Islamic Arab Insurance Co. (SALAMA) Bloomberg Code: SALAMA UH Reuters Code: IAIC.DU  Demand for Takaful Will Stimulate Growth

Global Research - UAE

Initial Coverage

Market Data Islamic Arab Insurance Co. (SALAMA) Bloomberg Code: SALAMA UH Reuters Code: IAIC.DU  Demand for Takaful will stimulate growth. CMP (16th May 2010): AED0.860 BUY O/S (mn): 1,100.0  Strong investment proposition. Mkt Cap (AEDmn): 946.0  Will outperform conventional players. Target Price Mkt Cap (US$mn): 257.7 AED 1.1 P/E 2010e (x): 6.2  Acting as a catalyst to offer Takaful products. P/Bv 2010e (x): 0.6 Focus on core business to drive the profitability Price Performance 1-Yr Islamic Arab Insurance Co. known as SALAMA is undoubtedly a leader in High /Low (AED): 1.45/0.71 providing Takaful and Re-Takaful insurance. The company has presence in Avg Volume(‘000): 9,148 UAE, Tunisia, Saudi Arabia, Algeria, Egypt, Jordan and Senegal. We expect the

company to report CAGR 9%, 8%, 14% and 29% in FY09-13E for Gross 1m 3m 12m written premiums, Net premiums earned, Net underwriting income and Net

Absolute (%) -5.6 12.0 9.1 income respectively.

Relative (%) -8.3 -0.9 -22.9 Higher retention, lower combined ratio translates into higher underwriting surplus SALAMA has not witnessed any volatility in claims or expenses due to better SALAMA's Price Volume Performance risk management and adequate reserve provision. The company has reported

100 1.6 average combined ratio of 59% during the last three years, we expect the company to report a slightly higher combined ratio at an average of 61% during 90 1.4 80 FY10-13E, this will be due to increasing expense ratio but no significant increase 1.2 70 in claims.

1 60 De-risked investments portfolio 50 0.8 The company has an active investment portfolio, holding more than 25.6% in 40 0.6 30 AFS in Mutual Funds and shares, 69% in HTM and balance in HFT. The most 0.4 of the holdings of AFS portfolio are in the international markets and very 20 10 0.2 miniscule exposure in domestic markets. The company has made shari’ah compliance placements with various financial institutions, this contributes to 0 0

47% of total investment portfolio. The placements results in average yield of

09 10

- -

- - 0.5% to 5.5%.

Feb

Aug

May May Nov CAGR 12% growth in networth

We expect SALAMA to report net income CAGR 29% during FY09-13E, this Volume (mn) SALAMA (AED) will translate into four year (FY09-13E) CAGR 12% for networth. The strong growth in networth will be driven by core growth in insurance operations. We Source : Zawya expect the company to deliver RoAE of 12.5% by 2013E.

Faisal Hasan, CFA Investment Indicators Head of Research Net Profit BVPS

[email protected] (AEDmn) EPS (AED) (AED) RoE(%) P/E (x) P/BV (x) Phone: +965-2295-1270 2009 (A) 96.3 0.1 1.3 6.8% 9.94 0.65 2010 (F) 152.9 0.1 1.5 9.9% 6.19 0.58

2011 (F) 190.7 0.2 1.6 11.1% 4.96 0.52 Vishal Shah 2012 (F) 217.9 0.2 1.8 11.4% 4.34 0.47 Financial Analyst 2013 (F) 269.4 0.2 2.1 12.5% 3.51 0.41 [email protected] Source : Company Reports, Global Research Phone: +965-2295-1298 Historical P/E and P/BV multiples based on respective year-end prices, while those for future years are based on current prices in the DFM as on May 16th 2010.

Global Research – UAE Global Investment House

Valuation & Recommendation

Embedded Value Method

We believe that statutory cash flow accounting does little to show how an insurance company’s management creates economic value. It looks at the past performance rather than the future potential. For valuation purposes past performance is just one of the indicators, as the insurance company would have to work in a very dynamic and ever changing scenarios.

Various research houses use different methodologies to value an insurance company, as its operations assume significant difference from other brick & mortar or services sector.

We use Embedded Value method recognized worldwide to value insurance companies. Embedded Value (EV) comprises net asset value, and the estimated value of current in-force business only for the Life & Health insurance segment, because it is relatively too low for the non-life insurance companies. Life & Health companies sell long-term contracts from which the company will derive profits in the future, in turn building up a profitable book of in-force business.

The fair value is based on comparing the company’s Return on Equity with its cost of capital to generate an appropriate embedded value projected forward by twelve months. Fair value per share = (Embedded Value Method)*(Return on Equity/Cost of Capital).

EVM (Embedded Value Method)

Amounts in AED'000 Dec-10 Cost of capital Stated shareholders' funds 1,618,164 Cost of equity 12.60% Dividend - Justified RoE 10.3% Goodwill 186,194 Net Asset Value 1,431,970 Inforce value 7,579 Net asset plus in-force value 1,439,549 Embedded Value per share (AED) 1309 Number of shares (mn) 1,100 Fair value per share using EVM (AED) 1.1 Source: Company Reports, Global Research

Relative Valuation Amounts in AED 2010 2011 2012 2013 BVPS 1.5 1.6 1.8 2.1 Industry P/BV (x) 1.3 Target price based on Industry P/BV 1.0 Source: Company Reports, Global Research We have also used the P/BV valuation method, the industry has historical P/BV of 1.3x so we have assigned a industry multiple for the insurance companies at 1.3x to the 2010E book value. We assign EVM 80% weight and P/BV 20% weight and the target price is arrived.

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P/BV and RoE AL Wathba 32% Insurance Co.

26%

20%

14% 2009RoE Oman Insurance Emirates Company 8% Insurance SALAMA Company ADNIC 2% 0.5 1.0 1.5 2.0 2009 P/BV

Source: Zawya, Global Research SALAMA trades at FY09 P/BV of 0.7x. As compared to the other insurance players trading in the range of P/BV of 1.3x-2.2x, SALAMA trades at less than the book value. We believe that there still remains huge Muslim population in MENA to be still tapped.

