
200,000
420
-420
4,204
140
-140
1,403
4,204
1,403
205,607
201,403
12/31/2009
usd(000)
203,639
9,962
12/31/2009
% of total
68.9
3.4
teChniCal aCCount:
reinsurance ceded
total
underwriting income
t
net claims paid
net increase/(decrease) in claims provision
Net operating expenses
transfer to reserves
retained profit/(loss) for the financial year
retained profit/(loss) brought forward
retained profit/(loss) carried forward
MoveMent in Capital & SurpluS

Capital & surplus brought forward
Change in non-distributable reserves
Change in other reserves
profit or loss for the year
total
t
change
change in capital & surplus
Capital & surplus carried forward
aSSetS
Cash & deposits with credit institutions
Bonds & other fixed interest securities
28
12/31/2008
usd(000)
200,398
aSSetS (continued)
12/31/2009
usd(000)
213,601
12/31/2009
% of total
72.3
12/31/2008
usd(000)
200,398
213,601
72.3
200,398
12,363
5,421
4.2
1.8
858
65
17,784
6.0
923
23,796
31,934
8.1
10.8
62
1,983
55,730
18.9
2,045
182
8,115
0.1
2.7
471
2,557
295,412
100.0
206,394
12/31/2009
usd(000)
200,000
12/31/2009
% of total
67.7
12/31/2008
usd(000)
200,000
200,000
67.7
200,000
560
5,047
0.2
1.7
140
1,263
205,607
69.6
201,403
3,720
1.3
-54
44,368
24,732
15.0
8.4
2,290
149
69,100
23.4
2,439
11,228
1,122
557
3.8
0.4
0.2
766
1,208
41
12,907
4.4
2,015
accruals & deferred income

other liabilities
3,806
272
1.3
0.1
561
30
t
total
liabilities & surplus
295,412
100.0
206,394
liquid assets
ttotal investments
reinsurers share of technical reserves - unearned premiums

reinsurers share of technical reserves - claims
ttotal rreinsurers
einsurers share of technical reserves
insurance/reinsurance debtors
other debtors
t
total
debtors
Fixed assets
prepayments & accrued income
ttotal assets
liaBilitieS
Capital
paid-up capital
non-distributable reserves
retained earnings
Capital & surplus
Minority interests
gross provision for unearned premiums
gross provision for outstanding claims
total
gross
t
gross technical reserves
insurance/reinsurance creditors
inter-company creditors
other creditors
total
t
creditors
creditors
ManageMent
offICERS: Chief Executive Officer, Jonathan Patrick Wilton; Department Managers, Maha
Fikree (Head, Human Resources & Administration), Hashem Jawad (Head, Finance & Technical Accounts); Senior Underwriter, Peter Tailby (Head, Engineering).
offICERS: Directors: Datuk Mohd Najib bin Hj. Abdullah, Ercument Cetin Alanya, Marwan Hassan Ali ElKhatib (Deputy Chairman), Datuk Syed Muhamad bin Syed Abdul Kadir,
Ahmad Farouk bin Mohamed, Keith Scott, Kwang Kherng John Tan, Raja Tan Sri Dato Seri
Arshad bin Raja Tun Uda (Chairman), Jonathan Patrick Wilton.
analysis oF gRoss PReMiuMs WRitten

reinsurance
ttotal non-life
usd
(000)
2009
77,655
usd
(000)
2008
2,539
2007
2006
77,655
2,539
2005
29

reinSuranCe
In addition to the proportional treaties with ACR Group, ACR ReTakaful MEA also has an
excess of loss protection program with a limit of USD 6 million in excess of USD 6 million
for its own business.
BalanCe Sheet iteMS

liquid assets
total investments
total
t
assets
net technical reserves
total liabilities
Capital & surplus
usd
(000)
2009
213,601
213,601
295,412
69,100
51,316
89,805
205,607
usd
(000)
2008
200,398
200,398
206,394
2,439
1,516
4,991
201,403
2007
2006
2005
usd
(000)
2009
77,655
60,075
3,753
4,204
4,204
usd
(000)
2008
2,539
1,573
-54
1,403
1,403
2007
2006
2005
2009
18.9
416.2
237.8
237.8
2008
1.0
999.9
999.9
999.9
2007
2006
2005
2009
29.2
25.0
37.8
33.6
27.1
43.7
2008
0.8
0.8
1.3
1.2
1.0
2.5
2007
2006
2005
2009
64.8
11.1
76.0
-0.1
20.4
55.4
7.0
1.7
2.1
2008
59.6
7.1
66.6
999.9
-99.9
89.2
2007
2006
2005
inCoMe StateMent iteMS

net
et premiums written
Balance on technical account(s)
liQuidity ratioS (%)

t
total
debtors to total assets
liquid assets to net technical reserves
liquid assets to total liabilities
total investments to total liabilities
leverage ratioS (%)

net premiums written to capital & surplus
net technical reserves to capital & surplus
gross premiums written to capital & surplus
gross technical reserves to capital & surplus
ttotal debtors to capital & surplus
total liabilities to capital & surplus
proFitaBility ratioS (%)

loss ratio
Operating expense ratio
Combined ratio
Other technical expense or (income) ratio
net investment income ratio
operating ratio
return on net premiums written
return on total assets
return on capital & surplus
the Financial Strength rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. the
ratings are not assigned to specific insurance policies or contracts and do not address any other risk, including, but not limited
to, an insurers claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds
of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. a Financial Strength
rating is not a recommendation to purchase, hold, or terminate any insurance policy, contract, or any other financial obligation
issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. in
arriving at a rating decision, a.M. Best relies on third-party audited financial data and/or other information provided to it. while
this information is believed to be reliable, a.M. Best does not independently verify the accuracy or reliability of the information.
visit www.ambest.com/ratings/notice for additional information or www.ambest.com/terms.html for details on the terms of use.
Copyright 2011 a.M. Best Company, inc. all rights reserved.
aMB Credit report - insurance professional BCr02242011
30
aMB Credit report - inSuranCe proFeSSional For
SALAMA ISLAMIC ARAB

