S&P cuts outlook for Emirates Insurance

EIC OUTLOOK: S&P revises outlook for Abu Dhabi-based insurer to negative from stable. (Getty Images)

Credit ratings agency, Standard & Poor's, revised its outlook on Abu Dhabi-based Emirates Insurance Co. (EIC), Wednesday, to negative from stable, in response to the heavy decline in the company's capital adequacy at December 31, 2008.

It also noted the heightened volatility in the value of the firm's investment portfolio, which may have a further negative impact on its capital adequacy.

At the same time, however, the 'BBB+' long-term counterparty credit and insurer financial strength ratings were affirmed.

On February 23, 2009, EIC announced a 42.6% fall in its shareholder funds as at December 31, 2008, compared with December 31, 2007. This material movement, said S&P, reflected a reduction of 87% in investment revaluation reserves to 92.9 million dirhams at the end of 2008, from 714.5 million dirhams at the end of 2007.

Despite this material weakening of capital adequacy, S&P continues to assess EIC's capitalisation as in line with the rating.

The ratings on EIC reflect its strong technical earnings. In 2008, excluding asset value movements, EIC again showed a strong underwriting performance, with a net combined ratio of 78% compared with 64% in 2007. This deterioration reflects a decline in commission receipts following lower reinsurance utilisation.

Also, the strength of liquidity has been maintained. Bank deposits and cash at December 2008 represented 99% of total net technical reserves, and if tradable investments (mostly equities) are included, technical reserve liquidity remains strong.

"The outlook revision reflects our opinion that the ratings will be lowered if capital adequacy continues to decline materially in the currently volatile investment market," said S&P credit analyst Kevin Willis.

"The outlook could revert to stable if EIC can show that its capital adequacy has been restored to a rating strength," he added.

S&P said positive rating action may be taken if the investment portfolio is actively de-risked, capitalisation sustained at a strong level, and earnings maintain their strength.

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