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Rating Action:

Moody’s affirms Gulf Insurance Group’s A3 IFS Rating; outlook negative

 The document has been translated in other languages

03 December 2020


DIFC - Dubai , December 3, 2020 - Moody's Investors Service ("Moody's") has today affirmed the A3 insurance financial strength rating (IFSR) of Gulf Insurance Group K.S.C.P. (GIG), the operating holding company of a Kuwait-based group with operations across the Middle East and North Africa (MENA) region, and maintained the negative outlook.

The rating action follows the announcement made on 30 November by GIG that it had signed an agreement to acquire AXA's operation in the Gulf Cooperation Countries (GCC) of United Arab Emirates, Saudi Arabia, Bahrain, Qatar and Oman[1]. GIG expects the transaction to close by Q3 2021.

RATINGS RATIONALE

The negative outlook reflects (i) the significant increase in its financial and total leverage following the acquisition, as GIG will partly finance it through debt, as well as (ii) the execution risk attached to this large-scaled acquisition, including the ability to successfully integrating AXA Gulf operations without deteriorating its market position and the profitability as well managing the complexity of a significantly large group.

Moody's expects GIG's financial leverage to increase significantly, to above 35% following the acquisition, from 25.8% at Q3 2020. Moody's considers such level of financial ratio as high compared to similarly rated peers in the region. However it also notes the strong commitment of GIG's two main shareholders to inject capital in order to fund the remaining portion by equity.

More positively, a successful acquisition and integration of AXA's Gulf operations will materially strengthen GIG's position and brand across its key target markets of the GCC, cementing it as a top tier brand in the region. It will further aid the group's business profile by strengthening its product offering and geographic diversification away from its current concentration in Kuwait as well as to other MENA countries which are characterised by weak operating environments. A successful integration will also improve the group's profitability and earnings coverage.

The rating affirmation also reflects Moody's expectation that the group will mitigate the execution risks arising from the transaction. Moody's views GIG's risk management and governance as a key credit strength of the group. In addition, Moody's expects the group to gradually reduce the increased leverage once the transaction is completed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Given the negative outlook on GIG, upwards rating pressure is currently unlikely. Nonetheless, Moody's would likely stabilise GIG's outlook if the group is able and/or has credible plans to reduce its financial leverage below 30% over the two years following the transaction and the execution risks identified above are minimised.

Conversely, the group's rating could be downgraded in case of: (i) a significant deterioration in the economic environment as reflected by a downgrade of sovereign ratings in its main operating markets; and/or (ii) a deterioration in profitability with a combined operating ratio (COR) consistently above 100% or a return on capital (ROC) below 5%; and/or (iii) an erosion in capital and/or a loss of reinsurance protection; and/or (iv) a deterioration in asset quality with further significant investments in equities or non-investment grade assets with a high risk assets (HRA) as a percentage of shareholders' equity of over 150%; and/or (v) further liquidity pressures with increased borrowing and leverage rising sustainably above 35%.

AFFECTED RATINGS

Issuer: Gulf Insurance Group K.S.C.P.

Affirmation: Insurance Financial Strength Rating, affirmed at A3

Outlook Action: Negative Outlook maintained

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Life Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187348 , and Property and Casualty Insurers Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187352 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

REFERENCES/CITATIONS

[1] GIG's 30th November 2020 announcement: Gulf Insurance Group to acquire AXA's operations in the Gulf region

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mohammed Ali Londe
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Benjamin Serra
Senior Vice President
Financial Institutions Group
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

Releasing Office :
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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