Abu Dhabi-Based Al Wathba National Insurance Co. PJSC 'BBB+' Ratings Affirmed; Outlook Stable Overview
On Dec. 15, 2016, S&P Global Ratings affirmed its 'BBB+' long-term counterparty credit and insurer financial strength ratings on Abu Dhabi-based Al Wathba National Insurance Co. PJSC (AWNIC). The outlook is stable.
At Q3 2016, AWNIC reported bank overdrafts of United Arab Emirates dirham (AED) 164 million, a significant increase from the AED88 million reported at end-2014. The proceeds were used to fund the acquisition of Vision Capital Brokerage Co. LLC (VCB), a UAE-based entity that provides brokerage services to local and international clients, of which AWNIC now owns 99%.
We treat the overdrafts as debt maturing in the next 12 months, and therefore apply a haircut of AED164 million to the company's short-term assets when we form our view of liquidity. It is our understanding that the overdraft facilities are unlikely to be recalled by the banks and that AWNIC holds some investments as collateral against the full amount. AWNIC is also considering liquidating some of its investments in order to repay part of the overdrafts. In addition to VCB, AWNIC reported investments in associates of AED132 million for Q3 2016. These represent 20% of Oman-based Vision Insurance SAOC, 40% of Iraq-based UR International Insurance, and 23% of UAE-based FOODCO Holding PJSC. We see these actions as a sign of increasing investment risk appetite and tolerances. This comes at a time when AWNIC is experiencing a decline in its premium base and is exploring ways to redefine its strategy and grow profitably in the UAE. Hence, we are revising downward our view of management and governance to fair from satisfactory.
For the first nine months of 2016, AWNIC reported gross premiums written of AED243 million, a 19% drop from the same period last year (Q3 2015: AED299 million). This is due to a reduction in life and health premiums, and reflects AWNIC's decision to reduce premiums from this line of business given the market conditions and unprofitable rates. The 2016 net combined (loss and expense) ratio is likely to be about 108%, in part due to the medical portfolio and in part as a result of an increase in technical provisions resulting from insurance regulations expected to be enforced on Jan. 29, 2017.
We view positively AWNIC's decision to reduce its premium base as it has chosen profitability over top-line growth. Its net profits at Q3 2016 stood at AED56 million, supported by a significant investment income and share of results of associates. AWNIC expects the underwriting performance to improve from 2017 onward as a result of rate improvements.
The stable outlook reflects our expectation that AWNIC will repay some of the outstanding bank overdrafts and that it will maintain an adequate competitive position in the UAE, despite increasing competition. It also exhibits our expectation that AWNIC will maintain at least a very strong capital adequacy as measured using our risk-based capital model.
We view an upgrade as unlikely at this stage.
We could lower the ratings if AWNIC is unable to grow profitably in the UAE market, leading us to lower our competitive position assessment to less than adequate. Such a scenario would likely have a one-notch impact.
|Financial Strength Rating BBB+/Stable BBB+/Stable|
|Business Risk Profile||Satisfactory||Satisfactory|
|Financial Risk Profile||Moderately Strong||Moderately Strong|
|Capital & Earnings||Strong||Strong|
|ERM and Management||0||0|
|Enterprise Risk Management||Adequate||Adequate|
|Management & Governance||Fair||Satisfactory|
*Insurance Industry and Country Risk Assessment.
Al Wathba National Insurance Company PJSC
Counterparty Credit Rating
Local Currency BBB+/Stable/--
Financial Strength Rating
Local Currency BBB+/Stable/--