Standard & Poor’s (S&P) has affirmed its ‘BB’ counterparty credit and financial strength ratings on Wethaq Takaful Insurance Co (Wethaq). The outlook is stable.
As a result of Wethaq’s exit from Egypt, S&P’s assessment of its business risk profile has improved to fair, and Wethaq’s industry and country risk exposure is assessed as intermediate. However, S&P continues to regard its competitive position as a drag on the overall assessment, given the company’s reliance on the highly competitive Kuwaiti insurance sector and its increasingly limited business and geographic diversity.
Wethaq’s net combined ratios (claims and expenses as a percentage of net earned premiums) have traditionally exceeded 100%. Unless the company can demonstrate an improving track record from operations in its domestic market, S&P said its assessment of Wethaq’s competitive position could weaken further.
Wethaq’s capital and earnings have also deteriorated. Following the losses relating to the former Egyptian subsidiary and its sale in mid-2015, Wethaq’s S&P’s-adjusted capital base has declined significantly, mainly due to an increase in policyholder’s deficit to about KWD4.3 million (US$14 million) at the end of September 2015, from KWD2.7 million at year-end 2014. Reported shareholders’ equity at end-September 2015 therefore fell to KWD7.5 million from KWD11.9 million when adjusted to net out the policyholder account deficit.
As such, by global standards, S&P considers Wethaq small in absolute terms. Its prospective adjusted capital is likely to stabilise at around US$25 million. However, the company has adequate reserves and appropriate reinsurance protection.
S&P has also revised down its assessment of Wethaq’s risk position to moderate, because its high-risk investments now form a higher proportion of its depleted level of adjusted capital. “We understand that Wethaq intends to invest some of the proceeds from the sale of the Egyptian subsidiary in real estate, and this could further strain our risk position assessment,” it added.
The ‘BB’ rating on Wethaq is one notch lower than the anchor due to S&P’s view of the company’s weak enterprise risk management (ERM). “The risk management culture at Wethaq, particularly as regards investments, weighs on our ERM assessment. This is in part mitigated by Wethaq’s information technology systems, which integrate underwriting and claims management and are linked to the financial reporting system. We consider that this permits reasonable controls over operational risks,” it said.
The stable outlook reflects S&P’s expectation that the company will maintain at least very strong capital adequacy over the coming 12 months, and will seek to moderate its exposure to high-risk assets as a proportion of adjusted capital. S&P expects underwriting performance to stabilise, such that net combined ratios do not exceed 105%. It also anticipates that investment income will provide a positive and less-volatile contribution to earnings. Furthermore, it expects that Wethaq will remain operationally independent from its majority parent, Kuwait-based The Investment Dar.
KWD1 = US$3.29