Moody’s upgrades KFH Takaful to Baa2
Outlook on rating stable
LONDON, Oct 24: Moody’s Investors Service has today upgraded to Baa2 from Baa3 the insurance financial strength rating (IFSR) of KFH Takaful Insurance Company KSC (KFH Takaful). The outlook is stable. Ratings rationale The rating upgrade for KFH Takaful reflects (i) its improved levels of capitalisation following the KD 5 million capital injection in 2015 resulting in a consolidated (shareholders’ and policyholders’) equity representing 42.6% of total assets at YE 2015 (from 29.0% at YE 2014); and (ii) improved asset quality with the capital proceeds predominantly invested in high rated bank deposits translating in the high risk assets (HRA) equating to 30.0% of consolidated equity at YE 2015 (from 49.4% at YE 2014); and (iii) KFH Takaful’s continued growth whilst maintaining underwriting profitability with an average combined ratio (COR) of 97% between 2011-2015 which has helped convert both shareholders’ and policyholders’ accumulated earnings to a surplus from a deficit position.
Additionally KFH Takaful has a good market position, ranked as the second largest Takaful and the sixth largest overall insurer in the Kuwaiti market with an overall market share of 3.6%. It also benefits from strong product diversification with a mix of life, health and non-life insurance products.
However, these strengths are partially constrained by the high concentration in terms of its total premiums which rely on the business written with its banking parent, Kuwait Finance House K.S.C.P. (Deposits A1 negative, BCA ba1); in fact 75% of KFH Takaful’s 2015 gross premiums written were sourced from the bank and furthermore the insurer relies on its parent for most of its distribution.
Despite the related party concentration and growth, KFH Takaful has maintained its underwriting results, translating to a good 5-year average COR of 97.0%, 5-year average ROC of 10.3%. This has meant that as of YE 2015 policyholders’ fund had an accumulated surplus of KD 0.4 million compared to a deficit at YE 2012 and prior, whilst the shareholders’ operations reported a surplus retained earnings for the first time at YE 2015.
These results have aided organic capital growth and relieved the constraints of accumulated deficits on consolidated equity. Combined with the KD 5 million capital injection in 2015, this has meant that capital adequacy has improved with gross underwriting leverage (GUL) of 1.1x at YE 2015 compared to 2.3x at YE 2014. The injected capital followed the change of name to KFH Takaful Insurance Company KSC from Al Muthanna Takaful Insurance Company KSC in January 2015 thereby rebranding the company with its parent’s name and is indicative of the increased close linkages with, and support, from its parent bank. The increased capital has also improved overall asset quality with majority of the proceeds invested in, and expected to be maintained in, high rated bank deposits.
Given the upgrade of KFH Takaful’s IFSR, upward pressure on the rating is unlikely. However factors that would strengthen the rating include (i) if KFH Takaful were to diversify profitably its sourcing of business and distribution away from via its parent; and/ or (ii) if KFH Takaful were to profitably attain and maintain a top five market position with majority of business sourced from non-related parties.
Conversely, downward pressure on the rating could result from (i) significant deterioration in the underwriting profitability of KFH Takaful with COR consistently over 100% and or negative ROC levels; and/ or (ii) a diversification of the investment portfolio into higher risk asset classes, such as equities or real estate with HRA equating to over 50% of consolidated equity; and/ or (iii) significant reduction in market share; and/ or (iv) significant negative rating pressure on the ratings of its parent Kuwait Finance House. The following rating was upgraded: KFH Takaful Insurance Company KSC Insurance Financial Strength Rating to Baa2 from Baa3 The outlook is stable. Based in Kuwait, KFH Takaful reported a 12.6% growth in its premiums to
KD 11.5 million for 2015 from KD 10.3 million in 2014 and thereby reported a 53.7% growth in consolidated net income to KD 0.4 million in 2015 from
KD 0.2 million in 2014. KFH Takaful’s consolidated equity increased to
KD 10.5 million at YE 2015 from KD 5.1 million at YE 2014.