Damaan Islamic Insurance Company. Beema" Update Following the Change in Outlook to Positive from Stable. CREDIT OPINION 29 August 2016.

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1 CREDIT OPINION Update Damaan Islamic Insurance Company Beema" Update Following the Change in Outlook to Positive from Stable Summary Rating Rationale RATINGS Damaan Islamic Insurance Company "Beema" Domicile Qatar Long Term Rating Baa2 Type Insurance Financial Strength Outlook Positive Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Contacts Helena Kingsley Tomkins Assistant Vice President Mohammed Ali Londe AVP-Analyst Antonello Aquino Associate Managing Director Damaan Islamic Insurance Company (C.Q.S.C.) ("Beema") is rated Baa2 for insurance financial strength (IFS). The outlook for the company was changed to positive from stable reflecting the company's continued strong profitability and improved market position. Beema is a takaful insurer based in Qatar and was established in It writes a mix of nonlife, health and takaful life insurance. Beema's owners consist of Qatar Insurance Company (QIC, the largest insurance company in Qatar), Qatar Islamic Bank (QIB) and Masraf Al Rayan (two of the largest Islamic Qatari banks), Barwa Real Estate Co. (the largest listed real estate company in Qatar) and Q-Invest (a Qatar based Investment company). The Baa2 IFSR reflects Beema s (i) good capitalisation level, with consolidated equity of QAR297 million, representing 33.6% of its total assets at YE 2015; (ii) broad distribution, via its diversified shareholders; (iii) relatively strong asset quality, with vast majority of investments held as cash, bank deposits and investment grade Islamic sukuk bonds, translating to a low high risk assets (HRA) % of consolidated shareholders' and policyholders' equity of 27.5% at YE More negatively, Beema s financial and total leverage remains somewhat high compared with GCC peers, at 30.4% and 39.8% respectively at YE The leverage levels mainly reflects the increased use of murabaha financing proceeds largely invested into investment grade Islamic sukuks. Exhibit 1 Evolution of Beema's Leverage Harshani Kotuwegedara Associate Analyst harshani.kotuwegedara@moodys.com Source: Company Annual Reports and Moody's workings

2 Credit Strengths Strong profitability as reflected by its COR and RoC Good capitalisation levels Broad distribution channels, via its diversified shareholders Relatively strong asset quality, with high exposure to low risk assets Credit Challenges High Murabaha financing and high leverage compared to peers Significant related party exposure High concentration risk to the domestic Qatari market/economy Rating Outlook The outlook was changed to positive from stable. The positive outlook reflects (i) its sustained strong profitability, both in terms of underwriting profit and bottom line, with a 5-year average combined ratio (COR) of 84% and 5-year average return on capital (ROC) of 10% on a Moody's basis in 2015; and (ii) Beema's strengthened market position and brand, becoming the 2nd largest player within the domestic takaful market and 6th largest in the overall Qatari insurance market in terms of contributions written. We expect to resolve the positive outlook for Beema in the next 12 months. What to Watch For Revenue growth driven by Qatar's macro-economic growth due to both natural resources and construction activities ahead of the 2022 football world cup Potential political instability within the wider region, and the impact, if any, of the low oil prices on the insurance market and the value of their investments Potential changes to investment and investment funding strategy which is currently through the Murabaha finance Impact of recent Qatar insurance instructions (regulations) issued by the Qatar Central Bank Factors that Could Lead to an Upgrade Beema maintains its strong profitability with COR below 90% and ROC above 10% consistently Beema maintains market position and brand Beema strengthens its capital levels with consolidated equity equating to over 40% of total assets whilst complying with the new RBC requirements and the updated actuarial-led reserving requirements Factors that Could Lead to a Rating Affirmation with a Stable outlook There is a significant increase in HRA, such as non-investment grade sukuks, equities or real estate equating to a HRA % of consolidated equity of over 60% A significant deterioration in the underwriting profitability of Beema with COR above 100% Financial leverage increases to above 35% This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key Indicators Exhibit 2 Key Financial Indicators of Beema [1] Information based on IFRS financial statements as of fiscal YE December 31 [2] Certain items may have been relabeled and/ or reclassified for global consistency Source: Company Annual Reports and Moody's workings Detailed Rating Considerations Moody's rates Beema Baa2 for insurance financial strength which is in line with the adjusted rating indicated by the Moody's insurance financial strength rating scorecard. Market Position, Brand and Distribution : Baa - STRONG TAKAFUL MARKET POSITION AND GOOD OVERALL POSITION Moody's believes Beema has a good market position in Qatar, as an Islamic-compliant insurer. Beema is the sixth-largest insurer in Qatar, with a relative market share ratio of about 0.9x in 2015 (on a Moody's basis). The company has relatively high concentration in terms of its geography as, like most of its Qatari peers, the vast majority of Beema's business relates to Qatari insurance risks. Beema has no short-to-medium term plans to diversify outside Qatar. The insurance market in Qatar has been closed to external competition historically, although there has been an increase in insurers and brokers entering the market through the QFC during Total market size was about US$2.8 bn in 2015, growing by 5.8% compared to Insurance penetration as a % of GDP had increased to 1.5% from 1% in Islamic insurance accounted for approximately 20% of total gross premiums, placing Qatar as the third largest takaful provider in the GCC as a percentage of total premiums written. Distribution: A - DIVERSIFIED DISTRIBUTION NETWORK RELATIVE TO GCC PEERS The company has a diversified network of distribution which comprise of direct business (70%) and brokers (23%). From its total direct business, 38% was via related parties. Beema also has considerable amounts of affinity partnerships as well. Around 50% of motor policies are sold via dealers with whom Beema has exclusive dealerships for certain luxury brands. 3

