Best’s News & Research Service - August 24, 2017 11:08 AM (EDT)
A.M. Best Revises Issuer Credit Rating Outlook to Negative for Emirates Retakaful Limited
- August 24, 2017 11:08 AM (EDT)
London //BestWire// - A.M. Best has revised the outlook to negative from positive for the Long-Term Issuer Credit Rating (Long-Term ICR) and affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term ICR of “bbb+” of Emirates Retakaful Limited (ERL) (United Arab Emirates). Concurrently, the outlook for the FSR has been revised to stable from positive.
The revised outlooks follow ERL experiencing a USD 36 million write-off from gross written contributions for 2016. The adjustment reflects significantly reduced contributions received compared to booked estimates, the majority of which relates to prior underwriting years. The adjustment has resulted in A.M. Best revising its assessment of ERL’s technical and operating performance, business profile, and balance sheet strength. In addition, the impact of management actions taken to ensure adequate estimation of pipeline contributions are likely to take time to translate into reduced topline volatility, leaving ERL exposed to the occurrence of further revenue write-offs in the short term. Despite the write-off of contributions, the company has maintained a strong capital position.
Prior to the contribution adjustment, the company reported gross written contributions of USD 64 million in 2016. Whilst ERL operates a well-diversified portfolio, geographically and by line of business, proportional business in the Middle East and North Africa region remain the company’s core sectors. The company continues to face material challenges in improving its competitive position, owing to its limited business profile in the highly competitive international reinsurance market.
ERL’s operating performance is considered to be weak, reporting net losses of USD 18 million in 2016, and USD 4 million in 2015. Although the company has sustained unrealised losses on its investment portfolio over the past two years, the primary driver of poor earnings has been the underwriting performance. Weak technical performance has been further impacted by the contribution write-off, translating into a three-year average (2014-2016) combined ratio of 111%. The company’s high level of acquisition costs and modest top line has led to a relatively high expense ratio, with additional pressure applied from soft reinsurance market conditions. A.M. Best substitutes Wakala fees (a management fee charged by shareholders to policyholders) for actual expenses when assessing technical performance.
ERL continues to maintain a strong level of risk-adjusted capitalisation, despite operating losses leading to a USD 18 million decline in the company’s capital to USD 99 million in 2016. The company’s risk-adjusted capitalisation benefits from moderate underwriting leverage and a conservative investment portfolio that is focused on cash, deposits, and sukuk. The policyholders’ fund, for the first time in 2016, required a Qard-Hassan (interest free loan) from the shareholders’ fund to support a deficit of USD 18 million.
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