A.M. Best Revises issuer credit rating outlook to stable for Union Insurance Company P.S.C.
A.M. Best has revised the outlook to stable 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 Union Insurance Company P.S.C. (Union) (United Arab Emirates). The outlook of the FSR remains stable.
The revision of the Long-Term ICR outlook to stable reflects A.M. Best’s view that an upgrade of the Long-Term ICR in the short term is unlikely, owing to deterioration in the company’s risk-adjusted capitalisation.
The Credit Rating (rating) affirmations reflect Union’s good technical profitability since a change of management during 2012 and its solid business profile in its domestic market. Offsetting rating factors include volatility in overall earnings and risk-adjusted capitalisation over the past three years, as a consequence of rapid underwriting growth and fluctuations in the fair value of investments.
Management action to de-risk the company’s investment portfolio and reduce its concentration to large single investments has taken longer than expected. Union successfully sold one of its largest equity holdings during July 2017, which has reduced investment risk and is expected to support reduced volatility of prospective capital and surplus. However, the investment portfolio remains exposed to other large equity and real estate investments.
In A.M. Best’s opinion, Union’s risk-adjusted capitalisation no longer includes a buffer to absorb potential volatility in the market value of investments. In addition, underwriting growth will be a key driver of prospective capital adequacy, with continued strong growth likely to place negative pressure on the ratings of the company.
Union reported a marginal pre-tax operating profit of AED 283,000 for the first six months of 2017, with a robust technical profit offset by a loss from investments. For the full-year 2017, the company is projected to report a robust pre-tax profit, reflecting continued underwriting profitability and a positive investment result following the sale of equities in the second half of the year.
Union’s domestic market share has grown notably over the past three years, based on gross written premiums. Although new business has been profitable to date, A.M. Best believes competitive market conditions in the UAE will challenge prospective profitability.