Earnings up in the UAE, but so are regulatory pressures: S&P
Despite good premium growth, listed insurance companies in the United Arab Emirates (UAE) are showing further earnings strain so far this year, according to Standard & Poor's (S&P).
The firm’s report, UAE Insurance Market: Earnings And Regulatory Pressures Are On The Rise, found that gross premiums grew 9 percent year-on-year to UAE dirham (AED) 13.5 billion (or $3.7 billion) in the first nine months of 2015, in line with S&P’s expectations set earlier this year.
S&P said that the growing maturity and expansion of the Dubai compulsory health scheme, launched in the last quarter of 2014, was one reason for the increase, but others were the favourable economic and political climate.
“For instance, Abu Dhabi and Dubai are sustaining capital spending on housing, schools, and roads, with gross domestic product (GDP) forecast to rise more than an annual 3.5 percent through to 2019,” said the firm.
Kevin Willis, credit analyst, S&P, added: "However, underwriting and net earnings show real weakness so far this year.”
The 29 listed companies recorded an aggregate net underwriting deficit in the first nine months, representing a 103 percent net combined (loss and expense) ratio, according to S&P. Some 45 percent of the listed companies (13 insurers) posted underwriting deficits.
Net profits tumbled 90 percent from September 30, 2014, according to the report and ten companies reported net losses.
"We see three key factors behind the disappointing results: intense competition in all lines of business, technical reserving corrections, and weak investment returns," added Willis.
“We believe these factors will remain in place through 2016. Plus, low oil prices are now a fact of life for the Gulf region and will eventually likely bring other economic consequences. And though interest rates are rising in response to tighter liquidity, the additional yields generated may not fully offset any normally resulting erosion in asset values.
Willis also said S&P doesn’t expect to see any meaningful recovery in the UAE insurance market's earnings, either technical or net, before 2017.
“We believe companies are now starting to respond to the damage done by the fierce price competition in consumer lines,” said Willis.
“That said, depressed reinsurance pricing is still allowing for subtechnical margins in commercial lines, which are typically big risk values. As insurers complete independent actuarial reviews, we believe the insurance market is likely to continue to need reinforcement of technical reserves through 2016, and this will tend to depress earnings.
“We think the combination of new regulatory demands and poor earnings increase likelihood of business cessations in the years to come.”