INSURANCE COMPANY (P.S.C.)
Consolidated non-life
ultimate parent: SalaMa islamic arab ins Co (pSC)
4th Floor, Spectrum Building, Oud Metha, PO Box 10214, Dubai, United Arab Emirates
Web: www.salama.ae
Tel: 971-4-3355300
Fax: 971-4-3356223
AMB#: 78342
Ultimate Parent#: 78342
report revision date: 02/17/2011
BeStS FinanCial Strength rating

Based on our opinion of the companys Financial Strength, it is assigned a Bests Financial
Strength Rating of A- (Excellent).The companys Financial Size Category is Class IX.
rating rationale
Rating Rationale:The rating of SALAMA reflects its solid business profile, improved profitability and strong risk-adjusted capitalisation.
SALAMA benefits from a geographically well-diversified business portfolio. It is continuing its expansion of business in Saudi Arabia, where it owns 30% of a start-up operation
and through its subsidiary, Best Re, is targeting the development of life business in the
Southeast Asia.The portfolio is still focused on property (39%) and motor (16%), but the
growth of life business remains a key objective.This is to be achieved through taking advantage of growing demand for Takaful products in these regions and will be a fundamental driver of growth for future periods.
SALAMAs 2009 results show that it has successfully recovered from the turbulence
suffered by Middle Eastern stock markets in 2008. Pre-tax profits rose to AED 101 million
from a loss of AED 4.5 million in the previous year as a result of a combined ratio at 92%
and significant investment income of AED 52 million, driven by strong realized gains. In
the medium term, A.M. Best expects the companys combined ratio to remain stable and
for investment returns to remain positive, albeit at a slightly reduced level due to the
one-off nature of the gains in 2009. A.M. Best expects this to result in profits of AED 65-70
million for the year. Results for half-year 2010, show that the company is on track to meet
its business plan for the year.
SALAMAs excellent risk-adjusted capitalisation has strengthened to previous levels as a
result of the retention of earnings in 2009. In future periods, the new business strain of premium growth, forecast at 15%-30% annually for the next two years, may lead to a decrease
in risk-based capitalisation, although this will remain supportive of the current rating.Any
deviations from the companys current business plan may affect this level of capitalisation.
Bests Financial Strength rating: a-
outlook: Stable
FiVe yeaR Rating histoRy

date
bests FsR
09/21/10
a-
07/30/09
a-
08/18/08
a-
12/13/07
a-
03/09/07
b++
07/21/06
nR-5
31