SALAMA is the largest player in underwriting takaful and re-takaful non-life risks in the region. It has an edge over others since Takaful is growing faster as compared to conventional insurance. Although the insurance penetration is lower in GCC, due to domination of Muslim population in the region it has stimulated the demand for takaful products.

We expect as compared to other players in the insurance segment, SALAMA should trade at much higher premiums, due to its strong growth outlook in the takaful insurance segment. We believe going ahead the company will emerge much stronger player.

We believe the potential of the company to grow considering growth in Muslim population and per-capita GDP growth in MENA markets, SALAMA has a huge role to play to underwrite the insurance policies in MENA and World over.

Valuation Weighted Fair Value Valuation Summary Amount in Premium to per share (AED) CMP (%) Weight (%) (AED) Fair value based on Embedded Value method 1.1 24.9% 80% 0.9 Fair value based on P/B valuation 1.3 45.3% 20% 0.3 Total Weighted Average Fair Value per share 29.0% 1.1 Source: Company Reports, Global Research

There are 27 listed players in UAE catering to the insurance industry, although few are large players who dominate the industry. SALAMA is one amongst the largest player in UAE dominating the takaful industry.

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At the CMP of AED0.860 the stock trades at P/E of 4.34x and 3.51x and at P/BV of 0.47x and 0.41x FY12E and FY13E respectively. Using the Embedded Value Method and Price to book method we arrive at a price target of AED1.1 indicating a premium of 29.0% to the current market price of AED0.860 (As on 16th May 2010). We recommend “BUY” on the stock.

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SALAMA – Islamic Arab Insurance Company Islamic Arab Insurance Co. is a leading provider of Shari’ah compliant insurance solutions around the World. The company is undoubtedly an leader since its incorporation in 1979 in Dubai, UAE as a pioneer in the Takaful industry.

The company caters to both individual and institutional clients through its extensive global network. The company has six direct Takaful companies providing solutions to clients in UAE, Saudi Arabia, Egypt, Algeria and Jordan. The company also plans to expand its geographical reach to all GCC states, South East Asia and Europe to offer innovative Shari’ah compliant solutions.

The company offers many products majorly in three segments of insurance General, Family and Health segment. The company has maintained its strong position by diversifying in various other markets.

Insurance Products

General Family Health Takaful Takaful Takaful •Fire & •Finance •Mednet plan Allied Protection •ARIG - •Property •Savings plan NAS plan •Others •Child's Future plan

Source: Company Reports, Global Research

Geographical reach

The company has well established network, it is already present in the countries like Bahrain, Tunisia, KSA, Algeria, Egypt, Senegal and Jordan. It aims at further expanding into South East Asian markets, GCC states and Europe.

Islamic Arab Insurance Company is a leading provider of Shari’ah compliant insurance solutions (Takaful) around the world. Since its incorporation in 1979 in Dubai, UAE it acts as a pioneer in the Takaful industry, as the world's largest Takaful and Re-Takaful Company. SALAMA has been rated “A-” by A.M. Best and “BBB+” by Standard & Poor’s. BEST-Re, the Tunisia based company, is the world’s largest Re-Takaful company, operating in more than 60 countries.

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Liquidity of the stock Average Mthly Avg Monthly Value Traded Closing M.Cap Year Volumes (mn) (mn) price (AED) (AEDmn) 2007 299.69 1135.83 3.79 4169.00 2008 203.33 158.60 0.78 858.00 2009 272.86 237.39 0.87 957.00 2010* 264.50 227.47 0.86 946.00 *All Closing prices as at December year end and 2010 closing price as on May 10th’ 2010.

Source : Global Research

SALAMA currently trades at CMP of AED0.86 with a market capitalization of AED946mn. The stock has monthly volume averaging AED203mn to AED299mn during FY07-09. We believe as the company continues to deliver better results post FY09 the stock will fare well going ahead.

Shareholding Pattern Major Shareholders Holding % Noor Al Ain Management Services 13.7 Ajyad Management Services 10.0 Al Wajna Holding 6.0 Awafi Holding 5.0 Ferdos for Facilities Management Services 5.0 Hoor Al Ain Commercial Brokers 5.0 Jebel Alqala Management Services Company 5.0 Sarah Holding 5.0 Public 45.3 Source: Company Reports, Global Research

Management Team & Network SALAMA’s management team has immensive experience and technical expertise to underwrite the policies in the non-life segment in the region. The management team is headed by experienced Vice Chairman & CEO Dr.Saleh J Malaikah. The company has emerged as a Takaful player over a span of period. The vast experience, underwriting skills, different policies and operations across 60 countries makes SALAMA the largest takaful player in UAE.

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Network of SALAMA Subsidiaries % of Ownership Best Re 77.75% Salama Assurances Senegal 55.10% Salama Assurance Algeria 89.11% Egypt Saudi Insurance Home 51.15% Investment in Associates Saudi IAIC 30.00% Islamic Insurance Jordan 20.00% Source: Company Reports, Global Research

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Insurance : A Global Perspective In 2008, worldwide insurance premiums rose to US$4270.1bn. The life business accounted for US$2490.1bn and non-life insurance accounted for the remaining US$1779.0bn. For the first time in the last twenty years the premiums have declined in real terms with non-life premiums falling by 0.8% and life premiums falling faster by 3.5%.

Real GWP growth

Source: Swiss Reinsurance

The 3.5% fall in global life insurance premiums can be attributed to a decline in the industrialized countries (-5.3%) and a double digit growth in the emerging markets (+15%). The falling premium volumes in the industrialized countries was mainly due to slowdown in global economy and financial crisis. Majorly the fall in premiums was accounted due to financial crisis, also Unit linked business declined in emerging markets during second half of 2008.

