Fitch Ratings has assigned Abu Dhabi National Takaful Company P.S.C. (ADNTC) an Insurer Financial Strength (IFS) Rating of 'A-'.

The Outlook is Stable.

ADNTC's rating reflects the company's moderate business profile, very strong capitalisation and leverage, strong profitability and prudent investment strategy.

Key Rating Drivers

Moderate Business Profile: Our assessment of the business profile is driven by the company's moderate operating scale, competitive positioning, business risk profile and diversification. ADNTC is a takaful insurance company with AED447 million of gross written premium in 2022 (2021: AED370 million), making it a top 20 listed insurer in the UAE and one of the leading takaful insurers. The company is well diversified by line of business, writing a mix of personal and commercial lines takaful property and casualty business as well as family and health takaful products.

Very Strong Capitalisation: Fitch views ADNTC's capitalisation and leverage as a rating strength. Based on Fitch's Prism Factor Based Model, capitalisation is assessed as extremely strong. On a regulatory basis, under the Central Bank of the UAE's methodology, the company had an extremely strong regulatory capital ratio, with investment risk making up the largest proportion of the capital requirement. There is no financial leverage in the capital structure.

Strong Profitability Despite 2022 Results: The insurer has a strong record of net profit growth. However, 2022 saw a decline in net profit, following a negative underwriting result. The Fitch-calculated combined ratio weakened to 112% in 2022 from 70% in 2021. The three-year average remained strong at 82.7%. The deteriorated underwriting result was due to poor profitability in motor and medical insurance, which were undermined by inflationary pressure and difficult market conditions.

Prudent Investment Portfolio: Despite an increase in its investment risk appetite, ADNTC maintains a prudent investment portfolio. At end-2022 60% of investments were held in cash and term deposits, compared with 71% at end-2019, with increasing exposure to equity instruments, which accounted for 32% at end-2022 compared with 14% at end-2019. As a result, the company's Fitch-calculated risky-assets-to-capital ratio weakened to 55% at end-2022 from 30% at end-2021.

Reserving at Best Estimate: ADNTC performs regular valuations of its reserves, which are reviewed by external actuaries. In addition, external auditors also review the reserving position as part of the annual audit and the company is subject to regulatory audits from the Central Bank of the UAE.

Strong Reinsurance Panel: ADNTC makes significant use of reinsurance across all lines of business. The panel of reinsurers includes large globally diversified reinsurers, with a number of programmes led by large globally diversified reinsurance groups. Other reinsurers on the panels are also generally rated at least 'A-'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

ADNTC's rating could be upgraded if the company improves its operating scale and competitive profile within the UAE market.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Deterioration in financial performance, reflected in a return on equity below 9%, on a sustained basis.

A significant fall in the Prism score to the low end of the 'Very Strong' category.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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