S&P Global Ratings said it revised its outlook on Qatar Insurance Co. S.A.Q. (QIC) to negative from stable, although it has affirmed the group’s “A” rating.

When QIC acquired four of Markerstudy’s subsidiaries in 2018, it also purchased the parent-related loans of these entities, which amount to £240 million ($307.9 million) and are due before May 2020, said the ratings agency.

QIC has significant business and financial risk exposure to Markerstudy (MS), said S&P, noting that MS provides about 28 percent of annual premium to QIC via a long-term reinsurance arrangement to MS’s managing general agents.

Any failure by MS to pay its £240 million loan to QIC–accounting for about 14 percent of shareholders’ equity, or 8.4 billion Qatari riyal ($2.3 billion) as of Sept. 30, 2019–could place downward pressure on QIC’s financial risk profile, explained S&P.

QIC could potentially lose a significant portion of the premium it receives–about $1 billion per year–through MS. If MS does not pay its obligations, it will most likely find it difficult to maintain its premium income. This is because such behavior would indicate financial difficulty at MS and by extension this could cause reputational damage to MS and QIC.

“We understand that QIC is working with MS to ensure a successful resolution of the potential issues with MS. On the earnings side, any potential loss of business from MS is likely to have only a modest effect on QIC’s earnings,” added S&P.

“In our view, the developments with MS, along with rapid premium growth–gross premium increased by 27 percent between 2016 and 2018–and significant changes in business mix in recent years, raise questions about the group’s strategic planning process and risk management practice,” the ratings agency went on to say.

That said, S&P acknowledged that QIC has managed to post profit consistently in recent years while raising and holding sufficient levels of capital to manage the material amount of growth in recent years.

The negative outlook indicates the possibility that S&P could lower the ratings by one notch if QIC’s strong competitive position deteriorates or governance deficiencies in QIC’s strategic planning process and risk management practices are identified.

QIC’s exposure to MS could significantly reduce its premium income, albeit the impact on earnings is likely to be modest.

S&P said it could lower the ratings on QIC over the next 24 months if:

• There is uncertainty that the group’s risk-based capital is not likely to remain at the “AAA” level.
• There is a weakening of its competitive position through material decline in premium income and, by extension, its earnings.
• There is evidence of materially higher exposure to catastrophe or other highly volatile risks.
• Deficiencies are identified in strategic planning process or risk management practices that place pressure on either competitive position or financial profile.

Source: S&P Global Ratings

*This story ran previously in our sister publication Insurance Journal.