Emirates Retakaful write-off prompts AM Best outlook revision

Ratings agency AM Best said on Aug. 24 that it revised the outlook to negative from positive for the Long-Term Issuer Credit Rating (Long-Term ICR) of Emirates Retakaful (ERL) following a $36 million write-off from gross written contributions for 2016.

The adjustment reflects significantly reduced contributions received compared to booked estimates, the majority of which relates to prior underwriting years, AM Best noted. It has resulted in AM Best revising its assessment of ERL’s technical and operating performance, business profile, and balance sheet strength. In addition, the impact of management actions taken to ensure adequate estimation of pipeline contributions are likely to take time to translate into reduced topline volatility, leaving ERL exposed to the occurrence of further revenue write-offs in the short term.

Prior to the contribution adjustment, the company reported gross written contributions of $64 million in 2016. Whilst ERL operates a well-diversified portfolio, geographically and by line of business, proportional business in the Middle East and North Africa region remain the company’s core sectors. The company continues to face material challenges in improving its competitive position, owing to its limited business profile in the highly competitive international reinsurance market.

ERL’s operating performance is considered to be weak, reporting net losses of $18 million in 2016, and $4 million in 2015. Although the company has sustained unrealised losses on its investment portfolio over the past two years, the primary driver of poor earnings has been the underwriting performance. Weak technical performance has been further impacted by the contribution write-off, translating into a three-year average (2014-2016) combined ratio of 111 percent. The company’s high level of acquisition costs and modest top line has led to a relatively high expense ratio, with additional pressure applied from soft reinsurance market conditions.

AM Best has affirmed the Financial Strength Rating (FSR) of B++ (Good) and the Long-Term ICR of “bbb+” of Emirates Retakaful Limited. Concurrently, the outlook for the FSR has been revised to stable from positive.

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