In 2008 the World GDP expanded by 2.3% in real terms. Though the global financial crisis began affecting the demand negatively and fall in price of assets, the impact was felt strongly after the collapse of Lehman Brothers resulting to crash in the equity markets.

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Total Premium Volumes Premium Volume (In bns Change Share Premiums Premiums of US$) (in%) of in % of per capita inflation World GDP (in US$) adjusted Market (%) Total businesses 2008 2007 2008 2007 2008 2008 2008 America 1,450,749.0 1,428,890.0 (2.4) 3.2 34.0 7.3 1,552.7 North America 1,345,816.0 1,338,648.0 (3.1) 2.7 31.5 8.5 3,988.8 Latin America and Carribean 104,933.0 89,642.0 8.4 12.1 2.5 2.5 175.8 Europe 1,753,200.0 1,764,685.0 (6.2) 6.4 41.1 7.5 2,043.9 Western Europe 1,656,281.0 1,689,566.0 (6.9) 6.1 38.8 8.3 3,209.2 Central and Eastern Europe 96,919.0 75,119.0 9.0 13.2 2.3 2.8 299.2 Asia 933,358.0 812,046.0 6.6 (0.8) 21.9 6.0 234.3 Japan and newly industrialised Asain economies 675,109.0 608,007.0 3.8 (5.1) 15.8 10.4 3,173.2 South and East Asia 229,036.0 180,099.0 16.3 17.0 5.4 3.2 65.5 Middle East and Central Asia 29,213.0 23,940.0 4.7 10.9 0.7 1.5 110.3 Oceania 77,716.0 68,882.0 8.6 4.0 1.8 7.0 2,271.9 Africa 54,713.0 53,683.0 4.9 1.0 1.3 3.6 55.6 World 4,269,737.0 4,127,586.0 (2.0) 3.6 100.0 7.1 633.9 Industrialised Countries 3,756,939.0 3,705,676.0 (3.4) 2.7 88.0 8.8 3,655.4 Emerging Markets 512,799.0 421,911.0 11.1 12.6 12.0 2.7 89.4 OECD 3,696,073.0 3,644,916.0 (3.2) 2.4 86.6 8.3 3,015.2 G7 2,925,946.0 2,910,018.0 (4.4) 1.8 68.5 9.0 3,930.2 EU, 15 Countries 1,564,424.0 1,610,393.0 (7.1) 6.3 36.6 8.7 3,726.8 EU, 27 Countries 1,616,461.0 1,650,192.0 (6.7) 6.4 37.9 8.3 3,061.3 Nafta 1,364,839.0 1,356,214.0 (3.0) 2.8 32.0 8.1 3,065.7 ASEAN 45,493.0 41,288.0 0.4 9.8 1.1 3.0 85.1 Source: Swiss Reinsurance 9 SALAMA May 2010

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As it can be inferred from the above chart the premiums as a % to GDP is the lowest in the Middle East as compared to the other regions in the world. The insurance market it at its nascent stage and has the potential to grow as compared to other countries in the world.

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Total Life Business Premium Change Share Premiums Premiums Premium Volume (in%) of in % of per capita Volume (In bns of inflation World GDP (in US$) (In bns US$) adjusted Market of US$) (%) Life Business 2008 2007 2008 2007 2008 2008 2008 America 666,954.0 660,579.0 (2.8) 6.2 26.8 3.4 713.8 North America 626,066.0 624,558.0 (3.4) 5.9 25.1 4.0 1,855.6 Latin America and Carribean 40,889.0 36,021.0 7.0 12.3 1.6 1.0 68.5 Europe 1,050,815.0 1,115,147.0 (11.1) 9.5 42.2 4.5 1,244.1 Western Europe 1,025,260.0 1,097,027.0 (11.6) 9.4 41.2 5.3 2,022.4 Central and Eastern Europe 25,554.0 18,120.0 18.7 17.2 1.0 0.7 78.9 Asia 690,951.0 592,644.0 8.2 (2.7) 27.7 4.4 173.9 Japan and newly industrialised Asain economies 519,046.0 459,512.0 5.2 (7.0) 20.8 8.0 2,447.8 South and East Asia 164,228.0 127,127.0 19.0 18.4 6.6 2.3 47.0 Middle East and Central Asia 7,677.0 6,005.0 9.3 12.1 0.3 0.4 29.0 Oceania 43,835.0 35,809.0 17.6 7.9 1.8 4.0 1,281.5 Africa 37,866.0 37,645.0 5.5 (0.9) 1.5 2.5 38.4 World 2,490,421.0 2,441,823.0 (3.5) 5.1 100.0 4.1 369.7 Industrialised Countries 2,218,523.0 2,220,129.0 (5.3) 4.4 89.1 5.2 2,174.4 Emerging Markets 271,898.0 221,695.0 14.6 13.2 10.9 1.4 47.4 OECD 2,147,210.0 2,150,619.0 (5.1) 3.9 86.2 4.9 1,764.4 G7 1,710,983.0 1,725,307.0 (5.7) 3.3 68.7 5.3 2,327.7 EU, 15 Countries 973,700.0 1,054,307.0 (11.9) 9.7 39.1 5.5 2,365.0 EU, 27 Countries 998,452.0 1,071,539.0 (11.4) 9.8 40.1 5.2 1,926.8 Nafta 634,394.0 632,242.0 (3.3) 5.9 25.5 3.8 1,425.0 ASEAN 29,329.0 26,842.0 (0.4) 12.2 1.2 2.0 57.7 Source: Swiss Reinsurance 11 SALAMA May 2010

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In the Middle East region the premiums to per capita income ratio is the lowest as compared to other regions in the world. Although the Life & Health business is gaining its dominance post the takaful launch, which is gaining more importance and awareness for Life & Health insurance. The Life & Health business has gained popularity since the takaful product is launched in GCC countries, which is shariah compliant. As can be inferred from the table above there is potential to tap in the Life & Health insurance segment.