4 Product Risk and Diversification : Baa - GOOD PRODUCT DIVERSIFICATION AND LOWER EXPOSURE TO UNPROFITABLE COMPULSORY LINES THAN PEERS ALBEIT DOMESTIC CONCENTRATION Beema is well diversified by product line amongst Qatari insurers. The GPW mix has remained stable in 2015 with motor accounting for 50% of the total portfolio in 2015 (2014: 49%), compulsory third-party motor accounted for around 11% of the total motor portfolios while the remainder was from comprehensive motor lines. Beema also had a strong takaful life & health portfolio which comprised of 38% of total contributions in 2015 (2014: 39%). The majority of life insurance came from credit life policies, which we typically regard as lower-risk policies. Asset Quality : A - MORE CAUTIOUS INVESTMENT STRATEGY RESULTING IN GOOD ASSET QUALITY Beema's asset quality is relatively good aided by a more cautious investment strategy compared to that of many peers in the region. As at YE 2015 Beema's investments in Sukuks and cash, accounted for 65% and 23% respectively (YE 2014: 64% and 25% respectively) with the remaining 13% being securities and funds. The majority of cash is held in related party accounts (mainly QIB), resulting in some asset concentration risk. Excluding related party cash and deposits, high risk assets to shareholder's equity ratio was 27.5% as at YE 2015 compared to 22.2% as at YE The ratio is better than comparable rated peers, albeit the small size of the Qatari market leads to some concentration risk. Reinsurance recoverable as a % of equity at 24.2% as of YE 2015, was low compared to GCC peers. The majority of P&C business reinsurers are investment grade (mostly A) rated Middle Eastern players. Life reinsurance is done on a facultative basis and is generally reinsured with high quality international reinsurers. Capital Adequacy : Baa - GOOD CAPITALISATION, LIKELY TO REDUCE AS TOP LINE INCREASES Capital is considered a relative credit strength, shareholders' equity as a % of total assets marginally decreased to 34% at YE 2015 compared to 38% as at YE 2014 and comparable with similarly rated GCC peers, albeit trending down as the business matures and operational leverage remains significant. As at YE 2015, consolidated (shareholders' and policyholders') equity increased to QAR297 million from QAR288 million as at YE 2014, driven by the operations driven increase in retained earnings. New regulations were issued by the Qatar Central Bank (QCB) on 30th March and stipulate that listed insurance companies must have capital greater than QAR100 million or their risk-based capital (RBC) requirement. We will watch for the impact of the new regulations on the overall Qatari insurance industry and expect Beema's capital adequacy to benefit from compliance with these rules. Profitability : A - GOOD PROFITABILITY, ONE OF THE FEW TAKAFUL PLAYERS TO REPORT A POLICYHOLDER SURPLUS By line of business, Beema retains 97% of motor, 56% of marine & aviation, 34% of fire & general and 69% of takaful life & health. Overall, Beema's loss ratio improved in 2015 to 58% (61% in 2014), driven by improved underwriting performance. Beema has outperformed some similarly rated peers in terms of underwriting profitability, with the 5-year ( ) combined ratio averaging 83.9% and the 2015 combined ratio of 78.9% (2014: 85.5%). As a result, Beema's adjusted return on capital was 15.2% at YE 2015 much higher than the 11.7% as at YE 2014 and reported a 5-year average ( ) return on capital of 10%, reflecting its good underwriting performance coupled with stable investment returns. Furthermore, Beema is one of the few takaful players in the region that report a policyholder surplus and have distributed profits to its policyholders. 4

