Arab Finance: Moody's Investors Service has today upgraded to Baa1 from Baa2 the insurance financial strength rating (IFSR) of Al Fujairah National Insurance Company P.S.C. (AFNIC). The rating carries a stable outlook. AFNIC is the largest insurer in Fujairah and was established in 1976. It writes a broad mix of non-life insurance classes of business and more than 50% of its business is written within Fujairah, with the balance through branches within the other Emirates. AFNIC has a dominant market position in Fujairah, albeit a much smaller 0.5% market share across the United Arab Emirates (UAE). AFNIC is over 80% owned by the Government of Fujairah, whilst Members of the Royal Family of Fujairah also control a further c.15% of AFNIC through a linked investment company; as a result Moody's assesses AFNIC as a Government-Related Issuer (GRI) and considers the potential support for AFNIC from its shareholders to be a key positive driver for the rating. RATINGS RATIONALE The rating upgrade for AFNIC reflects key improvements in its standalone credit metrics including (i) the improved levels of capitalisation, with gross underwriting leverage (GUL) improving to 1.2x as at YE 2014 from 2.2x as at YE 2012; (ii) the improved and sustained strong bottom line profitability, with a 5 year average return on capital (ROC) of 7.3% and a good sharpe ratio of return on capital, which measures the very strong consistency of returns on a 5 year average basis; (iii) the good underwriting performance with a 5 year average combined ratio (COR) of 93.8% in 2014; and (iv) lowered and diminishing levels of leverage, with the financial and total leverage reducing to 13.8% at YE 2014 from 27.7% at YE 2012 (all on a Moody's basis). Additionally AFNIC's asset quality has improved with the high risk assets (HRA) as a percentage of shareholders equity improving to 119% as at YE 2014 from over 150% as at YE 2012. The Baa1 IFSR also reflects support from the Government of Fujairah, benefiting from the strategic importance of AFNIC to the Emirate of Fujairah given the current ownership level. The Baa1 IFSR is two notches higher than the standalone rating of AFNIC. These strengths are partially constrained by the high level of price competition in the UAE property and casualty (P&C) insurance market and AFNIC's concentration to this market, that could hinder growth. Furthermore the HRA, particularly exposure to equity investments, albeit improved, are still significant and can introduce income statement volatility. RATING DRIVERS Given the stable outlook, upward pressure on the rating is unlikely. However factors that would strengthen the rating by providing a buffer from negative pressures include (i) wider geographic diversification, with good positions elsewhere in the UAE and the wider Gulf Cooperation Council; and/ or (ii) improvements in asset quality, with a greater focus on bond investments and deposits equating to HRA ratio of below 80%; and/ or (iii) a material improvement in the operating and/ or sovereign environment of Fujairah. Conversely, downward pressure on the rating could result from (i) a weakened capital position, with gross underwriting leverage increasing to over 2x or loss of major cedents in the reinsurance program; and/ or (ii) a significant deterioration in the underwriting performance, with COR above 100% for several years, or significant losses related to the investment portfolio; and/ or (iii) a deterioration in the quality and liquidity of the asset portfolio; and/ or (iv) a significant reduction in market share; and/ or (v) any perceived or actual decline in the implicit support from the Government of Fujairah for AFNIC or a material deterioration in the operating and/ or sovereign environment of Fujairah. The following rating was upgraded with a stable outlook: Al Fujairah National Insurance Company P.S.C. -- Insurance Financial Strength Rating to Baa1 from Baa2 PRINCIPAL METHODOLOGIES The methodologies used in this rating were Global Property and Casualty Insurers published in August 2014, and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies. In 2014, AFNIC largely maintained its gross contributions at AED161 million in 2014 from 2013. At the same time, net income marginally declined by 4% to AED18 million from AED19 million in 2013. Even so AFNIC's equity increased by over 11% to AED215 million in 2014 from AED193 million in 2013. The Local Market analyst for this rating is Mohammed Ali Riyazuddin Londe, +9220.127.116.1103. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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