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Total Non-life business Premium Change Share Premiums Premiums Premium Volume (in%) of in % of per capita Volume (In bns of inflation World GDP (in US$) (In bns US$) adjusted Market of US$) (%) Non-Life Business 2008 2007 2008 2007 2008 2008 2008 America 783,795.0 767,711.0 (2.0) 0.7 44.1 3.9 838.9 North America 719,751.0 714,090.0 (2.8) - 40.5 4.6 2,133.2 Latin America and Carribean 64,044.0 53,621.0 9.5 11.9 3.6 1.6 107.3 Europe 702,386.0 649,538.0 (0.5) 1.3 39.5 2.9 799.8 Western Europe 631,021.0 592,539.0 (1.1) 0.4 35.5 3.1 1,186.8 Central and Eastern Europe 71,365.0 56,999.0 5.7 12.0 4.0 2.1 220.3 Asia 242,407.0 219,402.0 2.3 4.5 13.6 1.5 60.4 Japan and newly industrialised Asain economies 156,063.0 148,495.0 (0.4) 1.2 8.8 2.4 725.4 South and East Asia 64,808.0 52,972.0 9.5 13.8 3.6 0.9 18.5 Middle East and Central Asia 21,536.0 17,936.0 3.1 9.5 1.2 1.1 81.3 Oceania 33,881.0 33,074.0 (1.0) 0.1 1.9 3.1 990.5 Africa 16,847.0 16,038.0 3.0 6.8 1.0 1.1 17.1 World 1,779,316.0 1,685,762.0 (0.8) 1.5 100.0 3.0 264.2 Industrialised Countries 1,538,290.0 1,485,547.0 (1.9) 0.3 86.5 3.6 1,481.0 Emerging Markets 240,901.0 200,216.0 7.1 11.8 13.5 1.3 42.0 OECD 1,548,862.0 1,494,297.0 (1.8) 0.3 87.1 3.5 1,250.8 G7 1,214,963.0 1,184,711.0 (2.5) (0.2) 68.3 3.7 1,602.6 EU, 15 Countries 590,724.0 556,073.0 (1.1) 0.3 33.2 3.2 1,361.9 EU, 27 Countries 618,009.0 578,653.0 (1.0) 0.6 34.7 3.1 1,134.5 Nafta 730,445.0 723,972.0 (2.7) 0.2 41.1 4.3 1,640.7 ASEAN 16,164.0 14,446.0 1.9 5.7 0.9 1.0 27.4 Source: Swiss Reinsurance 13 SALAMA May 2010

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GCC Insurance market Insurance is one of the cornerstones of the modern-day financial services sector. In addition to its traditional role of managing risk, the insurance sector promotes long-term savings and serves as a conduit to channel funds from policyholders to investment opportunities, including mortgage lending.

Insurance Penetration

9% 8% 7% Malaysia 6% 5% 526 4% 3%

written/GDP) Indonesia Bahrain 42 United Arab Emirates 2% 104 83 1% 430 Saudi Arabia

Insurance penetration (Premiums (Premiums Insurancepenetration 0% 1 10 100 1000 GDP per capita in USD 1 000

Source: Company Reports, Global Research

GCC Insurance Market potential

The Islamic population is primarily concentrated in the Middle East, Northern Africa and South and East Asia. About 300mn muslims live as minorities in other countries, with the largest number of muslims living in India (157mn :13%), China (40mn:3%) and Ethiopia (40mn). Given their fast-growing economies and insurance sectors, India and China are potential markets for Islamic insurance going forward. Islamic countries accounted for US$3,462.2bn (22%) of emerging market GDP in 2007. This is equivalent to an average GDP per capita for emerging countries (US$2,700).

In 2007, 11% of emerging market insurance premiums were written in Islamic countries (US$45bn), indicating a low level of insurance penetration compared to that of the emerging markets. Insurance penetration, particularly in Life & Health insurance is low in Islamic countries. Premiums written amounted to just 1.3% of GDP in 2007, versus 2.8% of GDP in the emerging markets. While economic growth has been solid in most Islamic countries since the turn of the century, the insurance sector has lagged. One reason for the low penetration is that conventional insurance is not compatible with Islamic faith.

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UAE Insurance Market

United Arab Emirates is the second largest market in GCC in terms of market size. There are 56 insurance companies currently serving the UAE’s insurance market of which 29 national insurance companies are incorporated in UAE and 27 are foreign companies. The lower penetration percentage as a percentage to GDP at less than 1% is favorable for the industry to grow considering the percapita GDP of the country.

The companies carrying out insurance against property and liability are more than 50% of total insurance companies and only two UAE companies and eight foreign companies underwrite in the life segment.

The total premiums underwritten in UAE grew from Dh10.9bn in 2007 to Dh18.3bn in 2008. The premiums from property and liability increased 31.1% from Dh11.9bn in 2007 to Dh15.6bn in 2008, the balance was contributed by the life segment. The development of economic, constructional and social activities in the UAE has positively reflected on the insurance sector.

Retention Ratio of UAE Insurance Companies… 40% 38% 38%

36%

34% 33%

32% 31% 30% 30%

28% 2006 2007 2008 2009

Source: UAE Interact

The retention ratio has witnessed overall improvement over a period of last three years, as the insurance companies have been taking more exposure to the non-life segment due to better margins and higher retention ratio. The motor segment has more than 95% retention ratio as compared to any other segment but it contributes to less than 10% of the total non-life gross premiums.

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Gross Claims

63% 62% 62% 61% 61%

60% 59% 59%

58% 58%

57%

56% 2005 2006 2007 2008

Source: UAE Interact

The gross claims has decreased to 58% in 2008 from 62% in 2007, the claims have decreased due to higher growth in gross written premiums. The strong growth in property and liability insurance premiums overshadows the growth in gross claims YoY.

