Ratings Recap: Oman Insurance, Abu Dhabi National, NLGIC, MEICO

August 24, 2012

A.M. Best Europe – Rating Services Limited has revised the outlook to stable from negative and affirmed the financial strength rating of ‘A’ (Excellent) and the issuer credit rating of “a” of United Arab Emirates-based Oman Insurance Company P.S.C. The ratings reflect OIC’s “strong level of risk-adjusted capitalization, robust underwriting performance and leading local business profile,” said Best. As offsetting factors the report cited “a historically volatile and concentrated investment portfolio and execution risks surrounding a significant corporate wide transformation.” Best also noted that the outlook revision was made “following a significant improvement in its investment guidelines and the initiation of numerous initiatives focused on improving risk management, internal procedures and controls.” Best said that in light of new investment guidelines and the intentions of senior management, it “anticipates that OIC will divest from some of its more illiquid equity positions over the short term. This will benefit OIC by significantly improving its level of risk-adjusted capitalization and reducing the potential volatility of both its risk-adjusted capitalization and overall financial performance.” Best also said it “anticipates that the company’s internally generated capital will sufficiently support new business growth over the coming years. The report also notes that “during the past year, OIC’s senior management team has almost entirely changed. The company’s new personnel bring with them significant experience in both the international and local insurance markets. OIC’s new management team has completed a review of its strategy and all of its functions.
Changes implemented or that are underway include: revised investment and underwriting guidelines; a revised reinsurance structure; strengthened internal controls; the centralization of functions such as pricing, reserving and claims; a revised distribution strategy; and an enhanced enterprise-wide risk management framework. While some of these initiatives may take time to implement, significant steps have already been taken. In the meantime,” Best added that it “considers that a degree of execution risk remains with regards to such an overhaul and that it may take some time before benefits can be seen in OIC’s financial results. OIC’s underwriting performance remained strong in 2011, with the company reporting a combined ratio for non-life business (excluding medical) of 71 percent (2010: 78 percent).” However, offsetting these good underwriting results “was a marginal investment return and significant non-technical expenses. Results for the first half of 2012 indicate a moderate decline in underwriting profitability, although the results are expected to remain good and in line with that of 2010.” Best said it “anticipates that OIC’s overall investment return will remain marginal in 2012 as the company modifies its assets holdings, although improvements can be expected from 2013 and onwards.” In addition Best indicated that “OIC has maintained a leading local position despite the significant upheaval of its senior management over the past year.” Best added that while it “expects OIC’s profile to change over the medium term, the company is expected to strengthen its position locally and increase its level of geographic diversification over the medium term. Positive actions on OIC’s ratings can arise over the medium term if the company is able to develop its business profile in line with its business plans and embed sophisticated enterprise-wide risk management within management’s decision making process, while at the same time reducing various concentration risks, maintaining a strong level of risk-adjusted capitalization and good profitability. There will be negative pressure on OIC’s ratings if it is unable to maintain its current good level of risk-adjusted capitalization, financial performance or business profile.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of United Arab Emirates-based Abu Dhabi National Insurance Company (ADNIC), both with stable outlooks. ADNIC’s reflect its “strong risk-adjusted capitalization, established position in the UAE insurance market and good financial performance,” Best explained. “ADNIC’s risk-adjusted capitalization is strong, with its capital base benefiting from a good track record of earnings retention. In 2011, ADNIC’s capital and surplus surpassed AED 2 billion ($551 million), sufficient to absorb projected growth of around 15 percent over the coming years.” However, Best also noted that while ADNIC’s risk-adjusted capitalization “remains at a good level, it declined in 2011 as a result of its decision to be a more pronounced risk carrier with an increased premium retention level, which now stands at approximately 55 percent of premiums written. ADNIC’s capital position benefits from a good level of credit risk, supported by a reinsurance program of good credit quality and moderate investment risks, as over 60 percent of investments are placed in bonds and short-term deposits.” Best added that, although there is “strong competition in the sector, ADNIC has been able to secure its strong position in the UAE market while sustaining a good level of profitability. In 2011, ADNIC maintained its position as the second-largest insurance company in UAE, in terms of gross written premium, with a market share of over 9 percent. Gross written premium grew 17 percent in 2011 to AED 2.066 billion ($562.5 million). While premiums emanate mainly from Abu Dhabi,” Best pointed out that the company “has been diversifying its source of income to other Emirates in the UAE and also across the Middle East and North Africa region. ADNIC’s profits increased 11 percent in 2011 compared to 2010, with a return over capital and surplus of approximately 8 percent. Overall profitability is underpinned by a good underwriting result, with a very good level of a combined ratio at approximately 84 percent (83.2 percent in 2010). However, the combined ratio is above the company’s historical trends and reflects its increased level of unearned premium reserves driven by the introduction of IFRS, forthcoming UAE regulatory requirements and increased business retention.” Best said that as a result it “does not expect the combined ratio to significantly improve in the medium term. Furthermore, the reduction in ADNIC’s fair value of assets continues to offset its investment performance, although it has de-risked its portfolio in recent years. In 2011, ADNIC’s invested assets yielded 2.6 percent. ADNIC’s conservative investment strategy (with a greater focus on cash deposits) provides additional stability to overall earnings and supports the capital base from the current financial markets’ volatility. In the first half of 2012, premium revenue has grown 16 percent to AED 1.179 billion ($325 million), and net underwriting income increased 14 percent to AED 138 million ($38 million). However, net profit in the period decreased to AED 72 million ($20 million) from AED 87 million ($24 million) compared to the same period last year, driven by the proactive implementation of draft UAE insurance regulation on unearned premium reserves and a provision for doubtful debt. “Going forward, Best said it “does not envisage an upward rating movement in the medium term. Downward pressures could occur if there were a significant deterioration in the company’s financial performance or a substantial reduction in its risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR) model.