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Capital base of insurance firms under stress

The capital bases of a number of regional insurance companies are under pressure due to the steep decline in the value of their investment portfolios, says credit rating agency Standard and Poor's (S&P).

The decline has been caused in particular by the fall in the value of local stocks and real estate, Kevin Willis, Director of Financial Institutions Rating Services, told Emirates Business.

"Six regional insurance companies have been put on the negative outlook list due to the strong pressure on their capital base caused by their high exposure to the local stock and property markets," he said.

The six include Emirates Insurance Company of Abu Dhabi, Tawyniya Insurance Company of Saudi Arabia, Dubai Islamic Insurance and Reinsurance Company (Aman) and Oman Insurance Company . Willis did not name the other two firms.

"These companies need to put in place a recovery plan to improve their capital bases," he added. "The shareholding pattern and diverse levels of corporate governance in individual companies restrain consolidation in the insurance sector through mergers and takeovers.

"However, due to the pressure on capital bases there is a possibility of further consolidation. Even though the local exchanges have witnessed a slow recovery, stock market movement and volatility in the first quarter is having a negative impact on insurance and reinsurance companies, which have huge exposure to the local markets.

"These companies have to look at traditional ways of increasing their capital bases or reducing asset risk in their portfolio. Investment volatility and undue exposure to real estate is putting tremendous pressure on at least two local companies."

He said there were no standard rules for defining the ideal levels of real estate and stock market assets in an insurance company's portfolio.

"The financial results of many insurance companies for 2008 do not reflect the steep decline in the asset and income value of real estate and equity holdings," he added. "The rental income from property investment and dividend income from stock market investment has come down, but this is not reflected on the balance sheets."

S&P rates more than 20 insurance companies in the region, including major reinsurers Saud Re of Saudi Arabia, Takaful Re, Hanover Re, Kuwait Reinsure and Trust Re of Bahrain. A number of new reinsurance companies have launched recently in the local market.

"There was a capacity shortage in the reinsurance market. The impact of the newly added capacity is to reduce premium levels. However, these companies are trying to increase premium levels to compensate for their investment losses in the stock and property markets."

He said none of the local insurance companies had much exposure to the toxic assets in Western financial markets, and the number of Islamic insurance companies in the region was growing.

"The number of takaful firms in the market is going up due to the surplus capital residing in the Gulf. There is a proliferation of small takaful insurance companies. However, some small companies are struggling for business volume."

And Willis said the health insurance sector in the UAE and other GCC countries was undergoing drastic changes. "With the introduction of compulsory insurance it has become a high-volume business with regular cash flow."

By VM Satish

© Emirates Business 24/7 2009