The total invested funds amounted to Dh21.6bn (as per UAE Interact) in 2008 of which 45% is in form of shares and bonds and 34.2% in form of deposits. Despite the financial crisis the insurance companies have stood strong enough, the companies have bulky portion of reserves to cushion any losses arising from investment portfolio and claims.

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Analysis of FY09 Results

SALAMA reported 30% CAGR growth for gross written premiums during FY07-09, the higher growth attributes strong demand from MENA markets. The company’s presence in Far East has witnessed rise in contribution to gross written premiums from 49% in 2008 to 53% in 2009, whereas the Middle East markets have seen a decline from 23% in 2008 to 22% in 2009, the fall in contribution from Middle East operations indicates weak economical indicators.

The gross claims have also witnessed a CAGR 31% increase in FY07-09, this was in fire and motor segment and some major claims witnessed by Reinsurance company in Tunisia. We believe that the company is placed better to absorb any uncertainty in premiums.

Historical Overview

AEDmn 1490

990

490

-10 Gross Written Net Premiums Gross Claims Net Income Premiums Written Paid 2007 2008 2009

Source: Company Reports, Global Research The net income witnessed a decline of CAGR 21% in FY07-09, this was due to loss reported in FY08 but a profitable FY09. The company saw a rise of 44% in gross claims in FY08 as compared to FY07. The claims from fire segment witnessed a major increase of 1.23x in FY08 as compared to FY07. The claims from fire segment contributes more than 61% of total gross claims during FY08.

GWP Segment Wise Contribution to GWP 2007 2008 2009 Non-motor 63% 71% 73% Motor 33% 20% 16% Health 2% 4% 3% Family takaful 2% 5% 8% Source: Company Reports, Global Research

The higher contribution comes from non-motor segment which is classified as Fire, Marine and Engineering segment of insurance, the segment has been contributing 73% to total gross

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Global Research – UAE Global Investment House written premiums. The fastest growth segment is Family Takaful, albeit on a lower base. The faster growth for family takaful is due to more people opting for life insurance.

Claims Segment Wise Net claims incurred 2007 2008 2009 Non-motor 54.5% 71.3% 67.0% Motor 44.0% 25.0% 26.9% Health 1.1% 1.2% 1.5% Family takaful 0.4% 2.5% 4.6%

Source: Company Reports, Global Research

The company has witnessed more than 67% claims for Non-motor segment, but the contribution to overall net claims has seen going down. This was due to overall lesser retention for the engineering segment. We believe that the company has taken a right step towards de-risking the balance sheet and improving underwriting strength.

Gross Written Premiums

GWP - 2009 GWP - 2008 4%

7% 21% 21% 22% 23%

53% 49%

African Far East Middle East Turkey and Central Asia African Far East Middle East Turkey and Central Asia

Source: Company Reports, Global Research

SALAMA gets its premium contribution of more than 52.7% from Far East in FY09 as compared to 49% in FY08. The focus on Middle-East markets also continues but the contribution drops from 23% in FY08 to 21.9% in FY09, this shall not be potential target area of growth in the future. The company intends to expand in South East Asian countries like India, Pakistan, Singapore and Malaysia. It is also targeting Europe as a business segment but after expansion in South East Asian countries.

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Reinsurance & Retention Ratio 100%

80%

60%

40%

20%

0% 2007 2008 2009 Reinsurance Ratio Retention Ratio Source: Company Reports, Global Research The company has not witnessed any significant change in reinsurance ratio, although the segmental premium mix has changed. BEST Re, the reinsurance company of SALAMA has been significant contributor to the segmental results of the company. The retention rate for motor segments is higher as compared to non-motor segment since the duration of the policy is shorter as compared to non-motor segment.

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Investments portfolio

The company has an active investment portfolio, holding more than 25.6% in AFS in Mutual Funds and shares. The most of the holdings are in the international markets and very miniscule exposure in domestic markets. The company has made shari’ah compliance placements with various financial institutions, this contributes to 47% of total investment portfolio. The placements results in average yield of 0.5% to 5.5%.

The company also has invested AED275mn in Sukuk and Govt bonds and allocated to HTM portfolio. The Sukuk portfolio has quadrupled in FY09 as compared to FY08 due to shari’ah compliant and also considered as less riskier in uncertain environment during global economic crisis.

Investment Portfolio AED’000 2008 2009 Domestic International Domestic International FV through P&L Mutual Funds 36,547 52,270 Shares & Securities 1,449 854 2,451 10,647 Sub-Total 1,449 37,401 2,451 62,917

AFS MF's 15,215 310,028 - 296,870 Shares & Securities 5,983 21,762 7,565 20,967 Sub-Total 21,198 331,790 7,565 3178,37

Islamic Placements 476,006 607,021

HTM SUKUK and Govt Bonds 41,772 275,390

Total 909,616 1,273,181 Source: Company Reports, Global Research

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Peer Comparison

Islamic Arab Insurance Company also known as SALAMA dominates the takaful insurance market in UAE. The company offers takaful insurance products for general and life segments. The company has huge potential to serve this segment as compared to other conventional players. The company also has its own Re-takaful insurance company being the largest retakaful insurer.

Peer Group FY09 Performance Abu Oman Emirates Al Wathba Dhabi Insurance Insurance Insurance National AED (mn) Company Company ADNIC Company Takaful SALAMA Gross Written Premiums 2,337.7 646.2 1,551.5 274.3 190.7 1,573.1 Net Profit 189.6 63.5 51.9 12.9 2.6 96.3 Dividend Yield 4.5% 7.1% 3.9% 1.8% NA NA RoAA 3.8% 4.0% 1.6% 1.4% 10.5% 3.1% RoAE 11.9% 7.9% 2.7% 3.0% 31.2% 6.8% Combined Ratio 75.4% NA 63.0% NA 154% 59.4% BV 4.0 6.7 5.4 4.0 1.5 1.3 Source: Zawya, Global Research

In the listed segment of players performance, SALAMA has more than 15% market share in terms of Gross written premiums during FY09. The company is expanding its presence in South East Asia and other European countries.

