UAE insurer RAK Insurance assigned ratings of 'BBB+'; outlook stable

05/01/2015 20:36 AST

Standard & Poor's Ratings Services today assigned to Ras Al-Khaimah National Ins Co. (RAK Insurance) its 'BBB+' counterparty credit and insurer financial strength ratings. The outlook is stable.

"The ratings reflect our view of RAK Insurance's favorable competitive position--it largely controls its product distribution and has a track record of underwriting performance above the market average. The company maintains a strong operating performance, demonstrated by its five-year combined ratio of 80 per cent, supported by low volatility in its loss ratios. The combined ratio is a measure of claims losses plus expenses. These factors and the intermediate industry risk we assign to the United Arab Emirates (UAE) support our assessment of RAK insurance's business risk profile as satisfactory.

"We assess RAK Insurance's financial risk profile as moderately strong, reflecting its sustainable and extremely strong capital adequacy and its intermediate risk position, which benefits from the investment portfolio characteristics. However, operational scale is limited. Gross premium written in 2013 was AED 250 million ($68 million), representing a market share of less than two per cent of UAE-listed insurers. Shareholder funds were also AED 250 million at the end of December 2013.

"We combine our assessments of satisfactory business risk profile and moderately strong financial risk profile to derive an anchor of 'bbb+'. Other rating factors of management and governance, enterprise risk management, and liquidity are neutral to the rating.

"In our opinion, RAK Insurance has extremely strong risk-based capital adequacy that is resilient to both underwriting event stress and the potential volatility from its investment portfolio. We expect its capital base to continue to grow as the company maintains its strong profitability, which will support RAK Insurance's current growth strategy. Our base-case scenario is that premium income will increase at 10 per cent per year, in line with market norms, and that it will report a combined ratio below 85 per cent and net earnings of at least AED 8 million, representing a return on equity of 12 per cent.

"We assess RAK Insurance's risk position as intermediate. As of Sept. 30, 2014, over 70 per cent of invested funds were in bank deposits predominantly at local banks with investment-grade ratings. Relative to market norms, we view this as a conservative strategy, but the company is exposed to a degree of counterparty concentration. Strategic investments in high-risk assets such as equity and real estate were relatively modest compared with regional peers at 25 per cent of invested funds, giving only moderate investment leverage. Our rating expectation is that any likely developments in the future investment portfolio structure will not weaken our assessment of risk position.

"Our assessments of management and governance and enterprise risk management are neutral to the rating. We see RAK Insurance's liquidity as exceptional, and we anticipate that it will maintain its liquidity.

"Our assessment of RAK Insurance's business risk profile as satisfactory reflects the current operational structure and plans of the management team. The government of Ras Al Khaimah currently owns 47 per cent of RAK Insurance, but we do not consider the insurer to be a government-related entity, so it merits no rating support. We understand that National Bank of Ras Al Khaimah (RAKBank), itself majority-owned by the Ras Al Khaimah government, will soon acquire a majority shareholding in RAK Insurance, by acquiring shares from the government and the open market. We do not view this expected change in ownership to be a rating event under our criteria.

CPI Financial