5 Exhibit 3 Beema's Financial Performance Source: Company Annual Reports and Moody's workings Liquidity and Asset/ liability management : Baa - GOOD LIQUIDITY WITH HIGH EXPOSURE TO CASH AND SUKUKS As at YE 2015, around 87% of Beema's investments are in cash and Sukuks. The vast majority of the Sukuk assets are investment grade and are generally considered highly liquid in normal market conditions. Conversely majority of the cash is held with related party banks, potentially reducing the liquidity of these assets. Reserve Adequacy: Baa- IN LINE WITH THE PEERS No reserve triangles are currently published, as is commonplace within the region. We consider the lack of triangles to be mitigated by the generally short tail nature (and lower risk profile) of the business written. Moody's will monitor the impact of the new regulations introduced by the QCB which are expected to benefit Beema's reserve setting as well as adequacy levels. Financial Flexibility : Ba - MORE LEVERAGED THAN PEERS DUE TO MURABAHA FINANCING Beema's Murabaha financing levels marginally increased as at YE With this, it's financial leverage and total leverage (which includes operating debt) increased to 30.4% and 39.8% respectively at YE 2015 (YE 2014: 28.2% and 37.5%). Murabaha financing was mainly utilized to invest in Islamic Sukuk and both metrics are higher than comparable rated regional peers. Whilst the Murabaha financing (and investment of proceeds into Sukuk) has generated positive net investment results, in the event of a deterioration in the value of the Sukuk and property assets, there remains full recourse from these bank loans to the remaining assets of Beema, which we consider one of the major credit risks for the business. However, the current levels of Murabaha financing were in line with our expectations. Further, the 5 year ( ) earnings cover was strong at 62.6x driven by the underlying business performance, with 2015 reporting a coverage level of 114.6x (2014: 94.5x). Operating Environment : Baa - OPERATING ENVIRONMENT IMPACTED BY THE LOW OIL PRICES AND STRONGER-THANENVISAGED DETERIORATION IN CORE CREDIT METRICS Beema operates out of Qatar (rated Aa2/Negative). The credit strengths for Qatar include: (1) its strong net external creditor position; (2) vast hydrocarbon reserves; (3) relatively low fiscal break-even oil price; (4) very high levels of wealth; and (5) ongoing economic diversification away from hydrocarbon sector. However, the challenges to the economy include (1) a relatively strong increase in government debt; (2) vulnerability to regional geopolitical risk; and (3) relatively weaker institutional transparency than other highly rated sovereigns. Positive infrastructure and economic development are likely to occur from the staging of the football world cup in Qatar in The Qatari insurance market is still underdeveloped from a global perspective with adequate insurance density but very low levels of insurance penetration, indicating the potential for further market growth over time. 5

6 Rating Methodology and Scorecard Factors Exhibit 4 Rating Scorecard for Beema [1] Information based on IFRS financial statements as of fiscal YE December 31 [2] Certain items may have been relabeled and/ or reclassified for global consistency Source: Company Annual Reports and Moody's workings 6

7 Ratings Exhibit 5 Category DAMAAN ISLAMIC INSURANCE COMPANY "BEEMA" Rating Outlook Insurance Financial Strength Moody's Rating POS Baa2 Source: Moody's Investors Service 7

8 Endnotes 1 World Insurance in 2015, No. 3/2016, Swiss Re Sigma, March

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