The company has been performing well due to its expertise, considering the GWP underwritten of AED1573.1mn it has delivered a bottomline of AED96.3mn during FY09. As compared to other players although making more on GWP but unable to deliver the same quantum of PAT.

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Outlook

Focus on core business to drive the profitability Islamic Arab Insurance Co. knows as SALAMA is undoubtedly leader in providing Takaful and Re-Takaful insurance. The company has presence in UAE, Tunisia, Saudi Arabia, Algeria, Egypt and Algeria. We expect the company to report CAGR 9%, 8%, 14% and 29% in FY09- 13E for Gross written premiums, Net premiums earned, Net underwriting income and Net income respectively.

Operational outlook

Source: Company Reports, Global Research

Higher Retention, lower combined ratio translates into higher underwriting surplus… SALAMA has not witnessed any volatility in claims or expenses due to better risk management and adequate reserve provision. The company has reported average combined ratio of 59% during the last three years, we expect the company to report a slight higher combined ratio at an average of 61% during FY10-13E, this will be due to increasing expense ratio but no significant increase in claims.

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Profitability outlook

Source: Company Reports, Global Research We expect underwriting surplus to gross written premiums to increase from 12% in FY09 to 14% in FY13E this is due to improvement in retention, growth in gross premiums from motor, health and family Takaful premiums. The motor and health segment have more than 90% retention rates. Overall the company sustains retention of more than 60% as most of contribution to total premiums is from non-motor segment of insurance.

CAGR 12% growth in networth We expect SALAMA to report net income CAGR 29% during FY09-13E, this will translate into four year (FY09-13E) CAGR 12% for networth. The strong growth in networth will be driven by core growth in insurance operations. We expect the company to deliver RoAE of 12.5% by 2013E.

Return Ratio’s

300 AEDmn 14.0% 12.0% 250 10.0% 200 8.0% 150 6.0% 4.0% 100 2.0% 50 0.0% - -2.0% 2009 2010E 2011E 2012E 2013E

Net Income RoAE RoAA

Source: Company Reports, Global Research

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The company had made an loss in FY08 as compared to FY09 witnessing profits. We expect the company to report RoAA to be at 4.9% during FY13E. The company reported an RoAA of 3.1% during FY09. The improvement in RoAE and RoAA will help the company in boosting its networth and emerge as a stronger player ahead.

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BALANCE SHEET ISLAMIC ARAB INSURANCE COMPANY AED'000 2007 2008 2009 2010E 2011E 2012E 2013E Property and equipment 65,995 63,119 71,602 75,964 78,685 82,619 85,561 Intangible assets 8,541 9,974 7,734 7,347 8,082 6,870 7,557 Goodwill 186,194 186,194 186,194 186,194 186,194 186,194 186,194 Investment properties 90,095 86,326 83,744 87,931 87,931 96,724 106,397 Investments in associates 29,607 24,694 27,981 29,380 30,849 32,392 34,011 Statutory deposits 27,671 34,133 40,608 40,608 40,608 40,608 40,608 Investments 914,775 785,601 1,273,181 1,394,172 1,569,133 1,728,158 1,953,080 Deposits with insurance and reinsurance companies 306,788 313,855 325,803 338,835 352,389 366,484 381,143 Contributions and insurance balance receivables 455,207 627,585 751,864 902,237 1,082,684 1,299,221 1,559,065 Retakaful share of outstanding claims 101,166 98,642 130,352 173,806 173,806 208,568 250,281 Retakaful share of unearned contributions 48,772 47,121 81,161 92,591 111,803 134,697 161,942 Amounts due from related parties 50,059 256,046 11,352 13,534 16,240 19,488 23,386 Other assets and receivables 63,350 71,627 97,127 116,552 139,863 167,835 201,403 Cash and bank balances 162,945 313,561 197,728 232,953 300,456 374,785 433,712

Total Assets 2,511,165 2,918,478 3,286,431 3,692,106 4,178,724 4,744,642 5,424,341

Liabilities Bank finance 178,142 368,732 291,417 305,988 321,287 337,352 354,219 Outstanding claims & Family Takaful reserve 517,969 678,590 804,659 965,591 1,158,709 1,390,451 1,668,541 Unearned contributions reserve 172,621 223,229 402,569 462,954 532,398 612,257 704,096 Insurance balances payable 108,082 150,451 157,981 165,880 174,174 182,883 192,027 Other payables and accruals 92,543 114,425 115,019 117,319 119,079 121,461 124,497 Amounts due to related parties 4,957 4,546 4,621 4,976 5,225 5,486 5,761

Total Liabilities 1,074,314 1,539,973 1,776,266 2,022,709 2,310,872 2,649,889 3,049,141

Net Assets Employed 1,436,851 1,378,505 1,510,165 1,669,397 1,867,851 2,094,753 2,375,200

Financed by: Shareholders’ equity 1,411,823 1,354,344 1,465,311 1,618,164 1,808,827 2,026,679 2,296,096 Policyholders’ fund - - 2,126 2,533 3,160 3,611 4,322 Minority interest 25,028 24,161 42,728 48,699 55,865 64,463 74,781 TOTAL 1,436,851 1,378,505 1,510,165 1,669,397 1,867,851 2,094,753 2,375,200 Source: Company Reports, Global Research

