iciec report... · 2019. 5. 19. · aa3 stable for insurance financial strength. iciec's rating...

FINANCIAL INSTITUTIONS

CREDIT OPINION2 July 2018

Update

RATINGS

ICIECDomicile Supranational

Long Term Rating Aa3

Type Insurance FinancialStrength - Fgn Curr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Mohammed AliLonde

971-4-237-9503

[email protected]

HarshaniKotuwegedara

971-4-237-9567

Associate [email protected]

Helena Kingsley-Tomkins

44-20-7772-1397

Assistant Vice [email protected]

Antonello Aquino 44-20-7772-1582Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

ICIECUpdate to credit analysis - YE2017

Summary rating rationaleThe Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) is ratedAa3 stable for insurance financial strength. ICIEC's rating reflects the strong ability andpotentially high willingness of ICIEC's main shareholders, in particular IDB and Saudi Arabia,to support the company in times of financial distress. As a member of the IDB Group, ICIECbenefits from various managerial synergies and support from its parent. On a standalonebasis, the rating reflects ICIEC's legal structure and business nature as the only multilateralexport credit and investment insurance corporation in the world that provides Shariah-compatible insurance and reinsurance products, as well as its enhanced regional knowledgebased on its experience of operating in the region.

ICIEC changed its fiscal year-end from the Lunar Hijri calendar with year-end 30th DhulHijjah (for example, previous year-end of 30th Dhul Hijjah pertained to 13 October 2015,that is, fiscal 2015) to the Solar Hijri calendar with year-end 31 December (2nd Rabi Al-Akhir1438H, fiscal 2016). This change resulted in the financial results for fiscal 2016 (31 December2016) representing roughly 15 months (or 444 days). Fiscal 2017 represent 365 days.

In fiscal 2017, ICIEC reported gross written premiums of ID25.3 million (2016: ID33.5 millionfor ~15 months). The company's underwriting results improved in 2017 following a yearof weak results due to a large claim in 2016. The 1yr combined ratio improved to 108.3%in 2017 from 200% in 2016. In addition, ICIEC also reported a net income of ID1.2millionin 2017 (2016: loss of ID7.4 million). ICIEC's good asset quality continued with high-riskassets (HRA) to shareholders' equity of 14.2% at YE2017 (16.7% as of fiscal 2016). The netunderwriting leverage and net total exposure as a percentage of shareholders' equity wasmostly stable as of YE2017 at 0.16x and 7.6x, respectively (fiscal 2016: 0.22x and 7.8x).

THIS REPORT WAS REPUBLISHED ON 03 JULY 2018 WITH AN UPDATED SCORECARD

https://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1129980

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Exhibit 1

ICIEC's profitability indicators

100%

120%

140%

160%

180%

200%

220%

(8.0)

(7.0)

(6.0)

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

-

1.0

2.0

2017 2016* 2015 2014 2013

Co

mb

ine

d r

atio

Ne

t in

co

me

(ID

mn

)

Net income (loss) Combined Ratio (1 yr.)

*2016 represent 14 October 2015 to 31 December 2016 Corresponding to 1 Muharram 1437 H to 2 Rabi Al Akhir 1438H (444 days)Source: Company reports, Moody's workings

Credit strengths

» Capital support from IDB and other member countries, including Gulf Cooperation Council (GCC) countries (particularly SaudiArabia)

» Advantageous position as the only insurer providing Shariah-compatible export credit and investment

» Regional knowledge gained while operating in the region

» Various managerial synergies and support benefits as a member of the IDB Group

» Strong international network

Credit challenges

» Further improvement in and management of standalone capitalisation levels in the context of growth opportunities and the level ofgeopolitical risk in some of its markets

» Enhancement of business coverage and reduction in risk and business/client concentrations

» Optimisation of and improvement in the level of efficiency of the organisation and the underwriting process

» Optimisation of the production of distribution networks

Rating outlookThe outlook is stable.

What to watch for:

» Any significant dilution of shareholding from IDB Group or reduction in operational support

» Geopolitical instability within certain member countries to which ICIEC is exposed

» The impact of low oil prices and weakening of credit quality of its member countries

» Potential for meaningful top-line growth following the capital injections

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 2 July 2018 ICIEC: Update to credit analysis - YE2017


» Increasing focus on medium-term business

Factors that could lead to an upgrade

» A multi-notch upgrade of the long-term ratings of ICIEC's main shareholders/member countries

» Significant strengthening in ICIEC's ownership structure or level of support from members and in particular from IDB through itsWaqf fund

Factors that could lead to a downgrade

» A downgrade of some of ICIEC's main shareholders/member countries, in particular IDB, as well as Saudi Arabia's rating movingbelow A1