Corporate overview
SALAMA Islamic Arab Insurance Company (P.S.C.) (SALAMA) is the ultimate holding company for several insurance companies, among which the Malaysia-based BEST Re group
continues to be the majority contributor to its overall business. SALAMAs ownership of
BEST RE is mainly direct, with some indirectly ownership through another subsidiary, the
Bahrain-based TARIIC Holding Company.Through TARIIC, SALAMA owns the majority of
Salama Algeria, an insurance company based in Algeria, and two other minor operations,
the Senegal-based Salama Senegal and the Egyptian Saudi Insurance Home (ESIH), based
in Egypt. However, a separate company is under formation for the launch of life products
in Egypt and Senegal, and this is likely to change slightly the business profile of these
two companies going forward. SALAMA is also a 30% shareholder of the recently publicly
traded company, Saudi IAIC Cooperative Insurance Company (SALAMA) (Saudi IAIC).
CoRPoRate stRuCtuRe
aMb #
CoMPany naMe
doMiCile
% oWn
078342
SalaMa islamic arab ins Co
united arab emirates
091260
Best re holding Company
Malaysia
100.00
087128
BeSt re
tunisia
100.00
055779
takaful & retakaful intl
Bahrain
99.40
088908
egypt Saudi insurance home
egypt
51.15
088907
Salama assurances algerie
algeria
93.95
088909
Salama Senegal
Senegal
55.10
BuSineSS review
In A.M. Bests opinion, SALAMA Islamic Arab Insurance Company (P.S.C.) (SALAMA) continues to hold a solid position in the insurance market in the Far East, Middle East and Africa.
In 2009, SALAMAs consolidated gross written premium (GWP) was AED 1.57 billion, an
increase of 15% on the previous year.
SALAMA is the ultimate holding company for several insurance companies, among
which the Malaysia-based BEST RE group (comprising life and non-life entities, and the
only reinsurers in the group) continues to be the major contributor to its overall business,
although its premium income contribution to the group in 2009 was slightly lower at 71%
compared to 72% in 2008. BEST REs GWP was USD 304 million in 2009 and is expected
to increase at an annual rate in the range of 15-30% in the next three years.
Currently, SALAMA has a 30% direct shareholding in Saudi IAIC, which commenced
formal operations in 2008 and focuses mainly on motor and medical lines.
SALAMA also writes business directly in the United Arab Emirates, where it primarily
focuses on motor business, medical insurance and property, and has recently launched individual life products. SALAMA UAE represented 15% of the groups GWP in 2009, slightly
up from 14% in the previous year. In recent years, the company has been developing its
life business which is expected to continue expanding over the next few years. Currently,
the life business comprises mainly group policies (both life and medical) though SALAMA,
expecting to increase the proportion of individual policies over time. As part of its effort
to expand its market offering, a broader range of products, including unit linked, were
launched in 2009. SALAMA is also developing its distribution network through agents,
branches, telesales and bancassurance, albeit with competition from both established and
start-up companies in the UAE.
Through TARIIC, SALAMA, in addition to BEST RE, owns the majority of SALAMA Algeria,
a direct insurance company based in Algeria, the Senegal-based SALAMA Senegal, and the
Egyptian Saudi Insurance Home (ESIH), based in Egypt. SALAMA Algeria represents 7% of
the groups premium income (USD 33 million in 2009), while SALAMA Senegal and ESIH
represent 2% each.
A.M. Best expects SALAMAs premium income to continue to grow at 15-30% over the
next two years.The markets of KSA and UAE and low level of takaful penetration are likely
to be its target markets to drive the companys growth. Additionally, the growth of health
market and emergence of retakaful through BEST RE is expected to benefit the company.
In 2009, SALAMAs insurance business portfolio remained concentrated mainly in property (39% of GWP) and motor (16%), with the balance in accident (13%) engineering (9%),
32
marine (9%) and the remaining (14%) in other lines including life and medical business.
This represents an ongoing diversification away from the traditional lines of property and
motor due to growth of life and medical business. In the coming years, A.M. Best expects a
further shift towards life business driven by demand in the Middle East, South and Far East
markets.
In A.M. Bests opinion, SALAMAs geographical diversification is broad, with the largest
markets consisting of the Far East (approximately 53% of GWP) and Africa (approximately
21%), followed by the Middle East (22%) and Central Asia with the remainder (4%). As a
result of the companys planned growth, A.M. Best expects that the Far Easts share of the
portfolio will continue to grow.
FinanCial perForManCe
SALAMAs pre-tax profits for 2009 improved significantly to AED 96.2 million, compared to
a loss of AED 8.2 million in the prior year as a result of both improving underwriting results
and positive investment returns.Although 2008 was profitable on an underwriting basis, this
was more than offset by significant investment losses.
The combined ratio for the group improved to 92% compared to the already good
93.7% in 2008. Investment returns improved to 3.5% from -1.8% as a result of strong
realised gains, while return on equity rose to 6.8% from -0.6% in the previous year. Going
forward, A.M. Best expects SALAMA to maintain good underwriting profitability, which will
continue to be the main component of future earnings.
The impact of declining stock markets in the Middle East and Europe was the main
reason for the investment losses in 2008, but these have shown marked stabilisation in
2009 and 2010. Investment returns are expected to remain positive in the future, albeit at
a slightly reduced level, due to the one-off nature of the realised gains.
undERwRItIng InCoME: A.M. Best expects SALAMA to maintain a good level of
underwriting profitability in the coming two years, with a combined ratio of 90-93%. Since
2006 and despite the rapid growth in soft market conditions, SALAMA has managed to
write business profitably.The introduction of life business is expected to enable rapid
growth and is expected to improve underwriting profitability. However, A.M. Best expects
the impact to be closely monitored by SALAMA and measures taken if necessary.
InVEStMEnt InCoME: SALAMA follows a Shariah compliant investment policy.The
investment split at the end of 2009 comprised cash (14%), deposits and short-term Shariah
compliant instruments -- referred to as mortgages and loans on the accounts below (37%),
unquoted mutual funds (27%), real estate (9%), unquoted investments (3%), sukuk and
government bonds (18%), marketable shares (2%) and intercompany investments (2%).
This reflects a move away from mutual funds and equities and towards less variable instruments in an attempt to reduce volatility and prevent the heavy losses incurred in 2008. As
a result, the potential for large returns has similarly been reduced.
SALAMA maintains a considerable amount of deposits with ceding companies (AED 326 million in 2009), which relates to BEST REs funds deposited with its cedants. SALAMA intends to
transfer these funds to local Islamic banks as the interest paid by ceding companies is relatively modest and not allowed under Islamic Shariah Law; however, this process is likely to take
time.A.M. Best expects SALAMAs investment income to remain more stable in future periods.
CapitaliZation
SALAMAs consolidated risk-based capitalisation has improved in 2009 compared to a historic low in 2008 (as a result of heavy investment losses).The increase has been driven by
the high level of profitability in 2009 and subsequent increase in retained earnings.This has
been partially offset by increased capital requirements as a result of rapid growth.
Going forward, A.M. Best believes that SALAMAs risk-adjusted capitalisation will remain
supportive of the current rating.The impact of the companys growth on risk-adjusted
capitalisation will be partially offset by improving investment income and full earnings
retention in the next three years.
SALAMA has injected capital in BEST RE during 2010 to support the groups expansion
plans. In A.M. Bests view, faster than anticipated growth rates may place pressure on its
risk-adjusted capitalisation, as measured by A.M. Bests capital model.The companys capital position is currently supported by a EUR 32 million subordinated bond issued by BEST
RE in 2006, for which A.M. Best has given credit but will diminish over time as the debts
call date draws closer.
33

