GCC Insurers In 2022: More Capital Market Volatility And Intense Competition Point To Earnings Headwinds - S&P Global
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GCC Insurers In 2022: Emir Mujkic Dubai emir.mujkic@spglobal.com More Capital Market Volatility And Intense Competition Point To Earnings Headwinds March 2, 2022 This report does not constitute a rating action
Key Takeaways – Profitable earnings and robust capital buffers continue to support rated Gulf Cooperation Council (GCC) insurers’ credit profiles. However, potentially more volatile capital markets and ongoing intense competition will increase pressure on earnings in 2022. – The region’s ongoing economic recovery from the COVID-19 pandemic, thanks to higher oil prices, government spending, and increasing activity in the non-oil sector, will also boost insurers’ growth prospects. – Although new regulatory and accounting developments are enhancing risk awareness and policyholder protection, this is not without cost. We expect to see further capital raising and consolidation, particularly in Kuwait and Saudi Arabia where regulators have introduced new laws leading to higher capital requirements.
Ratings | GCC Insurers’ Credit Quality Is Largely Stable – Positive rating actions and outlook changes outpaced downgrades in 2021, spurred by a build up in earnings and capital. We anticipate this trend will slow in 2022, given some earnings headwinds. – Overall, we expect our ratings to remain broadly stable, but note that some negative rating actions could follow if we observe unexpected severe investment or underwriting losses, or company-specific governance/internal control failures. GCC Insurers Rating Distribution GCC Insurers Outlook Distribution 45% 80% 40% 70% 35% 60% 30% 50% 25% 40% 20% 30% 15% 10% 20% 5% 10% 0% 0% AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- Stable Positive Negative CW Negative CW Developing Feb. 2021 Feb. 2022 Feb. 2021 Feb. 2022 Data as of Feb. 22, 2022, Source: S&P Global Ratings. Data includes ratings of group subsidiaries. CW--CreditWatch. Data as of Feb. 22, 2022, Source: S&P Global Ratings. Data includes outlooks of group subsidiaries. 3
Capital Adequacy | Excellent For Almost All Rated GCC Insurers GCC Insurers’ Capital Adequacy In Our Risk-Based Capital Model 120% – Last year, we estimate almost all our rated insurers in the GCC maintained capital 100% adequacy at the ‘AAA’ confidence level in our capital model, compared with about 84% in 2020. 80% – However, the overall size of capital for GCC insurers remains relatively small and can 60% therefore quickly fluctuate. – Overall, we estimate further capital build up 40% in 2022, but at a slower pace than in previous years when insurers benefited from stronger 20% earnings. 0% AAA AA BBB or below Year-end 2020 Year-end 2021e e--Estimate. Source: S&P Global Ratings. 4
ESG | Mainly Neutral But Governance Remains A Key Weakness Distribution of ESG Credit Indicators – Environmental, social, and governance (ESG) GCC insurers (%) factors are neutral to our credit rating All EMEA insurers (%) analysis of 85% of GCC insurers. Environmental Social Governance – In our view, GCC insurers face relatively 1 limited environmental risks. Physical risks from natural catastrophes are relatively low 2 in the region and large risks are typically E S G ceded to international reinsurers. 3 – Social factors do not affect our ratings, as 4 insurers generally have established processes to avoid potential mis-selling, 5 money-laundering, or privacy breaches that 0 50 100 0 50 100 0 50 100 could harm them. – Overall, governance factors, such as 1 = positive | 2 = neutral | 3 = moderately negative | 4 = negative | 5 = very negative. Our opinion of the influence of ESG factors on our credit rating analysis is reflected on a 1-5 scale. weaknesses in risk management, culture, EMEA--Europe, Middle East, and Africa. Source: S&P Global Ratings. and oversight, as well as transparency and reporting, are moderately negative considerations in our ratings on 15% of insurers in the GCC and Europe, Middle East, and Africa compared with 7% globally. 5
Profitability | High Competition Will Mean Lower Earnings Return On Equity For GCC Insurers Will Remain Volatile 16 – We forecast GCC insurers will remain profitable in 2022, but ongoing intense 14 competition, particularly in motor lines, will 12 likely constrain technical results. Return on equity (%) – Overall, earnings in 2021 were supported by 10 well performing capital markets, resulting in stronger investment returns. Increased 8 capital market volatility in 2022 could offset 6 higher interest rates and mean lower returns. – We project profitability will only improve in 4 Saudi Arabia this year, where pressure on underwriting is likely to ease. However, we 2 note that this comes from a low base and 0 project the sector’s profitability will remain 2019 2020 2021e 2022f relatively weak. United Arab Emirates Saudi Arabia Qatar Kuwait Oman Bahrain e--Estimate. f--Forecast. Source: S&P Global Ratings estimate. 6
Economic Recovery | Spurred By Higher Hydrocarbon Prices – Improving economic sentiment and higher oil and gas prices--we now assume an average Brent oil price of $85 for the remainder of 2022- -should lead to accelerated economic growth in the region. We expect that insurers will likely benefit from ongoing infrastructure spending, new mandatory coverage, and potentially higher insurance demand. – That said, an uncontrolled resurgence of COVID-19 cases limiting mobility could slow the global and regional economic recovery. Real GDP Growth Forecast 2020-2023 10 2020 8 2021e 6 2022f Real GDP growth (%) 4 2023f 2 0 -2 -4 -6 -8 -10 United Arab Emirates Saudi Arabia Qatar Kuwait Bahrain Oman e--Estimate. f--Forecast. Source: S&P Global Ratings. 7
