Abu Dhabi-Based Al Wathba National Insurance Co. PJSC 'BBB+' Ratings Affirmed; Outlook Stable Overview

  • On Sept. 30, 2016 (Q3 2016), Al Wathba National Insurance Co. PJSC (AWNIC) reported bank overdrafts of United Arab Emirates dirham 164 million, which were used to fund the acquisition of Vision Capital Brokerage Co. LLC (VCB).
  • The acquisition of VCB represents an increase in AWNIC's overall risk appetite and tolerances, and comes at a time where AWNIC is redefining its strategy to grow profitably in the UAE. We are therefore revising our management and governance assessment to fair and liquidity to adequate.
  • We are affirming our 'BBB+' long-term counterparty credit and insurer financial strength ratings on AWNIC.
  • The outlook is stable, reflecting our expectation that AWNIC will repay some of the outstanding bank overdrafts and maintain an adequate competitive position in the UAE.

Rating Action

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.

Rationale

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.

Outlook

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.

Upside scenario

We view an upgrade as unlikely at this stage.

Downside scenario

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.

Ratings Score Snapshot

  To From
Financial Strength Rating BBB+/Stable BBB+/Stable
Anchor bbb+ bbb+
Business Risk Profile Satisfactory Satisfactory
IICRA* Intermediate Intermediate
Competitive Position Adequate Adequate
Financial Risk Profile Moderately Strong Moderately Strong
Capital & Earnings Strong Strong
Risk Position Moderate Moderate
Financial Flexibility Adequate Adequate
Modifiers 0 0
ERM and Management 0 0
Enterprise Risk Management Adequate Adequate
Management & Governance Fair Satisfactory
Holistic Analysis 0 0
Liquidity Adequate Exceptional
Support 0 0
Group Support 0 0
Government Support 0 0

*Insurance Industry and Country Risk Assessment.

RELATED CRITERIA

  • General Criteria: Group Rating Methodology, Nov. 19, 2013
  • Criteria - Insurance - General: Enterprise Risk Management, May 07, 2013
  • Criteria - Insurance - General: Insurers: Rating Methodology, May 07, 2013
  • General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
  • Criteria - Insurance - General: Refined Methodology and Assumptions for Analyzing Insurer Capital Adequacy Using the Risk-Based Insurance Capital Model, June 07, 2010
  • General Criteria: Use of CreditWatch and Outlooks, Sept. 14, 2009 RELATED RESEARCH
  • UAE Insurers Show Signs of Recovery, But Regulatory Changes Create Uncertainty, Oct. 3, 2016
  • United Arab Emirates Property/Casualty Insurance Sector Carries an Intermediate Industry And Country Risk Assessment, Feb. 17, 2016

Ratings List

Ratings Affirmed

Al Wathba National Insurance Company PJSC

Counterparty Credit Rating

Local Currency          BBB+/Stable/--

Financial Strength Rating

Local Currency          BBB+/Stable/--


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