AM Best Revises Outlooks to Negative for Al Fujairah National Insurance Company PJSC

LONDON--(BUSINESS WIRE)--AM Best has revised the outlooks to negative from stable 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 rating enhancement from AFNIC’s majority shareholder, the government of Fujairah, which holds in excess of 80% of AFNIC directly. The government of Fujairah has demonstrated capital support to AFNIC through past capital injections and allowing the accumulation of capital at the company through bonus shares in lieu of cash distributions.

The revision of the outlooks to negative reflects a deterioration in AFNIC’s operating results since 2021, which has placed pressure on AM Best's operating performance assessment of strong. Historically, AFNIC has reported a strong track record of underwriting and operating performance, demonstrated by a five-year (2017-2021) weighted average combined ratio of 88.8%, and a return-on-equity ratio (ROE) of 10.8%. More recent performance has lagged these historical averages, with AFNIC returning a combined ratio of 99.0% for 2021 (as calculated by AM Best), and underwriting losses in 2022 year-to-date, stemming from increased claims experience coupled with reduced earned premiums causing an expense strain. While operating performance remained profitable for 2021 (ROE of 5.7%), the company reported a net loss of AED 8.4 million for the first nine months of 2022.

AFNIC’s balance sheet strength is underpinned by a very strong level of risk-adjusted capitalisation, as measured by Best Capital Adequacy Ratio (BCAR). The company has demonstrated its ability to strengthen its capital base over time through the retention and capitalisation of earnings. A significant offsetting factor to AFNIC’s balance sheet strength stems from the company’s high-risk investment strategy. Invested assets are concentrated to equity securities (69% of total investments at year-end 2021) and real estate (17%), leaving the balance sheet heavily exposed to fair value fluctuations. Furthermore, AM Best views concentrations within the company’s equity portfolio to single strategic holdings as elevating investment risk.

AFNIC’s operations are concentrated to the competitive and highly fragmented UAE non-life insurance market, where it writes a small share of total market premiums. AFNIC reported a 4% contraction in gross written premium in 2021 to AED 237.4 million, driven in part by underwriting discipline and in part by the high competition in its core motor and medical portfolios. The company does, however, benefit from some preferential access to government originated business in the Fujairah region.

AM Best views AFNIC’s ERM framework and capabilities as marginal for the size and complexity of its operations. AM Best views ongoing ERM developments as necessary to manage the company’s risk profile, notably for investment risk.

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