In addition, A.M. Best believes that the company is protected by a good reinsurance
programme.
RESERVE QuALIty: SALAMAs net technical ratio (net technical reserve over net
written premium) has improved from the low level seen in 2008 to approximately 80%
in 2009, with the majority of the book being short-tailed.The company is expected to continue improving the level of reserves kept over its net written premiums going forward,
which A.M. Best believes is due to its ongoing expansion into the individual life business
and further increases in non-life lines.
Reserves also continue to be established at local level for each subsidiary. SALAMAs reserving methodology is to have incurred but not reported (IBNR) reserves for each subsidiary based on formalised actuarial techniques, except for ESIH where IBNRs for all lines of
business are determined by the Egyptian Insurance Supervisory Authority (EISA). BEST RE
has its reserves for the Asian business (which represents the majority of its book) revised
by external actuaries.The company also sets-up reviews for the life business.
liQuidity
oVERALL LIQuIdIty: In 2009, SALAMAs current liquidity ratio, defined as the ratio of
total investments to total liabilities less capital and surplus, is at an adequate level of 92.3%.
This increase from 82.7% in the previous year is mainly due to the recovery in asset values
and the companys improved performance.
Liquidity remains constrained somewhat by significant deposits being held with ceding companies, although the company is expected to continue taking steps to gradually reduce these.
Source of information: Company annual report
Summarized accounts as of december 31, 2009
uS $ per local Currency unit .2722 = 1 united arab emirates dirham (aed)
StateMent oF inCoMe
12/31/2009
aed(000)
12/31/2009
usd(000)
1,442,031
221,952
392,521
60,415

1,220,079
179,418
34,040
332,106
48,838
9,266
net premiums earned
1,074,701
292,534
1,074,701
292,534
540,747
69,604
147,191
18,946
net claims incurred
610,351
166,138
Management expenses
101,848
317,264
27,723
86,359
419,112
114,082
1,029,463
280,220
45,238
12,314
131,067
64,568
35,676
17,575
66,499
18,101
net premiums earned
66,499
18,101
t
revenue
total
revenue
66,499
18,101
geneRal teChniCal aCCount:

reinsurance ceded
total
t
underwriting income
net claims paid

Balance on general technical account
liFe teChniCal aCCount:
reinsurance ceded
34
net claims paid

2,186
27,089
595
7,374
net claims incurred

net increase/(decrease) in long term business provision
dividends to policyholders
29,275
2,126
12,579
7,969
579
3,424
1,127
307
1,127
307
Total expenses
45,107
12,278
Balance on long-term technical account
21,392
5,823
CoMbined teChniCal aCCount:

reinsurance ceded
1,573,098
286,520
428,197
77,991

1,286,578
179,418
34,040
350,207
48,838
9,266
net premiums earned
1,141,200
310,635
t
revenue
total
revenue
1,141,200
310,635
net claims paid

542,933
96,693
147,786
26,320
net claims incurred

net increase/(decrease) in long term business provision
dividends to policyholders
639,626
2,126
12,579
174,106
579
3,424
Management expenses
101,848
318,391
27,723
86,666
420,239
114,389
1,074,570
292,498
66,630
18,137
non-teChniCal aCCount:
net investment income
realised capital gains/(losses)
unrealised capital gains/(losses)
Other income/(expense)
43,551
11,549
-2,985
-17,131
11,855
3,144
-813
-4,663

Taxation
101,614
5,357
27,659
1,458
96,257
26,201
9,128
-96
4,976
2,485
-26
1,354
82,057
22,336
255,757
337,814
69,617
91,953
12/31/2009
aed(000)
1,378,505
12/31/2009
usd(000)
375,229
9,128
-9,128
-118
2,485
-2,485
-32

Balance on combined technical account

transfer to reserves
Exceptional income/(expense)
Minority interests
retained profit/(loss) for the financial year
retained profit/(loss) brought forward
retained profit/(loss) carried forward
MoveMent in Capital & SurpluS

Capital & surplus brought forward
Change in non-distributable reserves
Change in other reserves
Currency exchange gains
35

MoveMent in Capital & SurpluS (continued)
profit or loss for the year
Capital gains or (losses)
dividend to shareholders
other changes
96,257
25,213
-1,168
9,350
26,201
6,863
-318
2,545
129,534
35,259
1,508,039
410,488
12/31/2009
aed(000)
238,336
275,390
390,770
12/31/2009
% of total
7.3
8.4
11.9
904,496
27.5
246,204
607,021
140,895
27,981
18.5
4.3
0.9
165,231
38,352
7,616
1,680,393
51.1
457,403
81,161
123,761
6,591
2.5
3.8
0.2
22,092
33,688
1,794
211,513
6.4
57,574
deposits with ceding companies
325,803
9.9
88,684
insurance/reinsurance debtors
inter-company debtors
other debtors
754,868
11,352
56,322
23.0
0.3
1.7
205,475
3,090
15,331
822,542
25.0
223,896
14,451
37,801
7,734
186,194
0.4
1.2
0.2
5.7
3,934
10,289
2,105
50,682
3,286,431
100.0
12/31/2009
aed(000)
1,100,000
12/31/2009
% of total
33.5
1,100,000
33.5
299,420
32,506
-5,009
337,814
1.0
-0.2
10.3
8,848
-1,363
91,953
1,465,311
44.6
398,858
42,728
1.3
11,631
402,569
768,637
36,022
2,126
12.2
23.4
1.1
0.1
109,579
209,223
9,805
579
1,209,354
36.8
329,186
116,134
175,283
3.5
5.3
31,612
47,712
total change in capital & surplus