Key Risks In 2022 | Asset Risk and Intense Competition Risk factor Description Impact on insurers Asset Risk With a rapid increase in inflation, the U.S. Federal Reserve is set to hike interest rates in 2022. We expect this to prompt a similar reaction from GCC central banks given their currency pegs with the U.S. dollar. In our view, this will mean insurers benefit from higher returns on their cash and fixed deposits. However, higher interest rates could be offset by more volatile Moderate to high capital markets. Although GCC insurers have limited direct exposure to Ukraine or Russia, in our view, an increase in market volatility could have negative implications for those with significant exposure to equities or other high-risk assets. Intense competition Motor and medical claims reached near pre-pandemic levels in most markets in 2021 as mobility increased. At the same time, a decline in motor rates and an increase in claim costs, due to price increases for spare parts and services, amplified Moderate to high pressure on margins. Although inflation is expected to normalize in 2022, we believe that ongoing high competition, particularly in motor lines, will continue to pressure earnings in 2022. New regulations and Although new regulatory developments and the implementation of International Financial Reporting Standard (IFRS) 17 and accounting standards IFRS9 accounting standards will continue to enhance risk awareness, policyholder protection, and transparency, it will come at a cost. The need to update processes and information technology systems will likely lead to higher expenses in 2022. Insurers with limited economies of scale may find it increasingly difficult to dilute their costs. Moderate Overall, we expect to see further capital raising and consolidation across GCC markets, particularly among smaller and midsize players in Kuwait and Saudi Arabia where regulators have introduced new laws leading to higher capital requirements. Decline in reinsurance A further increase in reinsurance rates or difficulties to place certain facultative risks could create top- and bottom-line Low capacity challenges for some primary insurers. Slowdown in premium We witnessed moderate premium growth in GCC insurance markets in 2021 and expect this trend to continue in 2022 as growth economies recover. However, the uneven global recovery and issues around supply chains could affect premium income in Low select lines and markets.
Country-Specific Trends The UAE, Saudi Arabia, Kuwait, Qatar, Oman, and Bahrain
United Arab Emirates | Satisfactory Earnings Despite Competition − The UAE's insurance market is the largest and among the most GWP Distribution In The UAE For 2018-2022f profitable in the GCC. Weaker economic conditions led to a decline in gross written premium (GWP) in 2020, particularly 14 due to lower premium income from motor and life/savings business. With GWP growth picking up again thanks to higher 12 economic activity, we expect 2022 to exceed 2019 levels. 10 − More intense competition, resulting in lower motor rates, led to a deterioration in technical results in 2021. As a result, we GWP (bil. $) estimate an increase in the market combined ratio (loss and 8 expense) to about 91% in 2021 from about 87% in 2020. We anticipate the ratio will further weaken to about 92% in 2022, 6 as competition and rates pressure in certain lines remain high. 4 − Although rated UAE-based insurers are typically very well capitalized, with substantial excess capital above 2 requirements, we note that at least 10% of listed players operate below required minimum capital/solvency levels. We 0 expect to see stricter enforcement of regulations, which will 2018 2019 2020 2021e 2022f increase pressure on smaller and weaker insurers. P&C Insurance Medical Insurance Life and Savings Insurance GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: UAE Insurance Authority, S&P Global Ratings estimate/forecast. 10
Saudi Arabia | Intense Competition Pressures Underwriting Results − The market maintained GWP growth of about 5% in 2021. We GWP Distribution In Saudi Arabia For 2018-2022f expect this to remain in the same range for 2022, backed by the kingdom’s expected economic recovery and further supported 12 by the Hajj and Umrah medical insurance program and other new covers such as the inherent defects insurance scheme. 10 − Underwriting profitability remained under pressure in 2021 due to the return of claim activity to pre-COVID-19 levels, coupled 8 with claims inflation. We expect 2022 will also be challenging GWP (bil. $) and require insurers to reassess their pricing strategy. We expect only a modest recovery in underwriting performance 6 with the net combined ratio remaining at about 98%-99% in 2022. On a positive note, with interest rates expected to rise in 4 2022, investment income will likely improve and support overall earnings. 2 − Following the increase in minimum capital requirements, announced in 2021 with an implementation period of three 0 years, we expect further sector consolidation, as already seen 2018 2019 2020 2021e 2022f in recent years. P&C insurance Medical insurance Life and savings insurance GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: Saudi Central Bank (SAMA), S&P Global Ratings estimate/forecast. 11