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INCOME STATEMENT ISLAMIC ARAB INSURANCE COMPANY AED'000 2007 2008 2009 2010E 2011E 2012E 2013E Gross written premiums 933,222 1,326,798 1,573,098 1,712,988 1,873,413 2,027,325 2,195,800 Less: reinsurance ceded (163,337) (222,736) (286,520) (342,598) (374,683) (405,465) (439,160) Net Premiums Written 769,885 1,104,062 1,286,578 1,370,390 1,498,730 1,621,860 1,756,640 Net movement in unearned premiums (28,946) (54,153) (145,378) (159,916) (175,907) (193,498) (212,848) Net Premiums Earned 740,939 1,049,909 1,141,200 1,210,474 1,322,823 1,428,362 1,543,792 Commission earned 23,022 42,072 57,918 58,497 59,082 59,673 60,270 Underwriting expenses Gross claims paid 355,003 511,399 610,115 676,630 739,998 800,793 867,341 Less: Reinsurance share of claims paid (31,874) (60,449) (65,182) (74,429) (80,660) (86,486) (94,540) Net claims paid 323,129 450,950 544,933 602,201 659,338 714,308 772,801 Net movement in O/S claims & technical reserves 100,377 168,621 94,693 89,958 94,456 99,179 104,138 Claims incurred 423,506 619,571 639,626 692,159 753,794 813,487 876,939 Commission paid and other costs 221,971 308,045 376,309 342,598 355,948 385,192 417,202 Net Underwriting income 118,484 164,365 183,183 234,215 272,162 289,356 309,921 (loss)/income on investments 154,532 (22,814) 52,115 63,978 77,529 94,609 116,197 Other income 9,633 11,937 28,092 42,138 63,207 94,811 142,216 Income after Inv & Other income 282,649 153,488 263,390 340,331 412,898 478,776 568,334 Expenses General & Administrative expenses (102,761) (124,046) (108,686) (130,423) (156,508) (187,809) (225,371) Financial Expenses (19,084) (26,606) (34,920) (31,364) (34,500) (37,872) (40,630) Provision for charitable donations (2,703) (3,282) (3,465) (3,520) (3,572) (3,644) (3,735) Net (loss)/ PBT for year before policyholder's contribution 158,101 (446) 116,319 175,024 218,318 249,451 298,598 Tax (3,334) (3,646) (5,357) (6,126) (7,641) (8,731) (10,451) Net (loss)/ PAT for year before policyholder's contribution 154,767 (4,092) 110,962 168,898 210,677 240,720 288,147 Distribution to policyholders - (4,087) (12,579) (13,512) (16,854) (19,258) (14,407) Surplus attributable to policyholders of holding Co. - - (2,126) (2,533) (3,160) (3,611) (4,322) Net PAT after policyholder's contribution 154,767 (8,179) 96,257 152,853 190,663 217,852 269,418 Shareholders 153,029 (10,400) 91,281 146,882 183,497 209,254 259,099 Minority Interest 1,738 2,221 4,976 5,971 7,165 8,599 10,318 P&L Appropriation A/C Opening balance of retained earnings 131,047 266,157 255,757 337,814 470,008 635,155 823,483 Bonus shares ------Movement upon acquisition of subsidiary (2,616) - (96) - - - - Net profit for the year 153,029 (10,400) 91,281 146,882 183,497 209,254 259,099 Transfer to statutory reserves (15,303) - (9,128) (14,688) (18,350) (20,925) (25,910) Closing balance of retained earnings 266,157 255,757 337,814 470,008 635,155 823,483 1,056,673 Source: Company Reports, Global Research

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CASH FLOW STATEMENT ISLAMIC ARAB INSURANCE COMPANY AED'000 2007 2008 2009 2010E 2011E 2012E 2013E Operating activities Net (loss) / profit before minority interest and distribution to policyholders 154,767 (8,179) 96,257 152,853 190,663 217,852 269,418 Adjustment for: Depreciation 5,554 5,549 5,271 - - - - Net movement in unearned contributions reserve 28,946 54,153 145,300 - - - - Unrealised losses/(gains) on investments (34,762) 29,757 402 - - - Unrealised loss/(gain) on investment property (15,188) 472 2,583 - - - - Amortization of intangible assets 3,600 1,313 1,567 - - - - Foreign exchange income - (6,973) - - - - - Share of loss from associates 3,933 5,933 (3,592) - - - - Distribution to policyholders - 3,252 - - - - - Dividend income (1,052) (2,247) (2,336) - - - -

Operating profit before changes in working capital 145,798 83,030 245,452 152,853 190,663 217,852 269,418

Increase in deposits with insurance and reinsurance companies (21,478) (7,067) (11,948) (13,032) (13,553) (14,096) (14,659) Increase in contributions and insurance balance receivable (138,356) (174,278) (124,279) (150,373) (180,447) (216,537) (259,844) Increase in due from / to related parties (51,290) (206,397) 244,769 355 249 261 274 Increase in other assets and receivables (67,238) (8,280) (25,500) (19,425) (23,310) (27,973) (33,567) Increase in outstanding claims (net of reinsurance) 104,645 163,145 94,359 160,932 193,118 231,742 278,090 Increase in insurance payables and other payables 32,773 61,007 10,250 10,199 10,054 11,090 12,181 Increase in retakaful share of O/S claims - - - (43,454) - (34,761) (41,714) Increase in retakaful share of unearned contributions - - - (11,430) (19,213) (22,893) (27,245) Increase in amount due from related parties - - - (2,182) (2,707) (3,248) (3,898) Increase in unearned contributions reserve - - - 60,385 69,443 79,860 91,839

Cash flows from operating activities 4,854 (88,840) 433,103 144,829 224,296 221,298 270,874

Investing activities Property and equipment-net (18,081) (1,806) (11,143) (4,362) (2,720) (3,934) (2,943) Net movement in intangible assets (1,148) (2,748) 673 387 (735) 1,212 (687) Investment properties – net - 3,297 - (4,187) - (8,793) (9,672) Net movement in associates - (1,020) 305 (1,399) (1,469) (1,542) (1,620) Statutory deposits (5,335) (6,462) (6,475) - - - - Investments-net (602,178) 69,660 (346,893) (120,991) (174,961) (159,025) (224,922) Dividends received 1,052 2,247 2,336 - - - -

Cash flows from investing activities (625,690) 63,168 (361,197) (130,553) (179,885) (172,082) (239,844)

