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Sat 5 Sep 2009 11:02 AM

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S&P’s sees stable outlook for Kuwait’s First Takaful

Ratings agency assigns 'BBB-' to Kuwait-based insurer on good capitalisation.

Ratings agency Standard & Poor's said on Friday that it had assigned its 'BBB-' long-term counterparty credit and financial strength ratings to Kuwait-based insurer First Takaful Insurance company.

The outlook is stable, the agency said in its press release.

The rating reflects First Takaful's good level of capitalisation, good liquidity, and good profitability," said Standard & Poor's credit analyst Wolfgang Rief.

These positives are partly offset by the company's aggressive and regionally concentrated investment policy, as well as by the company's position in a relatively small and very competitive market, according to the S&P’s press release.

The company enjoys good capitalisation; capital adequacy is good according to Standard & Poor's risk-adjusted capital model, it said.

The capital base sufficiently covers the heavy capital requirements stemming from locally concentrated equity investments and this, together with a relatively small capital base, makes First Takaful's capital adequacy highly exposed to asset volatility, S&P’s added.

The company's solvency position is currently pressured by the effects of the recent upheaval in the financial markets, reflected in a very high investment leverage level of 140% on Dec 31, 2008, it said.

“We consider First Takaful's operating performance to be good overall. The company's underwriting performance, with a combined ratio of 98.6% for 2008 and a five-year average of about 97%, appears adequate for a cooperative model-driven company. However, results for the first half of 2009 were disappointing, with the very competitive motor segment being a particular drag on the results. The relatively high net expense ratios are additional offsetting factors,” S&P’s noted.

“In our view, First Takaful's business volumes don't yet appear to allow the company to realize sufficient economies of scale. The return on equity was good, with a five-year average of 13%, but turned sour in 2008 to negative 2.8%, because a net loss had to be recorded due to significant asset value deterioration.”

First Takaful, following its Islamic status, invests heavily in local and particularly unlisted equities and funds, which weakens the company's financial profile, the ratings agency said. This gives the company a very high investment leverage of 140%, which emphasizes the asset value sensitivity of shareholder funds, it observed in its note on Takaful.

The takaful market represents about 14% of the total Kuwaiti insurance market, and First Takaful boasts the largest market share (about 23%) of that sector.

“The stable outlook reflects our assumptions that First Takaful will maintain its capitalization at least within the 'BBB' rating level, which might be helped if the recent first signs of recovering fair values continue,” S&P’s said.

"We anticipate that the company's liquidity will remain good, with total liquid assets clearly covering technical liabilities," said Rief.

A positive rating action within the rating horizon appears unlikely at this stage, but might be achievable if the company outperforms the targets mentioned above, according to S&P’s.

A negative rating action may be taken if the company is unable to meet the above mentioned capitalisation targets and fails to adhere to its generally sound underwriting principles, it concluded.

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