A.M. Best has upgraded the financial strength rating to A (Excellent) from A- (Excellent) and the issuer credit ratings to “a” from “a-” of Gulf Insurance Group K.S.C.P. (GIG) and its subsidiary, Gulf Insurance and Reinsurance Company K.S.C. (Closed) (GIRI) (both domiciled in Kuwait). The outlook for each rating has been revised to stable from positive.
The ratings reflect GIG’s strengthened risk-adjusted capitalisation, its excellent regional business profile, robust track record of underwriting profitability and improved risk management.
GIG is amongst the largest and most diversified insurance groups in the Middle East and North Africa region, with strong market positions in Kuwait, Jordan, Bahrain and Egypt. Furthermore, the group has interests in Syria, Iraq, Saudi Arabia, Algeria and the United Arab Emirates.
GIG’s risk-adjusted capitalisation has gradually improved in recent years. A.M. Best anticipates that prospective risk-adjusted capitalisation will remain supportive of the ratings, maintaining a sufficient buffer for the company’s expected growth over the next few years. GIG has demonstrated a track record of strong operating results, with an excellent five-year average combined ratio below 90%, which was complemented by stable investment returns.
GIG has a comprehensive risk management framework, with a well-defined risk appetite statement. The company has developed appropriate tools and processes to identify, measure, manage and monitor risks across its subsidiaries. These include internal assessments of capital requirements at group and subsidiary level, catastrophe exposures and counter-party credit risk. Economic capital is managed to ensure that sufficient internal capital is generated to support the company’s initiatives.
Standard and Poor’s has assigned its 'A-' insurer financial strength and counterparty credit ratings to Kuwait-based Gulf Insurance & Reinsurance Company K.S.C. (GIRI), the core Kuwaiti subsidiary of Gulf Insurance Group K.S.C.P. (GIG). At the same time, the rating of GIG was lowered to 'BBB+' from 'A-'. The outlook on both is stable.
The 'A-' rating on GIRI reflects its status as core to GIG. It is one of the key profit drivers for the group and, in its expanded role, has inherited a long-established and continually improving profile as Kuwait's market leader.
S&P lowered the rating on GIG to 'BBB+' from 'A-', reflecting its status as an operating holding company of a substantial regional group. Gulf Insurance Group (GIG) has transferred most of its domestic underwriting operations to its subsidiary GIRI, and GIG is now an operating holding company.
S&P assessed GIG group's business risk profile as strong, generated and sustained by its leading insurer positions in Kuwait, Bahrain, and Jordan. It continues to grow and reinforce itself operationally in all these markets.
S&P evaluated the group's financial risk profile as upper adequate, reflecting its moderately strong capital and earnings and moderate risk profile. S&P continued to view GIG's management and governance as satisfactory, and enterprise risk management as adequate. ERM is assuming a much stronger role in the group's direction.
The stable outlook reflects S&P’s view that the group's regional expansion plans will be tightly managed, thereby controlling industry and country risk to ensure continuing profitability and robust capital adequacy.
Global Credit Research - 09 Aug 2016
London, 09 August 2016 -- Moody's Investors Service has today assigned an A3 insurance financial strength rating (IFSR) to Gulf Insurance Group K.S.C.P. (GIG), the operating holding company of the Kuwait-based group with operations across the Middle East and North Africa (MENA) region. Moody's also assigned an A3 IFSR to GIG's main insurance operating company in Kuwait, Gulf Insurance and Reinsurance Company K.S.C. (GIRI). Both companies carry a stable outlook.
Established in 1962, GIG is a top tier composite insurance group operating in the MENA region with a leading position in its main target markets of Kuwait, Jordan and Bahrain and with a top five position in Egypt. These four countries represent 96% of gross premiums written in 2015 with the rest made up by various operations across the MENA region
-- Gulf Insurance Group K.S.C.P.
Moody's IFSR for GIG reflects (i) the group's strong and leading position in its target markets, with a relative market share ratio (RMS, which measures the group's premiums relative to the average industry premiums) of around 4x as well as its well-established brand recognition in the region; (ii) strong and consistent profitability, with a return on capital (ROC) of 11% between 2011-2015 driven by a very robust 5 year combined ratio (COR) of 93.5%; (iii) GIG's good capitalisation, with total equity of KD111 million (US$366 million), representing 22% of total assets at YE 2015; (iv) strong management, which has implemented prudent and sophisticated risk management which is critical for the group's continuous expansion in the region.
These strengths are somewhat offset by (i) the significant investments in high-risk assets (HRA) which represented 130.2% of shareholders' equity at YE 2015; and (ii) the continuous geographic expansion of the group in the region which carries some intrinsic execution risk.
The group, with premiums of KD186 million (USD614 million) in 2015, holds a leading position in terms of premiums in the Kuwaiti, Bahraini and Jordanian markets whilst also holding a top five position in the Egyptian market (top two when excluding state-owned insurers). The group has established a strong brand across the MENA region and ranks among the top ten MENA insurance groups. The management targets to reach USD1 billion premiums by 2018 and has recently acquired operations in Algeria and Turkey although Moody's expects the Kuwaiti and Bahraini operations to mainly drive organic growth over the next two years. In terms of business mix, the group is well diversified, writing most lines of non-life business as well as medical and life. Medical is the largest line representing 34% of premiums in 2015 followed by motor (23%) and property (13%). The strategy of the group is to focus on individual business although currently the majority (2/3) is derived by corporate clients.