Capital & surplus carried forward
aSSetS
Cash & deposits with credit institutions
Bonds & other fixed interest securities
Shares & other variable interest instruments
liquid assets
Mortgages & loans
real estate
inter-company investments
total investments
reinsurers share of technical reserves - unearned premiums

reinsurers share of technical reserves - claims
reinsurers share of technical reserves - life
total reinsurers share of technical reserves
total debtors
Fixed assets
prepayments & accrued income
other assets
goodwill
total assets
liaBilitieS
Capital
paid-up capital
non-distributable reserves
other reserves
retained earnings
Capital & surplus
Minority interests
gross provision for unearned premiums
gross provision for outstanding claims
gross provision for outstanding claims - life
gross provision for other technical reserves
total gross technical reserves
Short term borrowings
long term borrowings
36
12/31/2009
usd(000)
64,875
74,961
106,368
894,567
12/31/2009
usd(000)
299,420
External borrowings
291,417
8.9
79,324
189,628
4,621
27,566
5.8
0.1
0.8
51,617
1,258
7,503
221,815
6.7
60,378
accruals & deferred income

other liabilities
20,326
35,480
0.6
1.1
5,533
9,658
total liabilities & surplus
3,286,431
100.0
insurance/reinsurance creditors
inter-company creditors
other creditors
total
t
creditors
creditors
894,567
ManageMent
A.M. Best believes that the company has a credible business plan for future growth and
expansion. SALAMA has a two-level management structure, at the holding company and
through its various subsidiaries. SALAMAs representatives sit on the boards of directors of
these entities.This enables them to exercise their role in the management of these subsidiaries and provides oversight of the implementation of appropriate corporate governance.
SALAMAs primary internal management control procedure is its corporate internal audit
department, which looks at the performance of each subsidiary in order to enforce the importance of controls and liaisons within the group. In addition to this, SALAMAs management
consistently reviews capital needs of its subsidiaries and proposes the required injections.
BEST RE is currently in the process of developing its ERM processes to achieve the
level of sophistication required by the regulators adequacy and compliance standards.
The company has just completed the second year of its three-year plan to develop its own
capital modelling system, which is expected to come into use in 2011.
offICERS: Chief Executive Officer, Dr. Saleh J. Malaikah.
dIRECtoRS: Suhail Mubarak Al Dhaheri, Marwan Ahmed Majid Al Ghurair, Mr. Hussain
Hasan Bayari, Sheikh Khaled Bin Zayed Al Nehayan (Chairman), Dr. Saleh J. Malaikah (Vice
Chairman and Chief Executive Officer).
analysis oF gRoss PReMiuMs WRitten

other life
ttotal life
accident & health
automobile
Fire
life
Marine
other classes
transport
total non-life
aed
(000)
2009
131,067
aed
(000)
2008
71,349
aed
(000)
2007
aed
(000)
2006
2005
131,067
71,349
52,072
248,885
1,141,074
52,799
261,869
939,132
129,067
199,149
381,211
20,142
91,496
111,404
753
68,632
173,748
266,934
8,745
64,248
71,166 6
4,119
50,919
140,828
190,473
62,726
7,878
1,744
1,442,031
1,253,800
933,222
657,592
514,568
reinSuranCe
SALAMAs retention remained at 83% at year-end 2009. In A.M. Bests view, the companys
retrocession programmes are comprehensive, with each subsidiary reinsuring its main
lines of business independently through a combination of proportional and non-proportional retrocession facilities.The credit quality of the programme appears to be strong
with 85% placed with reinsurers rated A- or higher. SALAMA has reduced the proportion
of reinsurers share of claims reserves derived from non-rated entities to 14% in 2009 from
26% in 2007. A.M. Best expects this trend to continue going forward.
A.M. Best believes that the companys risk management with regard to its probable maximum
loss (PML) needs further strengthening at the group level, with SALAMA reliant on BEST RE,
which underwrites the majority of the companys exposures. BEST RE seeks independent advice
from brokers using catastrophe modelling software and its own internal modelling capabilities.
37

geographiCal diStriBution oF preMiuMS written
aed(000)
12/31/2008
gross
335,563
12/31/2008
% of total
21.3
aed(000)
12/31/2007
gross
283,388
335,563
21.3
283,388
344,586
892,949
21.9
56.8
301,147
740,614
total
t
asia
1,237,535
78.7
1,041,761
total
t
1,573,098
100.0
1,325,149
other africa
total africa
Middle east
other asia
BalanCe Sheet iteMS

