Tuesday 25, July 2017 by Georgina Enzer

UAE-Based Al Buhaira National Insurance Co. 'BB+' Ratings Affirmed; Outlook Stable

Global Ratings has affirmed its 'BB+' counterparty credit and financial strength ratings on Sharjah, UAE-based Al Buhaira National Insurance Co. (PSC) (ABNIC).

The outlook remains stable.

We have affirmed our ratings on ABNIC as we continue to regard the insurer's overall liquidity position as less than adequate, which caps the ratings at the current level. That said, we accept that management now seems more prepared than previously to sell some of its good quality property assets.

Such sales, if successfully completed, would help improve liquidity while also bringing the company somewhat closer to the new regulatory guidelines concerning property investments that will come into force in January 2018.

Typically, we would expect an insurer such as ABNIC, which principally writes short-tail business such as motor and medical, to maintain a level of liquid assets that is comfortably above the total of its net technical reserves. In ABNIC's case, liquid assets at the end of March 2017--notably cash of AED 165.4 million and equities of AED 54.7 million--together represented just 73 per cent of total net technical reserves of AED 301.7 million. We deduct from available liquid assets both potentially recallable overdraft borrowings and part of ABNIC's existing long-term debt that is contractually repayable within the next 12 months.

Meanwhile, our assessment of ABNIC's satisfactory business risk position and upper adequate financial risk profile leads to an indicative anchor of 'bbb+'. From the starting point of the anchor, we have then set ABNIC's stand-alone credit profile one notch lower at 'bbb' to reflect what we assess to be weak enterprise risk management relative to fair management and governance. The final rating level is capped at 'BB+' due to our liquidity assessment.

Although ABNIC has made considerable use of debt funding over recent years, we have noted a gradual reducing trend in borrowings, and the current level of indebtedness is not in itself a particular concern to us. If the company is successful in "terming out" some of its short-term overdraft funding by means of a new term loan, then the debt maturity profile will improve along with some of the near-term pressure on liquidity. In the interim, we note that, as of end March 2017, ABNIC reported total outstanding debt of AED 409.4 million, with AED 343.3 million in the form of term loans, and AED66.1 million as overdraft borrowings. When that part of the term loans due for repayment over the coming 12 months is added to the overdraft figure, the total amount of debt potentially due in the short term is AED 118.7 million. In terms of financial leverage, the debt to capital (equity + debt) ratio is somewhat elevated but still acceptable at 39.2 per cent. The appropriate servicing of this debt by ABNIC is not regarded as challenging for the company, in our view, as long as lending banks maintain their confidence in ABNIC.

Elsewhere in our analysis of ABNIC, we have also now applied standard rather than stressed property-related charges in our risk-based capital modelling of ABNIC, and have instead factored into our risk position assessment the insurer's elevated real estate concentration risk. For this reason, our assessment of capital adequacy has improved to extremely strong from very strong, while our assessment of risk position has changed to high from moderate risk.

The stable outlook indicates our view that we are unlikely to change the ratings on ABNIC during the one-year outlook period. The outlook, in particular, reflects our concern that although company seniors may now be more willing than before to sell at least some of the company's considerable property assets, actual sales may not be sufficient, both to fully satisfy regulators and to bring liquidity to a level that we can define as clearly adequate. That said, we remain aware that at any time management could potentially opt to sell properties of a more significant value than we currently expect. In such an event, we would likely undertake a further review of the current ratings.

We could raise our ratings on ABNIC if management successfully addresses liquidity and asset concentration concerns by means of real estate sales sufficient to improve liquidity to levels that we can readily view as at least adequate.

Although not expected, we could lower the ratings if company management opts to increase its exposure to high-risk property assets, or if ABNIC's use of bank debt rose significantly above current expected levels.


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