The group's management is strong, with a prudent and sophisticated approach to underwriting, reserving and capital management benefitting from the expertise of its main shareholders, Fairfax Financial Holdings Limited (41% ownership; Baa3, stable) and Kuwait Projects Company (Holding) K.S.C. (44% ownership; Baa3, stable). This approach is cascaded within the various group's subsidiaries across MENA and has helped the group achieve strong profitability, with a 5 year ROC of 11%, underpinned by a 5 year combined ratio of 93.5%, and consistent returns, with a very high sharpe ratio of return on capital of 980.5% (which measures the very strong consistency of returns on a 5 year average basis). The consistent strong results along with the sophisticated capital management also ensures good capital adequacy, with shareholders' equity consistently representing around 22% of total assets of the group despite the organic growth and expansion via acquisitions in the region.
More negatively, the significant exposure to (i) equity holdings, including large investments in affiliates (totaling to 42% of total invested assets at YE 2015), and (ii) meaningful amount of non-investment grade deposits and fixed-income securities (12% of total invested assets at YE 2015) translates into elevated high-risk assets, which represented 130.2% of shareholders' equity at YE 2015. The large amount of non-investment grade which represented 130.2% of shareholders' equity at YE 2015. The large amount of non-investment grade deposits and fixed-income securities relates mainly to the group's subsidiaries in Egypt, Jordan and Bahrain which are constrained by local regulation in investing only in their local economies.
Additionally the group has some borrowings in the form of bank loans and overdrafts at the holding company level, translating to a total leverage of 19.2%. Though this compares weaker to rated peers in the region which have negligible to no debt, we note that the leverage has been prudently managed and maintained at below 20% level.
-- Gulf Insurance and Reinsurance Company K.S.C
Moody's IFSR for GIRI, the group's main insurance operating company in Kuwait contributing respectively 46% and 38% of the group's total premiums and total assets, reflects (i) its leading position in Kuwait, with a commanding 27% of markets share in the insurance sector and with well-established position particularly in the life and medical lines; and (ii) good profitability with a 3 year COR of 98%. These strengths are somewhat offset by the relatively high investment exposure to equity, funds and non-investment grade debt driving the HRA % of shareholders' equity to 120.3%.
Being the group's main operating company, GIRI wrote premiums of KD86 million (USD284 million) in 2015 and has maintained the group's dominance in Kuwait with a 5.4x RMS. Similar to the group, GIRI offers all lines of non-life and life business, albeit with significant amounts of medical and life premiums, all of which are underpinned by its strong service levels that have helped it to retain large corporate and government business. Furthermore profitability has been strong with a 3 year ROC and COR of 24.3% and 98.1% respectively in 2015.
On the downside, similar to the group, GIRI's HRA % of shareholders' equity of 120.3% at YE 2015 is relatively high, driven by the significant investment exposures to equity and funds, representing 36% of total assets, and non-investment grade debt (5%); the level of HRA is exacerbated by the lean, albeit efficient, amount of capital in GIRI.
OUTLOOK AND RATING DRIVERS
The stable outlook on GIG and GIRI reflects our expectations that the group will maintain its solid market position and brand in its key markets whilst maintaining good capitalisation and delivering strong results.
According to Moody's, the group's rating could be upgraded if there is (i) significant improvements in the sovereign ratings and economic environments of its non-Kuwaiti subsidiaries; and/or (ii) significant improvement in asset quality with HRA % of shareholders' equity brought to and maintained at below 100%
Similarly GIRI's rating could be upgraded if (i) the GIG rating is upgraded; and/or (ii) GIRI's asset quality improved with greater focus on investment-grade bonds and deposits translating to a HRA % of shareholders' equity of below 100%; and/or (iii) improved profitability with COR consistently below 85%.
Conversely, the group's rating could come under negative pressure if there is (i) a significant deterioration in its main operating markets' sovereign rating and economic environment; and/or (ii) a deterioration in profitability with COR consistently above 100% or ROC below 5%; and/or (iii) an erosion in capital and/or a loss of reinsurance protection; and/or (iv) a deterioration in asset quality with further significant investments in equities or non-investment grade assets with a HRA % of shareholders' equity of over 175%; and/or (v) increased borrowing with leverage rising above 20%.
As for GIRI, the rating could come under negative pressure if (i) it starts to lose its leading market position and share in Kuwait; and/or (ii) there is further deterioration in asset quality with HRA % of shareholders' equity of around or above 175%; and/or (iii) profitability weakens with COR of above 100% for several years.
The methodologies used in these ratings were Global Property and Casualty Insurers published in June 2016, and Global Life Insurers published in April 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
The following ratings were assigned:
- Gulf Insurance Group K.S.C.P.: Insurance Financial Strength Rating of A3
- Gulf Insurance and Reinsurance Company K.S.C.: Insurance Financial Strength Rating of A3
Both companies carry a stable outlook
Local Market analyst for this rating is Mohammed Ali Riyazuddin Londe, +9188.8.131.5203.
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