Standard & Poor’s Ratings Services (S&P) has revised its outlook on Qatari insurer Al Khaleej Takaful Group (KTG) to positive from stable. It has also affirmed its ‘BBB’ long-term insurer financial strength and counterparty credit ratings on KTG.
The outlook revision follows a significant improvement of KTG’s operating performance in 2015, which has strengthened the company’s competitive position. Last year, KTG reported a stronger combined (loss and expense) ratio of 86% compared with 97% in 2014. This was mainly thanks to organisational changes during 2014 and 2015 that helped optimise the use of resources and enhanced claims management.
S&P sees KTG’s business risk profile as fair, based on intermediate insurance industry and country risk from operating in Qatar and KTG’s adequate competitive position. Although KTG remains the fifth largest insurer and the largest takaful provider in the country, with gross premiums written of QAR 333 million (US$91.5 million) in 2015 and QAR315 million in 2014, its market share is still relatively small.
S&P continues to assess KTG’s financial risk profile as upper adequate, reflecting its view of extremely strong capital adequacy and adequate financial flexibility, but high risk, due to significant exposure to equities and real estate. Although KTG’s net earnings in 2015 were below those in the previous year, mainly due to lower investment earnings, the company has significantly reduced its accumulated policyholder fund deficit by retaining a large part of its takaful fund earnings.
As of 31 December 2015, 90% of its investments comprised equities and real estate, which S&P considers high-risk assets. Although this large exposure increases the risk of fluctuations in the company’s capital and earnings, it expects that KTG will continue to de-risk its asset portfolio over time by shifting toward less volatile investments.
S&P anticipates that the company will maintain its current competitive position and upper adequate financial risk profile, which together support an anchor of ‘bbb+’ under its criteria. It currently applies a downward adjustment of one notch to the anchor, due to KTG’s relatively small market share and poor historical underwriting performance and earnings compared with that of peers in the domestic market. It expects that KTG will continue to demonstrate positive underwriting earnings, with the combined ratio below 95% over the next two years.
The positive outlook indicates that S&P could remove the negative notch and raise the ratings over the next one to two years, if KTG continues to generate underwriting profits and grows in line with the market, while maintaining its current financial risk profile and extremely strong capital adequacy.
QAR1 = US$0.27