LONDON–(BUSINESS WIRE)–AM Best revised the outlook from stable to negative and affirmed the financial strength rating of B++ (good) and the long-term issuer credit rating of “bbb” (good) of Al Fujairah National Insurance Company PJSC (AFNIC) ) (United Arab Emirates).
These credit ratings (ratings) reflect AFNIC’s balance sheet strength, which AM Best assesses as strong, as well as its strong operating performance, limited business profile and marginal enterprise risk management (ERM) . The ratings also reflect the improved rating of AFNIC’s majority shareholder, the government of Fujairah, which directly owns more than 80% of AFNIC. The Fujairah government has demonstrated its capital support for AFNIC through past capital injections and has allowed capital accumulation in the company through free shares instead of cash distributions.
The outlook revision to negative reflects a deterioration in AFNIC’s operating results since 2021, which has put pressure on AM Best’s operating performance assessment to strong. Historically, AFNIC has a solid track record of technical and operational performance, illustrated by a five-year (2017-2021) weighted average combined ratio of 88.8% and a return on equity (ROE) ratio of 10.8 %. More recent performance has been below these historical averages, with AFNIC posting a combined ratio of 99.0% for 2021 (as calculated by AM Best), and year-to-date underwriting losses in 2022, resulting from the increase in claims associated with the reduction in earned premiums, resulting in pressure on expenses. While operational performance remained profitable for 2021 (ROE of 5.7%), the company recorded a net loss of AED 8.4 million for the first nine months of 2022.
The solidity of AFNIC’s balance sheet is based on a very good level of risk-adjusted capitalization, measured by the Best Capital Adequacy Ratio (BCAR). The company has demonstrated its ability to build equity over time through earnings retention and capitalization. An important factor that offsets the strength of AFNIC’s balance sheet stems from the company’s high-risk investment strategy. Invested assets are concentrated in equity securities (69% of total investments at the end of 2021) and real estate (17%), leaving the balance sheet highly exposed to fluctuations in fair value. In addition, AM Best believes that concentrations within the company’s equity portfolio to single strategic holdings increase investment risk.
AFNIC’s activities are focused on the competitive and highly fragmented UAE non-life insurance market, where it underwrites a small share of total market premiums. AFNIC recorded a contraction of 4% in gross written premiums in 2021 to AED 237.4 million, partly due to underwriting discipline and partly due to strong competition in its main automotive and medical portfolios. The company does, however, enjoy preferential access to government-sponsored companies in the Fujairah region.
AM Best views AFNIC’s ERM framework and capabilities as marginal given the size and complexity of its operations. AM Best considers ongoing ERM developments to be necessary to manage the risk profile of the business, especially for investment risk.
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