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A.M. Best has revised the outlook to positive from stable and affirmed the financial strength rating of B++ (Good) and the issuer credit rating of “bbb+” of Abu Dhabi National Takaful Company P.S.C. (ADNTC) (United Arab Emirates).
The ratings reflect ADNTC’s solid risk-adjusted capitalisation and track record of excellent underwriting performance. These positive rating factors are partially offset by an accumulated deficit within the policyholders’ fund and a modest, albeit growing, business profile. The revised outlook reflects ADNTC’s improved balance of earnings between the policyholder and shareholder funds and enhanced enterprise risk management.
Given the strength of the regulations in the United Arab Emirates (UAE), risk-adjusted capitalisation is measured on a combined basis (integrating both the policyholder and shareholder funds). On this basis, ADNTC’s risk-adjusted capitalisation remains solid, benefitting from a prudent dividend policy, low underwriting leverage and a conservative investment profile. ADNTC’s capital position is sufficiently strong to absorb the company’s strategic objectives over the medium term.
ADNTC has demonstrated a track record of excellent underwriting performance with a five-year average combined ratio (adjusting wakala fees for actual expenses) of 80%, with most business segments producing strong operating results. This exceptional performance was achieved despite gross written contributions that almost doubled to AED 295.3 million (USD 80.4 million) in 2014 from AED 150 million (USD 40.8 million) in 2010. Furthermore, ADNTC’s overall earnings have been strong with a five-year average return on capital and surplus of 17% (2013: 15%). Half-year results for 2015 demonstrate that the operating performance has improved by 18% when compared with the same period last year.
In 2014, ADNTC carried out a detailed review of its wakala fee structure and subsequently reduced its wakala fees by approximately 33% compared to 2013. This improved the balance of earnings between the policyholders’ fund and shareholder funds, resulting in a policyholders’ fund surplus in 2014, which was offset against the accumulated Qard Hassan. In the first half of 2015, ADNTC has also achieved a surplus of AED 1.7 million (USD 0.4 million). Providing ADNTC maintains an appropriate balance of earnings between the policyholders’ fund and shareholder funds, the Qard Hassan is expected to be cleared by 2016.
ADNTC’s level of risk management surpasses many small to medium-sized insurers in the region. The company continues to enhance its enterprise risk management framework in line with international best practices. ADNTC has developed appropriate tools and processes to identify, measure and manage risks across the business. The company assesses it risk-based capital requirements using an internal capital model and employs an international third party actuarial consultant to assess the company’s exposure to natural perils.
Whilst ADNTC maintains a modest, albeit growing, profile in the UAE insurance market, it has a more dominant position within the local niche takaful (an Islamic compliant form of insurance) market segment.
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