A.M. Best Co. has affirmed the B++ (Very Good) financial strength rating of Al-Mohandes Insurance Company, Egypt. The rating is based on the company's strong capitalization, consistently profitable underwriting and financial performance and conservative investment portfolio. Offsetting factors include Al-Mohandes' high operating expenses, above-average reinsurance dependence and the challenges the company may face in adjusting to an increasingly competitive market as it liberalizes.
Capital adequacy remained commensurate with the rating level at the end of 2001. Strong parental commitment and financial flexibility has been evident through five separate capital issues totaling 34 million Egyptian pounds ($10 million) between 1993 and 1998, which have contributed to the 70 percent growth in adjusted capital and surplus in the last five years. More recent capital appreciation has been achieved through retained profits, despite Al-Mohandes' generous dividend policy—the company typically pays in excess of 50 percent of retained profits to its shareholders.
Al-Mohandes has reported successive underwriting profits in the last five years. The 33.3 percent five-year average loss ratio and positive investment income generation have contributed to the achievement of an average adjusted ROE of 18.4 percent in the same period. The 7.3 percent reduction in gross non-life premiums in 2001—primarily as a consequence of the company's desire to reduce its comprehensive motor account—has been offset by the company's life business, which has reported gross premium growth of 9.9 percent and 14.4 percent in 2001 and 2000, respectively.
The company's investment portfolio is weighted towards fixed deposits and government bonds/loan certificates, which accounted for 75.5 percent of total invested assets and 63 percent of total assets at the end of 2001. Al-Mohandes has gradually reduced its exposure to equities, which at the end of 2001 represented only 16 percent of the investment portfolio compared to 43 percent in 1997. Despite the conservatism, however, between 1998 and 2001, the company achieved an average investment return of 8.4 percent, while liquidity increased marginally to 113 percent in the most recent year from 110 percent in 1999.
The government has undertaken to liberalize the Egyptian insurance market by 2003, which should result in a sale of all or part of the state-owned insurers and allow increased foreign ownership of insurance providers. This will undoubtedly intensify what is already a competitive operating environment for Al-Mohandes. Although the process has and will continue to be gradual, in the longer-term the Egyptian companies will be required to continue to focus on expense reduction, product development and distribution in a bid to maintain market shares and to remain competitive.
A.M. Best expects Al-Mohandes to maintain a risk-based capitalization level that remains supportive of the current rating level. The company's financial performance and operating ratios will remain in line with the five-year average and recent trends such that underwriting profits are reported and bottom line profitability is maintained. Management will closely monitor production and management expenses to lower the expense ratio, which increased to 53.9 percent in 2001 from the improved 38.2 percent in 2000 due to a reduction in commissions received from reinsurers.
According to A.M. Best’s forecasts, the company will introduce no material change to its investment portfolio or strategy. The company will protect its share of the Egyptian market through continued new product development, high service levels and sourcing alternative distribution channels. — (menareport.com)
© 2002 Mena Report (www.menareport.com)
