News Middle East24 May 2023

Kuwait:GIG's ratings upgraded on improved business profile and earnings

| 24 May 2023

Kuwait-headquartered Gulf Insurance Group (GIG) has improved its business profile, earnings and assets diversification following its integration of AXA's operations in Saudi Arabia, the UAE, Qatar, Oman and Bahrain that it acquired in September 2021, notes Moody's Investors Service.

Ratings upgraded

Reflecting the improvements, Moody’s has upgraded the insurance financial strength ratings (IFSR) of GIG and Gulf Insurance and Reinsurance Company (GIRI) to ‘A2’ from’ A3’ and changed the outlooks to ‘Stable’ from ‘Positive’.

GIG is the operating holding company of a Kuwait-based group with operations across the Gulf and the Middle East and North Africa (MENA) region, while GIRI is GIG's main subsidiary in Kuwait.

Concurrently, but unrelated to the upgrade of GIG's rating, Moody's has placed the ‘Ba3’ IFSR of GIG's subsidiary in Egypt GIG Insurance - Egypt (GIG Egypt) on review for downgrade and changed the outlook to ratings under review from stable, following the review for downgrade on the Government of Egypt's long-term issuer and senior unsecured ratings.

-- Gulf Insurance Group (GIG)

Moody’s says that GIG's rating upgrade reflects (1) the relatively smooth integration of the acquired AXA operations, which has enhanced the group's franchise and contributed to reduced exposure to business in countries with weak operating environments, (2) the improvements in GIG's geographic diversification and asset quality following the AXA Gulf acquisition, (3) the group's solid operating profitability with improving combined ratio, (4) a strong capital base and moderate financial leverage, (5) its disciplined underwriting and good reserve strength. While the recently announced acquisition of a majority stake in GIG by Canada-headquartered Fairfax Financial Holdings is not a key driver of this rating action, Moody’s considers it to be credit positive for GIG as the group becomes part of a much larger organisation with enhanced access to insurance expertise and systems.

An important driver for GIG's rating upgrade is the smooth integration of AXA operations into the group that was implemented as planned, minimising any execution risks that usually characterise such large-scale acquisitions.

Moody's views GIG's risk management and governance as a key credit strength of the group, and believes that these will help manage the complexity of a significantly larger group delivering a sustainable good operating performance for the combined entity. This also allows the group to perform robustly in the more challenging markets with weak operating environments, although on balance the group's overall operating environment is less risky than before, following the AXA acquisition.

Geographical exposure

The group's enhanced business profile on the back of a strengthened product offering and geographic diversification away from its previous concentration in Kuwait, are also factors driving its rating upgrade.

GIG has increased its exposure to highly rated economies in the region and is now proportionally less exposed to other MENA countries, which are characterised by weaker operating environments. The company has maintained its market leader position in terms of gross premiums written (GPW) in Kuwait, Bahrain and Jordan, while it strengthened its market standing across UAE and Saudi Arabia (among the top five insurers) and gained access to new markets such as Qatar and Oman through the AXA acquisition. The new geographic mix has also improved the credit quality of its investment portfolio by reducing the proportion of high-risk assets, mainly in the form of fixed-income securities with below-investment-grade ratings and equities.

Financial performance

Moody's rating action also considers the good financial performance in 2022, which was the first full fiscal year following the AXA acquisition, driven by GIG's strengthened position and brand across its key target markets of the GCC, cementing it as a top-tier name in the region. The group has further improved its competitive position and overall business risk profile, with potential economies of scale that will likely further benefit its operating profitability.

In addition, the group benefits from its stricter underwriting standards for high loss-inducing product lines such as motor and medical, and review of both external and internal actuaries at the group and subsidiary levels. These reviews have brought both sophistication and greater comfort around reserve adequacy.

Furthermore, given the company's low severity, high-frequency book and short-tailed products, reserving risk is generally considered low, while its reserves are also reviewed by Fairfax that will soon become its majority shareholder. GIG is also on track to successfully implement IFRS 17 across the Group, with no expectation of a negative impact on its earnings or capital base.

Moody's also believes that Fairfax's majority ownership of GIG following the recent transaction announcement with the other core shareholder Kuwait Projects Company (Holding) (KIPCO), will provide GIG with enhanced access to Fairfax's underwriting, financial and operational resources. Fairfax manages its operations on a decentralised basis. In common with its approach to its other operating insurance subsidiaries, the rating agency expects GIG to continue to manage its underwriting independently, while Fairfax is likely to support the management of GIG's investment portfolio. Fairfax's approach of allowing operating subsidiaries to operate independently reduces integration risk and enables each subsidiary to maintain strong management and underwriting expertise.

-- Gulf Insurance and Reinsurance Company (GIRI)

GIRI's rating upgrade derives from the rating agency's high parental support assumption from GIG, positioning the two entities' ratings and outlook at the same level. GIRI, which is the core subsidiary of the group in Kuwait and services the 'Afya' pensioners' medical programme, contributes around 34% of the group's total GPW and around 57% of the group's total consolidated profit with a favourable combined ratio of 82% in 2022. Accordingly, Moody's believes that the holding company GIG will be supportive towards its main subsidiary GIRI in case of need, and that the underlying credit risk for the two entities should remain aligned.

-- GIG Insurance - Egypt

Despite the rating agency's high parental support assumption from GIG towards its Egyptian subsidiary GIG Egypt, its IFSR of Ba3 was placed on review for downgrade given a similar rating action on Egypt's sovereign rating (B3). Currently, GIG Egypt's IFSR is positioned at the country local currency ceiling for Egypt of 'Ba3', and three notches higher than the sovereign rating, Moody's added. Nonetheless, a potential downgrade of the sovereign rating for Egypt is likely to trigger a downward repositioning of the country ceiling as well.

Moody's notes that in the absence of any irrevocable guarantee by GIG for GIG Egypt's obligations, the IFSR for the latter is inevitably constrained by the country ceiling in Egypt. In addition, GIG Egypt is highly exposed to Egyptian government securities, which also exerts negative pressure on its standalone credit profile because of its strong linkage to the sovereign. This is despite GIG Egypt's good financial performance in recent years (Moody's-adjusted five-year average ROC of 26.8% as of June 2022), and the further strengthening of its franchise (third largest P&C insurer in Egypt) with the acquisition of AIG Egypt's domestic operations.

The acquisition of AIG Egypt by GIG was completed in April 2023. GIG plans to merge the two entities (AIG Egypt and GIG Egypt) within 12 months from the acquisition date as mandated by the Financial Regulatory Authority in Egypt. As a result, GIG Egypt's IFSR was placed on review for downgrade, in line with Moody's review of Egypt's sovereign rating.

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