Al Buhaira National Insurance ratings lowered to 'BBB-'

02/08/2010 00:00 AST

Standard & Poor's Ratings Services said today that it lowered its long-term counterparty credit and insurer financial strength ratings on United Arab Emirates (UAE)-based composite insurer Al Buhaira National Insurance Co. (PSC) to 'BBB-' from 'BBB'. At the same time, we removed the ratings from CreditWatch with negative implications, where they had been placed on July 23, 2010. The outlook is negative.

"The downgrade of ABNIC, the parent company and core operating entity of ABNIC Group, reflects our view that the group's financial profile has weakened," said Standard & Poor's credit analyst Nigel Bond. This, in turn, reflects our belief that ABNIC Group's investments, liquidity, capitalization, and financial flexibility have all weakened, primarily due to continued debt-funded property investment and rising leverage ratios.

In our view, ABNIC Group has a consistently high-risk investment strategy, concentrated primarily on property (72% of total investments on June 30, 2010), and secondarily on equities, including investment in affiliates (11%).

The ratings on ABNIC reflect the group's strong operating performance, good capitalization, and good competitive position. Offsetting factors are its marginal investment profile and marginal liquidity; a lack of clear risk tolerances, particularly in its investment risk management; and its elevated debt and investment leverage.

The negative outlook reflects our view that ABNIC Group's debt leverage will rise to no more than 50% by year-end 2010 (assuming the same amount of dividend and directors' fees is paid for 2010 as for 2009) and then decline to below 45% thereafter; that the investment leverage ratio will rise to between 160%-170%, again after deducting post-balance sheet items; and that net debt will rise to about Dhs370m (before deductions) in 2010 before declining once the property investment program concludes, assuming operating cash flow is positive. In addition, we remain sensitive to the short-term nature of the borrowing.

We expect ABNIC Group's net combined ratio to remain very strong at around 70% in 2010, that its investment portfolio will remain heavily exposed to property and equities, and that its capital adequacy will remain good.

The ratings may be lowered if there is deterioration beyond any of these specific expectations, or if ABNIC Group's overall liquidity or capitalization deteriorates. The ratings are unlikely to be raised.

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