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb” of Oman-based National Life & General Insurance Company SAOC (NLGIC); however, Best’s outlook on both ratings remains negative. The ratings of NLGIC “continue to reflect its supportive level of risk-adjusted capitalization and good track record of operating performance,” Best explained. “The maintenance of the negative outlook reflects NLGIC’s weak enterprise risk management (ERM), continuous losses from its motor business and the level of risk associated with its increased volume in the medical business in 2011, mainly from its recently launched Dubai operation.” Best said that in its opinion, “NLGIC’s risk-adjusted capitalization remained sound in 2011 and is expected to continue to support its planned growth over the coming years. The company’s risk-adjusted capitalization benefits from a good capital base of OMR 12.8 million ($33.3 million) relative to low credit risk, underpinned by a reinsurance program of good credit quality and moderate investment exposure.” Best added that it “expects the company’s capital position to enhance going forward given its projected higher level of earnings retention over the coming years. NLGIC has a good track record of generating profits, owing to its solid domestic franchise in life insurance and the recent positive performance from its medical business. However, non-life business has been straining underwriting performance in recent years, driven by poor performance in the motor business. Additionally, the company’s investment performance has been relatively stable, paving the way for good overall profitability.” Best also noted that “losses in the motor business have been significantly reduced in the first half of 2012, compared to the previous year, and NLGIC has demonstrated a higher level of earnings with net income reaching OMR 1.7 million ($4.5 million) in the same period. NLGIC’s ERM is in its infancy stage, lacking internal controls over key management functions, in particular investment risk management. The company has recently developed a risk matrix.” However, Best indicated that it “believes NLGIC’s risk framework remains basic with a lack of controls. Moreover, NLGIC’s growth of over 100 percent in the medical business in 2011, particularly in Dubai, places some concerns about prospective medical profitability since it is a new venture.” In light of the good performance of Dubai’s medical portfolio in 2011 and the first half of 2012,, Best said it “expects NLGIC’s management to oversee its portfolio closely to ensure good performance is maintained. NLGIC is a well-established provider of life insurance in Oman, accounting for over one-third of its domestic market.” Best also indicated that it “expects NLGIC to protect its position going forward and build on the foothold it has gained in the Dubai medical market. Going forward, positive rating actions including the removal of the negative outlook could arise from an improvement in the performance of NLGIC’s motor business while maintaining the medical business profitability at a good level. Whereas material losses from the company’s non-life business or a deterioration of NLGIC’s medical performance could add negative pressures to the ratings in the future.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B++’ (Good) and the issuer credit rating of “bbb” of Middle East Insurance Company plc (MEICO), which is based in Jordan. The outlook for both ratings is stable. MEICO’s ratings “continue to reflect its sound domestic franchise, diverse business profile, good technical profitability and strong risk-adjusted capitalization,” said Best. “However, the ratings are tempered by the perceived risk in the company’s investment strategy and the country risk associated with Jordan. MEICO ranks as the third-largest insurer in Jordan by gross written premiums, which rose almost 10 percent in 2011 to JOD 29.7 million ($42 million), accounting for almost 7 percent of the market. The company traditionally has had a corporate focus, enjoys a leading market position in marine and ranks second in property.” Best added that “MEICO has a long track record of generating technical profits, which have shown a good level of stability in recent years. Whilst the company’s technical performance has shown some signs of deterioration in recent years, MEICO’s five-year average combined ratio is very sound at 90.6 percent. Furthermore, the company’s results for the first half of 2012 indicate that technical profits are likely to improve in 2012.” Best said that in its opinion, “MEICO’s prospective risk-adjusted capitalization remains strong despite some deterioration in the company’s Best’s Capital Adequacy Ratio (BCAR) in recent years. MEICO’s invested assets continue to be the main source of capital consumption given its focus on real estate and equity investments.” Best also indicated that it “believes the company’s investment strategy continues to be a source of potential volatility to capital strength and overall earnings. The ratings of MEICO incorporate the perceived risk associated with operating within Jordan. A.M. Best assigned a country risk tier of four to Jordan due to its high economic, political and financial system risks. Positive actions on MEICO’s ratings are likely to be driven by further improvements in its financial position, business profile or a de-risking of its investment portfolio. Negative rating pressure may occur from deterioration in the company’s financial standing.” A.M. Best again stressed that the “ratings also are sensitive to a change in the country risk tier of Jordan.”

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