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Moody’s affirms Kuwait Insurance Co’s Baa1 rating Move reflects KIC’s relatively strong diversification

KUWAIT CITY, May 27: Kuwait Insurance Company (KIC), whose insurance financial strength rating (IFSR) Moody’s has affirmed at Baa1, is the largest Kuwaiti non-life insurer in terms of direct premiums. Established in 1960, it writes most lines of non-life insurance, with small amounts of health and medical insurance. The IFSR reflects KIC’s strong position in the domestic market with an established brand and a good reputation for service and financial strength. The rating also reflects the company’s relatively strong diversification, albeit within a small market, and its strong capitalisation relative to peers. However, these strengths face the constraints of an investment strategy that can introduce income statement volatility, as well as high levels of price competition in the Kuwaiti non-life insurance market.

KIC’s strong domestic market position, focus on service, and longstanding relationships with key departments and businesses in Kuwait demonstrate that the company is well placed to secure a significant proportion of the contracted insurance stemming from the upcoming government stimulus package (the draft budget for fiscal 2014-15 projects spending of KD21.9 billion). Furthermore, the IFSR benefits from the company’s strong capitalisation (with 2013 shareholders’ equity representing over 37% of total assets and a gross underwriting leverage, on a Moody’s basis, of 1.6x compared with 2.0x at year-end 2012).

Nonetheless, although real estate holdings are at comparatively low levels, KIC maintains a still significant level of investment risk, with meaningful levels of investments in Kuwaiti equity markets (translating to the 2013 high-risk assets, on a Moody’s basis, being equal to 111% of shareholders’ equity), which has contributed to some volatility in net income. In addition, the company’s underwriting performance has deteriorated recently, with a combined ratio (on a Moody’s basis) of 89% in 2013 compared with 71% in 2011. Further, the Kuwaiti property and casualty insurance market continues to exhibit high levels of price competition.

As a result, upward pressure on the rating could result from (i) improvements in asset quality, with a greater focus on bond investments and deposits; (ii) consistent improvements in underwriting, with the combined ratio on a steady downward trend; and/or (iii) wider geographic diversification, with good positions elsewhere in the Gulf Cooperation Council.
Conversely, downward pressure on the rating could result from (i) a weakened capital position, with gross underwriting leverage increasing to 3x, or loss of major cedents in the reinsurance program; (ii) a significant deterioration in the underwriting performance, with combined ratios above 100% for several years; (iii) a deterioration in the liquidity of the asset portfolio; and/or (iv) a significant reduction in market share.
Moody’s has affirmed the following rating with a stable outlook: Kuwait Insurance Company — IFSR of Baa1.
In 2013, KIC recorded a 2% increase in gross contributions to KD34.0 million from KD33.3 million in 2012, owing largely to the increase in its fire, general accident and takaful business. At the same time, net income increased by 8% to KD4.2 million from KD3.9 million in 2012. Finally, KIC’s equity increased by 17% to KD54.2 million in 2013 from KD46.2 million at year-end 2012.

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