Best Assigns ‘B+’ Ratings to UAE’s Al-Sagr; Outlook Stable

A.M. Best Europe – Rating Services Limited has assigned a financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” to United Arab Emirates-based Al-Sagr National Insurance Co.; both with stable outlooks.

The ratings reflect Al Sagr’s “strong level of risk-adjusted capitalization and good local business profile within the UAE,” said Best. As offsetting factors the report cited the company’s “volatile operating performance and its leveraged balance sheet. Al Sagr’s ratings also take into consideration its parent company, Gulf General Investment Company (GGICO), which has successfully undergone a restructuring of its debt.”

Best described Al Sagr’s risk-adjusted capitalization as “strong and benefits from a large capital base of AED 570.7 million ($155.4 million), relative to a low net written premium and technical provision leverage. The company has been able to grow its capital internally through a good track record of operating performance and high level of profit retention. Furthermore, risk-adjusted capitalization is expected to remain supportive of the company’s projected growth of 10 percent to 15 percent over the coming years.”

Best added that in its opinion “Al Sagr’s business profile is good. Although its premium revenue decreased in recent years as a result of tightening underwriting guidelines, Al Sagr remains the ninth-largest UAE insurance company by gross written premiums. Premium is generated throughout UAE and also regionally through a subsidiary in Jordan. Dubai remains Al Sagr’s main source of income.” In addition Best indicated that “other Emirates in UAE and also Al Sagr’s Jordanian operation have been growing in importance in recent years.

“Al Sagr’s investment portfolio is inclined towards equities and real estate investments, which exposes the company to volatility of earnings through its non-technical account. Although investment yield has been stable at 3 percent, investment performance has been offset by large unrealized losses. Furthermore, underwriting performance has deteriorated in recent years as a result of negative performance in the medical business and losses emanating from the company’s Jordanian operation.

“Al Sagr has borrowing facilities in the form of overdrafts repayable upon demand that totaled AED 207.5 million [$56.5 million] in 2011. As a result, a large portion of the company’s deposits are held under lien and are bearing a yearly finance cost of AED 11.5 million ($3.2 million).” Best also noted that the “company’s result has been partly offset by the cost of this facility but does not expect this to be fully repaid over the coming years. The net debt-to-equity ratio equaled 35.2 percent in 2011.”

In addition, Best pointed out that “Al Sagr’s parent company has bank loans and facilities totaling AED 3.45 billion [$940 million], and due to the nature of its operation, equities and real estate investments also have been performing weakly in recent years. However, GGICO was able to secure a refinance agreement with its existing finance providers, and the debt is expected to be fully repaid by the end of 2018.”

However, Best also cautioned that “the largest portion of its loans is to be repaid in the later years, which could place further pressure on the company’s cash flow in the future.

“Over time, a material improvement in Al Sagr’s operating performance, including its medical and its Jordanian operation, could place positive pressure on the ratings. A deterioration of the company’s risk-adjusted capitalization or difficulties experienced by GGICO in meeting its debt’s amortization schedule could have a negative impact on Al Sagr’s ratings.

Source: A.M. Best