Financing activities Decrease from buyback of share capital (24,759) (11,214) - - - - - Bank finance-net 15,519 190,590 (77,315) 14,571 15,299 16,064 16,868 Net movement in minority interest (16,151) (3,088) 13,591 5,971 7,165 8,599 10,318 Policyholder's fund - - - 407 627 451 711

Cash flows from financing activities (25,391) 176,288 (63,724) 20,950 23,092 25,114 27,897

Increase/(decrease) in cash and cash equivalents (646,227) 150,616 8,182 35,225 67,503 74,329 58,927 Cash and cash equivalents at the beginning of the year 809,172 162,945 189,546 197,728 232,953 300,456 374,785 Cash and cash equivalents at the end of the year 162,945 313,561 197,728 232,953 300,456 374,785 433,712 Source: Company Reports, Global Research

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FACTSHEET ISLAMIC ARAB INSURANCE COMPANY Amount in AED'000's 2007 2008 2009 2010F 2011F 2012F 2013F Company Fundamentals - Gross premiums written (GPW) 933,222 1,326,798 1,573,098 1,712,988 1,873,413 2,027,325 2,195,800 - Net premiums written (NPW) 769,885 1,104,062 1,286,578 1,370,390 1,498,730 1,621,860 1,756,640 - Net commission earned/ (paid) 244,993 350,117 434,227 401,095 415,031 444,865 477,472 - Gross Claims Paid 355,003 511,399 610,115 676,630 739,998 800,793 867,341 - Invested Assets 1,034,477 896,621 1,384,906 1,511,484 1,687,913 1,857,274 2,093,488 - Cash & Invested assets 1,197,422 1,210,182 1,582,634 1,744,437 1,988,369 2,232,059 2,527,200 - Insurance Contract Liabilities 517,969 678,590 804,659 965,591 1,158,709 1,390,451 1,668,541 - Total Assets 2,511,165 2,918,478 3,286,431 3,692,106 4,178,724 4,744,642 5,424,341 - Shareholders' funds 1,411,823 1,354,344 1,465,311 1,618,164 1,808,827 2,026,679 2,296,096 - Net Income 154,767 (8,179) 96,257 152,853 190,663 217,852 269,418

Investment type as a % of invested assets - Available for sale 37.7% 38.8% 25.6% 22.5% 21.1% 18.5% 18.0% - Held for Maturity 58.9% 56.9% 69.3% 71.8% 72.4% 74.6% 75.0% - Held for Trading 3.4% 4.3% 5.1% 5.7% 6.5% 6.9% 7.0%

Liquidity Ratio's - Invested Assets as a % of Assets 41.2% 30.7% 42.1% 40.9% 40.4% 39.1% 38.6%

Profitability Analysis - Combined Ratio 58.7% 57.6% 59.4% 60.1% 60.4% 61.4% 62.4% - Retention rate 82.5% 83.2% 81.8% 80.0% 80.0% 80.0% 80.0% - Loss Ratio 46.1% 46.3% 47.4% 49.4% 49.4% 49.4% 49.4% - Expense Ratio 12.6% 11.3% 12.0% 10.7% 11.0% 12.0% 13.1% - Return on avg. Shareholders' equity (ROE) 11.5% -0.6% 6.8% 9.9% 11.1% 11.4% 12.5%

Capitalisation/ Leverage Tests - GPW to Policyholders' Surplus (PHS) 0.66 0.98 1.07 1.06 1.04 1.00 0.96 - NPW to PHS 0.55 0.82 0.88 0.85 0.83 0.80 0.77 - Technical Reserves to PHS 0.37 0.50 0.55 0.60 0.64 0.69 0.73 - Technical Reserves to GPW 0.56 0.51 0.51 0.56 0.62 0.69 0.76 - Technical Reserves & PHS/ NPW 2.51 1.84 1.76 1.89 1.98 2.11 2.26

Ratio's Used for Valuation - EPS (AED) 0.1 0.0 0.1 0.1 0.2 0.2 0.2 - Book Value Per Share (AED) 1.3 1.2 1.3 1.5 1.6 1.8 2.1 -P/E 26.9 NA 9.9 6.19 4.96 4.34 3.51 -P/BV 3.0 0.6 0.7 0.58 0.52 0.47 0.41 - Market Capitalisation (AEDmn) 4169.0 858.0 957.0 946.0 946.0 946.0 946.0 - Current Market Price (AED) 3.8 0.8 0.9 0.9 0.9 0.9 0.9 Source: Company Reports, Global Research Note: P/E and P/BV for 2007-2009 are based on historical prices as on year end. Future P/E and P/BV are based on closing price as on 16th May 2010.

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The following is a comprehensive list of disclosures which may or may not apply to all our researches. Only the relevant disclosures which apply to this particular research has been mentioned in the table below under the heading of disclosure.

Disclosure Checklist Company Recommendation Ticker Price Disclosure Islamic Arab Insurance Co. BUY SALAMA UH AED0.86 1,10 IAIC.DU

1. Global Investment House did not receive and will not receive any compensation from the company or anyone else for the preparation of this report. 2. The company being researched holds more than 5% stake in Global Investment House. 3. Global Investment House makes a market in securities issued by this company. 4. Global Investment House acts as a corporate broker or sponsor to this company. 5. The author of or an individual who assisted in the preparation of this report (or a member of his/her household) has a direct ownership position in securities issued by this company. 6. An employee of Global Investment House serves on the board of directors of this company. 7. Within the past year , Global Investment House has managed or co-managed a public offering for this company, for which it received fees. 8. Global Investment House has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 9. Global Investment House expects to receive or intends to seek compensation for investment banking services from this company in the next three month. 10. Please see special footnote below for other relevant disclosures.

Global Research: Equity Ratings Definitions Global Rating Definition Buy Fair value of the stock is >10% from the current market price Hold Fair value of the stock is b/w +10%/-10% from the current market price Reduce Fair value of the stock is b/w -10%/-20% from the current market price Sell Fair value of the stock is < -20% from the current market price

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