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Rating Action:

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

 The document has been translated in other languages

21 October 2019

DIFC - Dubai , October 21, 2019 – Moody's Investors Service ("Moody's") has 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. Moody's has also affirmed the A3 IFSR to GIG's main insurance operating company in Kuwait, Gulf Insurance and Reinsurance Company K.S.C. (GIG Kuwait). The outlook on both companies remains stable.

Established in 1962, GIG is a top tier composite insurance group operating in the MENA region with a leading position in its main target markets of Kuwait, Jordan and Bahrain and with a top three position in Egypt. These four countries represent 86% of gross premiums written in 2018 with the rest made up by various operations across the MENA region.

RATINGS RATIONALE

-- Gulf Insurance Group K.S.C.P.

The A3 IFSR for GIG reflects (i) the group's strong and leading position in its target markets, with a relative market share ratio (which measures the group's premiums relative to the average industry premiums) of around 5.3x as well as its well-established brand recognition in the region; (ii) strong and consistent profitability, with a return on capital (ROC) of 10.4% between 2014-2018 driven by a very robust 5-year combined ratio (COR) of 94.7%; (iii) GIG's good capitalisation, with total equity of KD112 million (US$368 million), representing 15% of total assets at YE 2018; (iv) prudent and sophisticated risk management which is critical for the group's continuous expansion in the region.

These strengths are somewhat offset by (i) the significant investments in high-risk assets (HRA) which represented 127.3% of shareholders' equity at YE 2018; (ii) the continuous geographic expansion of the group in the region which carries some intrinsic execution risk; and more recently (iii) liquidity pressures driven by the delay in cashing the premiums related to the large Kuwait retirees medical program, which the group managed by significantly increasing borrowings, resulting in financial leverage (debt as a percentage of capital) increasing to 29.3% at YE 2018 from 19.6% at YE 2016. The group took actions to reverse some of these pressures and risk, such that the ratio has improved to around 26% at Q3 2019 and will further decrease. These actions will also relieve pressure on the group's internally monitored risk-based capital.

-- Gulf Insurance and Reinsurance Company K.S.C.

The A3 IFSR for GIG Kuwait, the group's main insurance operating company in Kuwait contributing respectively 60% and 35% of the group's total premiums and total assets, reflects (i) its leading position in Kuwait, with a commanding 42% market share in the insurance sector and with well-established position particularly in the life and medical lines; and (ii) good and consistent profitability with a 5-year COR of 93.1%, a 5-year ROC of 26.5% and a high Sharpe ratio of ROC of 565%, demonstrating the low volatility of the company's results in the last 5 years.

These strengths are somewhat offset by the recent liquidity pressures caused by the servicing requirements of the large Kuwait retirees medical program, as the company started to pay claims on this policy before cashing in the premiums.

Furthermore, as part of relieving liquidity pressures, GIG Kuwait has de-risked its investment portfolio such that HRA as a percentage of shareholders' equity improved to 47.6% at YE 2018 from 120.3% at YE 2015. The improvement in asset quality also improved its capital adequacy.

OUTLOOK

The stable outlook on GIG and GIG Kuwait reflects Moody's expectations that the group will maintain its solid market position and brand in its key markets with consistent profitable results, whilst also improving capitalisation through proactive capital management and reducing leverage levels further.

WHAT COULD CHANGE THE RATING UP/DOWN

According to Moody's, positive pressure could be exerted on the group's rating in case of (i) significant improvements in the sovereign ratings and economic environments of its non-Kuwaiti subsidiaries; and/or (ii) a significant improvement in asset quality with HRA as a percentage of shareholders' equity brought to and maintained at below 100%; and/or (iii) a significant improvement in liquidity and financial flexibility with financial leverage falling below 15% of total capital.

Similarly, GIG Kuwait's rating could be upgraded if (i) the GIG rating is upgraded; and/or (ii) the company's profitability improved, as evidenced by a COR consistently below 85%.

Conversely, the group's rating could be downgraded in case of (i) a significant deterioration in its main operating markets' sovereign rating and economic environment; and/or (ii) a deterioration in profitability with a COR consistently above 100% or a 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 HRA as a percentage of shareholders' equity of over 150%; and/or (v) further liquidity pressures with increased borrowing with leverage rising above 30%.

As for GIG Kuwait, the rating could come under negative pressure if (i) the company loses its leading market position and share in Kuwait; and/or (ii) asset quality deteriorates with HRA as a percentage of shareholders' equity of around or above 100%; and/or (iii) profitability weakens with a COR sustainably above 100%.

AFFECTED RATINGS

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

Affirmation: Insurance Financial Strength Rating, affirmed at A3

Outlook Action: Outlook remains stable

Issuer: Gulf Insurance and Reinsurance Company K.S.C.

Affirmation: Insurance Financial Strength Rating, affirmed at A3

Outlook Action: Outlook remains stable

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Property and Casualty Insurers published in May 2018, and Life Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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
AVP-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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