Kuwait | New Regulations Will Accelerate Consolidation − We expect GWP growth of 5% in 2021, supported by ongoing GWP In Kuwait For 2018-2022f economic recovery and due to an increase in premiums from 2.5 the medical scheme for retirees (AFYA), which is written by only one insurer. − We forecast GWP will increase about 5% in 2022, supported by 2 ongoing economic recovery and a rising number of retirees, increasing premium for the AFYA scheme. We anticipate that government-sponsored infrastructure projects and higher reinsurance rates will also support GWP growth. 1.5 GWP (bil. $) − Like in previous years, we expect the overall combined ratio for the market to remain at 95%-97% in 2022. 1 − Insurers in Kuwait tend to maintain lower capital buffers than peers in other markets, which makes their credit quality more sensitive. The new more-risk-based insurance law will likely lead to some capital raising needs and consolidation among 0.5 smaller and midsize players. 0 2018 2019 2020 2021e 2022f GWP Kuwait 2018-2022f GWP--Gross written premium. e--Estimate. f--Forecast. Sources: S&P Global Ratings. Breakdown by line of business is not available. 12
Qatar | Mandatory Medical Scheme Will Fuel Growth − The Qatari government approved a compulsory health GWP In Qatar For 2018-2022f insurance law, expected to take effect in May 2022. Under the law, all foreign visitors, residents, and workers in the country 1.8 will have to hold medical insurance for the entire duration of 1.6 their stay, unless they are exempt. We estimate that the scheme could generate Qatari riyal (QAR) 1 billion-QAR1.5 billion in 1.4 additional GWP in the coming years. We have not incorporated this in our growth forecast for 2022, since no details about the 1.2 potential volume have been disclosed. GWP (bil. $) 1 − In the meantime, we anticipate that higher public expenditure to diversify the Qatari economy and further preparation for the 0.8 2022 FIFA World Cup will contribute to GWP growth in 2022. − In 2021, we estimate combined ratios of 90%-92%, after just 0.6 under 90% in 2020. We then expect combined ratios to 0.4 converge closer to about 95%, potentially between 93%-96%, as the proportion of medical business increases, which tends to 0.2 have lower profit margins. 0 2018 2019 2020 2021e 2022f GWP—Gross written premium. e--Estimate. f--Forecast. Source: S&P Global Ratings. Breakdown by line of business is not available. Data does not include GWP from Qatar Insurance Co.’s international business. 13
Oman | More Normal Claims Levels Will Weigh On Earnings − After a GWP decline of about 4% in 2020 due to weaker GWP Distribution In Oman For 2018-2022f economic conditions, the market returned to growth of about 4% during the first nine months of 2021, backed by the 1.4 normalization of activity as well as implementation of 1.3 mandatory health insurance. We expect this trend to continue, 1.2 and the market will expand 3%-5% in 2022. 1.1 1.0 − Profitability significantly improved in 2020 thanks to fewer 0.9 claims because of lockdowns. It then declined in 2021 due to GWP (bil. $) more normalized claims activity. Looking ahead, we anticipate 0.8 the market will remain profitable but with underwriting 0.7 margins potentially still under pressure. With interest rates 0.6 expected to rise in 2022, investment income from cash deposits 0.5 is expected to improve and support overall earnings. 0.4 0.3 0.2 0.1 0.0 2018 2019 2020 2021e 2022f P&C insurance Medical insurance Life and savings insurance GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Source: Oman Central Bank, S&P Global Ratings. 14
Bahrain | Investment Income Is A Major Contributor To Net Earnings − After an about 3.6% decline in GWP in 2020 due to weaker GWP Distribution In Bahrain For 2018-2022f economic conditions, the market returned to growth of about 0.9 6.7% during first-half 2021. This came on the back of more normal activity levels as well as strong growth in life, medical, 0.8 and property lines. Although motor lines remain under pressure, with 2021 rates declining from 2020, we expect 0.7 overall GWP growth should remain at 3%-5% in 2022. 0.6 − With 36 licensed insurers, competition in the relatively small GWP (bil. $) market will remain high. Profitability improved in 2020, thanks 0.5 to fewer claims because of lockdowns, then declined in 2021 0.4 due more normalized levels of claims activity. We note that at mid-year 2021, Bahraini insurers generated an underwriting 0.3 loss, while overall profitability was solely driven by investment results. We anticipate the market will remain profitable, but 0.2 underwriting margins could still face pressure. With interest 0.1 rates expected to rise in 2022, investment income is expected to improve and support overall earnings. 0 2018 2019 2020 2021e 2022f P&C insurance Medical insurance Life and savings insurance GWP--Gross written premium. P&C--Property and casualty. e--Estimate. f--Forecast. Sources: Bahrain Central Bank, S&P Global Ratings estimate/forecast. 15
Related Research – Global Insurance Markets: Alive And Kicking, Dec. 7, 2021 – ESG Credit Indicator Report Card: EMEA Insurance, Nov. 29, 2021 – EMEA Insurance Outlook 2022 Sector: Fighting Fit For 2022, Nov. 16, 2021 16
Analytical Contacts Emir Mujkic Sachin Sahni Dubai Dubai emir.mujkic@spglobal.com sachin.sahni@spglobal.com Mario Chakar Liesl Saldanha London London mario.chakar@spglobal.com liesl.saldanha@spglobal.com 17
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