A survey of CFOs of 15 GCC insurers – including some of the largest national and multinational insurance groups in the region – indicates that more than half expect the growth in their company’s operating profit to be moderate or high, said Moody’s Investors Service in a report.
In the report, “Insurance – Gulf Cooperation Council Countries: CFOs Optimistic on Profitability Despite Competition and Stronger Regulation”, the rating agency said that although it shares the expectations of the CFOs on a good number of important topics, they tend to be more optimistic on some issues, including the profitability outlook.
“Profitability expectations for the next 12 months were generally buoyant among surveyed CFOs and more optimistic than our own view for the overall profitability of the industry. Forty-three percent of responding CFOs said they expect their company’s operating profit to grow moderately next year (5%-10%), and 14% expect stronger growth of more than 10%,” said Mr Mohammed Ali Londe, Moody’s Assistant Vice President – Analyst.
Conversely, Moody’s expects the industry’s operating profits to remain broadly stable, with some moderate downside pressures, particularly for insurers operating in jurisdictions where actuarial-led reserving measures have recently been introduced, such as the UAE in 2015. Reserve strengthening will apply downward pressure on profitability at least in the short term as regulators adopt similar measures across the GCC.
Profitability pressure is the key concern for 2016 and beyond, according to the survey responses, which coincides with Moody’s view. Asked to name their top three concerns, 40% of respondents cited profitability pressures, 20% cited the region’s highly competitive environment, 13% cited the new regulatory risk based capital and Solvency II-type requirements and 13% named the depressed oil price.
On enhanced regulations and its impact, the survey responses showed a depressed view, with 46% expecting market consolidation, 20% expecting capital raising, 27% expecting other remedial actions and 7% expecting issuance of hybrid debt to relieve pressures on capital.
Moody’s also expects capitalisation to be pressured for the region’s insurers but does not expect to see any significant consolidation in the GCC. Moody’s believes that well-capitalised insurers are reluctant to take over insurers with weaker balance sheets. The rating agency expects insurers that are under pressure to either strengthen capital or, in the case of smaller insurers with less appeal to larger players or investors, to eventually enter into run-off.
The recent volatility in the equity markets along with enhanced regulations have also driven CFOs to rethink their investment strategy, with the CFOs surveyed intending to keep a significant portion (minimum 10% to over 30%) of invested assets in investment-grade bonds to raise the quality and stability of returns from their investment portfolio.