Profits and capital rebound for listed insurers in the United Arab Emirates

For the insurance market in the United Arab Emirates (UAE), the first half of 2021 has been marked by a notable rebound in profit and overall capital levels compared with the picture 12 months previously. AM Best’s analysis of the interim financial statements of the national insurers listed on the Abu Dhabi Securities Exchange (ADX) and the Dubai Financial Market (DFM)1 indicates that the market’s performance as a whole has been resilient to challenging macro-economic conditions and intense competition.

Market conditions remain difficult in the UAE, particularly in core motor and medical lines, which represent a large part of insurers’ retained portfolios. Underwriting performance for 2020 was boosted by COVID-19 impacts such as reduced frequency of motor and medical claims.

These classes of business have been subject to significant competition and pricing pressure since early 2020. AM Best expects prospective market performance to be sensitive to the pricing adequacy of business written in this period in the context of normalising claims frequency over the near term.

Strong Net Profits, Despite Thinner Underwriting Margins
The first six months of 2021 has seen strong growth in profits for UAE-listed insurers. Net profits for the market reached AED 1.14 billion, compared with AED 949 million in the first six months of 2020, equivalent to growth of 19.7%.

Overall, the return on equity (ROE) for the market reached 12.3%, compared with 11.1% in 2020 (on an annualised basis). AM Best notes that returns generated in 2020 and year-to-date 2021 compare favourably to the aggregate market ROEs generated over recent years, which averaged around 9% for the five-years to 2020.

The growth in operating profits over the first half of 2021 comes despite an increase in the market-wide loss ratio. The near four-point increase in the loss ratio to 61.3%, compared with 57.5% in the first half of 2020, is partially reflective of the positive impacts of virus containment measures on underwriting performance in 2020. In particular, motor and medical classes, which account for a large part of insurers’ net underwriting portfolios, benefited from lower loss frequency.

The increase in loss ratio to date in 2021 incorporates an uptick in loss frequency, as economic activity has recovered, and elective and non-urgent medical procedures have resumed. The UAE insurance market has been characterised by highly competitive conditions in recent years. The effects of the COVID-19 pandemic have served to heighten competition, due in part to insurers’ response to the strong underwriting performance experienced in 2020, and in part due to a reduction in demand for insurance in these core classes during the pandemic, for example, as vehicle sales and the number of journeys taken fell. Price competition has remained high into 2021, with motor rates in particular at levels well below the pre-pandemic benchmark. In the context of this pricing environment, further increases in loss ratios may be observed over the second half of 2021, and AM Best expects competitively priced business written in 2020 and 2021 to be susceptible to reduced margins as loss experience normalises and activity rebounds.

The increase in the loss ratio had a carry through effect to the overall market combined ratio for the first half of 2021, which stood at 91.7% compared to 88.1% for the comparable period in 2020. Both management expense and acquisition cost ratios remained stable at 23% and 7% respectively, with a modest increase in absolute expenses matched by net earned premium growth. Insurers in the UAE are generally large purchasers of reinsurance capacity, and continue to benefit from commission income on ceded portfolios to maintain low net acquisition costs.

Given this increase in the combined ratio, the growth in operating profitability over the first half of 2021 is indicative of stronger investment performance compared with the first half of 2020. Investment returns, accounted through the income statement, were depressed in the first six months of 2020, which saw the peak of COVID-19 driven financial market volatility and uncertainty. A number of UAE-listed insurers have seen exceptionally high growth rates in net profit in 2021 compared to the first half of 2020 (see Exhibit 1), and in many cases this was linked to the impact of weaker investment results in 2020, which weighed on net profits.

Capital Rebound from COVID-19 Investment Volatility
Total aggregate capital and surplus of the UAE-listed insurers reached AED 18.7 billion as at 30 June 2021. Total capital has increased by 3.1% compared to year-end 2020 (AED 18.2 billion), and a significant 11.6% when compared with June 2020 (AED 16.8 billion).

Financial market volatility linked to COVID-19 was a key driver in the 3.7% reduction in total capital over the first half of 2020, with investment fair value losses taken through the balance sheet more than offsetting net operating profits for the period.

The rebound in total market capital over the 12 months since June 2020 is reflective of the market’s strong net profit generation and recovery in financial markets, partially offset by dividend distributions made during in the first half of 2021. While the capital growth demonstrates resilience within the market to uncertain and challenging operating conditions.

© Press Release 2021