(MENAFN - Muscat Daily) Insurance companies in Oman and elsewhere in the GCC continue to face investment risks due to the dominance of high-risk assets in their investment mix which remains a key credit negative, says Moody's Investors Service.
In its report GCC insurers: Investment risks remain a credit negative in the medium-term, Moody's said that equities remain the key asset class for GCC insurers, accounting for over 40 per cent of total investments in 2013, while real estate is also a key investment class, accounting for over 20 per cent of total invested assets in 2013.
"Equity and real estate account for a material portion of GCC insurers' total invested assets," says Mohammed Ali Londe, a Moody's analyst. "Because of the low interest rates in the GCC region, traditional investment options offer low returns compared with those of equity and real estate, weakening the appeal of traditional investments."
In a reply to a Muscat Daily query, Londe said, ''In terms of investment portfolio, we anticipate that trends witnessed elsewhere in the GCC (significant investments in real estate and equities) will remain a feature of Omani insurance companies' balance sheets for the foreseeable future.'' He said, in Oman, insurance firms owned by larger international groups would be expected to maintain a more conservative portfolio following the centralised investment decision-making policies adopted by most large insurers.
Londe said that takaful players in Oman will also face these challenges, as being Sharia'a-compliant, limits the investment choices available. ''With sukuk bonds - a key alternative asset class - still relatively limited in supply and also relatively exposed to the property market, they are likely to face the same challenges.'' Moody's expects that, over time, GCC insurers' investment strategies will shift towards higher allocations to lower-risk assets.
Londe said that there is a considerable level of fragmentation and over-capacity in the Omani insurance industry - which depresses the market's overall performance. ''Further insurance awareness and growth is required to reduce market and pricing volatility driven by the competition. Nat cat (natural catastrophe) is more of a threat in Oman than in the other GCC markets, such as cyclones Phet and Gonu in 2010 and 2007,'' he added.
Moody's said the region has limited volumes of traditional investment options (e.g. fixed income bonds, sukuk) and the returns on these are low due to the low interest rates prevailing in the region.
''As many insurers in the region have a poor underwriting performance, they tend to rely on investment income to improve overall profitability, and as conventional bonds and sukuks offer low returns, these investment classes may not be the prime choice for most insurers. So, although we would usually regard higher investment in bonds as credit positive, we expect that as economic conditions in the region improve, insurers will continue to prefer real estate and equities over sukuks and conventional bonds,'' Londe added.
Equities remain the key asset class for GCC insurers, but have historically provided volatile returns. The report said that the main risks of real-estate assets stem from their valuation and liquidity. ''Specifically, real-estate assets are often recorded in insurers' financial statements at market value, exposing the balance sheet to volatility. In addition, the liquidity of real estate is frequently low, with a surplus of completed properties further limiting the ability to liquidate real-estate assets quickly at balance-sh