Wednesday 05, July 2017 by Georgina Enzer

Ratings On Gulf Insurance Group Raised To 'A-' As Integrated Operating Holdco; GIRI Ratings Affirmed

S&P Global Ratings raised to 'A-' from 'BBB+' its insurer financial strength and counterparty credit ratings on Kuwait-based Gulf Insurance Group K.S.C.P. (GIG). At the same time, we affirmed our 'A-' rating on Gulf Insurance & Reinsurance Company K.S.C. (GIRI), the core subsidiary.

The outlooks are stable.

Our upgrade of GIG is driven by our view that, as the group's operating holding company, GIG is capable of generating diverse income streams from its operating subsidiaries and associates as well as its own activities to meet its ongoing payment obligations. The interest payment obligation on the overdraft at the GIG level has remained below KWD 2 million and is expected to stay that way, while the group has produced a consistent net income in excess of KWD10 million over the past five years. We note that few regulatory barriers exist to upstream dividends to the holding company in case of need, whereas operating companies have significant regulatory buffers to doing so.

GIG remains a fully licensed operating insurer in Kuwait and underwrites some key contracts like Kuwait Retiree Medical Plan (AFYA) and Kuwait Petroleum Company (KPC) medical plan for which either the tenders require the company to be listed, or where the insured prefer to deal with GIG rather than GIRI. This also highlights that in the Kuwaiti insurance market, GIG and GIRI are almost identical and replaceable, and the holding company structure relates more to the group's internal purposes. It also underwrites a small volume of Islamic insurance (takaful) business from Kuwait.

Our 'A-' rating on GIRI reflects the entity's status as core to the group. 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 the Kuwaiti market leader.

We see the group as having a strong business risk profile, 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. We now see the group's managed expansion into Algeria, Egypt, Iraq, and Turkey as increasing its country risk exposure. That said, the regional diversity this adds is a compensating factor, particularly if profitably developed. Country risk is partly offset by GIG's exponential growth in Kuwait after it won the tender for the AFYA plan. AFYA has more than 120,000 active members and expected GWP is close to KWD89 million. GIG's combined ratio is stable at a five-year average of 98%, which is not quite as good, on average, as some regional peers but demonstrates a less volatile track record.

We assess the group's financial risk profile as upper adequate, sustained by its moderately strong capital and earnings and moderate risk profile. The group's forecasted capital adequacy is expected to remain moderately strong over the outlook period; it depends on successful earnings and controlled operational growth. We see the risk profile as gradually improving but high-risk assets, typically equity-type instruments, will continue to dominate the investment portfolio. We expect the group to deliver combined ratios around 98% (lower combined ratios indicate better profitability; a combined ratio of greater than 100% signifies an underwriting loss) and return on equity of at least 12%.

GIG's use of bank overdrafts is expected to grow marginally over the outlook period but financial leverage is expected to remain below 20%. Furthermore, we believe GIG's earnings will sufficiently cover its payment obligations over the outlook period.

We continue to view GIG's management and governance as satisfactory and its enterprise risk management (ERM) as adequate. ERM is assuming a much stronger role in the group's direction and this partly eases our concerns about its regional expansion program. Liquidity is strong, but GIG forecasts an increasing level of overdraft over the next two years as the group financesits regional expansion.

GIG was established in 1962 and is listed on the Kuwait Stock Exchange. It has significant minority shareholders KIPCo (44%) and Fairfax (41%). Prior to 2014, GIG was a full-fledged insurer writing domestic Kuwaiti business with other insurance subsidiaries across the region. In 2014, GIG changed its organizational structure and transferred its domestic business predominantly to GIRI, which is the leading group entity in terms of premium volume and shareholder funds. GIRI is 99.8% owned by GIG and is a key source of group earnings.

Our stable outlook on GIG and GIRI reflects our view that the group's regional expansion plans will be managed efficiently, thereby controlling industry and country risk ensuring continued profitability and strong capital adequacy over the next two years.

We see limited likelihood of an upgrade during the outlook period. However, this could happen if the group reinforced capital adequacy redundancy to better than the 'AA' range.

We could lower our ratings on GIG or GIRI if:

The group's expansion into relatively immature insurance markets causes us to reassess the country risk parameters, or creates significant earnings volatility, causing us to reassess the strong business risk profile; or

the group's risk-based capital adequacy falls below the moderately strong level over the outlook period, causing us to reassess capital and earnings to below moderately strong. This could result from a large-scale acquisition, material earnings deficits, or very high growth above current expectations. If the group embarks on a large-scale acquisition, it could also create significant execution risk and weaken the group's business or financial risk profiles.



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