Ratings Recap: Electrical Contractors, Al-Sagr, Alliance (UAE)

August 16, 2013

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of UK-based Electrical Contractors’ Insurance Company Limited (ECIC), both with stable outlooks. The ratings reflect ECIC’s “excellent risk-adjusted capitalization, strong operating performance and specialist business profile,” Best said. “Risk-adjusted capitalization is expected to remain at a strong level in 2013 and into 2014, in spite of the payment of an exceptional dividend of £6 million [$9.38 million] in the second half of 2012. This dividend was paid to help ECIC’s parent, the trade organization, The Electrical Contractors’ Association, meet cash calls in relation to a loss-making Lloyd’s syndicate, the interest in which has now been sold.” Best also noted that ECIC “has further reduced its reliance on third-party reinsurance, particularly quota share agreements. The company ceded approximately 40 percent of gross written premium in 2012 and 2011, but a review of its reinsurance needs led to the decision to reduce the quota share arrangement during 2013 to 25 percent on a two-year contract basis. An increased premium retention rate of around 70 percent is forecast for 2013 and 2014, thereby diminishing ECIC’s exposure to increased reinsurance rates and credit risk.” In addition Best pointed out that “ECIC has a solid underwriting record, which is underpinned by an excellent knowledge of its core market. In 2012, the company produced a strong underwriting result, assisted by releases of prior years’ reserves. ECIC’s operating performance for 2012 was supported by an excellent investment performance, enhanced by realized investment gains following the disposal of all equity based investments during the year. Despite challenging market conditions in the United Kingdom, a good operating performance is anticipated for ECIC in 2013, albeit with lower investment income given the continuing low interest rate environment. ECIC has a good niche business profile providing insurance to electrical and mechanical building services contractors and other specialist construction professionals in the United Kingdom. The company benefits from its relationship with its parent, which provides access to a large membership base. Distribution is primarily via a network of brokers across the United Kingdom and has been enhanced by an electronic trading platform.” In conclusion Best said: Positive rating actions are unlikely in the near future for ECIC, whereas an unexpected weak operating performance or a material deterioration in its risk-adjusted capitalization could lead to negative rating pressure.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘B+’ (Good) and issuer credit rating of “bbb-” of Al-Sagr National Insurance Company P.S.C.(ASNIC), which is based in the United Arab Emirates, both with stable outlooks. Best said the ratings reflect “ASNIC’s strong risk-adjusted capitalization and sound business profile within the United Arab Emirates (UAE). An offsetting factor is the company’s volatile investment performance. ASNIC’s ratings are subject to drag from its parent company, Gulf General Investment Company P.S.C. (GGICO).” The report also indicated that “ASNIC’s risk-adjusted capitalization benefits from a strong equity base supporting low underwriting leverage, with capital requirements mainly driven by investments. The company has been able to grow its capital internally through a good track record of operating performance and a high level of profit retention. ASNIC maintains a good franchise within the UAE despite premium revenue decreasing in recent years, as the company restructures its operation to improve profitability. The company’s profile benefits from diversification through its majority owned subsidiary, Jordan Emirates Insurance Company PSC (JEIC), which represented 25 percent of gross written premium in 2012.” Best also noted that “ASNIC produced overall earnings in 2012 of AED 29 million (US$7.9 million) mainly as a result of improving underwriting performance. This was driven by stricter underwriting controls on its medical business and restructuring of the management team and underwriting practices within the Jordanian subsidiary. Favorable unrealized gains from its equity portfolio contributed to profitability. However, due to the concentration of investments in local property and one Saudi equity holding, performance is subject to volatility.” In addition Best’s report pointed out that “GGICO is significantly exposed to equities and real estate investments, which have been hard hit by market conditions in recent years. The company has bank loans and credit facilities totaling AED 3.4 billion (US$ 925.674 million) against net equity of AED 1.2 billion (US$326.7 million). However, in 2012 GGICO was able to secure a refinancing agreement with its existing credit providers and the debt is expected to be fully repaid by the end of 2018.” Best added that the “largest portion of its loans is to be repaid in the later years, which could place further pressure on GGICO’s cash flow in the future. Over time, a material improvement in ASNIC’s risk-management capability and reduced volatility emanating from its investment portfolio could produce positive ratings movement. A material deterioration of ASNIC’s risk-adjusted capitalization or difficulties experienced by GGICO in meeting its debt amortization schedule could have a negative impact on the company’s ratings.”

A.M. Best Europe – Rating Services Limited has affirmed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating of “a-” of Alliance Insurance (PSC) – based in the United Arab Emirates – both with stable outlooks. The ratings reflect Alliance’s “strong risk-adjusted capitalization, excellent level of underwriting performance and moderate business profile, Best said. “Alliance maintains a strong capital position benefiting from low underwriting leverage, a conservative investment profile and a reinsurance program of good credit quality. Moreover, Alliance’s internal capital generation has outpaced capital requirements in recent years further strengthening its capital base.” Best also noted that “Alliance has demonstrated a good track record of profitability, with overall earnings reaching AED 41 million (US$ 11 million) in 2012, equivalent to a return on capital and surplus of 12 percent. Alliance’s profitability is supported by a solid underwriting performance, with life insurance producing a 13 percent profit margin and non-life achieving a strong combined ratio of approximately 60 percent. Furthermore, Alliance’s profitability is supplemented by a conservative and stable investment profile yielding a 4.7 percent return in 2012.” In addition Best indicated that “despite Alliance’s weakening market profile in recent years, the company maintains a good position as a medium-sized insurer within the United Arab Emirates. Alliance’s new management team is taking measures to improve its market profile through developing its distribution network and restructuring its product offerings. Alliance will be challenged over the next two years to grow its market franchise, while maintaining strong profitability. Negative rating pressures could arise from a material deterioration in Alliance’s financial performance or risk-adjusted capitalization. Positive rating movement is unlikely in the near term.

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