» Significant reduction in ownership or level of support from IDB

» Material increase in ICIEC's risk profile due to significant deterioration in current capitalisation or a material increase in thecompany's asset risk and insurance risk profile

Key indicators

Exhibit 2

ICIEC[1][2][3][4] 2017 2016 [4] 2015 2014 2013

As Reported (Islamic Dinar (ID) Millions)

Gross Premiums Written 25.3 33.5 16.6 10.8 8.9

Net Premiums Written 8.8 17.0 8.6 7.6 5.7

Net income (loss) attributable to common shareholders' 1.2 (7.4) (0.6) (3.0) 0.3

Total Shareholders' Equity 155.2 152.5 152.8 150.5 137.1

Moody's Adjusted Rat ios

High Risk Assets % Shareholders' Equity 14.2% 16.7% 14.6% 13.8% 15.7%

Reinsurance Recoverable % Shareholders' Equity 28.0% 26.7% 8.5% 0.2% 1.1%

Goodwill & Intangibles % Shareholders' Equity 0.0% 0.0% 0.0% 0.0% 0.0%

Net Total Exposure % Shareholders' Equity 7.6x 7.8x 5.1x 5.6x 4.1x

Net Underwriting Leverage (Credit Insurers) 0.16x 0.22x 0.10x 0.07x 0.05x

Combined Ratio, gross (1 yr.) 68.8% 94.2% 64.0% 92.3% 72.3%

Combined Ratio (1 yr.) 108.3% 200.0% 141.5% 147.8% 122.7%

Sharpe Ratio of ROC (5 yr. avg) NM NM NM NM NA

Financial Leverage 2.5% 1.6% 1.2% 0.8% 0.1%

Total Leverage 2.5% 1.6% 1.2% 0.8% 0.1%

Earnings Coverage (1 yr.) NM NM NM NM NM

[1] Information based on IFRS financial statements as of Fiscal YE December 31 2017; 13 Rabi Al-Thani 1439H corresponds to 31 December 2017 and 2 Rabi Al-Akhir 1438H corresponds to31 December 2016. Prior years (excluding 2016) are as of Fiscal YE Lunar Hijri calendar 30 Dhul-Hijjah [2] Certain items may have been relabeled and/or reclassified for global consistency[3] 1 ID= US$1.41241 as at 31 December 2017 [4] YE2016 represent 14 October 2015 to 31 December 2016 Corresponding to 1 Muharram 1437 H to 2 Rabi Al-Akhir 1438H (444 days)Source: Company reports, Moody's workings

Company profileICIEC was established in 1994 in Jeddah, Saudi Arabia. ICIEC provides export credit insurance and reinsurance for exports from itsmember countries to anywhere in the world to cover the non-payment of export receivables resulting from commercial or non-commercial risks. ICIEC is a member of the Islamic Development Bank (IDB, Aaa stable), which holds 52.1% of ICIEC's issued sharesthrough its Waqf fund as of 13 Rabi Al-Akhir 1439H (corresponding to 31 December 2016), a special fund established by IDB. ICIEC'sother shareholders/members include the sovereign members of the IDB, including Saudi Arabia (A1 stable) and other sovereignmembers of the Organisation of the Islamic Conference.



The company also provides investment insurance for foreign investment flows into its member countries, irrespective of their countryof origin, against country risks, mainly the risks of exchange-transfer restrictions, expropriation, war and civil disturbance, and breach ofcontract by the host government.

Detailed rating considerationsMarket position, brand and distribution: Baa - Strong position in core markets, but poor presence globallyAlthough ICIEC has a relatively small scale on a global basis, it maintains a strong market position in its core market of providing exportcredit insurance and reinsurance to its member countries. With total gross premiums written (GPW) of ID25.3million in fiscal 2017 anda large proportion of its premiums in relation to contracts written in markets such as Saudi Arabia, GCC countries and other nations,ICIEC is seen as one of the leaders in its market segment. Given the relatively low penetration of credit insurance in the region andamong member countries, we expect stable premium volume of ICIEC to continue. Notwithstanding this, ICIEC has experienced overthe last few years a considerable degree of competition from international players, especially in its short-term insurance portfolio,which represented around 74% of ICIEC's business insured as of fiscal 2017. The company's strategy is to focus on increasing theproportion of medium-term insurance and foreign investment insurance. The later grew by 28% in 2017 and the contribution tobusiness insured increased to 21% from 15% in 2016.

ICIEC's diversification by insurance purchaser is relatively low, with a current focus on several large exporting names. Nevertheless, thismight potentially improve as ICIEC expands its operations across its member countries.

