Composite insurer Al Ahleia Insurance’s acquisition of Kuwait Reinsurance will strengthen the insurer’s brand but will have a negative impact on its capital position and financial flexibility, said Moody’s in a report.
“The addition of Kuwait Re will notably strengthen Al Ahleia’s brand by increasing its product offering, as well as extending its geographic diversification across Middle East, North Africa and Asia,” said the rating agency said.
However, the transaction will also incrementally increase high-severity, low-frequency exposures, with long-tail risks among the acquired business lines, potentially increasing the risk of a more volatile future financial performance for Al Ahleia.
In July, Al Ahleia made a bid for Kuwait Re, offering approximately KWD18.4 million (US$60.9 million) for a 61.27% stake. Following the announcement, Moody’s affirmed Al Ahleia’s A3 insurance financial strength rating (IFSR) and changed the outlook to negative from stable.
“The acquisition, which brings with it the challenges of successfully integrating Kuwait Re’s sizeable operations and improving its profitability, will have a negative impact on Al Ahleia’s capital position and financial flexibility, driving the change in outlook from stable to negative,” said Mr Mohammed Ali Londe, Moody’s Assistant Vice President – Analyst.
“However in terms of profitability and managing risk, we find that the execution risk of integration is partially mitigated by Al Ahleia’s strong management which has executed its strategy on the primary insurance side well,” he added.
The acquisition will be financed through borrowing and cash. The borrowings will increase leverage to around 20% from Al Ahleia’s current unlevered financial profile. However, Moody’s expects that the insurer will revert to its unlevered status in the short to medium term as it settles the borrowings through operational surpluses.
KWD1 = US$3.31