23 August 2016
London -- A.M. Best has downgraded the financial strength rating to B+ (Good) from B++ (Good) and the issuer credit rating to "bbb-" from "bbb" of Al-Sagr National Insurance Company P.S.C. (ASNIC) (United Arab Emirates). The outlook for each rating has been revised to negative from stable.

The rating downgrades reflect ASNIC's higher financial risk position, due to its affiliation with its majority shareholder, Gulf General Investment Co. (P.S.C.) (GGICO), an investment company that maintains a vulnerable credit profile.

GGICO remains highly indebted, with a debt-to-capital ratio of 68% at year-end 2015. The company's ability to service its debt has steadily diminished in recent years, as earnings have been affected by the challenging conditions in Dubai's real estate market. As a result, GGICO is in the process of refinancing its obligations before the next scheduled payment on 31 December 2016. GGICO previously restructured its debt obligations in 2012. At the time, A.M. Best understood that GGICO's debt would be fully repaid by 2018.

Given these circumstances, A.M. Best's opinion regarding ASNIC's financial risk profile has worsened. A.M. Best expects that the execution risk associated with the successful restructuring of GGICO's debt obligations, along with the potentially higher refinancing costs arising from a new debt arrangement (if successfully concluded), will likely compromise the level of financial flexibility that ASNIC derives from its parent and may result in management undertaking a more aggressive strategy to grow its earnings. This risk is particularly acute, given the ongoing economic challenges and their effect on GGICO's profitability.

ASNIC has demonstrated weaknesses in its risk management during 2015. This has negatively affected A.M. Best's perception regarding the company's rating outlook, owing to the uncertainty relating to the suitability of ASNIC's risk management framework in supporting its evolving risk profile. In particular, ASNIC's operating loss of AED 105 million (USD 29 million) in 2015 was primarily driven by two investment transactions, which combined produced a loss of AED 129 million. These losses were primarily due to management's inability to crystallise the investments, supporting concerns regarding its understanding of ASNIC's investment strategy and ability to mitigate the associated volatility. 

Additionally, the company strengthened its reserves by AED 107 million during the year, corresponding to a regulatory change that standardised the industry's methods of calculating technical provisions. The level of reserve deficiency reported by ASNIC generates further concern regarding management's understanding and estimation of its liabilities. Although, ASNIC has implemented a number of changes to strengthen its risk management framework, A.M. Best believes that its benefit is likely to take time to materialise into better and more stable operating results.

ASNIC's non-life technical performance remains marginal, with the company reporting a technical profit of AED 2.4 million in 2015 compared with a prior-year loss of AED 3.8 million. Results continued to reflect the impact of the ongoing intense competitive conditions within the company's target markets, and were enhanced by the company's high underwriting concentration in the challenging motor and medical segments. Additionally, underwriting earnings in 2015 were dampened by provisions for doubtful debt associated with ASNIC's reinsurance claims recoveries, which amounted to AED 9 million in 2015 (2014: AED 2 million). 

Receivables arising from insurance and reinsurance contracts accounted for over half of gross written premium in 2015, with a material amount of these outstanding receivables maintaining a duration of over 365 days, indicating an issue with premium collection. This is likely to have negative implications for ASNIC's prospective performance if not promptly addressed.

Despite the above factors, ASNIC's risk-adjusted capitalisation remains strong, due to its low level of insurance leverage. ASNIC maintains a good franchise within the UAE, with a 1.1% market share and benefits from some geographical diversification, with its Jordanian-domiciled subsidiary representing 12% of gross written premium in 2015. 

This press release relates to rating(s) that have been published on A.M. Best's website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Best's 
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© Press Release 2016