Product focus and diversification: Ba - Limited diversification as the company is a pure export credit insurerAs a pure export credit insurer, ICIEC's business diversification is inherently limited. ICIEC's risk exposure predominantly relates toinsurance of exports from various member countries to countries globally and in particular to the default of commercial counterpartsin those territories. In addition to commercial credit exposure, certain ICIEC policies also cover, albeit to a more limited degree,political risk, which in many countries can be relatively high. Nevertheless, the stable demand for political risk policies in ICIEC'smember countries led to continued stable new commitments in fiscal 2017. ICIEC has also won some major new clients in fiscal 2017in countries such as Egypt, Kuwait, Denmark, South Africa, France and Singapore. ICIEC maintains good access to a variety of sovereignmarkets through its member countries, ensuring good information and access in the event of political trade interventions.

The material proportion and focus on multiyear policies limit ICIEC's flexibility to change policies at renewal, if necessary, potentiallyaffecting the overall company's risk portfolio. Furthermore, the company's exposure by buyer is relatively concentrated by country andby sector, but overall reflecting ICIEC's strategic goal to facilitate the trade of its member countries.

Asset quality: A - Good investment strategy with the majority of investments held in MurabahaICIEC's invested assets predominantly consist of Shariah-compliant Murabaha (similar to money market instruments) and Sukukinvestments. The portfolio is liquid, and the majority is rated within the investment grade category. We therefore regard asset qualityas strong, although the company's Shariah compliance does impose some restrictions in terms of asset choice leading to a relativelyhigh concentration risk. HRA as a % of consolidated equity (shareholders' and policyholders') was low at 14.2% as of fiscal 2017 (fiscal2016: 16.7%). Reinsurance recoverable as a percentage of shareholders' equity was 28.0% as of fiscal 2017 up from 26.7% at fiscal2016. In the past, reinsurance recoverables figure actually related to other debtors rather than specific reinsurance counterparts.

Capital adequacy: Baa - Adequate capitalisation with considerable free assets backing high-risk policiesWe view ICIEC's capital levels as adequate. Net total exposure as a proportion of consolidated equity was stable at 7.6x at YE2017(fiscal 2016: 7.8x) and net underwriting leverage of 0.16x as of fiscal 2017, ICIEC remained strongly capitalised. However, this measureis not risk adjusted and does not reflect the higher probability of default on political risk versus credit risk, and the concentrationexposures on both the liability and asset side of the balance sheet. Nevertheless, ICIEC maintains a strong level of potential shareholderresources, in particular both the Waqf fund and the individual sovereign members of ICIEC maintain considerable levels of free assetsthat could be provided to support ICIEC's growth. In March 2011, the board of directors of ICIEC approved a proposal to more thandouble ICIEC's capital resources to ID400 million ($613 million) from ID150 million ($230 million). As of year-end 2016, ID288 million($406.5 million) was subscribed, of which ID140.5 million ($198.4 million) was paid up. Furthermore, the support is illustrated by thefact that IDB's Waqf fund had participated in the capital increase in 2015 with IDB's Waqf fund owning 52.1% of ICIEC as of fiscal 2017.



Exhibit 3

ICIEC's capitalisation indicators

7.6x 7.8x 5.1x 5.6x 4.1x

0.16x

0.22x

0.10x

0.07x

0.05x

0.00x

0.05x

0.10x

0.15x

0.20x

0.25x

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

9.0x

2017 2016* 2015 2014 2013

Net

Und

erw

riting

Le

vera

ge

Ne

t e

xp

osu

re %

SH

eq

uity

Net Total Exposure % Shareholders' Equity Net Underwriting Leverage (Credit Insurers)

*2016 represent 14 October 2015 to 31 December 2016 Corresponding to 1 Muharram 1437 H to 1 Rabi Al Akhir 1438H (444 days)Source: Company reports, Moody's workings

Profitability: Ba - Improved profitability in 2017 is positiveICIEC's underwriting performance improved in 2017 after a year of weak results in 2016. The combined ratio improved in 2017 to108% from 200% in 2016 (when was lowest compared to the past 5 years). With this, ICIEC's net income was a positive ID1.2 million(negative ID7.4 million in 2016). However we note that as part of the IDB Group and reflecting its pseudo-state/social role, ICIEC isunlikely to aim to consistently produce strong levels of profitability, and the volatility of results is also likely to be a feature. However,we regard a consistent and modest level of profitability, principally through controlled underwriting and pricing but also through goodlevels of expense control, as being a key credit goal for ICIEC.