liquid assets
total investments
total assets
net technical reserves
total liabilities
Capital & surplus
aed
(000)
2008
904,496
1,680,393
3,286,431
1,209,354
997,841
1,821,120
1,465,311
aed
(000)
2007
613,593
1,293,391
2,918,478
901,819
756,056
1,564,134
1,354,344
aed
(000)
2006
764,437
1,275,825
2,511,165
690,590
540,652
1,099,342
1,411,823
aed
(000)
2005
955,243
1,207,131
2,152,370
494,645
406,507
880,313
1,272,057
2004
667,445
879,721
1,797,367
390,467
321,922
689,517
1,107,850
aed
(000)
2008
1,573,098
1,286,578
66,630
101,614
96,257
aed
(000)
2007
1,325,149
1,102,413
41,447
-4,533
-8,179
aed
(000)
2006
933,222
769,885
25,001
158,101
154,767
aed
(000)
2005
657,592
566,174
28,001
184,578
182,141
2004
514,568
451,470
23,999
128,460
123,800
2008
25.0
90.6
49.7
92.3
2007
32.3
81.2
39.2
82.7
2006
22.5
141.4
69.5
116.1
2005
16.4
235.0
108.5
137.1
2004
19.7
207.3
96.8
127.6
2008
56.8
34.4
91.1
4.1
87.1
66.1
1.7
7.5
3.1
6.8
2007
59.4
36.5
95.8
1.3
94.5
63.6
-24.4
-0.7
-0.3
-0.6
2006
57.2
38.0
95.1
13.1
82.0
20.1
6.5
11.3
2005
54.3
39.0
93.3
33.5
59.8
32.2
8.4
13.9
2004
58.3
37.3
95.6
5.4
90.2
27.4
inCoMe StateMent iteMS

Balance on technical account(s)
liQuidity ratioS (%)

total debtors to total assets
liquid assets to net technical reserves
liquid assets to total liabilities
total investments to total liabilities
proFitaBility ratioS (%)

loss ratio
Operating expense ratio
Combined ratio
net investment income ratio
operating ratio
Benefits paid to net premiums written (life)
Expense ratio (Life)
return on net premiums written
return on total assets
return on capital & surplus
the Financial Strength rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. the
ratings are not assigned to specific insurance policies or contracts and do not address any other risk, including, but not limited
to, an insurers claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds
of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. a Financial Strength
rating is not a recommendation to purchase, hold, or terminate any insurance policy, contract, or any other financial obligation
issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. in
arriving at a rating decision, a.M. Best relies on third-party audited financial data and/or other information provided to it. while
this information is believed to be reliable, a.M. Best does not independently verify the accuracy or reliability of the information.
visit www.ambest.com/ratings/notice for additional information or www.ambest.com/terms.html for details on the terms of use.
Copyright 2011 a.M. Best Company, inc. all rights reserved.
aMB Credit report - insurance professional BCr02182011
38
Guide to Bests Financial Strength Ratings

A Bests Financial Strength Rating is an independent opinion of an insurers financial strength and ability to meet its ongoing insurance policy
and contract obligations. The rating is based on a comprehensive quantitative and qualitative evaluation of a companys balance sheet strength,
operating performance and business profile.
Vulnerable
Secure
Financial Strength Ratings

Rating
A++, A+
Descriptor
Superior
A, A-
Excellent
B++, B+
B, B-
Good
Fair
C++, C+
Marginal
C, C-
Weak
Poor
Under
Regulatory
Supervision
In Liquidation
Suspended
F
S
Definition
Assigned to companies that have, in our opinion, a superior ability to meet their ongoing insurance
obligations.
Assigned to companies that have, in our opinion, an excellent ability to meet their ongoing insurance
obligations.
Assigned to companies that have, in our opinion, a good ability to meet their ongoing insurance obligations.
Assigned to companies that have, in our opinion, a fair ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.
Assigned to companies that have, in our opinion, a marginal ability to meet their ongoing insurance obligations. Financial strength is vulnerable to adverse changes in underwriting and economic conditions.
Assigned to companies that have, in our opinion, a weak ability to meet their ongoing insurance obligations. Financial strength is very vulnerable to adverse changes in underwriting and economic conditions.
Assigned to companies that have, in our opinion, a poor ability to meet their ongoing insurance obligations. Financial strength is extremely vulnerable to adverse changes in underwriting and economic
conditions.
Assigned to companies (and possibly their subsidiaries/affiliates) placed under a significant form of
regulatory supervision, control or restraint - including cease and desist orders, conservatorship or rehabilitation, but not liquidation - that prevents conduct of normal, ongoing insurance operations.
Assigned to companies placed in liquidation by a court of law or by a forced liquidation.
Assigned to rated companies when sudden and significant events affect their balance sheet strength or
operating performance and rating implications cannot be evaluated due to a lack of timely or adequate
information.
Rating Outlooks
Assigned to an interactive Financial Strength Rating to indicate its potential direction over an intermediate term, generally defined as 12 to 36 months.
Positive
Negative
Stable
Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.
Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.
Indicates low likelihood of a rating change due to stable financial/market trends.
Rating Modifiers
Modifier
u
Descriptor
Under Review
pd
Public Data
Syndicate
Definition
Indicates the rating may change in the near term, typically within six months. Generally is event driven, with positive, negative or developing implications.
Indicates rating assigned to insurer that chose not to participate in A.M. Bests interactive rating process.
(Discontinued in 2010)
Indicates rating assigned to a Lloyds syndicate.
Affiliation Codes
Indicates rating is based on a type of affiliation with other insurers.
Group
Pooled
Reinsured
Not Rated Designation

