MENA re/insurers’ ratings trending ‘positive’ despite regional challenges – AM Best

AM Best has put out a report on the creditworthiness of Middle East and North African (MENA) insurers and reinsurers, underlining positive trends overall.

Country risk remains an important component of the rating assessment for MENA re/insurers, amid “challenging regional geopolitical conditions”.

Effective risk management and governance practices continue to be important to ensure re/insurers keep pace with the changing risk landscape, the rating agency emphasised.

The report is focused on AM Best ratings of MENA based firms in the calendar year 2024, and include reinsurers, insurers, captives, credit and health insurers and takaful operators.

“When considering ratings of MENA companies, it is essential to understand the region is not homogenous, and (re)insurers are faced with varying challenges,” AM Best observed.

“A key differentiator driving divergent economic conditions throughout the region is between the hydrocarbon-producing economies and those that rely heavily on the import of the commodity,” the ratings firm noted.

“All of the countries in the MENA region have over the past three-to-four years contended with global supply chain disruptions and inflationary pressures, while more recently, some have been impacted - due to their proximity to regional conflicts,” AM Best said.

“Nonetheless, the majority of the economies in the MENA region have been relatively insulated and their economic prospects generally improved in 2024. In part, this has been helped by stable oil prices, and by inflation levels which have cooled since late 2023,” the rating agency highlighted.

The wide spread of ratings among MENA firms is “largely the result of country risk factors”, AM Best said, which often play an important role in determining overall rating assessments.

At the lower end of the rating scale, most re/insurers are domiciled in what AM Best considers to be higher risk operating environments, “characterised by elevated levels of economic, political, and financial system risks”.

In 2024, there was a positive trend of rating movements; in total, seven companies had their issuer credit ratings (ICRs) upgraded.

Most notably at the upper end of the rating distribution, AM Best emphasised, Gulf Insurance Group (GIG) in Kuwait and GIG in Bahrain were upgraded from “a” to “a+”.

“Of the seven ICR upgrades, the majority benefitted from improvements in the rating enhancement captured under the lift/drag building block, with all three companies demonstrating greater integration into, and support from, GIG,” AM Best said.

Compared with 2023, even excluding GIG, 2024 was a “much more positive year”, according to the report. Three companies ICRs were downgraded in 2023, while only one firm was upgraded.

The ICR range narrowed in 2024, with the lower end of the distribution improving from “ccc” to “b-”. The improvement was due to a two-notch ICR upgrade of Milli Reas Turk Anonim Sirketi, supported by “stabilisation of economic conditions” in Türkiye.

A minority of rating units (14%) had negative outlooks at year-end 2024, a relatively significant change compared with the previous two years, according to AM Best.

In 2024, six companies saw the outlook on their ICR improve, from stable to positive in four cases, or from negative to stable for two firms, which shifted the overall distribution toward the stable and positive outlooks.

Positive outlooks were assigned to four ICRs, up from one the previous year, which AM Best said “reflects the stabilisation of operating conditions in the MENA region”.

In addition, at year-end 2024, three firms’ ICRs were assigned “developing implications, all of which are involved in a single merger and acquisition (M&A) transaction”.

The balance sheet strength assessments of (re)insurers are generally skewed toward the Very Strong and Strong categories with limited exposure to the lower assessment levels. No MENA rated company is assigned the Strongest assessment level.

AM Best uses its “Best’s capital adequacy ratio” (BCAR) as a risk-adjusted capitalisation score.

Analysis shows that in 2024 more than 80% of MENA rating units recorded BCAR scores above the threshold for the strongest assessment of risk-adjusted capitalisation. The mean BCAR score for the universe of rated MENA entities was “robust” at 46%.

When comparing companies across North Africa against those domiciled in the Middle East, it is observed that there is a greater skew toward the Strong balance sheet strength assessment, AM Best noted.

“There is notable disparity in BCAR scores across the region, with the most robust scores typically being reported by Gulf Cooperation Council (GCC) domiciled (re)insurers. On average, more than 50% of companies domiciled in North Africa are assessed to have BCAR scores of less than 35%, compared to just 25% for Middle Eastern companies,” AM Best said.

“In part, this is often driven by the fact that the average rated (re)insurers, excluding those domiciled in the GCC, have smaller capital bases and hold assets in CRT-4 and CRT-5 countries which incur higher capital charges,” the report added.

At a global level, capital consumption within BCAR is generally driven by underwriting – premium and reserving – risk, AM Best noted, given typically low-risk investment portfolios.

“By contrast, the underwriting leverage of MENA (re)insurers is generally low, and investment risk tends to be the main driver of capital consumption. This is due in part to less mature financial markets and lower-rated securities in the region, which results in typically more concentrated investment portfolios given the limited investment opportunities,” said AM Best.

“Moreover, MENA (re)insurers typically have considerably greater exposure to market and illiquidity risks, through holdings of local equities and real estate. The contribution of underwriting risk tends to be low for MENA (re)insurers, with these risks on average accounting for less than one-third of capital requirements,” the ratings firm continued.

To generalise, most MENA re/insurers tend to have less complex underwriting risk profiles, with portfolios typically focussed on motor and medical lines on a net basis, the paper observed.

On the other hand, more diverse and complex companies are viewed to have higher risk profiles and would require more sophisticated risk management capabilities.

“For both Middle Eastern and North African carriers, concentration risk is consistently the lowest scoring sub-component. This reflects the risk profile of many MENA (re)insurers being concentrated in a single market, product or counterparty, and the higher asset risk associated with those markets,” AM Best said.

“In the North African markets, enterprise risk management capabilities are more likely to be assessed lower than a company’s risk profile. Companies in the region often have to contend with greater levels of legal, regulatory, judicial and economic risks, which are extremely difficult to effectively mitigate,” the ratings firm added.