(The following statement was released by the rating agency)
Dec 10 -
Summary analysis -- Orient Insurance P.J.S.C. --------------------- 10-Dec-2012
CREDIT RATING: Country: United Arab
Local currency A/Stable/--
Primary SIC: Fire, marine, and
Credit Rating History:
Local currency Foreign currency
14-Sep-2010 A/-- --/--
16-Dec-2009 A-/-- --/--
27-Jun-2008 A/-- --/--
The ratings on United Arab Emirates (UAE)-based composite insurer Orient Insurance P.J.S.C. (Orient or the company), reflect Orient's strong operating performance, very strong capitalization, and strong liquidity. These strengths are partially offset by Orient's high use of reinsurance and the concentration risk from its banking counterparties and equity investments.
We view Orient's operating performance as strong, supported by very profitable and stable underwriting results in turn supported by commissions from reinsurers. Orient's 2011 and second-quarter 2012 underwriting and operating performance remained highly profitable: the net combined ratio was 64% and 55% for each period, while the return on equity was 23% and 28%, and the return on revenue was 47% and 57%. In our base-case scenario we expect operating performance to remain strong and a support for the rating, and to remain about the same for 2012 and 2013.
We assess Orient's capitalization as very strong. It is of very good quality, despite some dependence on reinsurers' support. This strength is indicated by extremely strong and resilient risk-based capital adequacy, as measured by Standard & Poor's capital model, and an internal policy to maintain it. In our base-case scenario we expect Orient to maintain its very strong capitalization, supported by capital adequacy remaining at an extremely strong level. Capital growth since the company's creation has been strong and entirely through profit retention, and we expect this to continue. In absolute terms, however, Orient's capital size is small by global insurance standards, with net worth at June 30, 2012, of AED1.1 billion (US$300 million).
In our view, Orient's liquidity is strong. We expect claims to be met from current underwriting cash flows. Net technical reserves on June 30, 2012, were covered by cash 2.4x (4.3x at June 30, 2011). While the cash-to-reserves liquidity ratio has weakened, overall asset liquidity is fundamentally unchanged and remains a key strength.
We view investments as good (previously strong) and a relative weakness for the ratings. The change, in our view, is largely due to increased exposure to equities (41% of total invested assets at June 30, 2012; 3% at end-2011) and concentration risk. The investment portfolio continues to be managed along generally conservative lines despite the concentration in bank stock, with the long-term focus on highly liquid deposits at securely rated banks. The move to hold equities to reinforce asset yields introduces potential volatility not present previously. We expect the investment profile will remain highly liquid, focused on bank deposits in mainly strongly rated banks. We also anticipate equity end concentration exposure will be gradually diluted by asset growth.
Orient cedes around 73% of its gross premiums, reflecting the high single value of many of the risks accepted. This high reliance on reinsurance increases credit risk and is a relative weakness in the company's business model, in our view. However, the key counterparties are securely rated international reinsurers with whom Orient has maintained long-standing relationships, which helps mitigate our concerns. Also, Orient's access to such risks emphasizes the strength of its local competitive standing.
We note that Orient is wholly owned by the unrated Al Futtaim group. However, we believe that the insurer has a strong stand-alone credit profile and is to some extent ring-fenced from its corporate shareholder by insurance segmentation. We also believe that there is a strong economic incentive for the parent to maintain the financial strength of Orient under all circumstances; moreover, we consider Orient to be severable from its parent group. Taken together these factors allow us to rate Orient at the current level.
The stable outlook reflects our expectation that Orient will maintain its strong technical and overall operating performance, with a net combined ratio below 75%, absent exceptional circumstances. We also expect the insurer to maintain its very strong capitalization, supported by capital adequacy remaining at an extremely strong level. We expect that the investment profile will remain liquid, with a prudent investment mix. The competitive position will remain at least strong in the UAE, as demonstrated by the insurer maintaining its top-three market position in gross premium written (GPW) terms.
A negative rating action could occur if Orient's operating performance or capitalization were to deteriorate materially, either through external or inter-group (parental) events. A positive rating action is unlikely over the rating horizon.