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Rating Action:

Moody’s changes Gulf Insurance Group’s outlook to positive

 The document has been translated in other languages

30 November 2021


A3 insurance financial strength rating affirmed; outlook of subsidiary in Kuwait also changed to positive

Limassol , November 30, 2021 – 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 changed the outlook to positive from negative. The rating agency has also affirmed the A3 IFSR of GIG's main subsidiary in Kuwait 'Gulf Insurance and Reinsurance Company K.S.C.' (GIRI) and changed the outlook to positive from stable, while it affirmed the Ba2 IFSR of its subsidiary in Egypt 'GIG Insurance - Egypt (S.A.E.)' (GIG Insurance - Egypt) with stable outlook.

The rating action follows the closing of the acquisition of AXA's operation in the Gulf Cooperation Countries (GCC) of Saudi Arabia, United Arab Emirates, Qatar, Oman and Bahrain. The transaction was first announced on 30 November 2020 and was completed on 6 September 2021 for a consideration of approximately $475 million, after obtaining all regulatory approvals.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

GIG's rating affirmation and the change of the outlook to positive reflect (1) the limited strain on GIG's capital and leverage from the transaction, (2) the expected relatively smooth integration of the acquired AXA operations, which will enhance the group's franchise in the region, (3) the improvement in GIG's geographic diversification and asset quality that has resulted from the transaction, and (4) the potential for improved operating profitability.

Concerning the balance sheet impact of the transaction, GIG's recent capital increase and Tier 2 debt issuance have contained the strain on its capital from the transaction while limiting the increase in leverage. The company's capital increase of KWD50 million in September 2021, in addition to the KWD7.1 million raised in January 2021, have mitigated any pressure on GIG's capital adequacy. Moreover, GIG also raised KWD60 million of perpetual Tier 2 notes in the Kuwaiti market. Despite the increase in leverage (which Moody's estimates at around 29% as at 30 September 2021 on a proforma basis, incorporating the payment of an interim dividend of KWD20 million and recognizing as equity 25% of the Tier 2 notes in view of their subordinated and perpetual nature with an issuer optional interest deferral), the issuance improves the company's financial flexibility as the group has demonstrated it can tap the capital markets. The debt will mostly replace bank loans that the group used to manage its liquidity and capital needs.

A second driver for GIG's positive outlook is the smooth and gradual integration of AXA operations into the group that is proceeding as planned, minimizing any execution risks that usually characterize such large-scale acquisitions. The group is in the process of integrating and rebranding its newly acquired subsidiaries, following a decentralised business and operating model in its various markets in the MENA region. 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 large group delivering operating performance in line with expectations for the combined entity.

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 supporting the positive rating outlook. 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 new geographic mix also improves 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.

Moody's rating action also considers the good prospects for stronger financial performance through GIG's strengthened position and brand across its key target markets of the GCC, cementing it as a top tier name in the region. GIG's acquisition of AXA's Gulf operations has further improved its competitive position and overall business risk profile, with potential economies of scale that will likely benefit its operating profitability. 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 top 5 insurers) and gained access to new markets such as Qatar and Oman through the AXA acquisition.

Gulf Insurance and Reinsurance Company K.S.C. and GIG Insurance - Egypt (S.A.E.)

GIRI's positive rating outlook derives from the rating agency's high parental support assumption from GIG, positioning the two entities' ratings and outlook at the same level. Despite the high parental support assumption for GIG Insurance - Egypt as well, its Ba2 IFSR and stable outlook are constrained by the local currency sovereign ceiling for Egypt of Ba2, the rating agency added.

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

The positive outlook indicates that Moody's could upgrade GIG's rating over the next 12-18 months. GIG's rating could be upgraded if it continues to post strong capital adequacy with sufficient capital buffers and financial leverage trends down sustainably below 30%. The company's rating will also benefit if its improved competitive position and diversification relative to peers, translate into a stronger operating performance, combined with a continued low level of high-risk assets. In case Moody's upgrades GIG's rating, this will trigger a potential upgrade for GIRI's rating as well, while GIG Insurance - Egypt's rating could be upgraded in case Egypt's local currency ceiling is positioned higher.

Given the positive outlook on GIG, downward rating pressure is currently unlikely. Nonetheless, Moody's would stabilise GIG's outlook if the group is unable to fully leverage the positive effects from the AXA transaction, causing weaker earnings going forward. In addition, downward rating pressure could emanate if the company is unable to meet its plans to reduce its financial leverage, or in case its combined ratio (COR) is consistently above 100% and its return on capital (ROC) below 5%. Lastly, Moody's could change the outlook to stable if the group is facing unexpected challenges associated with consolidating operations and improving operating performance at its various subsidiaries. Similarly, GIRI's and GIG Insurance - Egypt's ratings could be under downward pressure in case GIG's rating is downgraded, or if their standalone financial performance deteriorates significantly.

AFFECTED RATINGS

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

Affirmation: Insurance Financial Strength Rating, affirmed at A3

Outlook Action: Outlook changed to Positive from Negative

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

Affirmation: Insurance Financial Strength Rating, affirmed at A3

Outlook Action: Outlook changed to Positive from Stable

Issuer: GIG Insurance - Egypt (S.A.E.)

Affirmation: Insurance Financial Strength Rating, affirmed at Ba2

Outlook Action: Outlook remains Stable

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Property and Casualty Insurers Methodology published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1254163 , and Life Insurers Methodology published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1254133 . 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Nondas Nicolaides
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol
Cyprus
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 Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol, CY 3301
Cyprus
JOURNALISTS : 44 20 7772 5456
Client Service : 44 20 7772 5454

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