Fitch Ratings has upgraded Oman Reinsurance Company SAOG’s (Oman Re) Insurer Financial Strength (IFS) rating to ‘BBB-‘ from ‘BB+, and assigned it an stable outlook.
According to the announcement, this rating decision continues to reflect Oman Re’s exposure to investment risk via its asset concentration in the Omani banking system.
It also reflects the company’s good financial performance and capitalisation, but moderately weak business profile, Fitch noted.
Fitch views Oman Re’s investment and asset risk as moderately weak, but improving following the upgrade of Oman’s rating – the rating agency upgraded Oman’s Long-Term Local Currency Issuer Default Rating (IDR) to ‘BB+’ from ‘BB’, as well as five Omani banks, in early October.
The agency expects Oman Re’s exposure to Omani assets to remain significant and to continue to drive the rating in the medium term.
This is because of the company’s exposure to asset concentration risk via its investments in the country. At the end of the first half of 2023, Oman Re invested 73% of its assets in fixed-income instruments, of which 41% in cash deposits at Omani banks and 32% in US dollar-denominated government bonds.
Regarding Oman Re’s business profile, Fitch considered it as ‘Least Favourable’ relative to that of global reinsurance companies.
“However, Oman Re is well-diversified locally with a substantive business franchise in the Middle East. Fitch views its business risk profile as ‘Less Favourable’ since property, fire and marine lines are more volatile than health and motor, which dominate most of the markets where Oman Re writes business,” Fitch stated.
At the same time, the rating agency also highlighted Oman Re’s good underwriting performance, as well as its earnings. This view is supported by a record of sound profitability in the past five years, Fitch noted.
Oman Re’s net income return on equity (ROE) was 4.8% in H1 2023, broadly in line with its five-year (2018 to 2022) average of 4.6%. The company reported good underwriting results in the period, as measured by a combined ratio of 97%, improving from 99% in 2022.
Oman Re suffered losses as a result of the earthquake in Turkey in the first quarter of the year, but the net impact is manageable and the company remains well-protected by reinsurance, in Fitch’s view.
“Our view of Oman Re’s good capitalisation is underlined by a Prism Factor-Based Model (Prism FBM) score of ‘Strong’ at end-2022 (end-2021: ‘Adequate’). The improvement was driven by a reduction in catastrophe risk exposure in 2022. Oman Re had no financial leverage,” Fitch added.
Finally, the reinsurer’s prudent reserving is seen by the agency as a rating strength. The company has maintained consistent reserve releases over the past five years.
There are some factors that could, individually or collectively, lead to a negative rating action, Fitch warned. These include a downgrade of Oman’s sovereign rating or Omani banks’ ratings and a decline in capitalisation, as measured by a Prism FBM score at the low end of ‘Adequate’.
On the other hand, an upgrade of the Omani sovereign’s or Omani banks’ ratings, and/or the strengthening of Oman Re’s company profile and capital position, could lead to a positive rating action.
Reduced exposure to the Omani banking system, via a significant rebalancing of the investment portfolio away from term deposits in Omani banks, is another factor that could lead to an upgrade.
