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: More Capital Market Volatility And Intense Competition Point To Earnings Headwinds - S&P Global
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

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