NR: Assigned to companies that are not rated by A.M. Best.
Rating Disclosure
A Bests Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not
assigned to specific insurance policies or contracts and do not address any other risk, including, but not limited to, an insurers claims-payment
policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability
contractually borne by the policy or contract holder. A Bests Financial Strength Rating is not a recommendation to purchase, hold or terminate any
insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract
for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information
provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information.
For additional details, see A.M. Bests Terms of Use at www.ambest.com.
Bests Financial Strength Ratings are distributed via press release and/or the A.M. Best Web site at www.ambest.com and are published in the Rating
Actions section of BestWeek. Bests Financial Strength Ratings are proprietary and may not be reproduced without permission.
Copyright 2011 by A.M. Best Company, Inc.
Version 041811
A
M
BEST
39
Guide to Bests Debt and Issuer Credit Ratings

A Bests Debt/Issuer Credit Rating is based on a comprehensive quantitative and qualitative evaluation of a companys balance sheet strength, operating performance
and business profile and, where appropriate, the specific nature and details of a rated debt security.
Long-Term Credit Ratings
Non-Investment
Grade
Investment
Grade
A Bests Long-Term Debt Rating, assigned to specific issues such as debt and preferred stock, is an independent opinion of an issuer/entitys ability to meet
its ongoing financial obligations to security holders when due.
Rating
Descriptor
Definition
aaa
aa
Exceptional
Very Strong
Assigned to issues where, in our opinion, the issuer has an exceptional ability to meet the terms of the obligation.
Assigned to issues where, in our opinion, the issuer has a very strong ability to meet the terms of the obligation.
a
bbb
Strong
Adequate
bb
Speculative
Very
Speculative
Extremely
Speculative
Assigned to issues where, in our opinion, the issuer has a strong ability to meet the terms of the obligation.
Assigned to issues where, in our opinion, the issuer has an adequate ability to meet the terms of the obligation;
however, the issue is more susceptible to changes in economic or other conditions.
Assigned to issues where, in our opinion, the issuer has speculative credit characteristics, generally due to a
moderate margin of principal and interest payment protection and vulnerability to economic changes.
Assigned to issues where, in our opinion, the issuer has very speculative credit characteristics, generally due to
a modest margin of principal and interest payment protection and extreme vulnerability to economic changes.
Assigned to issues where, in our opinion, the issuer has extremely speculative credit characteristics, generally due
to a minimal margin of principal and interest payment protection and/or limited ability to withstand adverse
changes in economic or other conditions.
Assigned to issues in default on payment of principal, interest or other terms and conditions, or when a bankruptcy petition or similar action has been filed.
ccc, cc, c
d
In Default
A Bests Long-Term Issuer Credit Rating is an opinion of an issuer/entitys ability to meet its ongoing senior financial obligations. When assigned to an insurance
company, the Long-Term Issuer Credit Rating descriptors are as follows: (aaa) - Exceptional; (aa) - Superior; (a) - Excellent; (bbb) - Good; (bb) - Fair; (b) - Marginal;
(ccc and cc) - Weak; (c) - Poor; (rs) - Regulatory Supervision/Liquidation.
Ratings from "aa" to "ccc" may be enhanced with a "+" (plus) or "-" (minus) to indicate whether credit quality is near the top or bottom of a category.
Rating Outlooks
Assigned to an interactive Long-Term Credit Rating (aaa to c) to indicate its potential direction over an intermediate term, generally defined as 12 to 36 months.
Positive
Indicates possible rating upgrade due to favorable financial/market trends relative to the current rating level.
Negative
Stable
Indicates possible rating downgrade due to unfavorable financial/market trends relative to the current rating level.
Indicates low likelihood of a rating change due to stable financial/market trends.
Short-Term Credit Ratings
NonInvestment
Grade
Investment
Grade
A Bests Short-Term Debt Rating is an opinion of an issuer/entitys ability to meet its financial obligations having original maturities of generally less than one
year, such as commercial paper.
Rating
Descriptor
Definition
AMB-1+
AMB-1
AMB-2
AMB-3
Strongest
Outstanding
Satisfactory
Adequate
AMB-4
Speculative
Assigned to issues where, in our opinion, the issuer has the strongest ability to repay short-term debt obligations.
Assigned to issues where, in our opinion, the issuer has an outstanding ability to repay short-term debt obligations.
Assigned to issues where, in our opinion, the issuer has a satisfactory ability to repay short-term debt obligations.
Assigned to issues where, in our opinion, the issuer has an adequate ability to repay short-term debt obligations;
however, adverse economic conditions likely will reduce the issuers capacity to meet its financial commitments.
Assigned to issues where, in our opinion, the issuer has speculative credit characteristics and is vulnerable to
adverse economic or other external changes, which could have a marked impact on the companys ability to
meet its financial commitments.
In Default
Assigned to issues in default on payment of principal, interest or other terms and conditions, or when a bankruptcy petition or similar action has been filed.
A Bests Short-Term Issuer Credit Rating is an opinion of an issuer/entitys ability to meet its senior financial obligations having original maturities of generally less
than one year.
Rating Modifiers
Both Long- and Short-Term Credit Ratings can be assigned a modifier. Note: The public data modifier does not apply to Short-Term Credit Ratings, which are
only assigned on an interactive basis.
Modifier
Descriptor
Definition
Under Review
Indicates the rating may change in the near term, typically within six months. Generally is event driven, with positive,
negative or developing implications.
pd
Public Data
Indicates rating assigned to a company that chose not to participate in A.M. Bests interactive rating process. (Discontinued
in 2010)
Indicative
Indicates rating assigned is indicative.
Not Rated Designation