Reserve adequacy: Baa - Adequate reserves, despite exposure to medium-term and investment policiesReserves are regarded as adequate, reflecting the short-tail nature of the risks that ICIEC takes compared with Middle Eastern propertyand casualty insurers; however, it underwrites more medium-term and investment multiyear policies than other credit insurers that werate. ICIEC strengthened its reserves in fiscal 2015 and fiscal 2016 due to some large losses pertaining to a single client.

Financial flexibility: Ba - Unlevered and with modest standalone financial flexibility, but benefits from IDB ownershipAs a Shariah-compliant institution, ICIEC does not fund itself through borrowings. In addition, ICIEC's dividend policy remains restricted(dividends are not payable until substantial reserves have accrued). Consequently, ICIEC's ability to fund its required regular cash-financing needs is strong. However, on a standalone basis, we regard ICIEC's ability to source additional external capital as modest.More positively, the company's position within the IDB Group and its supportive sovereign member countries indicates that its overallfinancial flexibility is at higher levels.

Operating environment: Baa - Adequate economic environments offset by underdeveloped insurance marketsICIEC is headquartered in Saudi Arabia and operates in various countries that are sovereign members of its major shareholderIDB, as well as other sovereign members of the Organisation of the Islamic Conference. ICIEC benefits from the strong economicstability of those of its members from the GCC. However, a majority of the insurance markets of the member sovereigns are still in adevelopmental stage, with potentially volatile growth and with some large risk concentrations. As an established credit insurer withsovereign ties, access to business is likely to continue to flow into ICIEC.

Other credit considerationsIn addition to these standalone qualities, ICIEC's rating also factors in the considerable benefits in the context of its key role as thefacilitator of trade among Islamic countries. In particular, ICIEC's rating reflects the strong ability and potentially high willingness ofICIEC's main ultimate shareholders, and in particular the IDB and Saudi Arabia, to support the company in times of financial distress.Capital resources of ICIEC were doubled with subscribed capital increasing to ID288 million as of fiscal 2015 from ID149 million as offiscal 2011 (1432H), while called capital has increased to ID144 million from ID74.5 million in the same period, as evidence of furthercapital support from ICIEC's owners, including the IDB through its Waqf fund.



Notching considerationsWe rate ICIEC Aa3 for insurance financial strength (stable outlook), which is several notches higher than the adjusted rating indicatedby the Moody's insurance financial strength rating Scorecard. The rating differential reflects the company's key role as the facilitatorof trade among Islamic countries and the consequent support that the rating incorporates from a variety of highly rated sovereigns inaddition to its main owner IDB, as described under “Other credit considerations”.

Rating methodology and Scorecard factors

Exhibit 4

Financial Strength Rating Scorecard [1] [2] [3] Aaa Aa A Baa Ba B Caa Score Adjusted Score

Ba Ba

Market Posit ion and Brand (8%) Ba Baa

- Relative Market Share Ratio

- Distribution and Access to New Markets X

Product Focus and Diversificat ion (16%) Baa Ba

- Business Diversification X

- Flexibility of Underwriting X

- Risk Diversification X

Financial Profile Aa Baa

Asset Quality (12%) Aaa A

- High Risk Assets % Shareholders' Equity 14.2%

- Reinsurance Recoverable % Shareholders' Equity 28.0%

- Goodwill & Intangibles % Shareholders' Equity 0.0%

Capital Adequacy (16%) Aaa Baa

- Net Total Exposure % Shareholders' Equity 7.6x

- Net Underwriting Leverage (Credit Insurers) 0.2x

Profitability (16%) A Ba

- Combined Ratio (5 yr. avg) 78.2%

- Sharpe Ratio of ROC (5 yr. avg) NM

Reserve Adequacy (4%) Baa

- Worst Reserve Development for the Last 10 Years % Beg. Reserves

Financial Flexibility (8%) Aaa Ba

- Financial Leverage 2.5%

- Earnings Coverage (5 yr. avg)

Operat ing Environment Baa Baa

Aggregate Profile A1 Baa3

[1] Information based on IFRS financial statements as of Fiscal YE December 31 2017; 13 Rabi Al-Thani 1439H corresponds to 31 December 2017 [2] Certain items may have been relabeledand/or reclassified for global consistency [3] FYE 2016 represent ~15 monthsSource: Company reports, Moody's workings

Ratings

Exhibit 5Category Moody's RatingICIEC

Rating Outlook STAInsurance Financial Strength Aa3

Source: Moody's Investors Service



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REPORT NUMBER 1129980


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CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


iciec report... · 2019. 5. 19. · aa3 stable for insurance financial strength. iciec's rating...

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