Moody's assigns Baa2 IFS rating to Al Fujairah National Insurance Co.

24/09/2013 08:43 AST

Moody's has assigned a Baa2 insurance financial strength rating (IFSR) to Al Fujairah National Insurance Company P.S.C. (AFNIC), based in Fujairah, United Arab Emirates. The rating outlook is stable.

RATINGS RATIONALE

AFNIC is the largest insurer in Fujairah and was established in 1976. It writes a broad mix of non-life insurance classes of business, albeit motor represented more than 50 per cent of gross premiums as at year-end 2012. As one of only three insurers actively operating in Fujairah, AFNIC has a dominant market position, albeit a much smaller one per cent market share across the United Arab Emirates (UAE). AFNIC writes approximately 55 per cent of its business within Fujairah, with the balance written through branches within the other Emirates.

Moody's notes that AFNIC has reported consistent underwriting profits in recent years, with a 2006-2012 average combined ratio of 91 per cent before bad debts. Furthermore, as AFNIC is 80 per cent owned by the Government of Fujairah, which also controls a further 15 per cent of AFNIC through a linked investment company, we consider the potential support for AFNIC from its shareholders to be a key positive driver for the rating.

However, offsetting this is the high risk investment strategy, which has led to material unrealised investment losses since 2007, with particular exposures to the Fujairah real estate market and the UAE equity markets. Due to the volatility in asset prices in the region in recent years, reported net assets decreased from AED 203 million as at year-end 2007 to AED 94 million as at year-end 2010, although following an AED 25 million capital injection in 2012 and retained earnings, this improved to AED 134 million as at YE 2012. However, we still consider asset risk as the predominant credit risk for AFNIC. Further credit negatives include the relatively high financial leverage for the region (30 per cent as at year-end 2012), driven, inter alia, by bank borrowings from a related party to fund property construction in Fujairah.

According to Moody's, the rating could be upgraded if there is: i) A meaningful improvement in asset risk, for example high risk assets falling below 100 per cent of shareholders' equity (year end 2012: 151 per cent), ii) Financial leverage consistently below 15 per cent (year end 2012: 30 per cent), and/or iii) AFNIC delivers improved levels of capitalisation, for example gross underwriting leverage consistently below 1.25x (year end 2012: 2.2x).

Moody's further added that a material improvement in the operating and/or sovereign environment of Fujairah could lead to positive rating pressure.

Conversely, negative rating pressure could arise in the event of: i) Any material further increase in asset risk occurring, ii) Financial leverage materially increasing from its current levels, and/or iii) Any perceived or actual decline in the implicit support from the Fujairah government for AFNIC.

Based in Fujairah, UAE, AFNIC reported a consolidated net income of AED 18.6 million in 2012 (2011: AED 4.2 million). AFNIC's total shareholders' equity increased to AED 134.3 million in 2012, from AED 79.1 million at year-end 2011. Gross written premium of AED 157.9 million in 2012 increased 4 per cent from the AED 152.2 million recorded in 2011.

CPI Financial