The Not Rated (NR) designation may be assigned to issuers or issues that are not rated.
Rating Disclosure
A Bests Debt/Issuer Credit Rating is an opinion regarding the relative future credit risk of an entity, a credit commitment or a debt or debt-like security. Credit
risk is the risk that an entity may not meet its contractual, financial obligations as they come due. These credit ratings do not address any other risk, including
but not limited to liquidity risk, market value risk or price volatility of rated securities. The rating is not a recommendation to buy, sell or hold any securities,
insurance policies, contracts or any other financial obligations, nor does it address the suitability of any particular financial obligation for a specific purpose or
purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information
is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. For additional details, see A.M. Bests Terms of
Use at www.ambest.com.
Bests Debt/Issuer Credit Ratings are distributed via press release and/or the A.M. Best Web site at www.ambest.com and are published in the Rating Actions
section of BestWeek. Bests Credit Ratings are proprietary and may not be reproduced without permission.
Copyright 2011 by A.M. Best Company, Inc.
Version 041811
A
M
40
BEST
Contact Us
For more information about a.M. Bests ratings of
takaful insurers, please contact:
niCk ChaRteRis-blaCk
Managing director, Market development and information Services

+44 (0)20 7397 0284
nick.charteris-black@ambest.com
Market development Managers:
CliVe thuRsby
Senior Manager Market development

+44 (0)20 7397 0279
clive.thursby@ambest.com
dR edeM kuenyehia
Manager Market development
+44 (0)20 7397 0280
edem.kuenyehia@ambest.com
41
Notes
42
43
Notes
44
Founded in 1899, A.M. Best Company is the worlds oldest

and most authoritative insurance rating and information
source. For more information, visit www.ambest.com.
Copyright 2011 by A.M. Best Company, Inc.ALL RIGHTS RESERVED.
A.M. Best Company, Inc.

Ambest Road
Oldwick, New Jersey 08858
Phone: +1 (908) 439-2200
Fax: +1 (908) 439-3296
www.ambest.com
A.M. Best Europe Rating Services Ltd.
12 Arthur Street, 6th Floor
London, UK EC4R 9AB
Phone: +44 (0)20 7626-6264
Fax: +44 (0)20 7626-6265
www.ambest.co.uk
03805A1
A.M. Best Asia-Pacific Ltd.

Unit 4004 Central Plaza
18 Harbour Road
Wanchai, Hong Kong
Phone: +852 2827-3400
Fax: +852 2824-1833
www.ambest.com.hk

AMBest Takaful Review 2011

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AMBest Takaful Review 2011

Uploaded by

Copyright:

Available Formats

A.M.

4 rating Methodology For

11 Understanding Universal BCAR:

19 a.M. BeStS Country riSk tierS

Tackling Takaful: Opportunities and Challenges in a Growing Market

24 SaMple aMB Credit reportS

24 ACR ReTakaful MEA B.S.C. (C)

37 guide to BeStS FinanCial Strength ratingS

A.M. Bests Takaful Review

It seems that in many markets price competition rather

A.M. Bests Takaful Review

A.M. Bests Takaful Review

February 11, 2008

Takaful (Sharia Compliant)

Rating European Mutual Insurers

A.M. Bests Takaful Review

takaFul ModelS & StruCtureS

Main CharaCteriStiCS oF takaFul CoMpanieS

A.M. Bests Takaful Review

analySing a takaFul CoMpany

A.M. Bests Takaful Review

two Separate Funds a two-Stage risk-Based Capital approach

Restricted investment policy

Market environment and regulatory environment

So far restricted to personal and SME lines

Potential for adverse selection due to crude pricing

Financial Strength Rating

A.M. Bests Takaful Review

Main drivers of Balance Sheet Strength in a takaful Company

operating performance issues in a takaful Company

A.M. Bests Takaful Review

Market environment and Country risk

regulatory environment and risk Management

A.M. Bests Takaful Review

Sample Takaful Rating Meeting Agenda

Ownership and Participant Requirements

product development and underwriting

Marketing and Business production

Claims and loss reserves

Severity and Frequency Trends (General)

Reinsurance Program Overview

Balance Sheet Composition

Profitability by Line of Business

Catastrophe Management Framework

Catastrophe Models Used

enterprise risk Management (erM)*

A.M. Bests Takaful Review

Understanding Universal BCAR

december 15, 2010

Bests Credit Rating Methodology

A.M. Bests Takaful Review

A.M. Bests Takaful Review

deterMination oF availaBle Capital

available Capital Components

A.M. Bests Takaful Review

additional StreSS teSting

A.M. Bests Takaful Review

Assessing Country Risk

Relationship between Ratings and CRts

aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-

aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-

aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-

aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-

aaa aa+ aa aa- a+ a a- bbb+ bbb bbb-